Trading has always been difficult, thanks to the short-term gyrations in the markets. Such shifts are more probabilistic and unpredictable than longer term trends.
People often tell me that no matter what analysis they do, they always seem to be the last person to buy before a market correction and the last to sell before a bottom.
There is a reason for this…
It’s not that they’re idiots. They do what they do well. But nowadays, when it comes to trading short term, they — and you — are competing against the best traders in the world. People who have far more resources and better information than you do. They also have far more experience than you. After all, they’re full-time traders.
In a head-to-head race with those guys, you don’t stand a chance.
Trading and Markets 101
In the past, professional traders and hedge funds were only a small part of the markets — say 10% or so. Their job was to arbitrage and keep the markets honest when they get too high or too low. That was a good thing.
But today, they’re a much larger part of the market, trading faster than ever before, and their job has changed. They rarely care about longer-term trends or fundamentals any more. Instead, they just go opposite to popular opinion (in other words, smaller traders like you). They’ve become the sharks that feed off the minnows.
Recent headlines and Michael Lewis’s new book Flash Boys have focused on high-frequency trading and why it’s become possible. He points out that today’s major firms have faster access to information, putting them one tick ahead of you in trading. They pay for faster computer connections to have the advantage.
But as I wrote in a recent Survive & Prosper article, that advantage isn’t the biggest challenge for a smaller trader. What’s 0.1% to you on a trade you lose to high-frequency traders?
The greatest challenge today is that these larger traders and hedge funds have now leveraged up more than ever: 30 to 50 times in many cases. That means they now control 30% to 50% of the trading volume.
They’re on steroids thanks to the Fed’s policies of near zero short-term interest rates.
More than ever, these smart money traders watch your every move and sell when you want to buy and buy when you want to sell.
And you simply don’t have the financial weight behind you to fight back.
So my advice to you is simple: Don’t try to become a trader unless you have extraordinary talents, do it full-time, and have unlimited funds to risk. Even then, you’re at a disadvantage to larger traders who are closer to the action and have more information, resources and leverage.
Instead find an experienced trader with a proven system that can beat the markets, like these larger traders. Bet on someone like the traders you’re competing against.
Find someone who has new insights into shorter-term trends and which sectors or stocks to bet on (even the larger traders operate on models that aren’t always unique).
Adam O’Dell, CMT, is a good example of such a trader. He’s our chief investment strategist at Dent Research and he employs a hierarchical model of cycles and indicators to help you trade short-term trends.
In an article he wrote earlier this year, I remember his great reference to “switch-hitters” and how they ultimately have the advantage when trading — yes, the switch-hitter would be you.
He is a successful momentum trader and I respect his system. In fact, it’s the perfect complement to our business.
I focus on longer term, macro trends…
Rodney offers the more practical insights for dealing with your life, family and investments…
And Adam provides the shorter-term models for profiting in markets that will, by my forecasts, be a roller-coaster for the next decade or so.
Buy and hold is dead.
Trading is nearly impossible, without help.
Outside of safer, cash investments to preserve your capital, the only way to prosper during the years ahead is to look to a guru, like Adam, who can play the ups and downs of the markets.
Adam not only thinks like the smarter money and traders — the very guys who keep you out of the markets by dominating the short-term market movements — but he has unique tools (just like I do) for profiting on short- term trends and sector shifts.
And that is the only way you can create an edge in these volatile times.
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