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I was watching the Benny Hill show and there was this skit which I found both funny but made me think. There was a man (Benny) who was standing in front of a plain brick wall and looking up. He just kept on standing there. A man walks by and sees Benny standing in front of the wall and wonders whats going on so he stands next to Benny and starts looking up as well. Another person comes, then another, and another and soon there is a small crowd of people all looking up at this plain brick wall. Benny then steps back and walks away while everyone keeps on staring up at this brick wall. The catch is that the whole time he had a neck brace on which wasn't initially visible cause of his coat so he was forced to keep on looking up.

 

Point being: group mentality and mass delusions do exist.

 

My question for the doc then in terms of trading: What is the best way to spot the sheep during your trading day and what makes people instinctively act like sheep when they trade?

 

On Jame's videos he often reades the tape which I'm slowly trying to learn because it seems to give information as to where moves begin and end. Is there a way you can train yourself to learn who is actually being proactive and who is being reactive?

If you can spot the real proactive movers from the rest and move as they do or even learn to anticipate their moves this would give you a great edge against the 95% of followers who cough up their hard earned.

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This is a very interesting observation and question. The problem with electronic trading as opposed to trading on floor is that we cannot see the emotions and crowd mentality taking place like a floor trader would looking at the pit with people hollering and screaming and expressions in their eyes. Tape reading is difficult in this manner due to lack of these cues. The only cue is the price being broken and by how much and by how many contracts at that price. This is why trading is so difficult, putting together a puzzle that have missing pieces.

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Great question! In trading and life, there is what is called the herding instinct or herding bias. You see if when momentum traders jump all over something because it is moving ( usually up, but also down if they are nible with shorting). For fundamental people, it is this herding which contributes to what might best be described as irrational valuations ( which one way or the other get back to mean reversion once the people wake up and realize what has been going on). One way to look for herding is to watch stocks with high volume premarket and see how they behave on any pullbacks. What momentum traders look for is a gap up on volume and then a pullback on lower volume ( to get long). With futures trading, you can sometimes tell with market depth and time and sales. It is not easy, and the programs are getting more and more sophisticated and tricky so this is an ongoing issue. One thing that is happening to bond traders is not so much fun. Many of them have left the floor now ( there are very few bond traders in open outcry) and gone to electronic trading. They are getting slammed by the programs which come in and "trap" them so they are stuck in a position with no way out, sometimes for an entire day ( when previously they were able to scalp in and out very quickly). There is much frustration in bond land because of this, and many bond traders have found their incomes cut in half or by a third. Some of them are using their core competencies to move into oil or ags. The majority of them are still trying to figure out how to beat the algorithmic programs. As program trading increases, it is going to be more difficult for the little guy to scalp and there is going to be a lot more "deception." For example, there is a program operating on the CAC 40 called Predator which fires thousands of orders into the CAC every day, most of which are not executed. The same thing is happening on ES, I believe.

This is the tip of a very deep iceberg. I would love to hear from others on this board about your experience with either herding or ( ugh!) being herded!

 

Thanks

 

Janice

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I typed my response very quickly and made a number of typos! So- I am posting it again. Apologies. Janice

 

Great question! In trading and life, there is what is called the herding instinct or herding bias. You see it when momentum traders jump all over something because it is moving ( usually up, but also down if they are nimble with shorting). For fundamental people, it is this herding which contributes to what might best be described as irrational valuations ( which one way or the other get back to mean reversion once the people wake up and realize what has been going on). One way to look for herding is to watch stocks with high volume premarket and see how they behave on any pullbacks. What momentum traders look for is a gap up on volume and then a pullback on lower volume ( to get long). With futures trading, you can sometimes tell with market depth and time and sales. It is not easy, and the programs are getting more and more sophisticated and tricky so this is an ongoing issue. One thing that is happening to bond traders is not so much fun. Many of them have left the floor now ( there are very few bond traders in open outcry) and gone to electronic trading. They are getting slammed by the programs which come in and "trap" them so they are stuck in a position with no way out, sometimes for an entire day ( when previously they were able to scalp in and out very quickly). There is much frustration in bond land because of this, and many bond traders have found their incomes cut in half or by a third. Some of them are using their core competencies to move into oil or ags. The majority of them are still trying to figure out how to beat the algorithmic programs. As program trading increases, it is going to be more difficult for the little guy to scalp and there is going to be a lot more "deception." For example, there is a program operating on the CAC 40 called Predator which fires thousands of orders into the CAC every day, most of which are not executed. The same thing is happening on ES, I believe.

This is the tip of a very deep iceberg. I would love to hear from others on this board about your experience with either herding or ( ugh!) being herded!

 

Thanks

 

Janice

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That's great insight, doc! Interesting how changing the style of trading affect other people as the markets and technologies change, the inevitable. It may be that more programs create less herd instincts? Or are there still emotional people behind these programs plug and unplug whenever they "feel" it?

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People program the programs. It becomes less and less emotional when the machines are programmed to trade on "their own." From what I understand there are still human beings who trade the programs, so there might be less emotion involved. Eventually, I think machines will be trading machines and machines will be programming themselves. We're not there yet, but look at what Kurzweil is going with FatKat.

 

Janice

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