Suppose you're a trader who has made money consistently, but now is
struggling. If you're like many of the traders in that situation, the odds
are good that you've tried to make major changes.
I am surprised at the number of struggling traders who assume that *they* are
the problems. They either seek counseling help for their trading woes, or
they latch onto untried and untested trading methods. Either way, they are
easy prey for self-anointed coaches and gurus who promise ready solutions.
But if you're a talented trader who is now struggling, maybe--just maybe--the
problem has nothing to do with you.
Maybe it's the market you're trading.
Perhaps it
no longer offers the movement (volatility) and directional trade it once
did -- a
particular problem for traders of the stock index market.
A
while ago, I noted that a trader who placed equal amounts of money in the
S&P 500 stocks reaped returns 88% greater than the trader who simply traded
the capitalization-weighted index. The simple message: What
you trade is just as important as how you trade.
The explosion of ETFs has offered traders--quite literally--a world of
trading markets. Few of the struggling traders I've spoken with, however,
have availed themselves of these options.
Let's just take one example. The Emerging Markets
ETF (EEM | Quote | Chart | News | PowerRating) has
certainly shown favorable volatility and trending. From May, 2003 to the
present, it has tripled in value. Average volume has expanded steadily
over this period. Since 2004, the median daily range for EEM has been
1.22%--the equivalent of about 15 S&P points. The median daily range
of the S&P 500 (SPY | Quote | Chart | News | PowerRating), conversely, has been .87%, about a third lower.
Moreover, my research suggests that there are significant statistical edges
in trading EEM that exceed the opportunities in the S&P market. On
Friday, for example, EEM was up over 1%, while SPY was up only modestly.
Since May, 2003 (N = 769 trading days), when EEM has been up over 1% and the
prior two days in EEM have been bullish (as is the case this past Friday; N =
50), the next day in EEM averages a gain of .30% (30 up, 20 down). When
EEM has been up 1% but the prior two days in EEM have been weak (N = 50), the
next day in EEM averages a loss of -.22% (23 up, 27 down).
This tendency for EEM to follow strength with strength is something we have
not seen for quite a while in the S&P market.
The takeaway, however, is not that you should trade EEM. Rather, it's
that you should treat your trading as a business. Every business has to
reinvent itself periodically. IBM began as a pioneer of mainframes, then
became a leader in the home computer market, then emerged as a services
company. General Electric has found opportunity over time in fields as
divergent as media, health care, and finance; now it is pursuing "ecoimagination"
initiatives. Your trading business is no different. To succeed over
time, you need to tweak your business model.
You need to go where the opportunity is.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
His book, Enhancing Trader Development, is due for publication this fall
(Wiley).
