More than ever, traders are subject to a dizzying array of data. Technical analysis, fundamental analysis, economic indicators, macro-economic policy, and the latest financial-crisis rumors all compete for a trader’s attention. The sheer quantity of information can become overwhelming, and the search for a trading edge can seem like blindly groping for a needle in a haystack.
Not only can the data seem overwhelming, but so can the competition: Well-capitalized high-frequency trading firms and hedge funds scour the markets for exploitable edges over ever-shrinking time horizons.
In the midst of this information chaos and extreme competition, however, there is still space for the individual trader or the startup trading company. In fact, the opportunities today might be greater than any time in history simply because these challenges completely ignore one seldom-discussed truth: Markets are frequently dominated by participants who are not profit-motivated in any rational sense of the term. This article will focus on isolating market patterns created by the general investing public, who by any rational standard, are not profit-maximizing economic participants.
Wrong trade at the wrong time
Most traders are dimly aware the investing public has bad intuition about market timing, but few understand how consistent this shortcoming is. The authoritative source on real investor performance is financial services market research firm Dalbar (www.dalbar.com), which puts out an annual report titled, “Quantitative Analysis of Investor Behavior” (www.qaib.com). Here’s a taste of DALBAR’s findings: In 2011, a year in which the S&P 500 (SPX) was up 2.12%, the average equity investor lost 5.73%. Over the past 20 years, the average equity investor has underperformed benchmarks by 4.32%.