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Going against the crowd isnâ€™t easy
Posted: Fri Jun 09, 2006 9:26 pm
Wanted to share an interesting article by Inner Worth(http://innerworth.com/
[quote] Going against the crowd isnâ€™t easy. We have a natural human, adaptive tendency to follow the crowd. Following the crowd usually keeps us safe, like fish that swim in schools for protection. The old adage, thereâ€™s safety in numbers, is true most of the time. As adaptive as conformity is, however, it prevents us from looking inward for guidance. We have a habit of looking outward and thinking of what we "should" do rather than what we want to do.
Itâ€™s amazing how conformist humans can be. Have you ever been at a party and done something you would never think of doing just because everyone else was doing it? It's hard to break away from the crowd. It is difficult to look completely inward for direction. But, ideally, we should be able to look inward and not care what anyone thinks. For example, imagine going to the financial district during lunch hour, taking off all your clothes, and walking around nonchalantly (believe or not, you can actually see this happen in San Francisco occasionally). It would be difficult to do, but if one were completely independent minded, he or she would have no trouble doing so. He or she wouldn't care what anyone thought. If only we could always be so secure that we naturally traded like rugged individualists.
Rugged individualists are not driven by money, fame, or recognition. They are resilient and persistent. At their core, their self-esteem is genuine and unwavering. As Dr. Nathaniel Branden observes, â€œWhen we appreciate the true nature of self-esteem, we see that it is not competitive or comparative. It is not about making myself higher by making you lower. It has nothing to do with you. It is the joy of my own being.â€
Posted: Fri Jun 16, 2006 4:06 pm
My first experience going against the crowd was in 1997 when I saw that the mutual funds I was holding in my retirement account had made a total of 2% in the previous 8 years. Not 2% per year, a total of 2%.
I decided out of desparation that I couldn't do any worse by trying to time the market instead of relying on buy and hold. My broker, my friends, my wife, my family, and I think even my dog told me I couldn't time the market -it was time IN the market, not TIMING the market, that worked.
Well, long story short, I learned how to time the market, started my own group of hedge funds, and made millions of dollars timing the market. However, contrary to the point of your post, my trading NEVER went against the crowd -it follows the crowd. I don't care how foolish the crowd is, if I can be just follow closely behind and be ready to change directions, I'll make lots of money.
Who cares about the crowd?
Posted: Fri Jun 16, 2006 5:31 pm
In many ways simply deciding to trade for a living is going against the crowd.
I quit a 'good' job with a leading ECN to start my trading business and everyone I talked to thought I was crazy. In fact, spending the rest of my life in an office selling my time to an employer in order to accumulate enough cash to one day do what I actually wanted to do sounded crazy to me.
The academic crowd insists profitable trading is not possible so you're going against them.
The financial industry crowd insists that the only way to do it is to buy and hold (but that's just to maximize the fees they can collect from their mutual funds) so you're going against them.
The general public crowd is hoodwinked, brainwashed, and cajoled to do whatever is best for the companies providing trading, financial, and investment services so if you don't subscribe to 'conventional wisdom' and 'what's possible' you're going against them.
Generally doing what you want to do instead of what everyone and everything else wants you to do is going against the crowd, so I say 'To hell with the crowd, do what you love, and do it well, and you shall have success (it just might take a little longer than you anticipate - the multiply-by-Pi rule seems to have universal application when it comes to how long things actually take compared to how long you wish they took)'
Posted: Fri Jun 16, 2006 7:48 pm
Doug, tell a bit more of your strategies that let you profit from following the crowd, from what I've experienced it never works... Paul, it was a really brave step to leave your steady job and go to full time trading, as bold traders say:"Traders never know when they'll have their Christmas" (meaning that traders never know when the next home run gonna be)
Posted: Fri Jun 16, 2006 8:14 pm
When I first started out I learned a lot from watching an interview with Sir John Templeton. Something he said struck me, and coincidentally is pretty much in alignment with the Turtle philosophy. Somewhere in the world there's always a bull market (or trend). My strategy is quantitative, back-tested, and it's based on making sure that when trends come I'm in a position to profit. I only trade vehicles that have historically trended more often than not.
I guess by following the crowd I think of it as following the money, even if it's not smart money. Of course there's also money to be made by fading the crowd, especially when the crowd's emotions push prices too high or low. I never tested this, but I'm guessing you could make a good living just fading every news story on CNBC, or every stock featured in IBD.
Posted: Fri Jun 16, 2006 8:21 pm
My definition of 'brave' is taking action despite fear, I was afraid of spending the rest of my life in a cubicle, so I acted to do something about it. I suppose I could have been afraid of the unknown, but I never really considered failure as an option (but building my business did take a lot longer than I anticipated).
The worst possible case would be that I had to return to my previous life as a business analyst if I couldn't make it work as a trader and that wasn't so bad (and I would have a lot more insights after building a business of my own).
As it turns out I get as much enjoyment and reward from coaching people and giving financial advice as actual proprietary trading so I am quite happy with my decision to ignore the crowd.
John Strelecky's The Why Cafe sums up my motivation for doing what I did, although I didn't read it until recently and actually realized that was what I was doing! (It's #10 on my non-trading recommended reading at http://www.pmkingtrading.com/id49.html
Posted: Sat Jul 08, 2006 6:50 pm
Doug, how did you succeed to start your own hedge funds without previous trading experience? From Chris67 I learned that it's not an easy thing to do even after you had a very successful track record:
Posted: Sat Jul 15, 2006 2:45 pm
It's a funny thing going with and against the crowd and in my experience you got to know when to go with and against the crowd.
Let me provide an example that might explain what i mean.
During the first few months of trading i can recall talking about X stock or Z stock and without fail an more experienced trader would say, "Oh, X stock, oh i cant trade that stock its on my restricted list, i ALWAYS lose money on that stock." And for a brief bit of time, i sat there confused on how someone could decide that a stock had beaten them and they couldnt get it right. Well, that didnt last long, i soon had my stock....
Goldman Sachs, the leader in investment banking, institutional trading etc, was my "sucker" stock. Stock went up almost every day and for some reason every couple of weeks, when the market got shaky for a day, i had the "urge" to short it. If you looked on the chart, it was a straight line up, a more beautiful chart you couldnt find, yet i had the unexplainable desire to "go against the crowd" and be the first guy in and short it. Time and time again, i would lose and funny thing is, as you talked to guys around the room, a few of them had a GS footprint on their faces as well. (Ironically, if you looked at the names people were trading on an average day, i would say there was 75% correlation - not too many bright new ideas floating around...funny how that works. A lot of people being "sucked" in to doing dumb things on the same stocks.)
The above example is a bad case of going against the crowd because inherently flawed in my approach was one of the KEY rules of going WITH the trend. For me in my experience you want to go with the crowd and go with the trend and only go against the crowd at those very rare turning points. Or to say it a bit differently, its best to go against the crowd and with the trend - the points in time where human behavior and the elements of fear and greed scew people's perception of what type of market they are in a broader sense.
Posted: Sat Jul 15, 2006 7:17 pm
William wrote: Or to say it a bit differently, its best to go against the crowd and with the trend - the points in time where human behavior and the elements of fear and greed scew people's perception of what type of market they are in a broader sense.
I guess you mean by that getting in(Long) during the pull backs while theres still an uptrend and Short during a pull back if there's still a down trend.
However, no matter what time frame the one trades, he can notice during the trading session that there are guys who start shorting at the exact top, good exmaple can be brought with Live Cattle August 2006 contract during 7/6/06 when during last 10 minutes of trading folks shorted it from the top of the daily range 2 points down and since then it went down. I consider this Cattle example as a good one "going against the crowd" example for both day traders and position traders, only few people had the courage to short Cattle that day with all those talks about strong cash. One pit trader even said to Futuresource he doesn't remember when he saw a move like that last time.
Posted: Sat Jul 15, 2006 9:17 pm
Its a confusing thing to go with trends, to " be" the market and to go against the crowd....i think they are all correct, depending when you decide to do each....You gotta know when to "do what" when...
In the past few years I have come across a few good traders, all of them discretionary. Which to clarify, does not mean that i think systematic trading is inferior to discretionary, since i think the exact opposite, however where i traded and the people i knew, discretionary trading and in some cases GUT trading were about as in depth as most want to venture.
One of the "truisms" i learned about the market, passed down from old timer to newbie, and i am sure you have heard it to or at least something very similar..."You got to buy them when they are crying and sell them when they are yelling (or high fiving or back patting.") This goes exactly towards what you are saying, going against the crowd. And i believe that being able to go against the crowd is extremely important because at the turning points, you have to be willing to go against the crowd.
Back to my trader friend and others like him who have EXPLOSIVE days every so often. I view them as hero or zero traders. An example of a trade he would do, SPYs shoot up and expode on the open....he shorts them. Now on somedays that works and the market sinks in and he takes his chop. Other days, it sinks in only a little and EXPLODES higher...he covers for a loss and reshorts a little bit higher at a point that he thinks the market is "at a level." Now somedays it comes in and he breaks even or makes some coin and on a few occassions it explodes again and he gets run over once more. Of couse every so often, he nails THE exact top with this approach and you get the adrenaline rush of nailing the top and making a ton of money. From watching this guy trade for a bit, i can say that his method of trading extremes, regardless of the trend had a very low success rate, but his wins (he would press when he felt things were collapsing) would make up for the losses and then some. He did very well for a period of a few years...and then for various reasons he lost a TON of money. While i dont know exactly the cause, i can think that it was HUGE bet sizing, no real risk management and a string of bad trades that did him in. But my point is that going against the crowd can lead to amazingly profitable trades, where things collapse or explode out of nowhere and everyone gets caught off guard. But to me if going against the crowd means fighting trends and trying to pick bottoms and tops, i think its a lose scenario long term.
As you pointed out, i do believe the proper way to trade the idea of going against the crowd, is to buy near-term time frame chart momentum dips, IF a time frame longer still trend up. What i find is that people typically get caught up with doing yesterday's trade and trade today based on how the past few days have been. Meaning you have people scrambling for shorts at bottoms. During bottoms of market corrections, going against the crowd makes sense and for a few days you will likely be sitting in limbo not sure if things will revert back to the mean or you get another collpase lower. To me this approach is better because it is a calculated bet on the persistence of trends and their typically underestimated durability. Mixed with smart risk management i think it works over time. From a sentiment point of view, trading this way is definitely going against the crowd. Market corrections happen for a reason, some data points, economic datum, political crisis throw the market off wack and you get a big counter move, which makes it seem like its truly the end of the world and if not that at the very least the end of the bull market. (Larry Kudlow chatting it up about the end of the gold run, 4 weeks ago and at that point in time, it seemed like he might have a point)
To your point, guys who try to do the exact top are extremely persistent and have to be well funded but i beleive if you are doing a strategy that bucks up against the crowd "too much" or at the wrong times from a logic point of view you are courting a disaster. Its funny because in my experience being in a prop trading firm it wasnt very hard to find a guy "going against the crowd" - those guys were the ones who were usually getting carried out on their shields. Its a lot easier to be the guy "going against the trend" becuase we feel smarter than everyone else and trick ourselves into believing that everyone is stupid or its different this time. The best traders i have seen are the ones who stick with the general trend, avoid costly corrections and get back in early enough on the resumption of the trend. They go with the flow but are willing to get back in when others are shorting or others are scared.
A classic example, c.f. talked in the past about how discretionary traders do well for a time and then typically their sector gets cold and they get poor. Well, i was at a place with 2 desks. "New money" and "old money". New money made money on buying oils and avoiding tech, which had gotten tricky after 2000 and tough to trade. Old money, were guys who had made money during the bubble, still bought tech out of habit and typically had to fight to make a living and they had the distinction of shorting oils since they didnt believe in the oil run, didnt understand the oil run and were used to the days when oil was 20 bucks a barrel. My point being - "old money" guys were guys who continually went against the crowd. The new money guys werent making hero trades but they did make a killing. They went with the flow, went with the crowd the majority of the time and made money the majority of the time.
(Its an odd thing, the oils stocks and later the metals became the new tech, meaning that the action was very similar to tech from 1999 - 2000 or so. Old money should have been able to just trade the tickers and the price action - but for some reason they just couldnt get out of their comfort zone of hating oil and loving dead tech.)
Thanks for the discussion, i love talking about trading...
Posted: Sun Jul 16, 2006 1:39 pm
from long term that "new money" guys were actually going against the crowd in 1999-2000 since they were buying when "dumb" money was still shorting oil at 11.26$ a barrel in February 1999. So they were doing the right thing and were making a killing as you said. I dont know if your prop guys were day traders at that time, but going Long Oil at 11$ or Corn at 100 Cents would never hurt unless people stop using oil or eating Corn. As you said there are strong trends that it doesn't make sence to go agaist them fundamentally, however shorting madness would never hurt if applying wise money management techniques. Those discretionary guys that were good and then EXPLODED and lost it all definitely bet HUGE on single trades and I only can learn from their mistakes. I guess that Mark Ritchie said about those best locals at silver pits he knew who shorted Silver when it went to 10$ in 1979 and lost it all as they were scalping it short on the way to 15-18. I recently shorted Corn and it was a day trade, I was glad I got out of it at the close since it rallied like crazy on the next day at the open and didn't look back. I've had bad experience going with the flow and almost always lost money on those trades since I didn't have enough staying power. I found it better for me to counter trade after I did a research in futures and found that moves dont last long in either direction, when they occur its about 25% of a time, such recent moves as we've seen in Cocoa(no matter if it's NY or London) only occur once in a while, actually if you run a test on Cocoa market there's no dual moving average system that makes money on Cocoa in the range of 1day- 180 days (results of exhaustive optimization tests on 20 years of data NYC Cocoa). I dont look at longer time frames cos I dont have that desire to "hang out" at the draw down for a long time. For short termers, its vital to do those kinda counter trend trades since the moves are very brutal once the public (or funds)starts panicking and exit their Longs just giving more fuel or vice versa.