Trading a Market That Discounts Logic

 | Jan 26, 2012 | 2:15 PM EST
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There are some thought-provoking comments on my blog about how easy or hard trading this market has been. One view is that we are at highs and have had plenty of big runs, so quite a few people must be doing well. On the other side is the view that the number of good trading opportunities has diminished sharply in the last few years and that the nature of trading has changed dramatically because of high-frequency trading, quantitative easing and the poor economy.

I ponder this issue quite a bit, as it goes to the heart of the issue of to what degree you should reinvent your trading style to adapt to a changing environment. What has worked in the market since the lows in March 2009 has definitely changed, and even if you are inclined to change your style, it has not been an easy task.

I don't know of a single trader who has been doing this for a long time who feels he is doing as well recently as he did in the past. Traders are making money, but they feel it is much harder and comes with higher risk.

Rather than complain about it (as I do too often), the smart thing is to look for effective ways to deal with it. The big problem from my standpoint is that most of what works best tends to be at odds with what seems logical to me. I suspect that that is exactly one of things that high-frequency trading tends to exploit, so maybe we really should use the thinking that George used in an "Seinfeld" episode when he declares that "if every instinct you have is wrong, then the opposite would have to be right." After that, George can't go wrong when he starts doing the complete opposite of what he would do normally.

I'm being a bit flippant, but this market has demanded a much different thought process. It is very easy to just sit and hope that eventually things will revert when macroeconomic conditions or the political environment changes. If we want to do well in this market, we will have to admit that some of the things that seem logical and make sense just don't work very well anymore.

The good news is that there will always be great opportunity in the market, and if we work hard, we can profit. The best advice I've ever given traders is to just keep plugging away at it and don't give up when the going is tough. It is the nature of the market, and it is why it's so potentially lucrative.

This has been a challenging market for quite some time, and I expect it to continue to be that way, but I'm confident that we will be able to profit no matter what happens.

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