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A Few Notes on Trading the Trader

| | Posted in: Animal Spirits, Technical Trading

In his 2010 book Trade the Trader: Know Your Competition and Find Your Edge for Profitable Trading, author Quint Tatro observes that “…what most investors don’t understand as they start to learn their basic technical patterns…is they are the ones actually in play. Seasoned traders are no longer just cuing off of charts or indicators, they are also analyzing those same charts to determine what the amateurs are doing, and are seeking to profit from the ignorance of the newcomers. It’s a chess game where the successful traders are thinking two and three moves ahead, playing off the basic strategy of the newcomers. Those simply pursuing a basic path of understanding technical analysis will find it is a road that ultimately leads to frustration, whereas those looking to trade the traders will be met with an endless world of opportunity. …If you don’t know on which side you fall, odds are you are someone’s next meal.” Some notable points from the book are:

From Chapter 3, “It’s All Opportunity”:

Page 23: “The market is neither good nor bad; it is just a wonderful world of opportunity. Furthermore, it is not your job to determine where it should go. Instead, you want to humbly seek to profit from whatever direction it moves.”

From Chapter 4, “Trade the Trader”:

Page 25: “To remain one step ahead of this crowd, you must not only study the underlying market character, you also need to study the current market players. The sooner you realize you are trading against other traders and not just the stocks or the market, the better off you will be.”

Page 32: “‘When the masses have moved to using traditional methods, such as technical analysis, you must be willing to trade on the failure of these patterns to exploit the crowd’s movement for your own benefit.”

From Chapter 5, “Finding Your Edge”:

Page 43: “Literally hundreds, if not thousands, of proven strategies exist from which you may choose to find your edge. These are proven strategies that traders at this very moment make consistent profits from year after year. …if you do not seek to master the strategy that fits your personality, temperament, and schedule, you are certainly doomed to fail.”

From Chapter 13, “How to Trade the Trader”:

Page 140: “When so many are looking for the same move to occur, if this move does not transpire all those traders will be like the airline passengers heading for the exits simultaneously. This creates an incredible opportunity because so many traders must now reverse their positions, thus sparking a significant move that you can capitalize on.”

Pages 142, 147: “I have gone long patterns that were traditional short setups, and shorted patterns that were traditional long setups. I have done this only after I have seen with my own eyes these basic technical analysis patterns fail in other stocks I was observing at the time. My trading is now evolving to become much more based on trading traditional pattern failures than it is on trading the traditional patterns themselves. …To truly succeed, you must elevate your game above others and seek to capitalize on where their education ends.”

From Chapter 17, “It’s a Head Game”:

Page 181: “Successful trading is the evolution from a battle between man and stocks to a battle between man and himself. Learning to trust certain instincts, avoid others, and stick to a set trading style, all while keeping emotions in check, are just a few of the issues you will face throughout your entire trading career…”

Some reservations regarding the beliefs presented in the book are:

  • This is a book of individual experience and example, not cited formal research or rigorous empirical analyses of large numbers of observations. Formal research instills confidence in accepting the beliefs of others.
  • Data snooping bias (based on both number of rules/parameters and number of subsamples investigated by millions of investors) is a plausible “fooled-by-randomness” counter to the assertion in Chapter 5 that “hundreds, if not thousands, of proven strategies exist.”

In summary, investors and traders may find parts of Trading the Trader an interesting discussion of exploiting the aggregate behavior of market technicians. However, the author does not establish confidence in the recommended trading approach with rigorous empirical research.

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