Trading Lesson: Is the Small Trader "Always Wrong"? Part 1 of 3

10/17/2018 1:55 pm EST


Jake Bernstein

Publisher, The Jake Bernstein Online Weekly Capital Markets Report and Analysis

When emotions reign supreme as they do in capital markets, myths and fantasies prevail. We know from considerable market history that traders often find comfort and take refuge in market mythology, writes Jake Bernstein. He's presenting at TradersExpo Las Vegas Nov. 14.

Terms such as “oversold” and “overbought” are merely expressions of opinions, wishes or fantasies, however, they are usually not quantified or for that matter not quantifiable. Although proponents of such terms may argue that there are objective scales for determining such conditions the real fact of the matter is that ultimately they are subjective and subject to broad interpretation which is mediated by one’s pre-existing orientation.

Another popular but errant acceptation is that “the small trader is always wrong.”

My problem with this statement is severalfold. First, we need to determine objectively what constitutes a small trader. Is the definition of small trader an odd lot trader or rather determined by account size? How do we define always? Indeed, if the so-called small trader was always wrong they wouldn’t be playing the game.

Efforts to quantify small trader sentiment have ranged from the use of odd lot short sales to monitor small trader activity or actual positions as reported by the Commitment of Traders Report for futures, to the use of my index, The Daily Sentiment Index (DSI).

In this series of three explorations into market sentiment, we will examine the issues associated with this concept as well its applications as a trading tool.

Let’s begin by looking at a chart which I urge you to ponder carefully until next article in this series.


The top of the chart shows S&P futures and the bottom of the chart shows my small trader sentiment index (DSI). Above the upper red line sentiment is 80% bullish while below the lower red line small trader sentiment is 15% bullish. The data has been slowed with a three-day moving average to smooth out spikes.

What are your initial conclusions? Is there a correlation between small trader sentiment extremes and S&P (SPX) highs/lows?

Best of trading,

Jake Bernstein

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