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How Traders Can Spot Abnormal Behavior in Market Signals

05/09/2017 2:46 am EST


Jake Bernstein

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

Fresh out of college, Jake Bernstein developed observations about abnormal behavior in his work at a Chicago mental hospital. Decades later, those experiences helped this trading legend  spot abnormal market behavior and opportunities. You can too. First of three weekly parts.

My first job out of college in the summer of 1968 was in the notorious Chicago State Hospital, a mental health facility, or more appropriately an insane asylum. There, my eyes were opened to the sad reality that those who could afford treatment would not end up in state care where their opportunities to improve were minimal. The vast majority of patients spent the rest of their lives moving from one institution to another as their behavior continued to deteriorate.

Some people tell me that my current job as a trader is the same as my first job except for the fact that I get paid better.

As a staff member assigned to care for these patients, one of my responsibilities was to determine the behavioral status of patients and to inform the psychiatric staff so that appropriate medications and/or therapies could be prescribed. To do so I spent most of my time observing patients.

Agitated patients would resort frequently to extreme physical attacks on staff and patients. Once the aggressive behaviors began they would spiral out of control, often requiring security guards to come to the unit and the restrain the combatants.

I realized that by the time the behavior was spotted it was too late to treat it. I learned to observe and identify those behaviors that preceded violent outbursts so that we could stop the behaviors before they started.

More often than not these initial behaviors were subtle. Consider the behavior of throwing a chair. Throwing a chair must begin with walking toward a chair. Throwing the chair must then progress to picking up a chair. Finally, throwing a chair must be preceded by lifting the chair. Prior to walking over to a chair with the ultimate intent of throwing it, certain behaviors such as staring at the chair were observed to be early signs of the final act. I learned to observe abnormal behavior as a symptom or set up of what was likely to materialize in the near future.

Many years later in my life as a trader I recognized the importance of deviant market behavior or abnormal market behavior as a symptom of what was likely to occur soon.

Most traders spend their time looking for normal market behavior or established patterns that would predict normal behavior. I spend more time looking at the relationship between divergent indicator activity as a tool for anticipating and timing market turns.

And that has served me extremely well.

Normal market behavior is the focus of most trader attention and activity.

On the other hand, I have found that very powerful and accurate signals can be generated by, for lack of a better term, abnormal market behavior.

Consider, for example, contrary opinion, divergence, panic liquidation and bottoms, panic buying at tops, odd lot short sales, and other divergent indicators as examples of my point.
The next two articles in this series of three will further develop the ideas with this chart evidence to illustrate and support my point of view that could help your own trading.

Best of trading!

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