A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
When to Adjust Your Trading Strategy
10/06/2011 1:30 pm EST
Veteran traders have settled upon a specific strategy and have made minor adjustments in response to ever-changing market conditions. Oliver Velez tells how he’s adapted over the years.
My guest today is Oliver Velez. He was the very first keynote speaker at the very first Daytrading Expo in 1999, so he’s seen a lot of different markets and traded through them all. He’s going to talk about how he’s adapted over the years to remain successful.
Oliver, I know back in 1999, trading was a little bit different than it is today, and you’ve traded all kinds of different markets. Have you adjusted your systems over the years to each market?
Well Tim, actually, that’s a very good question. In truth, no, and I’ll tell you why.
It’s not that markets haven’t changed, because they actually have changed in some ways. As an example, when I first started trading—this is going back 24 years ago—the average spread between the bid and ask on a Nasdaq stock was $1.75.
That was the average; there were stocks that traded at $4 and $5 spreads, but $1.75 was the average spread between a stock when I started trading.
Today, the average spread is one penny. In that sense, markets have changed. It’s changed volatility patterns and things of that nature, but in reality, what moves markets are two broad emotions, as we know: fear and greed exercised by the participants in the market.
Fear and greed is a constant. That constant has basically made markets generally react the same.
Our patterns, our tactics and techniques, are designed to spot opportunity based on fear and greed. There is a transitional moment between those two emotions that looks the same every time.
For instance, if a market is rising and is in a “greed” mode, there is a moment when greed stops and passes the baton, as it were, to fear.
That picture, that baton pass, that change from buying to a balance of selling looks the same almost every time. What we do is we teach our traders to spot or identify that baton pass.
There’s also the reverse baton pass. A market is in a sell mode, it’s being liquidated, or distributed, by institutional players. There will come a point where the distribution in that stock will stop and there will be a switch, or change.
So the market will go from a fear-based market to the beginning of a greed-based market. If we could freeze that moment, that moment looks the same.
In essence, our strategies are timeless. They can be played across all markets because what moves all markets is basically fear and greed.
I guess that’s why books written in the 1920’s about technical analysis are often times still valid today; you can still use those same techniques.
Absolutely, and the technical approaches, the technical patterns that show up over and over and over again are nothing more than the technical patterns of people. People move stocks.
What we’re really doing in the market as a trader is we’re trading a collective person. This collective person called the market, or called IBM (IBM), or called Google (GOOG), this collective person—the participants create a collective person—experiences emotions.
These emotions show up in the patterns, and these patterns are repetitive over and over again.
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