Trading Journal 02162007: Trade with “Statistical Outliers”

When there is not much changes on FA (marketwise or stockwise) side like today, it would be a competitive trading game among traders.

The “Competitive” word I used here means that most traders (either as buyers or as sellers) are competitive in terms of their IQ, EQ and experiences.. And like in any other population, there are a few statistical outliers standing out from the crowd, the few really smart or lucky ones, and a few really dumb ones (or just having a bad day, we all have been there and done that).

So, if we look at the chart of individual stocks during such a day trading session, we can see the bulk of trades were distributed within a price range, well below the “resistance” (or the top) and well above the “support” (or the bottom) for the day. If we trade among the crowd within this price range, it’s very hard to make money, and actually easy to lose money as a day trader. That is because those trades are conducted among the well balanced and competitive buyers and sellers, and market is in balance.

The “resistance” and/or “support” are often identified or tested when trades move with a “spike” (featured often with certain speed and volume). “Spike” occurs everyday and for many reasons, expected or unexpected, rational or emotional, marketwise or stockwise, just anything you can think of. We are in the stock market, and it’s never short of surprises. So, if we can make one short near the “resistance” or one buy near the support, we will have plenty profit margin and trading time to close the trade in the “balanced part” of the market.

In an analogy, a day trader is almost like a lonely hunting wolf, watching the crowd closely, and waiting for the “outliers” to come out, and then strike. Never get into the crowd even you are hungry. Once you get into the crowd, thinking you are smarter and trying selling higher to the buyers or buying lower from sellers than their “group” price level, most likely you will end up getting beaten up by the gang.

Worse comes to worse, if for some reasons we were not lucky enough and did not even get near the “outliers” or there were just not that many coming out, then don’t do any trade, and no trade is better than “trading” riskily. Instead, spend the day studying the surrounding hills, forest and whether, and observing the crowd. Do more FA and TA work for the next day.