I assume that we are talking about very talented traders, and it still doesn't make a difference. If it is not your own idea, it messes up your trading? Right. You need to be aware that the world is very sophisticated and always ask yourself: "How many people
are left to act on this particular idea?" You have to consider whether the market has already discounted your idea.
How can you possibly evaluate that? By using the classic momentum-type indicators and observing market tone. How many days has the market
been down or up in a row? What is the reading on the sentiment indexes?
Can you think of any good examples of market tone tipping you off on a trade? The most classic illustration I can think of is one of the soybean bull markets in the late 1970s. At the time,
soybeans were in extreme shortage. One of the things pushing the market up was the weekly government reports
indicating strong export commitments and sales. I was holding a heavy long position in soybeans and someone from
Commodities Corporation called me with the latest export figures. He said, "I have good news and I have bad news."
I said, "OK, what is the good news?" "The good news is that the export commitment figure was fantastic. The bad
news is that you don't have a
limit position [the maximum permissible speculative position size]." They were
expecting the market to be limit-up for the next three days.
Actually, I wound up being a little depressed that I didn't have a larger position. The next morning, I entered
an order to buy some more contracts on the opening, just in case I got lucky and the market traded before locking
limit-up. I sat back to watch the fun. The market opened limit-up as expected. Shortly after the opening, I noticed a
lot of ticks being recorded, as if the market was trading at the limit-up. Then prices eased off limit-up just as my
broker called to report my fills. The market started trading down. I said to myself, "Soybeans were supposed to be
limit-up for three days, and they can't even hold limit-up the first morning." I immediately called my broker and
frantically told him to sell, sell, sell!
