Smart Money by Scott Brown
Should you develop a personal trading system, one that
reflects your own personality?
A belief persists among investors
that a select group of traders
have the inside edge. Some indicators,
such as The Commitment
Of Traders Report, try to
track the activities of these traders.
Some recent research may
shed light on the composition
of this group, as well as the
techniques that the Market
Wizards use to consistently
beat the market. Once the market participant understands the
areas that make a difference, he can use this knowledge to
improve his trading performance.
Trading the markets is a social phenomenon. Investors are also
greatly influenced by mass psychology. This could explain
trendlines of markets in the limelight that have dramatic shifts in
slope. An excellent example is the petroleum futures bubble at
the end of 1990 that was sparked by the Gulf War (Figure 1).
It could also explain stocks in low-volatility channels despite
favorable earnings, growth and dividends at the end of bear
markets when public interest is low.
EFFICIENT MARKET HYPOTHESIS
Random walk, or efficient market hypothesis (EMH), contends
that past, present and future prices accurately reflect
information coming into the market. Economist Robert Shiller
of Yale University is one of the leading challengers of
standard EMH. He emphasizes the role that popular opinion
could play in volatility. Shiller’s research indicates there is
more volatility in the market than the EMH model can account
for; price may not always reflect value.