Last Exit for the Lost

Last Exit for the Lost

Brett N. Steenbarger, Ph.D.

I’m encountering frequent tales of the demise of once-successful “daytraders” of the futures markets, which perhaps had me thinking of The Fields of the Nephilim when I titled this piece.

Here is what I believe:

As an increasing number of players swarm to a recognized trading “edge”, this creates new patterns of over-reaction and under-reaction in the markets and fresh sources of “edge”.

The new sources of “edge” are always diametrically opposed to the old ones. Where the edge had been momentum plays with growth stocks, the new edge can be found in fading low volatility markets. The erstwhile edge in harvesting ticks from inefficient markets yields way to an advantage trading the more protracted overreactions of these short-term players.

The insight I had on Friday was that the patterns defining the current edge are not resolvable into the terms of the previous advantage. They are emergent phenomena, to draw upon a concept from systems theory. No amount of counting and categorizing pixels on a television set can yield insight into the meaning of a broadcast; the laws that capture the firing of neurons cannot speak to the content of resulting thought. The overreactions of today’s traders form a larger pattern that becomes tomorrow’s source of alpha. The larger pattern cannot be seen from within the perspective of current traders.

Yesterday’s heroes always hope to hold on to their dying edge by blending the old with the new—oblivious to the fact that the new derives its edge precisely from the excesses of the old. Shades of Kuhn and paradigm shifts…

As I write this, Carl McCoy is growling “Love Under Will”: a song about goodbyes at the graveside. I visualize the book in the eminis—the thick size and the frantic pulling and hitting of bids and offers—and I can see yesterday’s traders desperately hoping to catch the next few ticks. Like the Nephilim contemplating life in the cracks and hollows, I’m resigned to the reality that “someone’s gonna suffer.”

Brett N. Steenbarger, Ph.D. is Director of Trader Development for Kingstree Trading, LLC in Chicago and Clinical Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY. He is also an active trader and writes occasional feature articles on market psychology for a variety of publications. The author of The Psychology of Trading (Wiley; January, 2003), Dr. Steenbarger has published over 50 peer-reviewed articles and book chapters on short-term approaches to behavioral change. His new, co-edited book The Art and Science of Brief Therapy is a core curricular text in psychiatry training programs. Many of Dr. Steenbarger’s articles and trading strategies are archived on his website,