Avoiding the pain at the edges

There are three trends to a market based on time frames; short term, intermediate term, long term. Unless you are a buy and hold or maybe short and hold type of person, the long term doesn't offer a lot. The short and intermediate term, however, hold promise.

When a market is moving in a given direction, the majority is right, except at the edges. Think about it for a minute. If the market is moving higher, then the only reason it is moving higher is because the majority of the money is on the buy side and thus the demand for stocks is greater than the supply. When the demand outstrips supply, prices move higher. If there is more demand than there is supply, the majority of the money is necessarily on the buy side. Taken further, when a market is heading higher, the majority is not just true of dollar terms but also true of players since the majority of the players are smaller and the smaller players are typically buyers of stock, not shorting stock. When stocks head lower, eventually the majority of the players also becomes sellers (although they are selling previously purchased stock, not shorting). Thus, the majority is right again ... until the next turn/edge arrives.

It's only at the edges where the majority is wrong because the where a change in direction truly occurs, the majority will necessarily become the minority. The rest of the time, the majority is right.

Now how can a trader take advantage of such knowledge? The obvious answer is that if you are an early adapter to the change in trend, then you are less likely to feel the pain that a turn causes. You don't necessarily need to take the other side of the trade but you do have to do some selling when the majority are forcing stocks higher just as you have to do some buying when the majority are selling.

In the next conversation, I'll talk more about how to avoid the pain of a turn in more detail. It's probably one of the most crucial points in how to outperform the markets.