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Trading, Fast And Slow

Jeff Miller profile picture
Jeff Miller


  • The uptick in volatility is mostly a result of those trading "fast."
  • Even small pieces of news can create an exaggerated market response.
  • Investors who understand the dynamics, can "think slow" and grab opportunities.

In Daniel Kahneman’s excellent book, Thinking, Fast and Slow, he investigates two systems of thought. The first is quick and automatic. The second, more focused on complex issues. Both employ heuristics, but in different ways. Both involve non-rational thinking.

While I am borrowing the title and the general approach, it is not a perfect analogy. So much volatility driven by minor snippets of news. It is time to think about why.

Market Heuristics

The human desire for an explanation for everything drives social media. There must be a reason! The PBS NewsHour show today attributed the stock rebound to economic news. Forget that such news was reported either before the opening or in the first thirty minutes of trading. Other sources assigned different explanations, but none were very credible.

In the last two weeks, we have seen multiple examples of “trading fast.” Here is how it works.

  1. There is a news-driven stimulus. These are all actual examples.
    1. There is a raid on the office of the President’s lawyer;
    2. One semiconductor company provides a clouded outlook;
    3. A tweet or an overnight speech hints at a change in trade talks;
    4. A news conference suggests higher (or lower) tensions with Iran or Russia.
  2. Traders react. Most people do not understand the basic trader approach. You often “take a leg” leaning in a direction that seems to capture the mood of the market. If it goes your way, you ride it. If not, you try to scratch it for even or a small loss. Every piece of news has a simple evaluation: bullish or bearish.
  3. Algorithms react. The top computer systems have learned the keywords that are associated with market moves. These are even faster than the traders.
  4. Technical traders react. The market reaction may send stock prices through levels widely viewed as important support

This article was written by

Jeff Miller profile picture
Seeking Alpha mourns the passing of Jeff Miller, on May 7, 2021. During his time at Seeking Alpha, Jeff attracted a following of close to 40,000 readers and published more than 1,500 articles. He was a portfolio manager at Incline Investment Advisors, LLC. Jeff also was President of NewArc Investments, Inc., and served as a university professor.....................................................................................................................................Jeff is Portfolio Manager for Incline Investment Advisors, LLC.,manager of both individual and institutional investments. A registered investment advisor, he was formerly President of NewArc Investments, Inc. Jeff is a former college professor with a hands-on, real world attitude. His quantitative modeling helped inform state and local officials in Wisconsin for more than a decade. A Public Policy analyst, he taught advanced research methods at the University of Wisconsin, and analyzed many issues related to state tax policy. Jeff began in the financial business as Research Director for a trading firm at the Chicago Board Options Exchange. He investigated anomalies in the standard option pricing models, taught classes for beginning options traders, and developed new forecasting techniques. In 1991 he established a general research consultancy, working with professional traders at all of the Chicago financial exchanges. In 1998 he started NewArc Investments, Inc. Jeff has a commitment to the specific needs of individual investors. It is not a one-size-fits all approach, but one that emphasizes the unique circumstances of each client. Jeff also serves on the board of a small technology company. He occasionally serves as an expert witness in legal cases involving financial markets and hedging.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (7)

Ian Farbrother profile picture
"The least valuable heuristic treats the market as a war between two sides."

Couldn't agree more !!!

... and "The clear majority of investors and managers were doing nothing;"

Yes - I remain always aware that the short-term moves are always 'on the margin'.

As User25... points out: "ignore the long term charts at your own risk".

I don't get seriously concerned unless long-term weekly charts start to roll over ...

Cheers, Ian
newfruit profile picture
Reading that book right now... it certainly pays to think slow.
Arbywon profile picture
Thanks for the reminder Jeff. I know this! I know I know this! Yet, I find it difficult to stand still when those around me are in panic.
Thanks Jeff. I am a behavior based investor. Every stock has it's own way of behaving based on the people who own/trade it...once you have a good understanding you know what is going to happen, up and down. Takes at least a year of watching a stock, daily, to really understand.

And that is key to making money....events will impact stocks differently...just like people react differently to a set of variables.

Since I am now 70 I have mostly stopped doing this...RISK MANAGEMENT...with a focus on WEALTH PRESERVATION. It is tempting to get back into the game, can be a lot of fun but, in a market like this you have to be very careful.
Spot on article Jeff ! I am mostly technical long term, strictly technical short term.
Fundy's confuse me (and many others ) so I rely on my beloved charts. In my opinion,
ignore the long term charts at your own risk. They have kept me out of a heap of trouble
at times. I could never get riding stocks down because one "thinks" the fundamentals are good. Look at the reit market..those charts broke down a long time ago, yet many keep buying, keep holding thru 20-50% drawdowns being happy with the dividends--I cannot do that, just not my style.

"Trading" the markets is not an easy task, look at the competition, as you noted. With that said,
it could produce some nice income if done properly. Personally, I have 2 accounts, 1 for trading
and one for the longer term. Never mix em, and I guess I think slow and fast--lol--.
Best to all no matter your style.
You are right on target Jeff, thanks for this informative article, it reinforces my own thinking. I’ve been in the market since 1984 and during my early years I fell into the drama traps, listening to the talking heads spreading doom and gloom and thinking they knew something I didn’t and reacting accordingly. I do my own research and rely mostly on various print media and tune out the television.
luckymonkey profile picture
I finished the book yesterday, coincidentally. A tougher read than I expected. Highly recommend The Undoing Project if you have not already. Thanks for the great article, as usual. Pretty soon 2009 will be removed from the E in CAPE and the perpetual bears will have an even harder time justifying their outlook. The short termism news, however, will never stop.
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