Always a lesson to be learned!

Today was a tough day for sure, and this morning it started out much the same way as yesterday… BADLY! It was at this point that I finally said enough, I had to find out what on earth was going on!

My trading method is based purely on statistics and probabilities and to have a grouping of losing trades so tightly packed together was mathematically nearly impossible, or at the very least, required immediate investigation. Well, I found out what the problem was. I was doomed the moment I started trading Thursday morning! The Russell family of indices was being reconstituted, or re-balanced. The link at the bottom will take you to the Russell site and I highly recommend reading it.

I didn’t learn how to trade from making winning trades, I learned by taking losing trades. The last two days are no different. The last two days forced me to look into what was causing this statistical anomoly - multiple losing trades back to back. In a nutshell, the rebalancing that was going on (that I had no clue was occurring) was creating a massive amount of volume and volatility, but in essence wasn’t going anywhere!

This of course, created signals, setups, and triggers visually on the charts, but in fact, these were being created by massive amounts of “meaningless” institutional orders and NOT typical supply/demand dynamics. Simply put, the institutions had to sell enormous amounts of stock of companies that were leaving the index, and buy huge blocks of company stock of those that were being put in. Net result - speculators that were caught unaware like myself recieved a bloody nose.

As soon as I understood what was occurring, I shut down immediately, but not before they took one more jab at me. Moral of the story… learn from your mistakes, they are far and away the best teacher. The learning never stops!

As promised, here is the link:
http://www.russell.com/indexes/about/articles/market_index_change.asp