How to NOT gain an information advantage to beat the stock market

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Hi, this is your Trader of Stocks. Looking for a way to beat the stock market with more and better data? Stop right here! Save valuable time on the learning curve by accepting early on that it is not possible or necessary to develop an information advantage as an active stock trader.

Introduction

Whenever you question my rather Zen-like approach of getting things done nowadays please recall where I am coming from and that I was doing the opposite thing for many years until I realised that I was on the wrong track! What you are about to read is self-centered as I am about to reveal my biggest failure. It took me half a decade to truly rewire my academic and engineering mind. That transition marked the low point of my learning curve right before I started a 5 year climb which lead me to profitability.

I believe that this detailed exposition of my biggest failure possesses a high educational value, hence I decided to share it. This is especially true for all those of you with a scientific background. If you are coming from that ‘analytical’ direction you have to let go of the idea that you can outsmart and beat the market with data. If it would work, many scientist would have an easy time making money in the markets. So ask yourself, why is that not the case?

On the other side I believe that the free spirits among you have to learn at least some technical skills first before they can hope to beat the markets for good. Just make sure to not go overboard like me.

In the following I’d like to show how easy it is to deceive yourself when it comes to running a trading routine.

I maintained a sophisticated Excel spreadsheet (My trading routine) during my early years of being a hardcore O’Neil follower. As it turned out, all that extra effort was just a collossal waste of time. It robbed me of at least a couple years.

Before we jump right into it I want to make clear again that this article explains how it shouldn’t be done! Trying to outsmart the markets is a dead end and the Excel spreadsheet shown below was a failure!

How I almost drowned in market data

Here’s a screenshot of a breakout system I created where breakouts in many different groups of stocks are monitored (High earnings growth, highly speculative, high relative strength, large and small caps…)

This subsystem was fed with 10 screens alone and I created my own breakout index on the right. This here is just the front end by the way and there was a lot of data crunching going on other tabs.

Here is the whole ‘wallpaper’ of my so-called trading routine:

The green area which is seventh from the right side is the aformentioned breakout system. As you see, there was a ton of other stuff going on. Each days open, high, low, close price and the volume of the NASDAQ Composite, S&P500 and NYSE Composite as printed on the first page of eIBD was copied into the spreadsheet.

There was everything in there, trust me on that!

One complete row (day) was filled each and every morning with 67 single data points for over 465 trading days straight. I only missed a couple data points during that period when the research tool I used back then was down or when I was sick and unable to get out of bed before the daily premarket data reset.

I was even sitting in front of my laptop with a lousy internet connection while being on vacation in Spain every morning from 5:00 to 6:30 AM while my wife and friends slept until 10:00 AM. I was dedicated for sure.

Similar wording but completely different meaning!

In hindsight, putting so much effort into this spreadsheet was so insanely stupid. I can’t believe that I tried to gain an edge doing all this.

All that data was then automatically displayed in proper fashion for me to gain unique insights, at least thats what I believed. The output consisted of a 6 page PDF document.

My uselss ‘holy grail’ stock market report

Lets have some fun and go through the individual pages of my ‘holy grail’ stock market report. And you must know that I did this only for myself and never shared it with anyone. I truly believed that looking at all this plotted information was going to lift my trading on another level, while in reality I slowy drowned in data. Silly me!

Page 1 featured the major market indices with accumulation, distribution and follow through days. The actual HLC bar-charts were all computed in excel manually and I was able to go back in time and then print whichever time period I wanted.

Page 1

First page of my holy grail report to outsmart the stock market

The next page page filled with various secondary indicators. I even monitored the exact money printing rate of the FED . I came up with my own small/large cap volume oscillator in order to see where the volumes goes. Advance/Decline ratio was there but also the Advance/Decline volume ratio. I am not sure what my thinking was at that time. This is beyond mad.

Page 2

Second page of my holy grail stock market report

On page 3 I created a relative strength based overview of all the major sectors and industries. Data came from a screen and I had to actually read and then paste the daily closing price of each ETF into Excel before calculating the relative strength against the S&P500.

Page 3

Third page of my holy grail stock market report

Alright the next one is the last page that I will share as the remaining two had been portfolio related.

Page 4

Fourth page of my holy grail stock market report

Here I tracked all quality (based on IBDs metrics) breakouts by hand. The red bars represent failed breakouts if I recall it correctly. I tried to judge the quality of accumulation days by checking how many stocks with great fundamentals actually made fresh 52-week highs that day. And I also tracked the block trades as printed in eIBD, because… …why not!

Again, the reason why I show you all this is so that you guys truly understand that trying to beat the markets by collecting and analyzing vast amounts of data does not work! I any case, it didn’t work for me!

Want to Improve your trading routine? Better do this instead

My decade long experience trading real money taught me that a trading routine must first and foremost be slim and effortless. All the effort I put into the mess above did not translate into a better trading performance, quite the contrary. And I was trying hard for multiple years until I finally acknowledged my failure. Whenever my trading suffered I came up with some more data, because I blamed a lack of data for all my shortcomings early on. In hindsight it is clear that I was simply overloaded with information without any idea or experience how to interpret all this. Instead of focussing on just a few important pieces of information I basically increased the amount and the entropy of information between my ears until I was confused 24/7. My ego was also quite proud of my excel sheet and it had a hard time to admit that it was heading towards a dead end.

I travelled too close to the blackhole and stayed for a little too long. If you watched the movie ‘Interstellar’ you can relate. As a result I certainly prolonged my learning curve by a least a couple years which I will never get back! However, I know traders who put effort into the wrong things for much much longer then me. When you took the wrong path you must be able to recognize it and make adjustments eventually.

Some traders spin in circles forever and never get it.

Don’t be one of them!

Or to put it in the words of Led Zeppelin:

“…there are two paths you can go by But in the long run There’s still time to change the road you’re on”

Whenever you think about gathering more data remember that I did all that and it truly got me nowhere. As a graduated engineer with a back round in scientific research I am trained to analyze and correctly interpret data. This skill turned out to be a major hidden handicap for me.

Caution! Reality check ahead

Ask yourself why Nobel Prize Winners -the smartest problem solvers- around are not able to outsmart the stock market to fund their research? If they can’t gain an information advantage by analyzing market data you shouldn’t even try. If you follow me for a while you probably already know that the ‘secret’ to stock market success is to be found elsewhere.

Today, I focus on only a handful pieces of carefully selected secondary information which proved to work for me over the years:

  • Relative strength
  • Market breadth
  • Put/Call ratio (fear gauge)
  • Retail sentiment

Click here for more details

However the real winning edge is provided by the hard learned ability to make sense of the clues hidden in the price and volume stream of leading stocks. Stock charts are primary information, everything else is secondary!

And I am working very hard to shield my mind from all the noise out there. My routine nowadays is slim and effortless and it yields me all the crazy stock movers I ever dreamed about during my early years. I don’t catch them all but I also couldn’t care less about the ones I missed.

But who knows, maybe all those wasted years were needed to teach this rational German engineer that stock picking and market timing is not a science and that you can’t force it by any means.

Enough! Time to forget about this monumental failure of mine!

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Disclaimer

The content of this article reflects my own opinion which stems from my experience gathered trading real money in the stock market. It represents my style and it suits my personality and risk allowance and it may or may not suit yours. Please refer to my honest risk warning for further information regarding the risks associated with active stock trading.


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