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Do Pit Traders Have an Advantage? Print E-mail
General Investing Articles | Written by Robert Prechter |

Do Pit Traders Have an Advantage?

By Elliott Wave International's Robert Prechter, Prechter's Market Perspective
Nov 23, 2005

When markets go against a trader, it's so often easy to believe that it's 'a conspiracy': professional traders do better, because they have better information to trade on. Even though Bob Prechter doesn't believe in this conspiracy theory, he does believe that professionals have an advantage. Here's an excerpt from his question-and-answer book, called Prechter's Perspective, which describes what it is.


When people fail to become 'professional' in their approach to the markets, they frequently exit the way frustrated gamblers leave Las Vegas: absolutely convinced that the deck is stacked in favor of the house. Usually, there is a feeling that the game used to be fair, but it somehow became rigged against them. Is this accurate?

Bob Prechter: Yes and no. The game is not rigged, but it is stacked against them because their opponent is their own unconscious emotional mind. Can your cerebral cortex beat your very determined unconscious mind?

But you have to have some sympathy. Looking back on paper, October 1987 is just a line on a chart, but as they lived through the crash, many found it very hard to understand how values could legitimately go from where they were on August 25, 1987, to where they were on the morning of October 20.

Bob Prechter: Most investors believe that they are dealing with a law of cause and effect, with the market's action on the 'effect' side of the equation. The market does operate in a cause-and-effect world, but it is a reading of what is on the 'cause' side. The market's behavior itself just IS. It is a manifestation of naturally rhythmic mass mood change. Any student of the market, as opposed to a theorizing model-builder, will have to come to that conclusion.

George Lindsay, in his very last market letter, published in February 1985, said this: 'Is it a 'crazy' market? Most professional market men call this a 'crazy, ' 'outlandish,' or 'weird' market. I can see nothing about it that differs materially from other strong advances….' That is from a man who wrote market commentary for 34 years and saw all types of markets.

A fox appears to be crazy only if you expect it to behave like a chicken. Similarly, the market appears 'crazy' only if you expect it to behave according to the laws of physics rather than those of sociology, upon which it is actually built.

Will you at least admit that professional traders have an unfair advantage because they have instantaneous access to resources that part-timers and amateurs do not?

Bob Prechter: Think a minute. Isn't that the case with every business? Why would anyone expect a professional commodity trader to trade as poorly as does the general public? So they have an advantage, but it is not an 'unfair' advantage.

Even then, there are several points to make. First, if anyone would like to become a professional, he or she can choose to give up regular life and crawl into the pits with the professional traders, thereby gaining all the latest 'information.' Secondly, the 'information' a professional trader gets is, nine times out of 10, erroneous or misleading or irrelevant to the trend of the market. Finally, even a cursory examination of commodity charts shows a remarkable propensity to trend, and split-second timing is really unnecessary. If you call the trend right, you'll make money.

If you make a lot of casual assumptions about hot, up-to-the-minute 'information' without studying the way markets act, you'll deserve to lose every penny you put at risk. In fact, it's long been shown that the in-and-out trader who relies on the latest news flash has the worst results. Many so-called insiders blow themselves out in just that way.

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