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Trading Against the Crowd: Profiting from Fear and Greed in Stock, Futures and Options Markets

ISBN: 978-0-471-47121-9
206 pages
October 2004
Trading Against the Crowd: Profiting from Fear and Greed in Stock, Futures and Options Markets (0471471216) cover image
Efficient market theorists contend that markets are random and thus not predictable. With the publication of Trading Against theCrowd, however, noted author, economist, and professional trader John Summa convincingly shows that investor sentiment can be incorporated into profitable stock and stock market trading systems. In this groundbreaking book, Summa explains how to use popular gauges of crowd psychology, such as put/call ratios, option-implied volatility, short sales, investor surveys, and advisory opinion to trade against, or contrary to, prevailing market sentiment. He also makes compelling arguments against the efficient markets hypothesis with the presentation of his own quantitative weekly bear and bull news-flow intensity indices, which he builds from news scans. This data series, and other popular measures of crowd psychology, are processed through custom indicators that are programmed into profitable trading systems, such as Squeeze Play I & II, Tsunami Sentiment Wave, and the Fourth Estate. Trading Against the Crowd is the first book to provide a comprehensive assessment of investor crowd psychology, offering valuable market timing tools and trading techniques, including: MetaStock and Trade Station system and custom indicator code; comparative statistical studies of CBOE, OEX, and equity-only put/call ratios; straightforward instructions for combining price triggers with sentiment indicators; a practical guide to understanding put/call ratios, short sales, investor surveys, newsletter opinion, and stock market news-flow intensity; how to use LEAP options as trading vehicles to avoid use of stop loss orders; use of put/call ratios for trading the Treasury bond futures market; and test results and evaluation of trading system performance. Many of today’s professional money managers rely on investor sentiment for improved market timing. They know that at extremes of market sentiment, markets tend to be the most predictable.Trading Against the Crowd shows how you can begin to profit from these short- to medium-term sentiment waves generated by the actions of the speculative crowd. Put into practice powerful sentiment data using thoroughly back-tested trading systems, and rise above the herd mentality of the investor crowd, where potentially large profits await.
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Preface.

Introduction.

Chapter 1. Reflections of a Contrarian on Investor Psychology.

Chapter 2. Measuring "Joe Option Trader" Sentiment.

Chapter 3. Will the Real Put/Call Ratio Please Stand Up?

Chapter 4. The Option Trading Crowd at Extremes.

Chapter 5. Does the Entire Group of Option Traders Get it Wrong?

Chapter 6. OEX Option Traders—Is This a Smart Money Crowd?

Chapter 7. From Statistical Tests to Sentiment Trading System.

Chapter 8. Squeeze Play I: Pulling the Price Trigger.

Chapter 9. Sentiment Squeeze Play II.

Chapter 10. Squeeze Play II and LEAPS Surrogates.

Chapter 11. The Tsunami Sentiment Wave Trading System.

Chapter 12. Adapting Put/Call Ratios to Bond Futures.

Chapter 13. Option Implied Volatility and Investor Sentiment.

Chapter 14. Testing Option Volatility on Equity Indices.

Chapter 15. Stock Options Volatility and Sentiment Long Waves.

Chapter 16. Gauging Crowd Psychology with Short Selling Ratios.

Chapter 17. Public Shorts: Still As Good As Ever as Crowd "Sentimeter".

Chapter 18. Trading Against the Advisory Opinion Crowd.

Chapter 19. The Fourth Estate Crowd.

Chapter 20. Postscript on Crowd Psychology in Financial Markets.

Appendix A: MetaStock Formula Language Code.

Appendix B: TradeStation EasyLanguage® Code.

Appendix C: Notes on System Testing. 

Index.

 

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JOHN F. SUMMA operates his own commodity pool and managed account program. He is an NFA-registered commodity trading advisor (CTA) and licensed, series-3 options broker. In 1997, John founded one of the first option advisory Web sites, OptionsNerd.com. More recently he established a new trading advisory site, TradingAgainstTheCrowd.com. He is the coauthor of Options on Futures: New Trading Strategies and Options on Futures Workbook, both published by Wiley. John regularly writes for Investopedia.com and has published his trading ideas in Technical Analysis of Stocks & Commodities magazine and Futures magazine. A former professional skier, John also holds a master’s degree in economics from the prestigious Graduate Faculty at New School University in New York City.
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