🔊 STS 008 – Larry Connors: buy the fear, sell the greed

Larry Connors has over three decades of experience in the financial markets industry and is widely regarded as one of the leading professionals, especially when it comes to systematic quantified short-term trading.

He is the author of many highly acclaimed books including “How Markets Really Work” and “Short Term Trading Strategies That Work“. Larry co-wrote “Street Smarts” with Market Wizard’s legend Linda Raschke. The Technical Analysis of STOCKS & COMMODITIES Magazine selected this book as one of “The Classics” for trading books written in the 20th century.

Today we talk about his latest book, “Buy the fear, sell the greed: 7 behavioural quant strategies for traders“, which proves that behavioural factors can be quantified and used on the markets.

I strongly encourage you to listen to the whole episode, as Larry is fully disclosing one of his strategies from the book, which is really very powerful and having a winning percentage over 90%!

The emotions are creating the edges. Prices are mispriced primarily due to some behavioral factors and especially when it comes time to fear. Fear is the strongest emotional factor. Fear tends to permeate or makes a great deal of decision making. Whether it’s on a daily, weekly or even a lifetime basis, when fear comes into the marketplace you will see prices tend to change. You will see behavior tend to change which creates the mispricing.

In this episode

• Larry’s career
• Why many traders are psychologically unable to take trades in times which historically proved to be large-edge high-probability trading opportunities?
• Why emotions play such a significant role in the markets?
• What trading the data means?
• How are markets changing over time due to the technology revolution?
• Is it true that strategies based heavily on fear and greed tend to be more robust than other?
• Why using quant, fully systematic approach helps to profit from market anomalies where fear and greed play role?
• Does quantifying repeatable human behaviour helps to avoid overfitting data?

Some useful links

• The Connors Group – Larry’s company dedicated to applying the power of quantitative analysis to financial markets
• TradingMarkets.com – Larry’s service supplying active traders with the education and tools they need to make trades based on data
• Quantopian – a crowd-sourced quantitative investment firm
• Recommended literature
  • Buy the Fear, Sell the Greed: 7 Behavioral Quant Strategies for Traders, TradingMarkets Publishing, Larry Connors, 2018
  • Street Smarts: High Probability Short-Term Trading Strategies, M. Gordon Publishing Group, Linda Bradford Raschke & Larry Connors, 1996
  • How Markets Really Work: Quantitative Guide to Stock Market Behavior, Wiley, 2nd Edition, Larry Connors, 2012
  • Short Term Trading Strategies That Work, TradingMarkets Publishing, Larry Connors & Cesar Alvarez, 2010
• People mentioned in this episode
  • General George S. Patton
  • Linda Bradford Raschke
  • Warren Buffet
  • John W. Henry
  • Cesar Alvarez
  • John Paulson

Quotes and tips from Larry

At certain times especially in a short term basis, fear and greed will overwhelm the markets. And what happens then is that irrational behaviour will occur. This type of behaviour is essentially inherent in humans.

When the fear subsides the buying comes back in, and prices go back readjusted to levels where they should be.

Fear as a whole will tend to seize people’s decision making. This is true. This has been true for mankind and you could see this in the military, you can see this in business, you can see this in markets. So that makes irrational decision making over a short term period of time.

The emotions are creating the edges.

What hasn’t changed is human behavior. Human behavior is inherent.

On a short-term basis, prices tend to mean revert. On a longer-term basis prices tend to trend.

Having a systematic approach in a sense one doesn’t have to physically make those trades in my opinion that’s a competitive edge because most people really do have trouble taking most trades when the fear is the greatest.

People don’t spend enough time on portfolio construction, and it is as important, and possibly even more important than the strategy itself.

Comments are welcome!

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