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Michael Bigger is an investor and a trader who has been involved with trading technologies for more than twenty years. In 1992, Michael joined Citibank as head trader of U.S. single-stock derivatives, where he managed a $5 billion portfolio of equity derivatives. In 1998, he joined D.E. Shaw & Co., L.P. to trade the U.S. equity derivatives portfolio. (More)

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Thursday
Nov082012

Simple Concept, Big Money

In our pursuit of stock trading profit, we view securities being connected to each other by a spring force. This force is invisible but very powerful. When one security moves, other securities are pulled in the same direction by the spring force this stock exercises on other securities at varying degrees.  Because the connection is flexible like a spring, the movements are not always 100% in sync, and that is where the trading opportunities come in.  When you see one security moving, you can take a position in other securities connected to it.  Understanding the force that connects them together is essential to exploiting the opportunity.  Because there is a lag in the pull this force is somewhat predictive. Think about it this way: You are tenth in line waiting for a traffic light to turn green. I bet you that when the first car gets going you won’t be far behind.  You may even find yourself stepping off the brake when you see the light turn green, you don’t wait until all the cars have gone through the light!  With the elastic force, you can anticipate market movements ahead of the crowd, and elevate your trading to the next level.   

These laggish pulls have all kind of wonderful applications in pairs trading, signal building, options trading, and so forth.  Depending on how you think about the spring force, you can find many different ways to interpret and exploit these opportunities.  
 
Can you think of one way to incorporate this in your trading strategy?
 
Written by Michael Bigger. Follow me on Twitter and StockTwits.  

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