The Trouble With “Bigness”
• THREE TRADERS, three lattes. One latte to satisfy the fat cravings, one to satisfy the sweet tooth, and one for that celebratory treat after making a great trade. All three lattes are the same size, but each has a different aroma, appearance, and sensory effect. It’s sort of the same with price moves. We strive to find big moves to trade. They can make us euphoric, but in reality, not all big moves are created equal. Sure, a $10 move in a $100 stock isn’t going to be the same as a $10 move in a $20 stock. That’s nothing new. But there’s more to price moves than what’s on a trading platform.
So, what other ingredients go into a price move? Prepare to be surprised. Just as lattes are made up of different ingredients, so too are price moves. Each trader has different needs, different goals, different desires. A price move in one stock may not mean the same thing to a momentum trader as it does to a contrarian trader. Which is why it’s a good idea to throw in a mix of volatility and some simple math calculations just to know how big a move really is. Curious to find out more? A good place to start is to read the feature article “Not All Big Moves Are Created Equal” on page 16.
The same can be said of indices; moves aren’t created equal. That has more to do with how the indices are created—they’re weighted differently. Most are either price weighted or market cap weighted. So, when you see a big move in an index, what does it mean for a trader? Turn to page 32, “What Drives the Dow?” and turn your index savviness up a notch.
No two traders are alike. Each has a unique set of goals to be met. So, when you see big moves in the market, there’s no need to get turned on by them all. Only go after the ones that deserve your attention.