Home > management, Markets, Teaching, trading, Uncertainty > Profitable ETF Trading Strategies: applying Gladwell’s insights from “The Tipping Point”

Profitable ETF Trading Strategies: applying Gladwell’s insights from “The Tipping Point”


Malcolm Gladwell’s excellent book “The Tipping Point” describes the common characteristics of mass psychology with respect to fans and trends. Even though it is just a popular psychology book, and has been criticized by some for its lack of academic rigor, I still think the book offers a lot of useful insights to the world of trading that can be applied by individual traders to their view of the markets.

This article describes how I apply his insights, which you may find useful in your own trading practice.

Gladwell classifies large populations into five categories, based on how and when they adopt a new trend. Not every new fad develops into a full-blown trend, but every full-blown trend, he suggests, experiences these five categories of people.

To paraphrase, then, here are Gladwell’s five classifications, with my naming convention and interpretation:

Innovators: these are the scouts who take the first step into the bold unknown.

Early adopters: people who see how the innovators ideas and actions have merit on a wider setting.

Early mass adopters: a large group of commercially significant people or businesses who have waited to see how the early adopters applied the new idea before taking it on themselves. They can afford to wait for the first two groups to learn what they’re going to learn about the new idea. This group knows that as long as they beat the late mass adopters, group 4, they will retain their competitive advantage in the marketplace.

Late mass adopters: this is the remaining group of commercially significant people or businesses who resisted the new idea for a long time until they see no way out of it but to join the rest of humanity.

Grumpy old men: these are the folks who adopt a new idea because they have no other choice. This group would still be riding in horse and buggies except they don’t make them anymore and so they have to buy a car, but they don’t like it.

It is my sense that in the lifecycle of trending assets, we see the same five groups manifest in the storyline of the trend no matter what the timeframe is. Ask yourself “which group am I in  when I enter and when I plan to sell?” and see if that helps you better understand your strategy in terms of group psychology. 

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  1. Terry Lesniak
    April 13, 2009 at 6:26 am

    Where you place yourself on Gladwell’s Classification spectrum will determine your long term “edge.” For all those traders out there who think entries take a subsidiary role to exits….. guess again.

    Terry

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