wolfstreet.com / by Wolf Richter / Feb 12, 2017
“Crowded trade” is an infamous phenomenon. It’s when traders are all betting on the same direction of a trade. But each trade must have someone else betting on the opposite direction. So who is on the other side of a “crowded trade?” And what do they know that these traders don’t?
And what happens when the traders in the “crowded trade” are all looking for an exit, and suddenly the entire psychology changes?
Oil markets may have reached that point, according to Dan Dicker, a 25-year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline, and heating oil futures contracts. In Oil & Energy Insider, he writes:
When I was standing shoulder to shoulder with all those other oil day traders on the floor of the NYMEX, once in a while I’d get a very funny feeling. All of a sudden, I’d realize that the position I’d built up for myself was largely shared by just about everyone around the ring – and I also sensed that every other trader had had the exact same realization.
That’d be a wary moment – staring around at each other like combatants in an old west quick draw. We’d all still be convinced still in our positions, of course. We, collectively, could be entirely right on the coming trend and just need some patience to all make some money. But we also knew that the first guy to flinch in panic could set off a complete avalanche of traders suddenly becoming less convinced and trying to get out.