Sunday Musings

If fundamentals don't drive the market how come a share price nose-dives on a profit warning?

If support and resistance is so important how come I can give you an example of how the price sailed through it for every example you throw at me where it bounced?

If a bull wants to release money to buy a new Ferrari how come selling is bearish?

If inexperienced traders expect to double their money each year how come heavyweights like Warren Buffet, George Soros, Peter Lynch and John Neff only have long-term annual average returns of 27% - 35%?

If day trading is the road to heaven how come the biggest fortunes seem to come from looooong term investment?

If the futures aren't used for hedging how come they are anything more than a playground for gamblers?

If I'm so damn clever how come I'm not a billionaire?

good trading

jon

barjon said:

If inexperienced traders expect to double their money each year how come heavyweights like Warren Buffet, George Soros, Peter Lynch and John Neff only have long-term average returns of 27% - 35%?

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The answer to that is obvious. New inexperienced traders have more talent just need the time to prove it. Also Warren Buffet spends all his time making documentaries and the Berkshire Hathaway annual report must take a fair amount of time to write. Maybe he'd make more if he spent more timing investing that doing these two activities!!

barjon said:

If fundamentals don't drive the market how come a share price nose-dives on a profit warning?

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Fundamentals do drive the market, but are pretty much priced in - by the time most people have heard about the profit warning, the price will already have dropped.

If support and resistance is so important how come I can give you an example of how the price sailed through it for every example you throw at me where it bounced?

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S/R (as with most TA concepts), is not absolute - it's a statistical approach. If price approaches an S/R level, it's behaviour there will indicate what price is most likely to do next.

If a bull wants to release money to buy a new Ferrari how come selling is bearish?

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Most people sell because they are no longer bullish, obviously there are some exceptions. If all the bulls wanted to free up money, this would be bearish - a bunch of people who think prices will rise won't make them rise unless they follow through by buying.

If inexperienced traders expect to double their money each year how come heavyweights like Warren Buffet, George Soros, Peter Lynch and John Neff only have long-term average returns of 27% - 35%?

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1)Over-optimism
2)The people who you've mentioned are managing large amounts of money, so aren't able to use the kind of short term strategies which allow rapid compounding.

If day trading is the road to heaven how come the biggest fortunes seem to come from looooong term investment?

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Similiarly, daytrading (done well) allows rapid increase in capital (in terms of % growth). Obviously this is good on a small account, but eventually long term trading is the only realistic option to make use of all your capital.

If the futures aren't used for hedging how come they are anything more than a playground for gamblers?

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My understanding is that they are used by hedgers, but the hedgers need liquidity (someone to take the other side of their trades), and this is where the gamblers step up to provide their "services".

If I'm so damn clever how come I'm not a billionaire?

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If you're so damn clever, how did I just rebut all your points?

Also, not all clever people become billionaires - how many Nobel prive winners end up being worth a billion?

fifty2aces said:

Most people sell because they are no longer bullish, obviously there are some exceptions. If all the bulls wanted to free up money, this would be bearish - a bunch of people who think prices will rise won't make them rise unless they follow through by buying.

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52, sorry to disagree.
If all Bulls decided to take out their profits at the same time, that's not bearish sentiment at all, it's just simple P&L accounting. In fact the drop in prices would probably (without any other bearish factors coming into play) lead to fresh bullishness as those traders on the sidelines spot value.
It happens every minute of every day on every instrument, that's what corrections and retracements are all about - simple profit taking. But in a bullish marketplace, profit taking does not and never will equate to bearish sentiment.
which is why inexperienced traders who try to catch top & bottom turning points are forever getting burnt.

in fact, it's NOT that "Most people sell because they are no longer bullish",
I'd suggest that most selling occurs simply because, rightly or wrongly, Take Profit targets have been hit.

just my 52 pence worth ......

Fifty2aces pretty much covered the bases with his reply. Still, couple of more things to add to that:

barjon said:

If fundamentals don't drive the market how come a share price nose-dives on a profit warning?

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(a) Correlation does not equate causality.
(b) Who said fundamentals don't drive the market?
(c) See also here.

barjon said:

If support and resistance is so important how come I can give you an example of how the price sailed through it for every example you throw at me where it bounced?

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There is no law that determines whether or not previous S/R will or can hold. There are obvious signals that point towards the likeliness (probability) of one thing happening over another. The only law in the stock market is that of supply and demand.

barjon said:

If a bull wants to release money to buy a new Ferrari how come selling is bearish?

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Who said selling is per definition bearish?

barjon said:

If inexperienced traders expect to double their money each year how come heavyweights like Warren Buffet, George Soros, Peter Lynch and John Neff only have long-term annual average returns of 27% - 35%?

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Because trading big money is a different game than trading a handful of contracts.

barjon said:

If day trading is the road to heaven how come the biggest fortunes seem to come from looooong term investment?

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Because 'the biggest fortunes' (a) start out with much more money, (b) unloading 10000 cars isn't so easy on a smaller timeframe. And (c) 'seem' is the right word here, because there's absolute and relative profit.

barjon said:

If the futures aren't used for hedging how come they are anything more than a playground for gamblers?

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Says who?

barjon said:

If I'm so damn clever how come I'm not a billionaire?

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Being 'damn clever' is not a guarantee to success. Nor is it a prerequisite, as shown by several people who managed to do quite well, using plain common sense.

There's a Black Swan around every corner. That is why neither markets not anything else can be predicted with any certainty and why Bollinger Bands, LRCs and even the bell curve are flawed.

That goes for the long term fundamentals, too, I'm afraid. Warren Buffet is a Black Swan. Everyone aims to be his equal but, the fact is, he is a one off.

Split

Why does Buffet ONLY make 27% on his capital every year? That is elemental, really. With the billions that he has, he has to invest in bigger and bigger projects, whereas we mortals are able to
(some of us) double our money on peanuts. Not all of us are very good at that, either!

Splitlink said:

There's a Black Swan around every corner.

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true mate, there's one on Sukhumvit Road, just opposite Asok skytrain station .....:cheesy:

Splitlink said:

Warren Buffet is a Black Swan.

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I thought nowadays only police officers joined the Masons ? :whistling

rathcoole_exile said:

true mate, there's one on Sukhumvit Road, just opposite Asok skytrain station .....:cheesy:

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Oh, yeah! Maybe its waiting to catch the train. I wouldn't take that one, if I were you!

nice ones, guys:cheesy:

As for "says who?", fire, I was just reflecting on some of the bold assertions that have been made on the boards over the past few months and which stuck in my mind.

There's a couple I'd expand on a bit:

1. Fundamental driver. People keep talking about fundamentals being priced in which is true, but isn't that "pricing in" a continuous feature which affects the short term movement as well as the long term? eg: the profit warning nose-dive (it'svery often the case that it hasn't been priced in prior to the event, fifty, hence the nose-dive).

Supply and demand rules ok, as fire says, but, as rathcoole says, can profit taking be truly seen as "supply"?

2. I think things like support and resistance give a "reason to enter". Trade management takes over from there (that all too simply stated cut losses and run winnners) and which brings home the bacon.

3. I think inexperienced traders generally have unrealistic expectations of the level of gains to be made year in year out. Don't forget those heavyweights weren't always wielding huge amounts of money.

cheers

jon

barjon said:

If inexperienced traders expect to double their money each year how come heavyweights like Warren Buffet, George Soros, Peter Lynch and John Neff only have long-term annual average returns of 27% - 35%?

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Well, lets see:

1) they are playing with OTHER people's money
2) it also a horrendous amount of money they are playing with
3) they can/do move the market
4) hence their style of play/game is different

and who says most day traders want to become billionaires/millionaires? Settling for not having to work for someone else and having extra free time would be enough for me . . . .

barjon said:

nice ones, guys:cheesy:

1. Fundamental driver. People keep talking about fundamentals being priced in which is true, but isn't that "pricing in" a continuous feature which affects the short term movement as well as the long term? eg: the profit warning nose-dive (it'svery often the case that it hasn't been priced in prior to the event, fifty, hence the nose-dive).

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True that fundamental information often isn't completely priced in in advance, but this is generally because it is not known in advance (therefore you can't take advantage of it), or because it is partially anticipated, e.g. if most people expect a rate cut, it will be partially priced in, which reflects the expected probability of a cut - if this probability is correct, you can't really take advantage of the fundamental info in the long run (unless your best mate is called Mervyn and you know that there will be a cut!)

3. I think inexperienced traders generally have unrealistic expectations of the level of gains to be made year in year out. Don't forget those heavyweights weren't always wielding huge amounts of money.

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This is absolutely true, although if the heavyweights were using the same longterm strategy with a small account, they'd probably get similar returns to those that they currently do (since the only real change would be the ability to enter and exit positions quickly, rather than having to work large orders). If they took advantage of their smaller size, they'd potentially do better - apparently Ed Seykota returned 250,000% over 16 years, but I doubt he could do that on a £10bn account.

temptrader said:

Well, lets see:

1) they are playing with OTHER people's money
2) it also a horrendous amount of money they are playing with
3) they can/do move the market
4) hence their style of play/game is different

and who says most day traders want to become billionaires/millionaires? Settling for not having to work for someone else and having extra free time would be enough for me . . . .

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That's what they all say!

I know that, since I became one, I can never get enough.

barjon said:

If fundamentals don't drive the market how come a share price nose-dives on a profit warning?

If support and resistance is so important how come I can give you an example of how the price sailed through it for every example you throw at me where it bounced?

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This is because 'support' and 'resistance' is the type of kindergarten stuff that only mechanical traders depend on.

EVERYTHING IS KNOWN IN ADVANCE

barjon said:

If the futures aren't used for hedging how come they are anything more than a playground for gamblers?

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Who says this? :-0

barjon said:

If I'm so damn clever how come I'm not a billionaire?

good trading

jon

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Maybe you're not that damn clever....next time, put your hand up

new_trader said:

Maybe you're not that damn clever....next time, put your hand up

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How do you put your hand up when socco is giving the lesson...are they not tied to a chair ?

NOTHING IS KNOWN IN ADVANCE.

We are told so much stuff by so many so-called knowledgeable people and, really, they no know more than any of the rest of us.

No one knew what was going to happen in China, nor Burma, The Twin Towers, The London Underground nor the Madrid Metro.

Now we are being told by the wise men that they saw the rise in the oil price coming and that, now they knew all along that the Footsie would recover from the 5500 in the beginning of March to the 6200 that it is today, when they were saying six weeks ago that anyone buying shares at that stage were mugs.

That is all a load of ********. There is no way that anyone can know anything for sure. They can take a stance, for right or wrong, and if they tell others, then it can only be a calculated opinion that their disciples accept. But there is no sure knowledge of what is going to happen in the future.

Not only that, but anyone buying shares for a recovery, right now, are probably making a mistake.

But how do I, or anyone else know, for sure?

But how do I, or anyone else know, for sure?

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What? First you say it's all crap, now you want me to tell you?

new_trader said:

This is because 'support' and 'resistance' is the type of kindergarten stuff that only mechanical traders depend on.

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Define 'mechnical traders'...
What is the opposite of kindergarten stuff?
How does one recognize it?
Because nobody elses uses it or because he thinks nobody else uses it?

new_trader said:

EVERYTHING IS KNOWN IN ADVANCE

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When you posted this earlier on, I reacted on asked you: "if you truly believe this, do you look to the left and right when you cross the street?" You said I misunderstood the concept. But given that you post these phrases, apparently out of context, how else are we to interpret it?

Splitlink said:

NOTHING IS KNOWN IN ADVANCE.

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I wouldn't exactly say that neither...

firewalker99 said:

I wouldn't exactly say that neither...

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I don't expect many to.

It is, however, the only truth about trading, because trading is about news.

The strangest thing about trading history is the hindsight phenomenum. Everyone knew that Worldcom had to collapse and they told us why they knew that it was going to. Afterwards. But it never stopped millions of Americans from investing in it beforehand.

Who remembers Barings? A rogue trader caused its downfall. How was anyone supposed to know that that was going to happen?

Financial history is full of these incidents They are not so rare as they seem. The "experts" stop one hole and say that they have learned the lesson. But swans appear in other places.

Trash bond crisis. South American loan crisis. Housing loans crisis. Prime loans crisis.
UK credit card debt crisis has not come home to roost, yet. UK credit card debt is 33% of the total for all Europe. The bankers and politicians say that it is now under control.

Do you believe that?

What else is there waiting to creep out from under the woodwork?

I trade because I am, right now, nervous to invest in anything. Daytrading is the only safe (?) way to earn a crust because the trade is closed, win or lose, every day. But from one hour to the next (remember Twin Towers) who knows?