I thought I had better do 'something special' for my 23rd post!
Two excellent posts. Mrippy has identified two, highly significant contemporary issues relating to successfully trading the financial markets. And JoulesMM1 has (although he subsequently removed his post) hinted at what we might want to consider is going on beneath the apparent superficiality of open price action and volume.
I’m going to jumble up the points from these two excellent posts in my response as they probably work out better that way if I do and I’ll deal with the relevant issues from both at the same time, as we go along.
It occurs to me that there is a danger of going too deeply into the wrong psychology of ‘the markets’: Which psychology do we want to really understand: The Winners or the Losers?
It’s fashionable to consider the burgeoning group of retail traders as a single block, a single entity, almost as a single institutional force. But this is a totally erroneous treatment in my view. Institutional and real money trading has a single focus, albeit potentially on a number of levels and over a number of timeframes, but a focused intent. This is all in addition to a significantly more attractive trade cost basis, greater market experience and trading expertise along with, for institutional and pro shops, a corporately nurtured development of personal will and personal ability to act.
By contract, the block of retail traders as you might imagine, encompass the entire spectrum of foci and random, if any, intent. Trading costs are for the majority, the most significant factor in their outright positions and actual position sizes. Very often however, it isn’t, and those that perish merely make way for more of the same and the net result to the flow of money to us from the rest of the crowd is the same. Cost of trading for retail traders is significant to the extent that it does or should determine the ‘if’ and the ‘when’ for both entry and exit - this is simply not the case for professional biased trading. Other factors entirely are involved.
When we consider the experience and expertise of retail traders as a whole you will find you have a genuine bell curve. And that isn’t to say roughly half will be thinking long and roughly half short. My hunch, developed over some years now in professional trading and with reasonable exposure to retail guys and girls is that perhaps 97% of these retail traders are clustered round the median and really, genuinely have no idea what to do next. They really don’t know how to find which instruments to trade, what markets to look at, what the bigger picture is for currencies and bonds and the impact of interest rates to money flow and where we are in the various economic cycles (Kondratieff, Kuznets, Kitchin and Juglar etc.). The majority see trading as some kind of a roulette wheel in which you either pick red or black, long or short. Absolutely no idea how much information and effort they need to layer in to make a good trading pastry. Nor where to look. And based on limited but very real personal experience, if they are made aware, they are not prepared to put in and sustain the ‘additional’ effort to achieve a higher probability hit rate. And a higher profitability entry and exit point. And more accurate targets. They are happier and more comfortable just waiting for a sign, a signal – from someone or somewhere else. Comfort in the crowd - which is of course what creates the crowd. But the crowd are not self directed, not at all. They are led for purposes of which you are probably already aware, but perhaps not yet how or why. Supply/Demand is a red herring and useful only for Economy-101 and for misdirecting those traders who believe they can plug all that old hat theory into modern-day market dynamics and come up with the right answer. Wrong. And I would caution you against putting too much store in assuming the ‘smart traders’ that are ready for a price pattern to form or fail are deliberately manipulating the price structure to cause it to do so. There are simply too many interests and too much at stake and it’s all moving too quickly across too many linked and inter-related markets to make the game of watching what everybody else is doing to form a view on what to do yourself while giving the impression of doing something different or nothing at all, to make it a feasible option. It simply doesn’t work that way because it can’t work that way. The timeframe we choose to trade determines what we see and how we act and you have to consider that is true for every active player in the market at all times. Some would say it’s harder to screw up in the longer timeframes than the shorter. Bear in mind which timeframe the real money is trading at all times. May I live so long.
Which brings us to will and the unrestricted ability to act.
Few retail traders I have met personally posses the same frame of mind when taking or exiting a position that a professional has. It’s analogous with the feast and famine cycle of serial dieters. They’ll unnaturally withhold and then equally unhealthily, binge. Many non-pro traders do something similar. They’ll freeze, waiting for just that one more piece of confirmation or they simply fail to pull the trigger and rationalize their ‘decision’ on the basis that it can’t hurt you not being in the market. It can. You can’t make profits by not being in the market all the time. Sure there are times not to be in the market, but that’s a positive decision – not an excuse for inaction. But when you’ve done your analyses and you’ve got the qualifying confirmations, whatever they are for your methodology, you go. You act. This is what pro traders do, without a second thought. One caveat here. This applies to most pro traders most of the time. As do my comments on retails traders, most of them, most of the time. My take on those retail traders I have watched trade is that the opposite is true they do not have the courage of their convictions or the will to act. On a missed or passed over entry it is ‘only’ an opportunity loss. When they hash the exit it’s an actually realized financial loss. That’s the famine side. The feast is when they hit every thing that even looks like it’s even just half alive and hit it with twice normal position size just to ‘claw back’ previous losses. Random, knee-jerk actions and unrelated position sizing, risk assessment, if any, and sweaty palmed seat of the pants watching every tick – from the very start of your 3-day swing trade, which lasts 35 minutes before you exit at ten times your pre-calculated loss just in time to see it swing back in your originally anticipated direction.
Unrestricted ability to act is what you get when you don’t have emotional blockages in the form of negative emotions such as fear, anxiety, doubt, greed, pressure, physical or mental tension, inappropriate physical environment, lack of focus, lack of information or low self-esteem. The degree to which you get unrestricted ability to act is precisely positively correlated with the degree to which you do not have any of those blockages. Or negatively correlated with the degree to which you do, if you don’t like processing negatives. The balance is potentially a little more even in this area as pro traders are human, most of us anyway, most of the time – and we get hit by the same personal and global issues the retail side does. But this is where the weight of experience, expertise and focus helps us reduce those factors which would otherwise similarly shackle us from time to time too. I guess the real trick it to get all your experience and expertise as a pro and then go retail. LOL.
Getting to the point from mrippy where he suggests price auction is more important than supply/demand it might help if I illustrated this concept by use of a non-trading parallel. I’m going to the trouble of doing this as it is such a vital aspect to be considered and it’s nice sometimes to read a story that hasn’t got anything at all to do with trading.
You want to sell some eggs, chicken eggs. Where do you go? Farmers’ market? Where all the other farmers are also selling eggs. Makes a lot of sense as people who are in the market for eggs will naturally enough be heading off to the market and you’ve got a reasonable degree of confidence in your success that the buyers for your product are going to be there. There is going to be a great deal of supply available to those buyers. You don’t know how many buyers are in the market for how many eggs. You do know you’re not the only one selling eggs and you don’t know just how many eggs the other sellers of eggs want to sell. Some buyers will have constraints and restrictions on when they must buy their eggs or how much they want to spend – others will not – they just want eggs – now. You have no idea how much other sellers of eggs will change their offer in the light of what they might perceive as the changing ‘needs’ of the current field of buyers. All you can gauge is the rate at which your eggs are being taken up. You can adopt different strategies such as waiting until late in the day and they start to lower your prices to unload more of your stock. Or you can plan on keeping the price where it is and take your stock back home with you – try again tomorrow. Or you can find out who is offering out lowest and undercut them – all day, every day. Or find the buyers that are constrained, those that simply have to buy right now regardless of price. The other sellers of eggs may or may not be doing all of this to greater or lesser extent too. You don’t know, but you can make a guess. And over time, if you use the same market, you’ll get pretty shrewd in assessing the other players and the buyers.
Of course, you can always set up your own market and sell your eggs where nobody else is currently selling eggs. You wont have any competition, for the moment, and you’ll not find as many people who pass your pitch will be in the market for what you want to sell, but the premium in your price may or may not offset that. Particularly if you have a high volume of traffic passing your way.
Another way to sell your eggs is to wait until there aren’t many around anywhere. A natural or perceived shortage and then you can go to market with a grade AAA price tag and be reasonably sure of juggling that figure all day long, plus or minus a few cents just to keep the interest up.
I’m not going to go through an example from the Buy side as I’ve already spent too much of your time.
Supply and Demand do not in and of themselves lead to less or greater volume or any transactions at all, it is the perceived need to buy and the willingness to agree a sale price that determines the degree of action that transpires. The auction. It is an understanding of the fundamentals of this auction that will determine the degree of success you have in trading the markets.
