Markets move because the function of markets is to price uncertain economic information into the future. What ultimately moves markets is new information or more importantly new best guesses on new upcoming information.
I think its a mistake to get too bogged down with manipulation, institutions, "smart money", ect...
There are great retail traders and great institutional traders..there are a whole lot of idiots in both too. While it may be worth while to track large traders from a liquidity standpoint, viewing instutional money as "smart" as if they know something special is a huge mistake IMO...ALOT of guys just went to the right schools and had the right connections and so get to play with bigger toys than us here.
I would say that markets move because they have to move, not because they "want" to move. In every big move that you see, either up or down, a large portion of that movement is being directly caused by individuals who made bad bets. They overleveraged themselves or just made plain old bad trading decisions that caused them to enter long/short in the incorrect direction of the eventual trend. As the market gradually moves against them, they now grow more nervous, and in many cases unwisely double down on their positions.
In those cases where the tide gets too strong they then start to panic, covering their positions. This drives the market even further in that direction, causing other people to have to cover their shorts or sell their longs to avoid further losses. Eventually, it becomes a complete rout, with rampant fear being the order of the day. At the very end of every trend, a majority of traders are so paralyzed with fear that they blindly hit the sell/buy keys to try to stop the pain.
We know from statistics that something like 90% of traders lose money, and only 10% consistently make correct decisions to increase the size of their trading accounts. Most of this wealth transfer from losing accounts to winning accounts occurs during periods of trending activity, not in ranges. In a range, the volume is low and and price isn't moving far, so whatever wealth is being transferred from the accounts of losers to the accounts of winners can't be that big.
But when the market starts to trend, the losers (90% of traders) consistently, as a group, position themselves incorrectly against the trend and try to pick bottoms/tops. They either try to scalp counter-trend and get killed, or hold and double down, and get killed. The 10% of traders who know what they are doing calmly press their advantage and continue to screw the losing traders until all of the fuel (i.e. losing traders' fear) is spent, at which point, the market usually starts to range again.
So the reason markets move is simple: pure fear and animal emotion on the part of losing traders, helped along by smart buying/selling near the beginning of the trend on the part of knowledgeable traders, and greed at the end of the trend by the latest batch of soon-to-be losers who are jumping in at exactly the wrong time.
The truth is that in any trend, 90% of the individuals in the world that are participating in it are probably screaming at their monitors, throwing keyboards, hurling curses, or just sitting there in stunned silence as their accounts are annihilated. The other 10% are calmly booking their profits as the wealth of the losers is being transferred to them. This occurs every day in every instrument, on a regular basis, and this emotion is what drives the markets. It has to be this way, because trends are where the vast majority of wealth transfer occurs, and it always occurs consistently from the bottom 90% to the top 10% of traders. Each individual trader may make good/bad bets from time to time, but as a group these numbers are constant.
For an example of this, take a look at that historic rally in the indices last July - that was not caused by a calm rational interpretation of economic data where people were all of a sudden enthusiastic about stocks... that's just the way the media talks about it, because they don't know any better. That rally was caused by only one thing, and that is the simple fact that a majority of traders in the market were getting royally screwed and had to cover because they were very silly and thought that whenever the market looks like it's making a head and shoulders pattern, it must go down. For another example on a different time frame, take a look at today's rapid drop in gold from 1:15 EST. In 8 minutes the market plunged 150 ticks or so... just another example of people who got pushed to the brink having to sell their losing long positions. If you were watching that live, you could feel the panic as wave after wave of selling hit the market. Once that was over, things calmed down again and the trend was over. As we speak, more bad bets are currently being placed in gold, and when it eventually breaks up or down, the losers will not cut their losses but will double down - until they are pushed to the brink and have to cover at a loss, providing fuel to drive the trend further. Wash, rinse, repeat.
Last edited by FBJS; January 12th, 2010 at 04:49 PM.
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I've hear even worse ratio something about 0.1 - 0.05 % (which is not highlighted a lot publicly due to its tragic figures)
as well as phrase which I liked a lot and what gave me great insight:
pro traders are not trading against market - they are trading against crowd.
Thank you again for great insight and hope you will continue your posts.
P.s. but you know I noted that trading seems one of the most "hyped" businesses in the world and one of the main problems is that a lot of "gurus" whom people trust, not because they are completely stupid, but because "gurus" very successfully position themselves as pro (I will not go deep inside all their tricks), however their info could be checked only through the bad results and still a lot of them argue "our course is 1000%, but you wrongly use it" yeap, partly it's true, but only in case provided info really correct, which is mostly not a case.
All that "mind games" and unfortunately a lot, lot of pain there.
The only survive those, at least has some chances to survive, who has or good mentor or good in right meaning contrarian brains, better both of that.
I'm not talking about those who come to trading thinking that this is big and fast money, yeap, that's true, but only in case one is working really hard, though even in that case it's not so easy at the beginning.
P.s.s. it were my 2 cents, but not as arguing, but as discussion with you as I enjoy that really much.
Last edited by Andrew; January 13th, 2010 at 06:42 AM.
Unfortunately there are lots of charlatans and snake oil salesmen in trading, like in everything else in life. All you really need in this world to scam most people is a confident attitude and to sound like you know what you're talking about, even when you don't. Because making money in trading is such a difficult thing to do, and because the rewards are so enticing and so high, many people will be drawn to what appears to be the easy path... they just want someone to hold their hand and lead them down the easy step-by-step path to untold riches and the good life. But of course that never happens.
The truth is that our minds are not hard-wired to think in terms of probabilities. We tend to think in deterministic terms as human beings, which means that we expect that when we perform the exact same set of actions in what appear to be the exact same set of circumstances twice in a row, we expect to get the same results. Unfortunately trading doesn't work like this - in order to succeed, you have to be willing to accept risk and uncertainty on a daily basis, and to accept the fact that you can and will be wrong all the time. You have to be strong enough to live with that feeling in the pit of your stomach that says "I accept that I don't know for sure what is about to happen next, and I could be wrong - but I'm going to enter this trade anyways, even though the last two times I did it, I lost money." Most people have egos that simply cannot handle this type of thing, so they spend years in an endless search for a system that will "never be wrong", or a guru that will "show them the easy path to profits".
These gurus are of course more than happy to oblige them, because it is just sooooo easy to make up excuses for why the "magical" system isn't working for a particular individual (and invariably, it must be because the individual is "using it wrong"). In the defense of some web mentors, it's not that they are scam artists, it's just that they themselves actually kind of suck as traders and don't know how to trade any better. In a lot of cases it's really just the blind leading the blind. I have personally listened to dozens of webinars given by these so-called mentors, and every single one of them has had at least one and sometimes more than one serious flaws in their game and the way they approach the markets. A few of them have methods that are so pathetic and ridiculous that I laugh out loud at their ignorance... and yet, so many new traders who are just coming into the trading world won't know what is going on and will think that this confident-sounding person must know exactly what they are talking about. The only reason I know that they are full of it is because I have already invested thousands and thousands of hours of time into trading, and have the experience to call them on their BS - but new traders don't. Unfortunately with today's economy and so many people looking for ways to make money, retail trading and fake online gurus are doing better than ever. It's sad that so many people are getting sucked into risking whatever money they have left in a vain attempt to provide an income for themselves after they have lost their jobs, because the vast majority of them will never make it and will only put themselves in a worse position.
The reality is that in order to make it as a trader, hard work and a good mentor are not enough. It doesn't matter if you have the best teacher in the world, or if you work your ass off - if you don't have a certain type of talent, you are never, ever, going to make it. The talent I am talking about is the ability to look at yourself, analyze your own actions, and see what your own motivations are for doing what you do... and then knowing how to take the correct steps to fix your own behavior. If you don't have that, you are utterly screwed as a trader.
I have a couple of times seen that show on TV with Dr. Phil, the psychologist guy who gives people advice on how to fix their lives. If you've ever seen that show, then you will know just how clueless the vast majority of people are. The majority of them are people who are having problems in their marriages, don't know how to deal with their kids, or have problems getting over some personal obsession with an issue that is hurting their lives. All of these people have one thing in common - they are so completely clueless about understanding themselves and their own motivations, that they need the help of a psychologist to get them past their personal issues. They are "stuck" in an endless loop, doing the same stupid crap day in and day out, and can't figure a way out of it. They need a person like Dr. Phil or some other psychologist who understands them better than they know themselves to help them through their problems... to guide them, like little children, through the confusing maze of denial and self-deception that is their own mind.
90% of the population of the planet is like this. 90% of the people on this earth don't know why they do what they do in their lives, they just have a feeling about something and they go with it, even if it's self-destructive. They know that what they are doing is bad for them, but they have no clue how to stop and need help to go about it. That's fine when we're talking about normal life, but in trading you can't be that person. You can't be the person who needs Dr. Phil to tell them how to fix their marriage. You can't be the person who needs a psychologist to help them get over their obsession with shopping too much. If you want to succeed as a trader, you have the be the psycholgist himself. You have to be the person who is so good at reading and understanding yourself that you can work through your own problems and fix them, because those problems are going to crop up in trading as you attempt to do something that is insanely difficult from a mental perspective. It is a hell of a lot more difficult to learn to live with constant uncertainty and to exert discipline in real-time when your money is on the line than it is to fix some simple issues in your life like most of the people on the Dr. Phil show are struggling with. In order to be a good trader, you need to be able to "fix yourself". (In order to be a _great_ trader, you need even more than this - you have to be good enough to also intuitively sense other people's motivations and "feel" what they are about to do, even before they know it themselves. Then you can take advantage of that skill by getting in ahead of the crowd in the market.)
Now even if you do have this type of natural talent, it will still take a long time to work through all the problems that you will have as a trader, and to go through all the psychological traps that are out there in the market - but at least you have a shot at it. With the talent, you have a chance if you are willing to put in the work. Without it, you are totally screwed and will do nothing but tread water and lose money for years until you give up (usually it's a lot sooner than that).
The truth is that most people simply don't have this ability. They don't have that talent, or the correct mindset to have a chance at success. So they continue to struggle in a hopeless cause, not even realizing that they don't have what it takes because they are not suited to this activity. They are so lost that they don't even know what is wrong, much less how to fix it. Think about the thousands and thousands of completely delusional idiots that line up for hours or days on end to audition for American Idol every year. Think about how MANY of these people there are, who can't even see basic reality and understand that they completely and utterly SUCK as singers and will never, ever make it in a million years. How many of those poeople walk out of that audition room in tears, completely unwilling to accept the truth that was just told to them about how little talent they actually have? How many of those people continue to waste their lives in a fruitless attempt to do something that they don't even have 5% of the necessary talent to achieve? Now consider that these types of people make up 90% of the market. These are the people who follow guru after guru who promises to lead them down the path to riches. These are the people who are always on the wrong side of the trade. What are their eventual chances of success? Exactly zero.
However, this is just the dynamic of the market. The market needs these people in order to exist the way that it does. Without all of these losers, the market could never make the trending runs that it does because short-covering rallies and massive margin-call declines would not happen. Without these people, it wouldn't be possible for the profitable traders to make money the way that they do. There is nothing that is going to change about this regardless of the warnings that are always provided, because it is just human nature for most people to be delusional about their own abilities, and to refuse to see the true causes of their problems. These people will inevitably fuel the next bubble that happens, buying at the top (like they always do), and then blaming everyone but themselves when things don't work out.
That's just life!
Last edited by FBJS; January 13th, 2010 at 11:54 AM.
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I see a lot of responses explaining WHAT happens instead of answering WHY it happens....
When you go to your local fruit market or community market and you pick out something you like, most of the time, you will haggle with the merchant to get a better deal. You exchange prices with the merchant until you reach a price that you both perceive as fair.
This haggling occurs because both parties (the buyer and the seller) have valued the product differently.
The same thing occurs in the financial markets. Prices move because you have a large number of buyers haggling with sellers until they find a price they can agree on.