The Essence of Trading and Financial Theories
By: Dave Samuel
I have decided to title this paper as so because I will be talking about a key, the lock you must find on your own. There is a difference between having theories and applicable strategies. You can not have success without both components, so you will only find a concept broken down into points of understanding. where one could design a strategy if mind is put to it and the necessary data is obtained that is needed for testing.
What people do not realize is what trading actually is. More so, they do not realize what one must do to profit off of a trade. In order to profit from a trade one or more of the two categories must be satisfied:
1.) have more knowledge then the other party on what they are trading. This is apparent in most areas of trade. For example a mechanic will have more of an idea of what a car is worth than an average person who has never worked on a car.
2.) Be able to “do something” with whatever is being traded that will increase the value of it that the other party is either unaware of or does not have the capability/desire to complete said process. For example a computer technician might buy a computer off of an average person but may have a soldering iron to fix the weak solder joints that have caused the mother board to stop working. So, both parties feel the price is fair since the average person has no idea what to do with a broken computer but the technician can put his knowledge and tools to work to create something with more value.
The same goes for the stock market. Which is why so many who try and trade fail to do so profitability. They simply think they can read commonly available and well known strategies on price action or technical indicators and make a profit. That is not the case. The person on the other side of the transaction most likely knows just as much about the equity being traded and therefore feels they are also getting a good deal taking the other side of your transaction. If the financial markets were not so centralized you might be able to make money since you might be able to find people in one market who are not aware of certain information that has already been priced into another market. But that is not the case. With the high speed that information can travel these days there is no way to make money through such a simple strategy. However, a lot of complex strategies do not seem to work either.
The reason such strategies and techniques are not only still out there, but promoted as well is the fact that they make people money (more so companies). They also provide liquidity to the markets as well. They are almost a necessary evil. They provoke over-trading on the retail level which provides liquidity for big firms and institutions. Therefore the market is less volatile when a panic occurs. These strategies also provide income to firms that broker retail trades for commissions. Which is why you will see free seminars all the time online. They want people to trade technically since when you trade technically you usually trade on smaller timeframes (note: usually) and therefore trade more frequently. That means more profits for the firm.
This brings up the question of why some people make money trading. Well, there are two reasons.
1.) The monkey on a typewriter theory: If you put enough monkeys in a room with a typewriter and they all banged away all day every day for lets say a million years then one of them would probably produce a Shakespeare play or maybe even exact version of this paper. It is that way for any profession involving a high level of chance. The more of them out there the more likely a few are going to have great success through chance alone.
2.) Some strategies encompass a sound idea: Some strategies use variable X to determine if it is a good time to buy or sell. This strategy can work, but it may not necessarily be because of variable X but more so what variable X represents. For example, if I told you to make a prediction each day if the sun was going to rise and told you to use the appearance of the moon as an indication (if the moon rises that means the sun will rise the next day) then you would be right 100% of the time, but it is not the moon that determines the rise of the sun (necessarily). Most people have a terrible understanding of causation.
Does this mean you cannot trade or invest profitability? No, not necessarily, but I do strongly recommend thinking about how you trade before you go about and do it.
I made this realization the other day. I am in the profession of fixing computers, monitors, cell phones, ect and I partake in trading everyday. Everyday I make money. But it is because I work with the perfect market. I have buyers and sellers that are not working with centralization. Therefore they are poorly informed. I have people who are less knowledgeable than me and I have a skill they do not possess or understand. Such is the recipe for profitable trading.
I thought to myself how I can apply these concepts to the financial markets. For I have studied for years various markets and how they trade. I understand the dynamics of how they function and why prices move the way they do, but how can I trade so well in one field but struggle in another? If trading were a skill then I should be able to transpose that skill from one market to another with relative success. That is not the case. I can dominate the tech market but the stock market is a game that took me 5 years to buckle down into.
The trick to profits in financial markets...
Ask yourself who you are buying from, why they are selling it to you, and who you are going to sell it to in order to make money. If you can not answer these questions you are just a monkey on a typewriter.
I hope to hear form the forexfactory community on my concepts and ideas.
By: Dave Samuel
I have decided to title this paper as so because I will be talking about a key, the lock you must find on your own. There is a difference between having theories and applicable strategies. You can not have success without both components, so you will only find a concept broken down into points of understanding. where one could design a strategy if mind is put to it and the necessary data is obtained that is needed for testing.
What people do not realize is what trading actually is. More so, they do not realize what one must do to profit off of a trade. In order to profit from a trade one or more of the two categories must be satisfied:
1.) have more knowledge then the other party on what they are trading. This is apparent in most areas of trade. For example a mechanic will have more of an idea of what a car is worth than an average person who has never worked on a car.
2.) Be able to “do something” with whatever is being traded that will increase the value of it that the other party is either unaware of or does not have the capability/desire to complete said process. For example a computer technician might buy a computer off of an average person but may have a soldering iron to fix the weak solder joints that have caused the mother board to stop working. So, both parties feel the price is fair since the average person has no idea what to do with a broken computer but the technician can put his knowledge and tools to work to create something with more value.
The same goes for the stock market. Which is why so many who try and trade fail to do so profitability. They simply think they can read commonly available and well known strategies on price action or technical indicators and make a profit. That is not the case. The person on the other side of the transaction most likely knows just as much about the equity being traded and therefore feels they are also getting a good deal taking the other side of your transaction. If the financial markets were not so centralized you might be able to make money since you might be able to find people in one market who are not aware of certain information that has already been priced into another market. But that is not the case. With the high speed that information can travel these days there is no way to make money through such a simple strategy. However, a lot of complex strategies do not seem to work either.
The reason such strategies and techniques are not only still out there, but promoted as well is the fact that they make people money (more so companies). They also provide liquidity to the markets as well. They are almost a necessary evil. They provoke over-trading on the retail level which provides liquidity for big firms and institutions. Therefore the market is less volatile when a panic occurs. These strategies also provide income to firms that broker retail trades for commissions. Which is why you will see free seminars all the time online. They want people to trade technically since when you trade technically you usually trade on smaller timeframes (note: usually) and therefore trade more frequently. That means more profits for the firm.
This brings up the question of why some people make money trading. Well, there are two reasons.
1.) The monkey on a typewriter theory: If you put enough monkeys in a room with a typewriter and they all banged away all day every day for lets say a million years then one of them would probably produce a Shakespeare play or maybe even exact version of this paper. It is that way for any profession involving a high level of chance. The more of them out there the more likely a few are going to have great success through chance alone.
2.) Some strategies encompass a sound idea: Some strategies use variable X to determine if it is a good time to buy or sell. This strategy can work, but it may not necessarily be because of variable X but more so what variable X represents. For example, if I told you to make a prediction each day if the sun was going to rise and told you to use the appearance of the moon as an indication (if the moon rises that means the sun will rise the next day) then you would be right 100% of the time, but it is not the moon that determines the rise of the sun (necessarily). Most people have a terrible understanding of causation.
Does this mean you cannot trade or invest profitability? No, not necessarily, but I do strongly recommend thinking about how you trade before you go about and do it.
I made this realization the other day. I am in the profession of fixing computers, monitors, cell phones, ect and I partake in trading everyday. Everyday I make money. But it is because I work with the perfect market. I have buyers and sellers that are not working with centralization. Therefore they are poorly informed. I have people who are less knowledgeable than me and I have a skill they do not possess or understand. Such is the recipe for profitable trading.
I thought to myself how I can apply these concepts to the financial markets. For I have studied for years various markets and how they trade. I understand the dynamics of how they function and why prices move the way they do, but how can I trade so well in one field but struggle in another? If trading were a skill then I should be able to transpose that skill from one market to another with relative success. That is not the case. I can dominate the tech market but the stock market is a game that took me 5 years to buckle down into.
The trick to profits in financial markets...
Ask yourself who you are buying from, why they are selling it to you, and who you are going to sell it to in order to make money. If you can not answer these questions you are just a monkey on a typewriter.
I hope to hear form the forexfactory community on my concepts and ideas.
