A Distorted View of the Market

Discussion in 'Psychology' started by ProfitTakgFool, Aug 1, 2008.

  1. I've had the opportunity to watch and study the various actions of many traders over the years, both beginning and expert, and a common flaw I see among many traders -- even the most experienced ones -- is they have a distorted view of what causes the market to go up and down and why it goes up and down from any given point. The common view is the price of any stock or market is caused by the buying and selling of shares or contracts by the various traders involved. This is true of course, but thinking along these lines blinds you from realizing one important point. That being, <b>the price or position of any stock or market is nothing more than a data point within a data set!</b>

    On a different thread, some guy responded to something I posted, something to the effect of, "You're buying when the rest of the world is selling so your method is heavily flawed." If you carry this kind of logic into the market you are destined to fail. When everyone in the world is selling that selling pressure will push the market to an extreme level -- a level that it most certainly will recover from, depending on the time of the day. Naturally, no method comes with a 100% probability but if you study the market from a statistical perspective instead of an, "Everyone is selling" perspective it will open up a window into the market that you never knew existed. The highest amount of buying and selling typically - emphasis on typically - occurs at the tops and bottoms of the market, which, often times, are statistically extreme levels. And what is the prudent thing to do at a statistically extreme level? Either get out or fade it. The markets are non-stationary and future movement can render an extreme movmement non-extreme so this view of the market obviously does not come without it's weaknesses, but what method does?

    Buying or selling just because everyone else in the world is doing that has some serious problems. The market can recover from a beating simply from the absense of selling, <i>because it has already occurred.</i>

    Extreme data points, mean-reversion, and top shelf money management are as close to the Holy Grail as you will find.
  2. enkidu


    a little off topic but i would like to add that...

    I think you should get out at serious statistical extremes. Let me explain myself.

    Normally the markets fluctuate and it ebbs and flows and such. But at times, when the volume is extremely high, and the markets becomes extremely frantic, it just goes crazy.

    All fundamentals, or support/resistance, everything that is "suppose" to work doesn't any more.

    I think that when it happens, it's time to get out of the market.

    Some top traders (i think they were option traders) have a rule where if they market gets too volatile, they simply get out because it no longer follows any sane rules!

    Good times to get at would be the last days of the tech bubble and the beginning of the sub prime crisis just b/c there was way too much movement.

    sure you can make a lot of money but that's too risky (gamblin?). and when markets become crazy, that's when the six sigma things happen!
  3. There are definitely times to stand to the side. If you don't stand a chance of winning you must retreat from the battlefield. Good follow-up.

  4. eagle


    Not that when they all had just finished selling.

    The candle slowly burns and gradually reduce its length; its burning speed is relatively constant. Suddenly, the burning accelerate very fast and then blow out. The darkness retakes its route.

  5. Many types of statistical analyses would reveal a high reward for buying when there is blood in the streets. I've read quite a few, but can't point to any at this moment.
  6. maxpi


    Well yeah, look at the DOM and you can see that quite clearly.
  7. Unfortunately the data set is incomplete--as the data only exists in the past---and is only relevant personally/subjectively after the trader enters the trade.

    Speak of distortion.

  8. Its fun to watch three MLR's whose ratio is 1:2:4.

    This pin wheel is flat in trends and spins up on peaks and does the opposite on troughs.

    As you imply, most posts are on the past data points and the DOM is looking at the future data points. DOM walls show the upcoming peaks (ask side) and troughs (bid side).

    Funny how limit orders (missed one's that make the walls) control the volatility and market orders control the market pace. (the zoom, zoom).

    The best part is how the DOM illustrates that the minority and not the majority controls the market direction.

    I agree most posters have a very distorted view of the market and how it works.
  9. eagle


    No doubt. That's the reason why price fluctuates wildly.

  10. I think it's because Osama controls the market.
    #10     Aug 1, 2008