In an attempt to find out why most investors/traders eventually lose, I am trying to understand the basics principles of market action and work my way up from there. The first question that came to my mind is the title - what exactly is the market? I believe that the market basically consist of buyers and sellers willing to express their beliefs on the current value of a product, whether it be stock, commodity, currency, etc. I wanted to get the wheels turning here at ET regarding this issue. Any feedback or comments is appreciated
Without resorting to quoting some sort of textbook definition, I think you have come up with a pretty good summary of what a market is. Basically a market is a place where people/entities meet in order to buy/sell goods, services, etc. As for your statement that "most investors/traders eventually lose", I don't agree. This isn't gambling at a casino, where the odds are significantly against you statistically, this is about 50/50 odds and managing your losses so that you end up ahead overall. A good book to read would be "Reminiscenses of a Stock Operator" by Edwin Lefevre if you want to get into the psychological side of trading. Btw, I'm a finance major (business undergrad), and some of the finance theories regarding the stock market are fairly stupid in my opinion (such as strong efficient market hypothesis). I think the problem is that some of these theorists are trying to apply nothing more than statistical analysis to something that actually involves a great deal of psychology. Guess which classes I'm doing for a significant portion of my optional credits? P.S. If you aren't familiar with it, the strong version of efficient market hypothesis essentially states that ALL information about a stock is already priced in, nothing is undervalued/overvalued, all investors are on equal footing, it is impossible to predict the future movement of the stock (and therefore impossible to make money by trading stocks), etc.
Yeah I am familiar with the "Random Walk" crowd, and I don't subscribe to it either. Anyone who watches live market action for any significant period of time will clearly see inefficiencies exist (which create profitable opportunities). Not all information is available to the public so it is impossible to be priced in, when the public (dumb money) represents a significant % of capital in the markets. I think it has been evident that throughout history the majority of market participants lose money over the long run. As you stated, this isn't gambling at the casino, it is a profession that takes tons of psychologyical discipline - something that majority doesn't have
The market is simply a conduit for building wealth. This is a viewpoint that cannot be arrived at from your current orientation which is not geared toward enhancing yourself financially. People participate in the market and do a lot of goofy things besides make money. At least in your case you are forthright about what you're after.
My feelings exactly. I personally find it kind of disappointing that the university I'm attending doesn't offer a class that explores the "alternative" side of investing/trading. Basically any courses that deal with investments either deal with pricing bonds/options/futures or cover generic portfolio theory (diversification, CAPM, etc.).
Yes you are right - at the end of the day we are involved in the market to make money. But being profitable is the end product. I seek to understand the rules of the game. I seek to understand the reasons 90% fail nomatter what system the are using (technical, fundemantal, tea leaves, whatever). And I seek to understand what makes the profitable few who they are. Focusing on the process will lead us to the end result (financial reward). If you look at it purely from the money standpoint, as most people do, greed takes over in and that is one of the reasons why the masses lose. Read anything on the great traders (Mkt wizards et al.) and they all say newbies/dumb money focus on what they can potentially make with any given trade, while professionals focus on what they are susceptible to lose (risk). So looking at the market simply as a wealth building machine, it inclines a trader to chase whatever the hot stock/newest fab system is and looking to make a fast buck. So through my own internal dialogue. I have now come up with two of the reasons I feel most people end up losing. A) The focus on the end result rather than the proccess that leads to it and B) they don't truly respect the risk that is associated with the market. Thank you all for the feedback so far, this is proving very helpful.
I appreciate the sincerity in your post. What I can comment on is that everything you state is conventional, and from my experience not quite true with regard to your statements, to point out as an example, about "newbies/dumb money" and "professionals". No matter; what is true or untrue is unimportant. What matters in trading is what is effective, which presupposes an object being sought. In any case, your statement about trading being a process is something I can relate to. Trading is an iterative process with effectiveness built on graduated levels of successful experiences. Unfortunately, there is probably not much I can convey to you that you would find helpful at this time. I accept it as a limitation on my part.
My answer here reminds me of Balmer's baloney (i would bet) statement on the Nasdaq commercial. -- my mother asked a more interesting question-- who would ever need a computer. Rather than ask what is the market. A better question is why does the market exist? Who does it serve and how does it serve them. That is the beginning of understanding how to make money.