Wednesday, January 12, 2011

What are you looking for?

It always slightly amuses me that, when the price of a stock starts moving, the trading and investing herd are trying to found out exactly what the reasons are for the move. A great swarm of sleuths converge, trying to nail down the elusive piece of data. 99% of the time, they are looking at news releases, fundamental data or other related titbits of information. Their findings are frantically and endlessly discussed in internet forums and on websites, fair values hurriedly recalculated and so on.

I read a piece recently about a trend following UK based hedge fund which predominantly trades Forex - they have been consistently successful, generating profits for their investors for a number of years, however their investors are repeatedly calling up wanting to know the reasons WHY the markets have moved. In the end, for their monthly reports the fund has had to 'create' a fundamental story to give to investors to 'back up' why they've taken the trades!!!

I will give you my take on why prices move - people buying and selling, and the price at which they are prepared to buy and sell. That's it - no more, no less.

And of those people buying and selling, you have NO idea of any other person's rationale for those decisions, (of which there can be tens of thousands of traders and investors, dotted around the globe) - they could be based on fundamental or technical reasons, based on different timeframes and outlooks, directors buys and sells, or a multitude of other reasons that necessitate an opening or closing of a position.

As I've stated here on more than one occasion, I focus solely on the price of a stock, and open and close positions as determined by my trading rules and criteria. All of the other stuff I ignore.

There are no doubt some people reading this who scoff that anybody can make money in the markets simply by looking at price. Yet there are simply too many stories of successful trend followers, who have made millions by following the price, for it not to be a fluke, or a series of lucky trades.

This is a collary of anther maxim about trading - "Do you want to be right, or do you want to make money?". The herd fall into the first category. The real winners fall into the second category.

I'm fully aware that there is more than one way to skin a cat. However, I'm more than happy to be judged on my trading performance, which is there for all to see, as detailed on the trades log. The rules that I adhere to are pretty simple, and I think the performance proves that simplicity in trading can work. I think I'll leave the hours of pouring over fundamental and economic data to others.

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