Monday, July 30, 2012

Market speculation

I'm all for keeping things simple, and boiling things down to the absolute basics. Today, I decided to key into Google 'definition of market speculation' and see what came up.
A couple of the definitions are shown below:

"...the engagement in business transactions involving considerable risk but offering the chance of large gains, especially trading in commodities, stocks etc., in the hope of profit from changes in the market price."

"Stock market speculation, by definition, involves taking a position that will benefit from a certain outcome.

It is not concerned, necessarily with underlying value, nor is it a view that tries to forecast the future for a particular industry or company purely beyond its short-term price action.

You see, when investors become speculators they are purchasing a stock with the sole purpose of selling it to someone else at a higher price."

You will note that those definitions make no reference to basing any trading decisions on fundamentals - they are only concerned with changes in the price of an instrument or stock. This is a basic fundamental (excuse the pun!) of being a trend follower - we pay no attention to underlying fundamental data, or what is perceived to be 'value' in a commodity or stock. The only way we will make profits is if the price moves in our direction.

We are masters of no one market - instead, we use the one metric common to all markets and instruments (price), see whether it trending or not, or trying to start a new trend, and use that as the basis for all our decisions. This allows us to trade all markets or stocks the same.

As trend followers, you do not need to have any understanding as to the fundamentals, whether there is a grain shortage, whether there is a surplus of oil, whether a company has 'missed' earnings etc, etc. Just concentrate on the price.

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