As important as it is to recognize our (natural) psychological shortcomings, it’s also important to understand what moves financial markets.
Essentially, we’ll need to position ourselves to profit from the actions of the people who move the market.
Let me put it this way: If you were the manager of a multi-million dollar hedge fund, would you make investment decisions based only on technical analysis?
(hint: probably not)
Professional investors look for investment returns over a period of time, say 3 months, a year or a number of years. And they certainly wouldn’t ignore the fundamental factors governing where they put their millions.
I mean, if you had $20 million to invest in a country, wouldn’t you want to find out about the economic, social and political fundamentals of that country? Or are you going to decide where to invest that $20 million based solely on what you see on the trading chart?
Folks, this isn’t rocket science. All you need to do is put yourself in the shoes of the people who move the market.
And get this: More than 90% of the daily trading volume is driven by professional speculators and investors…
So retail traders have practically no influence on how the market moves.
I’ll say that again, because it’s crucial that you really get this – Retail traders have practically no influence on how the market moves.
So if you’re just paying attention to what retail traders are doing (i.e. mostly technical analysis), you’re missing a large piece of the puzzle.
Look – we don’t necessarily have to hold onto our trades for 3 months or more (like the professionals), but it makes a big difference for us to trade in the same direction as they do.
To predict where the market is headed, all we need to do is understand the objectives of the professionals.
If we can figure out what they’re thinking (which isn’t complicated), we’ll have the opportunity to position our trades to profit from their likely actions.
So the key here is not learning more about technical analysis (which you’re probably already well-versed in), but to understand the fundamentals – it’s what the professionals pay attention to.
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