“If past history was all there was to
the game, the richest people would be librarians”
When attempting to solve a problem, the most difficult task is to know where
to start. In this specific case, the problem is how to find persuasive answer
to the above quote, a quote from none other that the “Oracle of Omaha”, as the
world’s most successful investor is often called.
I became a technical trader and I wanted to use price charts alone to determine me buy and sell signals. I realised this technical approach to analysing the markets could level the playing field between “professional in-siders” in the markets and individual traders like me. I recognised this when I realised that I was not smart enough to gather all the news and assess its impact correctly in order to arrive at the market’s behaviour. The obvious problem is that it is difficult to determine whether a news item is bad or good for the market, or, even worse, it could simply be rumour as well. And it is even more difficult to interpret the same news. It is important to remember that it’s not necessarily the news itself that is important; how the market reacts to the news is more important than the news. Therefore, instead of going through lots of news sources I started looking at price charts of the markets to understand how other market participants were interpreting the latest news and information.
It is interesting to see when a market makes an unexpected large move for no obvious reason, only to be confirmed by some news release at later time.
Jesse Lauriston Livermore, also known as the Boy Plunger, was an early 20th century stock trader. He was famed for making and losing several multi-million dollar fortunes and short selling during the stock market crashes in 1907 and 1929, once wrote:
Remember there is always a reason for a stock acting that way it dose. But also remember the chances are you will not become acquainted with the reason until some time in the future, when it is too late to act on it profitably.
Confused, right? Markets discount all the fundamental news there is and also how market participants interpret it.
The fundamental news involves corporate earnings, profits, book value, and price per share earnings and so on. The technical approach analyses past market movements and projects future actions.
“Price leads to fundamentals”
The above statement will probably surprise, or even upset, many investors. But it has been observed time and again that markets seem to top just when the fundamental news is the most bullish-and bottom out when the news reports are the most bearish. The price, thus, discounts the fundamental news in advance. Successful traders are already looking into the future, while novice traders are still trying to trade off past news. I am not saying that fundamentals do not influence market prices but prices usually anticipate and adjust to changes in fundamentals well before these become common news. As the legendary Jesse Livermore wrote in his book How to Trade Stocks:
All through time, people have basically acted and reached the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis.
As a result of two human emotions that are as old as humanity, greed and fear, traders have a tendency to over-react to market behaviour. When things are going well, traders succumb to greed and over-buy in an effort to maximize profits. When the market is not going their way, fear kicks in, followed by a flurry of selling. These two opposing emotions have been around since the market began and will always continue to be a key factor in the movement of prices.
-
Warren Buffett
I became a technical trader and I wanted to use price charts alone to determine me buy and sell signals. I realised this technical approach to analysing the markets could level the playing field between “professional in-siders” in the markets and individual traders like me. I recognised this when I realised that I was not smart enough to gather all the news and assess its impact correctly in order to arrive at the market’s behaviour. The obvious problem is that it is difficult to determine whether a news item is bad or good for the market, or, even worse, it could simply be rumour as well. And it is even more difficult to interpret the same news. It is important to remember that it’s not necessarily the news itself that is important; how the market reacts to the news is more important than the news. Therefore, instead of going through lots of news sources I started looking at price charts of the markets to understand how other market participants were interpreting the latest news and information.
It is interesting to see when a market makes an unexpected large move for no obvious reason, only to be confirmed by some news release at later time.
Jesse Lauriston Livermore, also known as the Boy Plunger, was an early 20th century stock trader. He was famed for making and losing several multi-million dollar fortunes and short selling during the stock market crashes in 1907 and 1929, once wrote:
Remember there is always a reason for a stock acting that way it dose. But also remember the chances are you will not become acquainted with the reason until some time in the future, when it is too late to act on it profitably.
Confused, right? Markets discount all the fundamental news there is and also how market participants interpret it.
The fundamental news involves corporate earnings, profits, book value, and price per share earnings and so on. The technical approach analyses past market movements and projects future actions.
“Price leads to fundamentals”
The above statement will probably surprise, or even upset, many investors. But it has been observed time and again that markets seem to top just when the fundamental news is the most bullish-and bottom out when the news reports are the most bearish. The price, thus, discounts the fundamental news in advance. Successful traders are already looking into the future, while novice traders are still trying to trade off past news. I am not saying that fundamentals do not influence market prices but prices usually anticipate and adjust to changes in fundamentals well before these become common news. As the legendary Jesse Livermore wrote in his book How to Trade Stocks:
All through time, people have basically acted and reached the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis.
As a result of two human emotions that are as old as humanity, greed and fear, traders have a tendency to over-react to market behaviour. When things are going well, traders succumb to greed and over-buy in an effort to maximize profits. When the market is not going their way, fear kicks in, followed by a flurry of selling. These two opposing emotions have been around since the market began and will always continue to be a key factor in the movement of prices.
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