May 25, 2013

• Trading Update: Reading The Language of The Market

  

   

  Understanding the market well enough to accurately predict future actions begins with being able to feel comfortable reading/analyzing the behavior of generated market data. The challenges are very similar to learning a new language.

  Most people look at a stock chart and see a graph of random price changes that may as well be written in Greek- the same feeling one would get trying to read a foreign language for the first time.

  The key to learning is to get past all the initial hurdles of making sense of the “language”, otherwise known as getting past the “learning curve”.

  When learning a language, first you start with the basics of learning the simplest of phrases and words and painstakingly work your way up. Success or proficiency won’t come without continued effort over time. Seeing and hearing the new language will only help if you are actively trying to understand it. Otherwise you could spend years in a foreign country surrounded by people who speak that language, but never learn it.

  At first the process can be painfully slow going as one tries to build their vocabulary. After enough time and effort however, things begin to stick and it starts getting easier. This is the same as the learning curve in studying market data. What appears to be random noise can over time can be seen to have specific meaning and direction.

  Being able to understand the new language and speak sentences is a great achievement, but the true challenge comes when one’s skills are put to the test talking to the general foreign population in general daily activities. The speed of their talking, or their accents and pronunciations may throw you off. You have to also be on the lookout for slang, words that have an alternate meaning. It’s easy to feel like a beginner all over again faced with all the new variables. This is where the real learning curve begins. Patience, time, and effort is the solution to conquering this phase as well. The brain is an amazing thing that keeps adapting (triggered by actively trying to learn) and over time will begin processing the new language as easily as your native tongue.

  Understanding market data flows along similar lines. The extra amount of random variables raises the bar on the challenge/difficulty aspect but the learning methodology is pretty much the same.

  Which brings us to my current market update. The last several weeks have been very fruitful in my understanding of market flow and direction – giving me a clearer and more fluent and detailed understanding of the market, in the areas that matter most – direct application. My prior understanding alerted me to “impending” market moves, but the timing was hazy which led to either getting in too soon, or not staying in for the full run. Even with that limitation, I was able to achieve very good performance. My new understanding removes those hazy areas, which makes it exciting times.

  That’s the good news. Like in the foreign languages learning curve, the main challenge has been translating my new knowledge in a real time environment . This week brought me that much closer to adapting. I was able to apply what I’ve learned and the profits came. Then I got ahead of myself, got over confident and added leverage, and the profits were lost, haha. It was frustrating to give back those profits, but the mistakes were easy to figure out and going through another round of back testing made my understanding even clearer so the probability of future mistakes goes down considerably.

  
  It’s about picking up the subtle nuances that can be easily missed, but offer great insight for future market direction.
  

  So the game is on – going forward should reveal what I know or don’t know about market behavior.  I’ve removed most of the mystery with my analysis- now the focus goes to just applying my methods properly without jumping the gun and adding risk (leverage).
  

   

  • 3:12 pm
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