Investing and trading has always been associated with the image of the savvy trader, that brilliant shark endowed with superior skills of analysis, honed by experience and armed with the latest computational tools. The fact is, success can be achieved in investing and trading merely by being an informed observer.
The average person will never have access to the information and contacts available to professional money managers. They will not know the next earnings release number and they most certainly will never read a company’s financial statement, much less make sense of it. But they can observe what the big money professionals do. Because after the high paid analysis is done, money managers have to execute their collective judgement into the public listed markets by buying or selling. When they do, the sheer size of their buying power will leave evidence of activity in their wake. There will be a sudden or sustained surge in volume beyond the normal average amount. This volume will likely manifest itself in higher prices as sellers get overwhelmed by buyers or by lower prices if big money sells. It’s not necessary to know as much as the professional money managers. It’s only important to understand and determine where they and millions of other people are placing their money.
In essence, it’s somewhat like following the flow of a body of water as it moves downhill. Don’t try to predict the direction, or even of the eventual end. Follow the ebbs and flows until a significant direction change appears. The famous martial artist Bruce Lee was asked to comment on his success as a fighter against larger and skilled opponents. He responded thusly and I paraphrase:
“…Be like water making its way through cracks; do not be assertive, but adjust to the object and you shall find a way around or through it. You must be formless, shapeless like water; when you pour water in a cup, it becomes the cup, when you pour water into a bottle, it becomes the bottle. Be water by friend…”
His advice is just as applicable when it comes to trading and investing. We can be our own worst enemies when it comes to trading since we impose our view of things upon a market that will never care what we think. In a similar sentiment, a long time mentor of mine, Bill Williams, encouraged us to dance with the rhythm of the market, not fight with it. We should strive to keep these sentiments in mind as traders and investors.
Tony Chan CMT