Learning The Change Of The Stock Market
How long would a gambling casino be able to stay in business if most of the customers won instead of lost? The markets are no different.
In order to continue to exist, the markets must operate in a way that causes most participants to lose. There would not be enough money available to pay the winners if the majority were consistently taking profits out of the markets.
Gambling casinos have an advantage over the markets in that they are able to set the rules of the game to insure that the house has a mathematical edge. The markets cannot directly control how the individual participants will play.
Most commodity traders are intelligent, competitive individuals. There are seemingly unlimited sources of information about how to trade.
There are powerful computers within everyone's reach to help conquer the markets. Why is it then that such a high percentage of traders still end up losing?
A well-known answer is that traders cannot overcome their emotions well enough to succeed. That is certainly true.
Another less well-understood reason is that the markets constantly send out "disinformation." This means false information designed to mislead and confuse the adversary.
This is something that just happens because of the nature of markets. A common formulation of this phenomenon is the concept of random reinforcement.
Traders are not rewarded with a profitable trade every time they do something right, nor are they penalized with a loss every time they do something wrong. This makes it exceptionally difficult to figure out what is right and what is wrong.
Compare this to an electric fence. Every time you walk by and don't touch it, you feel fine.
Every time you touch it, you receive a painful shock. It doesn't take a man or animal long to learn how to relate to an electric fence.
Think how much easier learning to trade would be if you automatically took a loss every time you failed to follow correct decision-making procedures. At the same time, what if you were always rewarded with a profit when you traded correctly?
You would be able to learn the correct trading rules much more easily. As your opponent who is trying to trick you into trading incorrectly, the market is constantly sending you disinformation.
One important piece of disinformation it sends is that the market is constantly changing its behavior so the successful trader must be vigilant to change his approach to keep pace. Have you noticed what a constant refrain this is from various trading experts?
It is a common piece of conventional wisdom that no mechanical approach can be successful very long because the markets change. You are advised, therefore, to change your system to keep in tune with recent market behavior.
It is in the expert's self-interest to preach this gospel. Anyone who tells you that the markets are always changing no doubt has found a "solution" to how to keep his trading method up-to-date.
He probably wants to sell it to you in one form or another. If he is not selling his system, he at least can appear incredibly wise and resourceful to his audience.
It is a sure thing his audience hasn't found such an elegant solution to beating the markets or they would be rich and would not have to listen to any experts. Another reason experts invariably claim the markets are forever changing is that it is a convenient excuse for poor performance.
Every successful trader has numerous periods when his system or method doesn't seem to work. It is more palatable to say the markets have changed than my system isn't working right now.
If your system isn't working, it implies you have failed. On the other hand, if the markets have changed, that is beyond your control.
This is the origin of the pernicious practice of re-optimization. Let's say you have a great trading system using three moving averages.
During the last five years, it has made beau coup bucks in hypothetical historical testing. Naturally, you use a different set of moving averages for each market because each market "has its own personality." You are in tune with the markets and ready to trade.
You know that the markets are constantly changing their personalities to keep traders off balance. It is only reasonable to expect that the correct moving average values will change over time in the future.
So as part of your approach, you set a schedule for yourself to re-optimize the moving average values every so often. As long as you are constantly on your guard and watching your options, your trading will be safe, balanced, and secure.
by: Terry Daniels
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