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Who Are You Trading Against?

Those who attempt to begin trading by simply reading a few books on technical analysis, or perhaps attend a free weekend seminar, find out that it’s not quite that easy.  The next step in these would-be traders’ search for profitability is combing through numerous indicators, oscillators and cheaply priced black box systems, only to be disappointed with the results.  That final step (that is if there is still money in their account) is to be mentored under someone who is trading professionally.

In the last couple of years I have increasingly become involved in doing sales presentations.  In these, I talk to people about what they’re doing wrong, and share some of my 20 years of experience as a broker and trader.  A common thread I see is that most people truly don’t understand how the markets really work.  The fact is that most retail traders/investors under-perform the market over long periods of time at best, and some will give up on trading or investing all together.   That’s because they don’t know who they’re competing against, and therefore have little chance of making money on a consistent basis. Professionals on Wall Street are highly trained and very competitive individuals, and their sole mission is to make money for the firm they work for.  This is important to understand because trading in its most basic level is a zero- sum game.  This simply means that the winner takes profits at the expense of the loser.

In these workshops there are people from all walks of life. To reinforce this notion that to compete one needs training, I will ask, perhaps a doctor in the audience, if I could step in and do his job competently.  It seems almost ludicrous that I would ask that question, yet, isn’t that what most retail traders/ investors do when they engage in the market?

It is no mystery that the financial markets are dominated by the large institutions that have and control vast sums of money. These institutions recruit the best and brightest people to work on their trading desks.  If you were able to look inside a trading desk at any of the major firms on Wall Street, you would find that 90% of the individuals seated in front of those trading desks graduated from an Ivy League school.  In addition, they are privy to information that we as individual traders don’t have access to. And lastly, they have hundreds of millions of dollars at their disposal.  In short, unless we understand how they operate, we don’t stand a chance of beating them.

Institutions however, do leave footprints. This is why understanding and learning to identify supply and demand is essential to knowing who you’re trading against.  When you look at the many charts that we show in these newsletters you will notice that there is always a strong or violent move away from a base.  If you think about it rationally, who else but a large bank or institution has the fire power to move a major market in that fashion?   As I like to say, “When we spot supply or demand levels on a price chart we are tracking elephant footprints.”

The last and probably most important aspect of who we trade against is ourselves.  There is a famous line from the cartoon strip Pogo which is, “I have met the enemy, and he is me.”  This quote sums up the difficulty traders have in maintaining self-discipline, and hence another obstacle to overcome on the road to being successful. This has been written about extensively in these and other publications, so I won’t bore you with any more of that.

The bottom line is that trading is a profession that requires training and acquired skills.  It isn’t any different than being a doctor or an engineer.  So if you want to step into the trading arena you had better be competent, because if you’re not, surely somebody that is will take your money.

Until next time, I hope everyone has a great week.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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