The Market is Never Wrong

“If all trading stopped at any particular price, what would this last posted price represent? At the most fundamental level, this last price (or any current price) would represent the consensus belief about value, relative to the future, of all the traders who are in the market in that moment. The current price is a direct reflection of the beliefs of all the traders who choose to act as a force on prices by putting on a trade. So, when there are two traders, one wanting to buy and one wanting to sell at a price and do so, they have made a trade, and they have also made a market.

All that is needed to make the market right are two traders willing to trade at a price. Regardless of the criteria they used to determine value, how rational, irrational, meaningful, or meaningless by your or anyone else's belief system, if two traders are willing to express their belief in future value by making a trade, they have made a market. Unless the trade can be undone, it has to be right by virtue of the fact that it was made.

What you wanted, thought, believed, or expected is of no consequence in the overall scheme of things unless you can trade with enough volume to control the market and move prices in the direction you deem to be correct. To do this, you would personally have to represent a buying or selling force strong enough to absorb all the counteracting buying or selling represented by the traders who didn't happen to agree with you, at any given moment, with enough financial power left over to bid or offer the price where you want it to be.

For an observer of market behavior, each trade that is made and the type of movement it creates in prices can tell you something about the consistency of the market and potential for movement in a direction—if you can discern the meaning and put that meaning within some framework defining opportunity. Price movement creates opportunities to buy low and sell high, or vice versa, if you can perceive what is likely to be high and low relative to some point in the future. Movement in any given direction is equivalent to the amount of force that is being applied to create that movement.

For example, if prices penetrated all-time lows, the fact that you may have believed that they would not do it is meaningless, unless you can personally trade with enough volume to move the price back above the old low. You have to consider that for prices to have penetrated all-time lows, there must have been more traders who believed that the current price was above what they considered to be of value, at least enough to where they believed the all-time low was a selling opportunity or they would not have sold. For prices to follow through and continue to go lower would indicate that there are more traders willing to act on their belief that prices are high and as a result sell than there are traders who are willing to buy at those prices (all-time lows).

What you believed about value and your reasons for believing it may be of highest quality, but if the market doesn't share your belief, it doesn't really matter how “right” you are based on your superior reasoning process or what you believe to be the quality of your information, because prices are going to go in the direction of the greatest force.

The point here is that right and wrong as you may traditionally think of them don't exist in the market environment. Academic credentials, degrees, reputations, even a high I.Q. don't make you right in this environment as they would in society. Traders, acting on their belief in the future by putting on a trade, are the only force that can act on prices to make them move. Movement creates opportunity to make money, and making money is what trading is all about. This is also true for the hedger trading to protect the value of his assets.

Each individual trader will define what market condition represents enough of an opportunity to put on a trade for whatever reason suits him. Regardless of how wrong you think he may be, if the net result of the collective actions of all the traders participating is moving prices against your position, then they're right and you're the one who is losing money.

The market is never wrong in what it does; it just is. Therefore, you as an individual trader interacting with the market—first as an observer to perceive opportunity, then as a participant executing a trade, contributing to the overall market behavior—have to confront an environment where only you can be wrong, and it's never the other way around. As a trader, you have to decide what is more important—being right or making money—because the two are not always compatible or consistent with one another.”

The Disciplined Trader by Mark Douglass

I see a lot of of post from people asking why this stock or that jumped/tanked despite some sort of news that would suggest the opposite reaction. There’s only one answer to all of these questions: supply and demand. No more, no less.

The answers you want – a fundamental reason underpinning and justifying any specific price action – doesn’t exist, because what you’re really asking is why the millions of market participants are acting a specific way and that is unknowable. Listen to the market or be wrong. The choice is all yours.


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