WHAT DO WE UNDERSTAND BY THE TERM, “OUTSMARTING THE MARKET”? WHEN YOU START BELIEVING THAT YOU CAN ACTUALLY FOOL THE MARKET AND STEAL OPPORTUNITIES IN TRADING; THAT IS WHEN YOU GO WRONG. REMEMBER, THE MARKET HAS AN UNCANNY METHOD OF BEING RIGHT IN THE MUST TRYING OF CIRCUMSTANCES. HENCE AS A TRADER, YOUR FOCUS MUST BE TO BE HUMBLE ENOUGH TO ACCEPT THE SUPERIORITY OF THE MARKET AND TRADE WITHIN THE SIGNALS GIVEN BY THE MARKET. THE MARKET ALWAYS HAS A STORY TO TELL YOU. IT IS UP TO YOU TO LISTEN TO THE STORY, GRASP THE INTENT AND TRADE ACCORDINGLY
HUMILITY IS THE KEY TO SMART TRADING
Why do you think that index funds perform better than most of the fund managers in the US? It is estimated that more than 85% of the active fund managers tend to underperform the index. That is because the market represents the collective wisdom of a large number of traders and is, therefore, better equipped to deal with news flows. This is a risk that fund managers with long-term perspectives can still afford to take. But as a trader with short-term perspective, you need to be humble enough to admit that the market knows best. The smart trader is one who is able to read the story of the market and trade accordingly. When you are trading against the market momentum, you are actually taking on an additional risk. When you take on additional risk your risk-return trade-off gets skewed against you. That means; you are more likely to lose money in the trade. Learn to trade within the limits imposed by the market and never try to outsmart the market.
IT ALL BOILS DOWN TO MARKET MOMENTUM
What do we understand by the term market momentum? Of course, there are technical definitions of momentum and there are methods by which charts define momentum in technical analysis. Here momentum is a lot more intuitive. When we talk of momentum we talk of the bias of the market. What does the market hint at? Does it refer to a market that should be bought on every dip? Does it hint at a market that should be sold on every bounce? Momentum refers to the underlying strength or weakness of the index as a whole or a stock in particular. The reason momentum is important for a trader is that you must always stay on the side of momentum. Don’t try to buy in a weak market; that is like catching a falling knife. Don’t try to short a booming market; you are almost trying to stop a high powered Ferrari with your bare hands. When you have momentum in your favour, the biggest risk of trading is automatically eliminated.
“Trading in any asset class; equity, debt, commodities and currencies is about grabbing the momentum with both hands” – A trader
5 WAYS IN WHICH MOMENTUM MAKES YOU A BETTER TRADER…
- Momentum helps you pinpoint the underlying strength or weakness of the market and trade accordingly. Momentum is very useful in reducing the cost of your trades and bringing down your trading risk.
- When you are on the side of the market you can at least be sure that you are not fighting against the collective force of the market. When you have the market on your side, you can focus more on your charts and ensure that you get your trades right down to the most granular details.
- Trading is all about reducing your cost of acquisition to the minimum and increasing your exit price to the best possible price. That is only possible if you have momentum on your side. When you are trading against momentum you are already paying a very high price for going against the market.
- Momentum takes care of the macro and the industry level factors. So, as a trader, you only need to focus on the micros of the market and the stock. That makes your job a lot easier and also more meaningful.
- When you try to outsmart the market, your focus shifts from being profitable in your trade to trying to beat the market. That is not the job of a trader at all. The trader has to focus only on being profitable and does not have to prove that he is smarter than the market. That is when you start to lose the plot.
LET MOMENTUM GUIDE YOU’RE TRADING ACTIVITY
That is the bottom-line! When you trade in the market, your primary and sole focus is to make money. You should not bother about proving the point that you are better than the market because you are not. The market represents the collective wisdom and the collective follies of millions of investors and traders. It is a great sounding board for bouncing off your ideas and fine-tuning your trading strategy.