Efficient Market Theory is steadfast in it’s assertion of investors as “rational investors”, which is to say that every investor has weighed the potential outcomes of a given investment decision and concluded that a certain event may or may not happen. Proponents of other market theories will tell you that efficient market theory is hogwash and the market frequently creates bubbles and mispricing anomalies, say over bought or oversold.
Investors in the second group, the non efficient crew, then base their investment decision on these overbought or oversold conditions, which is a rational decision. of sorts. However, this line of thinking creates some fairly irrational pricing in the capital markets.
Small investors are, generally speaking, not nearly as effective in the trading skills and buy and sell for a variety of reasons ranging from educated guesses, a hunch they may feel, or advice from a third party who may, or may not, possess any real investment expertise.
Through in the hedge funds, quants and others of the computerized trading ilk and you end up with a hodge podge of investors all chasing potential profits. Of course, they have all approached their market buying decision through different methodologies. Nonetheless, they are all after the same goal.
The Fed’s economic policiy has to be thrown into the mix, at this point, as they use market measures to control inflation and unemployment. The critics of the Fed’s actions are legion, with good reason. It would seem that often do as much harm as good…just the same they are major players in the overall market scheme.
This begs the question for the trader: Is the Market Wrong at Times?
Well, the answer is an easy one. The market is always right, and if you trade why you think is right versus what the market has deemed to be right you are in for an unprofitable ride. I always have to whisper to myself: “The market is always right, and I am always wrong.” This is a very tough pill to swallow, especially if you know a bit about economic theory and the way things “ought” to act given a specific set of variables. Wrong. Wrong. Wrong.
Trade the market, not the news, not economic theory, not the general consensus not anything but what you see on the chart. The Efficient Market Theories have one tenet quite right…there is a degree of randomness in the market that cannot be ignored, and the market often wanders in a direction that departs from common knowledge or well thought out economic principle.
The market is always right, because you have to trade exactly the price action on the market. This makes life as a market scalper much simpler, as I don’t have to make intermediate and long term prognostication on the movement of the equity markets. No, I am generally looking at what the market might do in the next five minutes, and that is a far easier proposition than the long term.
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