by Rick Ratchford
Whether you believe that the market is based on random events or that there is a natural order to its behavior, the market is in fact a reflection of our combined actions in the way of buy and sell orders.
To say that the Coffee market dropped in price because of news that Brazil had a bumper crop that exceeded expectations, or that the price of Sugar is rising because a major grower lost much of its crop due to disease, would not be completely accurate. In fact, if the people who got this news did not react to it in any way but simply kept it to themselves and did no buying or selling based on what they knew, the market would not show any reaction to the event.
The market only knows the information it is given, and that information is relayed to it in the form of buy and sell orders. The more buying and selling done by people and trading institutions the more the market 'knows' about the information that is spurring on this buying and selling. Once all the traders have made their buy or sell decisions as a result of a piece of information, then it can be said that the market has fully discounted that information at that point and thus that information will have no further affect on market action. Thus at this point it is no longer possible to profit from this information, unless new information has spurred new buying and selling.
Some have wondered why at times when the news is considered bullish that the market goes down instead of up. Or when the news is bearish the market moves up rather than down. The market only knows what its participants will tell it, in the form of buying and selling. So it is how these participants 'perceive' the news that makes it either bullish or bearish, not necessarily the event itself.
Most often when the general public is aware of certain market related news that much of it has already been discounted in recent market action. Most then become the 'late-comers' to the party. Although the news may appear interesting and is accurate, if the market has had its fill of it by the time a trader learns of it, then profit based on that information is no longer possible unless the trader has additional information that the market hasn't digested yet.
It is only when a trader has information unknown to others does the potential for profit based on that information exist. Yet this is important for long-term profitability since making a profit by luck or accident is brief and not enduring.
So it stands to reason then that for consistent profit potential the trader must have insight on certain facts about the market before the general trading public finds out about it. This will allow the trader to put on a position in order to benefit from this information as others start to learn about it and move the market in the traders favor. But how does one come about gaining this information ahead of the trading masses?
Well, there really are only two ways to do this. The first is quite obvious and that is to have insider information. Of course this is illegal and for the majority not easy to get. The second is if you can take freely available information and analyze it in a way that few traders are aware of. In other words, you would be generating your own inside information.
All traders have at their disposal freely available market information in the form of news, historical and current price data. The key is to analyze this information in a unique way that can give you an edge or advance notice of likely market action. This alone explains why it is not a good idea to use a system or method that is widely known and used by others. No matter how good that system may have been in the past, once it becomes used a great many traders, you have lost your 'insider' information edge using that system or method. This is a mistake that many make.
One of the greatest lures to esoteric methods of analysis is that the majority of the trading public does not use it. It's potential for providing insider information is much greater than a well-known system that most have embraced and accept, and especially use. The more that comes to learn of a method, the more its potential for profit decreases.
For example, let's say that a turn is forecasted using Fibonacci methods. What may happen is the turn actually occurs earlier than expected because more traders are taking a position anticipating this turn. Or perhaps rather than appearing early, it isn't as pronounced of a turn as it otherwise would have been had others not anticipated the same turn. Regardless, the more the market knows of the information the less benefit that information will be to someone trading it after it has been discounted in the market.
Once you come to understand that the market is only a reflection of how all traders combined view the currently available information, you then can come to understand the importance of acquiring information that most others will not have so you can act before they do. For once it is publicly known, they have already put this information into the market and it has already made its move accordingly.
Common sense should then tell you to look for insight in areas that are not commonly embraced but the trading public...yet. Everything sooner or later becomes common knowledge. So what is esoteric and mostly unknown today may become the popular approach at a later time. As that happens you then must work towards finding new ways of dealing with information not commonly known. Never settle to be of common mind with your fellow traders. They are looking to make a profit from others as you are. Only those with insider information will have the edge necessary to make a consistent run at market profitability.