by Alexander Mirolubov
To all who consider going by a risky path of financial speculations
Have you ever considered of becoming a trader and making a lot of money on financial markets? What can be simpler than that? Buy low, sell high ...or higher... the highest... the biggest possible price! What a wonderful dream! It is a dream shared by all.
The stock market reality is an embodiment - better to say, the most concentrated embodiment - of the idea of getting rich by a pure speculation. Everything there is "top": top money, top computers and means of communication, top nerves, top minds (cold and sophisticated), - and, of course, all nice things that you can buy for the top money. To get there, a person needs just one small thing: to know what direction the market will go the very next moment, up or down. Just that. And you are a king of the mountain!. you have got your lucky star!
That was my vision of the market reality at my first approach to it. I believe that many people share it with me. This is why I have started this discussion...
So, we want to play the market. And we need to figure out what is going to happen to the market. The first idea that comes to our mind is: the market (or the share price, or...) will go either up - or down. Just that. Up or down... Does it remind you something? Generally speaking, it is a simple vertical movement. Up - down. Cheap - expensive. Here - there. One dimension world.
It is quite a surprise. A very complicated thing that is the stock market can be thought as something one dimensional, something very simple! Wait a minute... Any person - just to be able to function in our everyday life - must position himself/herself in three-dimension (not in two-dimension) world. And these are just elementary functions. What market movements or market forecast can we discuss on one dimension basis, if a change from one dimension world to a simple three dimension reality is more than going now from a small sleepy village in the middle of nowhere to Proxima Centaurs?
At least, we should move to two dimension way of thinking. And it should be a smooth transition... If we decide to go this way, what can we take as a second dimension when we try to evaluate the situation on the markets? It is not easy to find the solution. "Up or down" thinking does not want to let us go.
Who can help us? Who will show the direction? There is a good answer to this question: the TIME. His majesty Kronos, who was the lord of the Olympus mountain sometime in the past. Though this answer may be not obvious for now, let us consider it. At least, we have made a step, we have moved to another level. It is important because we will have to make other steps.
Why is time so important? It is obvious that after some time the price of some share will go up (just look at any price history data for shares of any notable company that is long enough on the market). So, finally the price will go up, and it is the important fact to remember. But - what good is in it to a market gambler who dies before that happens?
It may look like a banality; as you know all the diagrams that all traders stare at all day a long are designed while taking time into account... But - I would say no, no and no! Why? Just because such a two dimensional system as used in common trading charts reflects only those things that already have been embodied in our reality and thus belong to the past. The really important thing is what is not seen on the monitor yet. It is in our mind only, somewhere after the right border of that chart. If that thing in our mind is "it will go up, soon" or " help, we are going down", - be assured that we are still in that one dimension thinking.
Consider this. Let say, we feel that the share price will grow. So, let us draw in our mind how it may grow, let us continue that chart at least in our minds. The growth - will it start immediately? Or something else should happen before that? What shape will this growth have? What angle, from our point of view, should it have in regards to the previous data, to make us able to notice it? How far will it go? What visual signs will give us a hint that the growth is completed? And - the most important question: what can happen a micro moment after that?
All these questions are uncomfortable... However, this is just a transition to two-dimension logics. If you decide that these questions are not necessary, this is a certain way to the disaster. Let me tell you a story. Actually, this is a real life situation that I have witnessed many times. Two market analysts do their forecasts. One says: "My understanding is that the market will grow next week", while the other sees it as the market going down. OK. These are two forecasts based on different theories. And here comes Reality, true life events. It has happened that the market actually went up 2% in the beginning of the week and went down 3% at the end of that same week. The first analyst claims that his forecast was a correct one as it was fulfilled earlier than the other forecast. The second analyst is boasting that "he has forecasted more significant market move".
Who is correct, who is closer to the core of the matter? My answer is: that one who has managed to receive more money for his forecast. I apologize for being cynical. However, the moral of the story is very simple: all market forecasts worth nothing, only one thing is important - are we making money or losing it? We see it clearly as soon as we leave that one dimension reality. While we are there, all words "start giggling and show their tongues to us and each other" (this is my translation of a very deep thought by Saint-Exupery expressed in his great book, "Citadel" (published in English as "Wind, Sand and Stars")). It looks like the secret of market price movements is actually unpredictable...
By the way, let us think about the money we made. Does it mean that we are moving to the third dimension? What for? It may look like a simple question while it is not so simple. Imagine that you have some shares of one of the Russian companies; it shows 25% growth within last 2 months. So, when you sell them, the result is not bad for you. But - it is in rubles. And you have a need to buy some quickly growing Wally Power 118 from Italian wharfs which is priced in euros. During those last 2 months, the euro grew 23% over rubles. What does it mean? Just that the nice looking vertical line on your share's chart may not signify the fulfillment of your goal... You have to look around. And the most important thing is that you have to look at yourself! Now welcome to three dimension reality!
Thanks God, now we are adequate to the situation (this is the expression of some of my younger friends). We can move in this universe. However, the ability to walk over the flat surface combined with ability to hold a spoon in our hands is not enough to bring us money enough to make some soup that we will eat with that spoon... And I am NOT speaking yet about the very complicated task of survival in the reality of modern markets. I will try to explain why.
Imagine that we have started successfully and feel ourselves well enough in a three dimension world. We keep in mind currency pairs dynamics. We were able to provide a chart for our financial instrument. We have learned the signs of its coming up trend, and we know the means of controlling it. Why do we do all these things? Maybe, we do it to get the maximum profit from our position?
October 24, 2010