Hello all,
I’m working on my trading beliefs and here is a list that I have come up with. Please feel free to comment and add your own suggestions…
Why is the market moving?
The market may move because:
[ul]
[li]The smart money is establishing a sizable position, usually rooted in fundamental assumptions but optimized by technical points of entry.
[/li][li]Stupid money is establishing a position, being led by false assumptions on either a technical or fundamental basis. Since these assumptions do not concord with the big movers, the move is short lived because it is faded by the professionals who use the false move as an opportunity to add to their current position at a better price.
[/li][li]Both stupid and smart money are establishing a position, usually the smart money first, then the dumb money next.
[/li][li]Currency dealers are trying to elicit a response from their opponents by playing for fakeouts. This happens in very illiquid markets.
[/li][li]The market reaches a critical support or resistance level where a lot of stop orders are parked, triggering massive selling/covering. The move will be faded by smart money if there is no strong fundamental thesis to the move.
[/li][li]A big hedger has to buy regardless of the state of the market. This is a problem in thin markets.
[/li][li]Smart money has to shift its position for non-market related reasons, such as redemptions or portfolio imbalances.
[/li][/ul]
The market will move sharply if:
[ul]
[li]News offers a significantly stronger confirmation of the current market consensus mood than expected.
[/li][li]News is a big surprise that radically upsets the general market consensus.
[/li][li]Several smaller news events continually dis-spell consensus forecasts in one direction (in other words, several small surprises that cast doubt on the market’s current bias).
[/li][li]There is a break of a significant technical level.
[/li][li]There is a false break and people realize they are caught wrong, which causes a rapid reversal to the other side.
[/li][/ul]