You can’t beat the market

20 Jan 2021

Too many who are engaged in trading, try to guess what will be the exact short-term future course of the traded security (stock, commodity, etc.)
they are dealing with. Behind this futile effort is our ego that is convinced that we are smarter than the rest and so we can predict how the security
will move in the short-term, to take a suitable position and beat them.

I remember myself planning on paper, many years ago, how the market will move and making scenarios. Every time I broke my face, and so I realized that,
almost always, it is impossible to predict the short-term course of the market. I write almost always because sometimes your predictions actually come true,
but that's because the market wants it because it's a trap.

Now I want to be very specific about what I mean by the vague term ‘market’.

There is a widespread opinion that prices are formed by all of us who participate in the market through supply and demand – bulls and bears.
This view argues that an institutional investor or fund managing billions and a micro-investor have the same weight in market price formation.
Of course it goes without saying that this is not the case. The smart money (institutional investors, funds and powerful individuals) and the general public,
the small investors, are both shareholders in each security. Everyone aims to buy cheap and sell high. The truth is that only smart money has the means to do it.

So when I'm talking about the market, I actually mean smart money and its mechanisms because it is the smart money that shapes prices.

Thus the goal of the market is the following:

1) To get the public to sell at the lowest point possible during a crash, so that the smart money can buy at the cheapest price possible.
2) To get the public to buy at the highest point possible during a rise, so that the smart money can sell at the highest price possible.

So the small investor has to deal with the smart money and that is why it is extremely difficult to win in this fight, at least in the short-term.
Smart money with its means is always a step ahead because it controls the game. That's why you have to accept that it's almost impossible to beat the market in the short-term.
You cannot predict how it will move because it has all the current data (which you do not know) and will make whatever moves it takes to deactivate as many traders
(bulls or bears) as it can. The market is a master at deception. In each phase, the short-term course of a security has infinite ways to move and each pattern has the potential
to transform to a different one, depending on the positions taken by the other players in the market.

Here is an example where some of the possible metamorphoses of a formation are shown.



So if you can't beat the market and you can't predict its short-term future moves to get a suitable position, what can you do?

You can 'read' the movements made by a security in the past, using the tools of technical analysis. So you can see what is the long-term (years), mid-term (months)
and short-term (weeks) trend and understand the market's intentions for the future, i.e. whether it is intended to follow an upward, downward or lateral path.

Once you've made it clear what path the market wants to take, instead of trying to guess its short-term future moves, you need to focus on what market is doing NOW,
right now, and once the technical analysis gives you a medium-term input signal to hook up to the path the market has set until you get an exit signal, ignoring the short-term
misdirection moves it will make.

This is the technique of following the trend - you may have heard the saying 'follow the trend, the trend is your friend'. Here I must stress that if you are wrong about
the intentions of the market and follow the opposite path you must accept your mistake and close your position by taking your losses as long as they are small.

If you are a beginner or do not have sufficient knowledge of technical analysis, it is probable that you do not understand what I mean in the previous paragraph and I,
on the other hand, cannot make up for them in the space and time I have by making detailed explanations. That's why you should read books on technical analysis and
get the experience needed in real, in my opinion, conditions with little capital. Only if you lose and hurt, will you be forced to reflect on your mistakes and eventually
gain meaningful knowledge and experience. Then you'll be able to better comprehend what I mean.

Summarizing,

1) You can't beat the market in the short term. You can't predict its short-term future moves, so don't get carried away in short-term trading.
2) You can, with technical analysis, decode past market movements, determine what the long-term, mid-term and short-term trend is, and understand its intentions for the future.
3) You can monitor the movements that the market is making now and follow the medium-term trend it creates once you get an input signal from the indicators of technical analysis.
4) You can let your gains run.
5) You can exit the medium-term profitable trend if it goes to reverse as soon as you get an exit signal from the technical analysis indicators.
6) You can cut your losses early if you misdiagnosed the market's intentions.

A suitable system to implement what I mention above is the 30d/200d SMA system, which I have described in my post entitled ‘a trading system for rookies, simple, profitable
and capital protective’ you will find here

tradingview.com/chart/HSBC/A8bLuwSy-A-trading-system-for-rookies/.

In fact this system is not only for beginners but also
for traders of every level who can simply, due to experience, apply it in the short-term.

Disclaimer
The writer of this text is not an investment advisor. The preceding content is intended to be used for informational and educational purposes only.
Before making any investment based on your own personal circumstances, it is very important to do your own research and analysis and also take independent
financial advice from a professional to verify any information provided here.