What you must understand before you trade
It is essential that you understand market movement from an investors standpoint first, and that you differenciate fact based analysis from opinions. There is an old industry joke which goes: “How do you make a small fortune trading currencies?” The punch line: “Start with a big one”. My guess is many traders don’t think like investors because they don’t have a lot of money left after trying to learn to trade. I’m thinking this must also be the case in financial blogdom based on all the negative press out there trying to tell us that the U.S. government’s attempts to secure it’s economy and stock market is somehow a terrible thing and will lead to near certain destruction down the road. Meantime the stock-market, still the best leading economic indicator I know of, just put in a 2-year high settlement earlier in the month – see Figure 1 – while long-term interest rates, and the economy, are steadily upticking. The S&P 500 is just below the 66% retracement level of the ‘07 – ‘08 Panic, a level which if eclipsed, would give us a definitive end to the bear market. It’s fact based occurrences such as 2-year high settlements, and upticks in long-term interest rates, and 60%+ retracements that investors take patient stock in, while so many bloggers and pundits still prefer guess work with a negative bias.
Figure 1
Ask yourself why Warren Buffett decided to loan Goldman Sacks $5 billion in late ‘08 during the height of the financial panic, and then invest $44 Billion in Burlington Northern in late 2009 in what he called “an all in bet on America”. We can’t speak for him but the answer has much to do with Buffett being an investor, not a trader, and, in the case of his railroad investment, having first-hand experience in seeing the benefits of the Economic Stimulus Act of 2009. Did Buffett somehow have inside information that the stimulus act would work as well as it did? And how can we know such things? Regardless of what Buffett believed we can have a pretty good idea that a plan is working by simply looking at the closing price of a market or security on a weekly and then a monthly basis. We don’t guess what it will be and then bet on it; we wait and see how in fact a market closes on a higher time frame, and then position ourselves in that same direction. We think and act like an investor.
Something else I keep hearing from short-sighted speculators is the inevitable graying of America and how we have so many Baby Boomers about to retire and how the whole system will be broke and America is trapped in a Keynsian whirlpool. I don’t doubt the certainty of death and taxes. And I don’t doubt that those U.S. workers in their peak earning years, 45 to 55 years old — which happens to be the largest segment of the U.S. population — are going to be paying a bit higher taxes over the next decade than they have over the previous two. Given their previous appetites and the extent which they spoiled themselves – multiple gas guzzling vehicles, two vacations per year, and every silly gadget imaginable – and thier kids — that list is too long to write — the fact that they are now going to have to pay incrementally higher taxes was essentially inevitable. But the good news is the U.S. still has a very strong up and coming consumer generation — See U.S. population pyramid in Figure 2 – and they aren’t going to be near as spoiled as the previous generations because many of them have had to make thier good fortune instead of taking it for granted. �
Figure 2
The U.S. population pyramid shows a pretty good bulge of 20 to 25 year olds who over the next decades will mature into the next investor class right about the time the current investor class will have paid down they’re share of the national debt thru taxes. While that bulge is not as impressive as the same generation in Australia and many emerging countries, it is still markedly larger on both an actual and percentage basis than that of Europe, the U.K., Canada and Japan. This is a fact that will certainly play a large role in investment trends going forward, and like any investment trend must be known by traders who want to succeed.
Trends fueled by facts run much longer and deeper than those based on speculation.
Jay Norris is the author of Mastering the Currency Market, McGraw-Hill, 2009 which is the text book for the intermediate level trading course offered though Trading-U.com see: Trading Courses Jay’s second book Mastering Trade Selection and Management, McGraw-Hill will be in book stores in 2011.
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. Risks include the potential that changing political/economic conditions may substantially affect the price/liquidity of a currency. Investors may lose all or more than their original investments. Any charts shown here represent market conditions at a particular point in time. Such conditions may not be replicated in the future. Past performance is not indicative of future results.