Originally posted at forexfactory on April 11, 2011:
I remember studying EMH when I was first starting. Didn’t get anywhere. Instead I think about order flow and liquidity and what will cause prices to move. I just throw that EMH in the garbage and think about what the market is pricing in now, and what will shatter those expectations.
No market is efficient. If it was, then all the markets would be stuck in a tight range forever. Now there are breakouts and things, so the market can’t possibly be efficient. How can the market be efficient when we are dealing with human emotions. Human beings are never always efficient. You can take a look at some top hedge fund managers and see how horrible their timing is on some of their trades.
If the information was priced in correctly, then the market would instantaneously within 1 second gap to the ‘proper fundamental valuation’ then stay within a 5-10 pip range as the fundamental value was instantaneously adjusted. The market sometimes adjusts to the right value immediately, other times it does not. You can look at all the news releases that could of sparked multi hundred pip moves to prove my point. If the market was efficient, those multi hundred pip moves spread out over a few days/weeks would of never happened. If the markets were efficient there would of been one sharp gap as the market repriced itself and then the market just would of sat there in a tight range.
Yes I like to get an estimate of where the market can move, but as I stated in one of my previous posts, that valuation can change on the fly.
The chance of trading an event that nobody is interested in can be minimized and brought to zero with proper planning, research, and always thinking about what will truly generate order flow.
Yes sometimes it takes a few months for the realizations to hit you. Humans, we are such inefficient beings. It takes us a few months to realize certain things, how could the markets possibly be efficient?
You don’t need charts, ma crosses, fibs, or any of that. If it does not generate order flow and cause price movement, PURGE it from your chart and your mindset. Now figuring which things move price and which things don’t, well that can be tricky at times, but it is a worthwhile challenge.
I had an exercise in one of my posts of getting rid of all your charts, and shutting down your computer, and just thinking about the market and what will cause it to move.
Now I do have a lot of tricks up my sleeve, but there is only so many ways one can say it. Figure out what is truly generating order flow and moving the markets, then figure out what will cause the market to move in the future. Figure out ‘why’ the market will move.
People who place trades, usually expect something to happen to cause the price to move in their favor. Some people wait for a moving average cross, others hope for blind luck, others wait for a round number, others use complicated algorithms, others use support and resistance. The closer you are to the actual true reasons why the market moved, the closer you are to the true reasons why the market will move in the future the better your chances at predicting where the market will move in the future.
If you go look up some of the greatest trades in history, you will notice a pattern. The people placing those trades, expecting something to happen that was going to generate order flow and move the market. They were not betting billions on a moving average crossover, or stochastic signal, or expert advisor. Everyone has a reason for a lot of different things. The question is, will it generate order flow and move price?