Random Market Questions Answered II

More random market questions answered.

You do not need a PhD in economics to understand economics impact or global macro impact on currency markets.  Typically the people who have stayed involved in academia for an extended period of time usually have accumulated many weird beliefs and false beliefs about how the currency markets and other financial markets operate.

Many economic models do not understand the foundations of every market – order flow and liquidity.  They have a difficult time explaining the emotions of fear,greed, liquidity crises, stops, etc.

Instead of teaching actual things that can help you make money in the currency markets – concepts like stops, option barriers, news, global macro, market sentiment, expectations, positioning, the economists and finance gurus in academia typically believe in concepts like purchasing power parity for currencies, and dividend discount model for stocks among many other formulas.  The economists also typically do a horrible job of judging proper market sensitivity and environment.

I have talked about being skeptical about the geeks bearing formulas.

Usually many economists and other people who have spent an extensive time in academia have cluttered their minds with information and concepts about things which do not generate order flow and move the markets.  Some of the concepts they know of may generate order flow, but they are mixed in with non order flow generators that cause confusion and thus generally do not make the best analysts and traders.

Again, because they have learned many ideas and theories about the markets, some of which work, but most of which do not work in the real world trading environment.

Also there may be many economists that have never placed a trade in their lives.  They may just like to get a degree in economics, or a PhD, then instead of trading on the side or at all, they have a day job and make appearances on the financial news channels to pontificate about the currency and financial markets.

If they have never placed a trade and never risked money in the markets, then how can they understand what works and what doesn’t?  How can they understand how to manage a trade successfully?  How can they understand when a currency pair moves out of equilibrium for an extended period of time?  How can they understand when to take profit?

And as such, you will not see many economists on those financial news channels become millionaires through trading.

There are all sorts of reasons why all the reporters, journalists, analysts that you see may not be rich.

Trading involves a risk and many people are not prepared to risk money in the markets.  Many of them may be truly fearful about risking money in the markets.  Even though you can control risk through position sizing, low leverage, and placement of stop losses, many people in the financial news media still claim that currency trading is “risky” or “volatile.”  And for the person who does not have an understanding of money management it is risky.  Especially for the gambler who likes to leverage up and place trades without a stop loss and then just waits for a margin call to close our their positions.

Another reason is that they do not want to be a trader.  Trading can be very difficult for some people.  They suffer information overload, confusion and the journey to being a successful trader can be filled with much fear and anxiety.  Going through the process of sifting through all sorts of trading books, forums, indicators, forex robots, chart patterns, etc in order to find success can be a daunting task.  Not to mention the incredible work on solving your inner demons that needs to occur.

Therefore many of the people working in the financial world who are non traders do not want to be a trader.  They may not want to trade full time or on the side.  Trading at times can be very lonely as not many people can understand what you are doing, and many more do not seem to care.

Also they may legitimately be happy and content with their current jobs and careers.  They are happy, maybe have a decent salary and are not looking for anything more.  They may enjoy the energy and the environment they work in.  They may not want to attempt to trade that for an uncertain career in trading.

Some people are not looking for more money.  Money isn’t necessarily everything for some people.  If people enjoy the environment and people they work with, and enjoy their current lifestyle they may not be looking to change that for a chance at making obscene amounts of money trading.

As for the news.  News is important.  Here is an important quote:

Anyone who made money, a lot of money yesterday on Tuesday August 9, 2011, was either lucky or had skills in interpreting the information differently than others and acting upon that difference.

Using information and perceiving it differently and knowing its true implications and timeline for doing so is one of the greatest edges in trading of all time.

 

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