What are your thoughts on PTJ’s quote from Market Wizards that “price moves first, fundamentals come second”? It seems to imply that price action makes the move, which is then later explained by some kind of fundamental reason. For instance, CAD was the strong currency today (price move 1st), and it has been explained away somewhat by the BOC statement (fundamentals coming second).
Your thoughts on this…..price moves happen first and then a fundamental reason is applied to it….or perhaps you have a different view and interprettion of what PTJ was getting at?
As far as my knowledge and interpretation of PTJ and his trading philosophy back in the 1980’s, he traded in a very tactical way. Trades would last minutes, hours, or days at the most. Occasionally some trades could last months. I think I remember reading he bought some puts on the Nikkei in early 1990 or something. In Market Wizards he also said:
Always think of your entry point as last night’s close.
Who cares where I am long from. That has no relevance to whether the market is bullish or bearish right now, or to the risk/reward balance of a long position at that moment.
I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them.
Back in 2000 or so, he said that he traded the same way he did in the past, but with less leverage.
And after his firm suffered a small loss in 2008, I remember he said he was going to “return to his roots” and focus on trades that he can liquidate in 1-3 days if he wanted to. He liked and still likes the ability to get liquid at a moments notice.
A lot of short term tactical futures traders, are very price sensitive. If a position is moving against them, they are very price sensitive and will like to know what is going on, etc. They can cut trades quickly. They generally don’t want to hold losing trades for weeks or months or years.
So that is what I feel PTJ is saying when he says “prices moves first, fundamentals come second.” He is just sensitive to the price movements and likes to trade tactically. Likes to get in and out on the same day for some positions. Other positions he may hold them for a few days.
The way I would think of it is: If you are a directional trader, then you are relying on the financial instrument that you are trading to move in your favor. Some people call it “price action”, I like to call it volatility in your favor. Then the next question becomes well why is the market moving now? What will cause it to move in the future? And that is where the analysis of stops, barriers, information flow, expectations, scenarios, etc comes into play to help a person determine where a financial instrument is likely to go.
In my view, there are different types of trades. There are some trades where prices are moving, let’s say upwards, and everyone knows why prices are moving, but you still want to buy becomes the volatility is going to continue upward as even more people come to that same conclusion, etc. There are other trades where the prices are moving upwards let’s say, whether breaking out or not, but the price is moving up, but you want to fade it, either because you anticipate that the bullish scenario is false or going to be exhausted, or you anticipate some bearish scenario to overwhelm the bullish scenario.
The principles of whether to “Go with the move” or “fade the move” or “do nothing.”
So when PTJ said that, he may have been short S&P’s but the price didn’t break, so he was price sensitive, and didn’t want to hold a losing trade past the end of the day, or for too many days in a row. So he covers. Maybe he tried to short S&P’s at the lows of the day or of the recent trading range, and they didn’t break lower, so the macro model was “Do Not Short Bottom Tick.” And perhaps he did some analysis on the underlying macro conditions and believed that the bullish macro scenario was going to continue, so he switched to long. Him being short S&P’s and losing some money and price moving against him, spurred him to figure out what was wrong with his position and thinking since he is a tactical trader.
PTJ certainly has a mindset of whether to “Go with the move”, or “fade the move” or “do nothing”, even though he may not explain it the way I do in the Mastery Course. I know that from my experiences and reading of him. There is another story where Crude Oil was rallying strongly, but he was waiting and waiting and wanted to fade the move and short it. So in that scenario he used the “Fade the move” strategy.
In other cases he just stays out. One of his quotes is:
If you don’t see anything, you don’t trade. You take risk only when you see an opportunity.
In most trades I know of the top 5 bullish and bearish scenarios that can cause the price to move. But in some cases I may be unsure of which ones are fully active or relevant, so I may place a small position and give it a few hours or day or a few days or so. Whether the trade is in a profit or loss and how much, it helps to spur me to find reasons why the market did what it did, sometimes a bit better if I was completely flat. As Soros once said: “Invest first, investigate later.” You can change it to “trade first, find reasons later.” Or “go with the move sometimes, fade the move on other times, stay out completely on other times, and other times trade a small position first, find the news/sent/fund/macro reason later.”
As Soros once said:
My approach works not by making valid predictions, but by allowing me to correct false ones.
In other words, sometimes he has a on a trade, it moves against it and he starts searching for why he is wrong. If he believes he is wrong and the market is going to continue moving against him, he can get out of the trade and perhaps reverse, or search for another trade given the new knowledge of the news/sent/fund/macro scenarios he has found.
A lot of trading information can be interpreted in so many different ways and in some cases it can cause confusion. As time goes on, one can develop a stronger trading philosophy and help to find the proper meaning. But even then, you can accumulate so much trading knowledge and wisdom that eventually some of the trading advice starts conflicting with each other. That is where knowing when to use the proper strategies and principles come into play. Not all trading information is relevant every single day, or for every single market.