How much of what we do as speculators is guesswork?
I would suggest much more than most experts and analysts are willing to admit.
Of course, we analyze product information and data as much as we can and look for chart patterns to form, in the hope they prompt the market to repeat previous actions. But once we have made our decision, from that moment onwards, what happens next, we are hoping we are right, rather than knowing we will be right. That’s why it is called speculation.
From my point of view, it is the amount of in-depth analysis that we carry out that rebukes the argument that we are gambling, although it is unquestionable that many people do trade our markets without studying the data or even sometimes the product.
Truth be told, whether you spend hours analyzing or jump in on a whim, you can still make money on a speculative investment. However, if you wish to be successful over the long term, you do need to study the markets, you do need to allow time to build up a certain amount of experience, and you do need to formulate a strategy that works for your appetite for risk, which will also take you some time to discover.
Most of these issues are mentioned regularly and should not be undervalued. However, what is rarely discussed is the importance of knowing where you are in the pecking order of market participants.
The old adage that “no one is bigger than the markets” is mostly true. But that doesn’t mean that some people can’t actually move the markets and bully the prices. Some people will call this market manipulation, but as someone who in a past life has been in a situation where my trading volume could affect the market, this claim of market manipulation is a little unfair and normally comes from people who are envious that they are not in such a position.
Firstly, not every time someone with volume tries to move the market, do things pan out, and when it doesn’t, the costs can be quite considerable. I was trading precious metals when Bunker-Hunt was squeezing the Silver market, and at the end of the day, he lost his shirt and never traded again. When I was at Phibro, who was a major player in the commodity world, we had a major position in Cocoa, and Sucden had an equally large but opposite position. Both sides attempted to bully the market at different times over a period of months, but in the end, there was only one winner, and the losing side lost millions, resulting in lost jobs.
I can name other times this has occurred, some of which I have firsthand experience, and some I observed as an outsider.
Sometimes you don’t need to trade yourself to move a market; you simply have to be in the right company. Before the internet, research was a very expensive luxury, which few companies could afford. Therefore, when a major broker or dealer issued a recommendation on a product, lots of speculators would follow them.
In the 1970s, I started my career in the Merrill Lynch research department, when Merrill was the biggest broker in the World. As brokers, we didn’t hold any positions, but if we put out a recommendation to buy, so many people would follow our suggestions, that the prices would increase. We did this, and it was almost like we were issuing self-fulfilling promises.
In the 80s and the 90s, Goldman Sachs, who did hold sizable positions, regularly used their research department to move markets in the direction which suited the positions they held. They built a position slowly, then issued a recommendation; when everyone started to buy, Goldman would wait and then dump their position as the speculative buying frenzy reached its peak.
Having a decent research department can be worth its weight in gold, but in the internet era, with online platforms and self-directed trading, few people have access to such high-quality researchers. And we are forced to make our trading decisions based on the opinions of a multitude of analysts, whose knowledge and analytical skills, to be kind, can vary greatly, especially in this age of “influencers.”
Indeed, you only have to recall what happened during the cryptocurrency buying frenzy when thousands of buying recommendations were issued daily on all kinds of weird and wonderful coins. How many of you are still waiting for BTC to reach $100,000 or $120,000, which was the stated target of most “influencers and analysts”?
Strangely enough, even when some renowned traders suggested taking profits, the noise of the masses drowned out what the more knowledgeable players were saying.
One of these reasons I chose this subject this week, is because of what is happening in the crypto space.
Over the past 18-months or so, many traders have applauded loudly when institutions increased their cryptocurrency exposure. It was an indication that crypto had become mainstream.
However, this also means that some of these traders will look for opportunities to move the markets around, which might prove detrimental for the less experienced investors.
Don’t complain, these guys are the same as you, they are trading to make themselves money. Just don’t ignore that some moves might not be for the reasons you think.
When it comes to the pecking order of analysts, it's really important to get as close to the original source of information as possible. Whether it is news stories or trading ideas, it's important to get them from the horse's mouth if possible. Even then, if you wait for them to issue a recommendation on the internet, you can guarantee they have discussed their ideas over the phone with their major clients before they tell the rest of the world. Moreover, if you receive the news second, third, or fourth hand, from some post on the internet, you might find yourself buying when the early birds are selling.
While there are lots of good analysts out there, both working in banks and working privately, people whose opinion I value greatly, in today's investment environment, it is very important that everyone who puts their money on the line continually strives to improve their own analytical skills. And always try to find someone with a bit more experience who you can discuss your ideas with.
Having been around a long time, I have a small network of people whose knowledge I trust and who I can discuss various ideas. This includes people at JPFS and SGT. We will sometimes disagree, and sometimes they will point out flaws in my views. Such discussions are invaluable.
In my own reports, which vary week to week, I do not issue recommendations or use charts to encourage investors because it's important that people make their own decisions.
I will point out what I am doing and share what I am thinking and try to encourage people to look at instruments outside of their comfort zone. I also encourage people to create a trading strategy that allows them to comfortably trade these markets from the short side because it increases the number of opportunities to make profits and means that you are forced to adopt good risk management in your trading strategies.
We are all guessing what will happen next, but it is very important as a smaller investor to try and out-guess what other traders will do, because once you are committed, how the markets move will always depend on the trading actions of others. And some of these other traders could have much more knowledge and a lot more volume than the average speculator.
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