some time ago. a friend and I had a conversation about market price movement... in his wisdom, i was reminded that fundamentally price movements are caused by none other than the first principal of economics, demand and supply... this is not an unfamiliar concept to many of us here...although we often forget ...
"market sentiments" as a concept is intimately tied to "demand and supply" principal.
often, we hear people asking : "how is it that just last week, when the world thought the european nations are collapsing under its debts, that this week, the euro currency is soaring? is the problem over? is it true that the issues are all resolved?"
i think, in this case above, euros soared, bcos the buying pressure exceeded the selling pressure; 1st principal of demand and supply, which my friend talked about...
that puzzles us as to why the demand is now stronger than a week ago, when obviously the financial crisis cannot have mutated for the better in over a few days....
imo, the problem by itself, is not the main reason for the price gyration... it is the collective reaction to the problem, the consolidated opinion of the market players, that sway the price one way or the other....
market players can and are often wrong about any given situation...Lehman, Bear Sterns, Dot gone, length of recession, etc... this could be due to the lack of info, misinformation or simply a wrong assessment.... and as information streams in, market opinion will eventually more accurately align itself with the reality of that problem... this is what "market sentiments" is all about...it is no more than an aggregated opinion on a situation.
market sentiments on a situation, create the demand or supply for that relevant traded instrument; such as eur/usd was actively traded when Greece threatened to go bankrupt ...
the financial crisis over at Greece probably hasn't changed much in the last 2 months; very likely, they are still in huge debt and have very little ability to pay for their loan obligations by themselves... yet, the Euros have stopped losing value since it hit a low of 1.18..today, it is about 1.27 against the greenback.
so, if Greece's problems are still around, then what has changed?
i say to you, it is the Market's opinion that have changed. it perceives that Greece is no longer an imminent threat to the global financial system, now that those rescue packages from IMF and ECB have flowed into Greece.
with this change in Market Sentiment, the demand and supply equation is now re-written....
in summary, problems do not get solved in a short timeframe and it almost always stays problematic over a short timeframe...what has changed is the market players' opinion, collectively known as Market Sentiments... and that causes the relevant instruments to change in value...
The way to improve, is to get better at what you do. Doesn't that sound just rhetorical?
Employees receive periodic job performance reviews by peers and/or their supervisors. Behavioural science professors from ivy league schools write thesis about this subject. MNC HR departments implement such reviews. Employers spend resources and must be getting some real benefits out of such performance reviews.
So many people can't be so wrong about the need to review work performance.
For those who trade, especially professionally, there's no such formal review system. We are on our own. We have no work peers nor supervisors. There isn't such quarterly or yearly performance reviews.
So, how do we know if we are trading optimally? How will we know if we could have traded better or avoided those mistakes? We won't, until we actually review our trades.
The only way to fully understand our trading performance is for us to review our past trades. But unlike corporate reviews, done quarterly or yearly, we must do this more frequently. It is individual preference as to how frequent this happens. The objective is to stamp out any bad trading habits, acquire good ones and improve as fast as I can. It's my money on the line, not some shareholders' money.
It is said that we make better traders, when we spend more time thinking than actually trading. I think, there's some truth to this. Afterall, repeating bad habits frequently, wont make trading badly more profitable.
How should we go about this reviewing process?
Personally, I like doing this every week, usually over the weekend. I go through my trading log, capturing entries and exits, profits and losses for each individual trade.
I reflect on each of them, recalling the reasons and the accompanying emotions that motivated me to open and close off those positions.
I not only focus on what went wrong but also what went superbly well.
Sometimes, when I screw up big time along the week, I stop trading momentarily. I find a quiet spot and immediately reflect the entire episode. After Action Review is best served when the memory and emotions are still lingering. I pen them down. It could be "lacked discipline" or "snatched price" or "impatience" or "there was no signal to initiate", etc... I remind myself not to repeat those mistakes.
When I pen these trades, I also relook at earlier weeks' entries. The purpose is to check if I have recommitted earlier spotted errors. I am aware of my personality to know that I repeat errors. So, I have to make every conscious effort to eradicate them.
By reviewing past records, I get to reinforce my correct trading habits too. I get more motivated to seize those successful trade setups.
Summing It All Up
In a gist, we must review our previous trades periodically, so that we can improve on what works, remove bad trading habits and hone our overall trading skills. No one will sit us down to check whether we achieved our KPIs. We are our boss..we check up on us, ourselves.
There's an adage "It takes 3 days to learn to be bad, it takes 3 years to acquire good traits". It has to be a continuous review effort, if we hope to benefit from this exercise.
Happy trading
