Saturday, November 6, 2010

Fish and Markets

Many fish swim in numbers for safety.  If I were a small fish I would not leave the presence of the school for safety of my life.  Just as in trading, there is no reason to stray from the path of least resistance.

Have you ever watched a school of fish swim?  When danger comes close they all react at the exact same time as if they were interconnected or one organism in itself.  Markets do the same thing.  The fish that refuse to react get placed in danger.  Now I don't know much about fish but I would imagine the old fish, and very young participants within the school end up straying off.  The experienced ones clearly know better.

So this gets to the idea of being a contrarian or a trend follower when it comes to markets.  I don't care what anyone says, you need a trend in order to make money.  Being a contrarian can be dangerous because to me that is an analogy of being a stray fish.

One must keep there eye on where the school of fish is heading not necessarily trying to predict where it will change course.  When it changes course you will know and as you get better you will be able to anticipate the move shortly after the leaders move.

In markets the leaders of the school generally have the most capital (institutions, commercial hedgers, large traders).  They sometimes have the strength to change the market course, but more often than not they get confused too.  I am certain when they are confused they always choose the obvious answer and that is the current direction the school is swimming.

Bottom line, the school of fish is often more intelligent than the ones who stray.

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