So much effort goes into trying to predict what markets will do next. Confidence, however, comes from understanding. When we understand what is going on in markets, the right trades come to us.
In a recent video for SMB Capital, I explained how the perspectives of active investors--such as those managing capital at hedge funds--can benefit short-term traders. This is because portfolio managers don't just look for trades: they identify themes that connect a variety of markets. A good example of this can be found in my recent post, which tracks recent moves in the U.S. dollar, U.S. interest rates, the U.S. and overseas stock markets, and commodities. There are themes underlying these moves (such as the potential impact of tariffs), which show up as relative strength in certain stock market sectors (such as the growth areas of technology) and relative weakness in other sectors (such as interest-rate sensitive shares). When we can step back and see the themes connecting movements among markets, it becomes easier to participate in significant market developments, such as the weakness in stock and bond prices on Friday.
Much of what we call "overtrading" occurs when we don't step back and achieve understanding and instead react to every market move that catches our eye. There can be no quiet confidence when we overtrade and when we are more interested in finding trades than in understanding market behavior. An experienced psychologist knows that people don't have dozens of problems; they typically have just one or two issues that show up in dozens of areas of life. Once we can step back and see the themes connecting our life challenges, we open the door to responding to old challenges in new, constructive ways. So it is in trading. When we stand back from the moment-to-moment ups and downs of markets and perceive the themes driving the trading from large institutional participants, we place ourselves in a fresh position to ride those waves.
Success in markets comes from turning themes into solid risk/reward trades. Confidence comes from seeing a bigger picture and knowing how to turn that into short-term opportunity.
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