Thursday, April 16, 2009

Achieving a Structural Awareness of Markets

I want to call attention to an excellent bulletin written by Jim Dalton, expert in Market Profile and co-author of the excellent books Mind Over Markets and Markets in Profile. Jim works with Terry Liberman in teaching traders an approach to understanding markets grounded in auction theory. In the bulletin, he raises an important issue to those developing market mastery.

Whereas many traders are focused on analyzing markets--from technical and fundamental analysis to statistical analysis--an equally important component of expertise is synthesis: the ability to assemble parts into meaningful wholes. A physician does not perceive a mere collection of symptoms; rather, he or she groups these into diagnostic categories that guide treatment decisions. Similarly, an experienced trader does not simply see low volume, balance between advancing and declining stocks, and mixed performance among sectors. Instead, these features cluster together to suggest a rotational, bracketing market--which, in turn, suggests trading strategies that will involve fading moves away from value that cannot sustain participation (volume).

We learn synthesis by seeing so many examples of how individual features cluster that eventually we can recognize the categories for ourselves. As Jim's bulletin article points out, many times we can't verbalize this clustering: the whole (the overall pattern) is more than the sum of its individual parts. Market mastery begins with the ability to move beyond a perceptual level of awareness to a conceptual one. The beginning trader sees trees; the advanced trader understands the forest. When we develop a structural view of markets, we're seeing, not just indicators, price, and volume, but how those are connected to create trading patterns.

Our doing is limited by our viewing; our cognitive grasp determines our mind's reach. Someone who doesn't understand football sees only a random movement of players. A beginning student of football can follow the game and determine who is winning. An expert scout for a professional team appraises the various components of offense and defense to understand why one team has an advantage. Markets are no different.