Dysfunctionality Is At The Core Of Market Functionality

Financial Markets

No matter which financial market you are trading, they all share a very particular similarity, and that is unpredictability. If, as market participants, we knew the direction of any particular market, trading would be a breeze. However, as I am sure you know, that’s definitely not the case. Even when probabilities are high, markets tend to whipsaw and liquidate traders.

Even traders who have chosen the correct direction sometimes get liquidated. This is due to two primary reasons:

There is a very important underlying message being communicated here, and that is… money is made by leveraging the mistakes of others.

If everyone was hypothetically correct markets wouldn’t move. Essentially, markets move because people make mistakes, or they have no idea what they are doing. Either way, this provides an opportunity. Without these errors, there are no significant movements. You will notice a level of this understanding when markets become range bound.

This usually takes place during a time of uncertainty. In other words, no big bets in either direction… but rather a hesitancy from the market. In such a scenario, markets await a catalyst or news event. Something that will trigger a sudden directional bias. When we look at why markets are moving, we are able to ascertain and understand one of the key driving forces of any market.

Markets function due to dysfunctionality. In other words… the market thrives on mistakes being made. This is the motivation behind fakeouts, flash crashes, and other “market tricks”. These are designed to adjust the scales. This is why having a cool head and doing exhaustive technical analysis are so important. However, many fall for the “tricks” because they interpret them as legitimate moves.

This is only avoided by gaining knowledge, understanding, and experience, and keeping a cool head. Sure, you are not always going to get it right. However, your success rate will be significantly higher than those who are impoverished in relation to the abovementioned qualities and traits.

Just Like Anything Else

Operating within financial markets is much like anything else. Whether it be a career, sport, or any other related activity. Having the knowledge and experience is imperative. Get on the field with a team of professional sportsmen and see where you land. Likewise, there are those who commit endless hours to financial markets.

Furthermore, they have been doing so for years and even decades. A guy with a big balance, and ego to match, doesn’t stand a chance when coming up against such market players. Markets thrive on arrogance and overconfidence.

Final Thoughts

When a group of individuals is making money, another group is subsequently making mistakes, costly mistakes. The functionality of the markets relies on the dysfunctionality of the majority of the participants. I am sure you have heard that approximately 90% of retail traders lose money.

Unfortunately, it is this very dynamic that enables markets to operate profitably. The main objective is to ensure that you are on the correct side of the scale. This is not an immediate outcome, which is why so many try trading for a few months and then just fade away. Markets are a tough terrain.

That’s it for this one. All the best, keep it real, and see you in the next one!

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