Trading Is An Open System = Increasing Complexity Over Time

 

I’ve seen posts online stating that trading shouldn’t be difficult because all it involves is buying and selling and the rules are pretty similar to when it originally started.

That mindset is wrong though. This first thing missed is trading isn’t just about buying or selling, but buying or selling at the RIGHT times to maximize profits and avoid losses.

The next oversight is not realizing the market is an “open system”, meaning its overall behavior can and will change over time as new participants enter the market with different buy and sell strategies. Over time, as market participants acquire more knowledge and skills, the market will also change to reflect that.

An example of this would be the Olympics over time. If you look at the sporting events of Olympics at the turn of the century versus now, the skill levels that qualified for medals in past history wouldn’t even pass the qualifying rounds for the same sports today. Even though the rules of the past haven’t changed much compared with current rules, the skills and strategies of the participants have.

Current markets include a mix of humans, computer programs, and artificial intelligence into the mix attempting to execute the best buy and sell strategies. This means to succeed in trading over the long term, one must be capable of adapting to market behavior changes over time.

Open systems will change and adapt to new information received. This means that a “market edge”, an advantage one has over others in the market can only work if the information that creates that edge isn’t known by all members in the system. Otherwise, if the information becomes widespread, the market will adapt and the edge will be neutralized. This is why many books and courses promoting sure fire trading plans don’t work- the information is already known by the market. 

PSA: Ignore The Media When They Cover The Market

At the start of August the market had taken on some roller coaster gyrations and the media has been flashing red alert signs to make you think it could be time to panic.

The problem is the news ignores the day to day market activity unless a big move happens and the then they attempt to connect it to some event happening that day as if they actually know the cause and effect. They actually don’t.

By focusing on the the short term, it’s easy to jump to questionable conclusions.

This is the Dow Jones Chart for Monday 8/5/24, when the market had a big drop:

So the news reported on that. Then they focused on the drop the prior two days to add some more fear to their report:

Thurs 8/1/24 – Monday 8/5/24:

Three days of declines….the month of August off to a scary start as reported in most media.

They do these things and then they wonder why people make panic filled market decisions that they say no one should do.

When you look at longer time frames, the perspective changes.

Here’s several months of market activity this year:

You can see the market has experienced two major declines earlier this year but recovered to make new all time highs.

The thing is at every major decline the news media sounds “alarms”, then ignores the market unless it makes new record lows or hits all time highs.

This should make it clear that they are not at all helpful is gauging market sentiment and it’s best to stick to your own due diligence when managing your investments or trades.