Pricing In The Future

the market is a discounting mechanism

To be honest this is something that took me a long time to understand, mainly because the words seemed impenetrable. But I am now starting to utilise this more in my trading and wanted a record of it somewhere.

how I understand it

For me, it was reading Barton Biggs, Wealth, War and Wisdom that hammered home this principle. Using WW2 for numerous examples he showed how good investors consistently priced in the events before they happened, meaning that reactions to the eventual event were often relatively subdued or counter to what Main Street thought would occur.

The reasons for these subdued or counter reactions were due to the Big Money (smart) averaging in and out of the market. They would do this either to disguise the size of their positions or simply as a tactic to manage risk; get in small then add if the position is proved correct. The problem for most small traders is they believe the lie: "Big Money is forced to average in and out of positions". No, Big Money chooses to average in and out of positions because it helps them get a better price and improves their edge by hedging spread, slippage and commission risk.

pricing in the future

My prior post is probably far better at explaining how to price in the future but I will try and explain briefly why the opposite of what is expected often happens.

Big Money is a buyer before a positive/negative event arrives (they preempt it). So when the event comes to fruition Main Street is often left surprised. What they failed to notice is the three-month rally Big Money created leading up to the event.

Not only do positive events cause relatively subdued reactions they can often mark market tops (the same is true of negative events and market bottoms). This, of course, is an illusion: it's not that the good news causes a market to crash, it's that when markets are already as long as they're going to get it will only take slightly less good news for Big Money to start taking profit and begin shorting in anticipation of a market fall.

summary

The only thing that can move the markets is Big Money, so we need to stop pretending to ourselves that we have an edge being small and fast: jumping in and out exposes you to the three constant risks of trading: commission, the spread and slippages. Start doing what Big Money does; get ahead of Main Street,  be aware of what's on the horizon, buy low (demand), sell high (supply) and average in and out of your positions as the market approaches these places.