Today's Quote: “The harder I work the luckier I get.” Samuel Goldwyn

There are several good books out there about trading that should be on every trader’s must read list. If you were forced to choose one and only one, the only possible pick would be “Tools and Tactics for the Master Day Trader”. We are going to run a series of excerpts from the best selling book for the next series of lessons. Now in the words of the master trader himself, Oliver L. Velez…

FACTS WILL NOT MAKE YOU MONEY

Have you ever wondered why one stock drops in the face of positive news, while another rises on the heels of what appears to be damaging news? How often have you scratched your head in absolute astonishment, trying desperately to understand why the market or a particular stock seems, at times, to totally defy the facts and/or logic? Well, the truth of the matter is that reality does not matter in the investment world. It is the perception of reality that is important. What’s factual rarely, if ever, moves stocks. How investors as a whole interpret those facts is the reality, the true driving force behind stock movement. This is why and how stocks can—and do—part with logic. And this is the phenomenon that makes trading difficult. As market players, we simply don’t place bets on stocks. And those who assume so will lose, often. We actually place bets on how others will feel about those stocks. Why? Because it’s people and theft feelings and emotions that ultimately move stocks, and, as you know, people are far more unpredictable than any other entity in existence. So the next time a company comes out with killer earnings that take the street by surprise, it would be wise not to blindly assume that the stock will rise. Of course, this goes for the reverse as well. We must never lose sight of the following fact. We trade people, not stocks

Traders who spend their trading lives delving into the facts that Wall Street and news services ceaselessly put out will not be as successful as those who learn to focus and capitalize on how the crowd reacts to those facts. The astute traders recognize that it’s the reaction and/or the response that possesses the money-making potential, and the very best traders fully understand that the crowd’s perception and/or reaction to the facts can be out of sync with the reality of those facts. There are times when the reaction can even be diametrically opposed to those facts, which is what really throws most novice market players. In essence, the master trader has come to terms with the knowledge that it is the understanding of people and what moves them that makes for truly profitable trading. Those who are the real captains of the game never ask, “What’s the news?” Instead they ask, “How are people likely to respond to this news?” There is a big difference, and it usually makes a big difference in one’s bank account.