Today's Quote: “Without ambition one starts nothing. Without work one finishes nothing. The prize will not be sent to you. You have to win it. The man who knows how will always have a job. The man who also knows why will always be his boss.” Ralph Waldo Emerson

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…

THE TRUTH DOESN’T COUNT ON WALL STREET…

If you, as a trader or investor, believe that the market responds to what is real and true, you are sadly mistaken. Worse, if you actually play the market based on this erroneous assumption, you have just about guaranteed yourself a losing market career. The truth of the matter is that stocks rise and fall based on belief, not facts. Did you get that? Please do, because it's enormously important. What we are trying to communicate here is that reality doesn't matter. It never has, and it never will. Rather, it is the perception of reality, the perception of the facts that drives the market. We are not playing stocks when we put our money at risk. It is not a company or even its fundamentals we are buying when we bring up our execution system to place an order. No. No. No. No. "Well, what exactly am I buying?" you ask. We buy people and the beliefs they have about the underlying stock. Think about it. When we, as traders, step up to the plate to put our money on the line, we are betting that we know how people, other investors, will perceive the stock we like in a day or so. It's people who are going to move the stock one way or the other, not facts. A fact has never moved a stock, and never will. And allow us to add a deeper dimension to our little discussion. Perception can be, and usually is, more dangerous than reality. Take the rekindled fears of an interest rate hike. How many times has the market sold off dramatically as a result of fears involving a possible rate hike by the Federal Reserve? Does it matter much that the Federal Reserve had not even hinted at raising rates? No. Not at all. What matters is that traders and investors perceived a rate hike as possible. That was and is enough to cause havoc. The point that must be fully realized by traders is that the market is anticipatory in nature. It tries to play on what will happen, not what has happened. Facts are remnants of the past. They tell us very little about tomorrow. This is why the real professionals tend to buy the rumors (perceptions) and sell the news (facts). So don't be fooled. It is not the truth that wins in the market. It is the perception of that truth.

There will be times when the truth (facts) and the perception of the Wall Street crowd will be identical, perfectly in sync. There will be other times when the truth and the perception of it will be completely opposed or out of sync. It is the latter scenario that confuses and trips up the bulk of novice market players. In order to stay on guard so that these events can be utilized for profit, the trader must forever be mindful that the opportunity lies in the crowd's reaction to the facts, not in the facts themselves. In the short-term time frame, the truth does not always win out. This is why a perfectly sound company can get cut in half, when it deserves the very opposite, and a valueless company can be hyped up to a billion dollar market capitalization. One can certainly argue that the perception and the reality cannot stay out of sync forever, and that what is real will ultimately prevail. But who has forever? Someday does not exist for short-term traders. They do not have the luxury of a great deal of time. Their living, their livelihood, their very well being depend entirely on the Here and Now. And in this Here and Now, the truth does not always count.