Market Theories

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When an unsettling news comes down the pike, traders tighten his mind, his soul and his entire being to make profits and take money out of the market. So, there is a theory pointing out that market prices reflect all available market information. It is called the efficient market theory.

In the efficient market theory, people buy and sell on the basis of their knowledge, so the latest price presents everything known about the market. Since everyone has the same information about market, the price should reflect the knowledge and expectations of everyone. Therefore no one should be able to beat the market since there is no way to know something about market that is not already reflected in the market's price.

Because markets know everything and no one can beat them, trading is like playing chess against someone who knows more than you. Here, do not waste your time and money, just trade simply by indexing your portfolio and selecting securities based on volatility.

However, there is ample evidence to dispute the basic claims of this theory since there are traders who constantly and ever make money, what about them?

The efficient market theorists say that winners are plain lucky. Most people make money at some point, before boring it back into the markets.

This is obviously incorrect. Because there are people who keep outperforming markets year after year. One of them is Warren Buffet, brilliant traders, says that investing in a market in which people believe in efficiency is like playing poker against those who believe it does not pay to look at cards.

Along the efficient market theory, there is one of the largest pieces of theoretical garbage. The theory correctly observes that markets reflect the intelligence of all crowd members.

Most traders can be rational when the markets are closed. They calmly study their charts and decide what to buy and sell, where to take profits, and when to cut losses. However, when the markets open, they do not trade their plans.

Trading is partly rational and partly emotional. To be a successful trader you must keep your cool at all times and take money from aroused amateurs. People are more likely to be rational when alone, and grow more impulsive when they join crowds.

All the while, the intelligent trader follows his rules. He may use a mechanical system or act as a discretionary trader, reading his markets and putting on trades. Either way, he follows his rules rather than his gut. That is his great advantage.

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