The Market's Memory

As the rally off the March lows takes us to the November 2008 swing highs, it pays to take a step back and think about what markets really are and how they actually work. It is very easy to get lost in the numbers and forget that prices are only the reflection of human perception.

Perception derives from many factors - beliefs about the future, analysis of underlying economic factors, the desire to make money in the market and more. But one old saying "the market has a memory" stands out now.

Why do old swing highs have the effect they do? The biggest reason is that everyone who is looking can see the same number. The second reason is that whether the longer time frame trajectory is up or down, there are market participants who either got in or didn't get out who are now back to "break-even" and this creates powerful motivation for their new or added participation. 

That reality opens the door to the most fundamental fact about any and all markets - they are endeavors of betting on other participants future perceptions. It doesn't matter if that future is 5 minutes, 5 days or 5 years from now, every time we enter an investment or a trade we are betting on the belief that other smart market paticipants will be willing to pay a different price in the future.

It isn't about efficiency and it isn't even about adaptation, it is about why will that other investor or trader pay a different price?

Research shows that interpreting trading decisions with this foundational question in mind improves one's ability to read markets. I know it has improved mine.