Warren Buffet once said that “In the short term, the market is a voting machine. Eventually, a heavy machine. “What he meant is that ultimately in the financial markets and in real life, speaks of action and silly walks. No matter how ridiculous, illogical, totally crazy how prices be correct from their intrinsic value. Witness the Nikkei in 1980, Internet stocks in late 1990, the housing market in the U.S. in 2000.
Mr. Buffet maximum applies to investors, but may be a comfort to speculators like us who trade the market more unstable in the world. Apparently, the foreign exchange market exists for companies to hedge its currency exposure, but 97% of the volume (last measured at 4 trillion per day) is driven by speculators, such as banks, hedge funds and retailers as ourselves. The dirty little secret of FX is that everyone speculated – even businesses and central banks.
The history of the market is full of ghost stories of the Fortune 1000 that treasury departments lost millions and sometimes billions of their shareholders in capital badly managed foreign exchange transactions that had nothing to do with their core business. Even Mr. Buffett dropped a cool million dollars earlier this century, when their bet on the collapse of the dollar became sadly mistaken.
So how do you think about the value in a market where sentiment queen? After all the actions at least had a semblance of equity, because they represent hard assets of the companies that issue them. Currencies on the other hand are a completely abstract concept backed only by faith and credit of their respective sovereigns. In our world, money is just a blur of electronic bits on a computer screen.
So the speculators who have to operate differently. In order for us to heed advice from Mr. Buffett must ensure that the market is functioning much like a vote and a heavy machine at the same time. What this means in plain English is that to succeed we must ensure that the fundamentals and price action are in alignment. Those of you who follow me on Twitter know that my ideal flow operations are always driven by a combination of momentum in prices of some key trigger. In the flow of trade is not enough to be on the right side of the news – the price action should confirm your analysis. Only then you have a high probability trade.
The more trade flows, the more I am convinced of the effectiveness of this approach. Every time away from my approach, trying to fight either the price action or the flow of news, which inevitably lose. In short, Mr. Buffet is the right market is both a vote and a heavy machine and it is our duty as merchants to make sure that we respect both the factors before entering the fray.