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Common Knowledge is a Trading Trap

common-knowledge-trading-trap

Traders cannot really predict the market

Any trader will tell you that behind every good strategy, lies at least a tiny amount of logic. This base claim seems somewhat obvious because why would a trader assess the market according to what seems to be a reasonable strategy, but a yet unstable one too.   

As traders, we are dedicated to proving the logic of our strategies over and over again. However, this logic will not always work out the way it was intended. There are many factors that may divert the course of logic due to the unpredictable nature of the market. If you’ve been in the industry long enough, you will know that no strategy is 100% loss proof. At the end of the day, it is a probability game, where risk management should be added for protection from the time that the trading strategy fails on its logic.

If your strategy sometimes fails, why would you try to predict the market rather than act on what the market shows you? Acting on the market, rather than the predictions is a more sensible way to decode the secrets of the market.

Acting on the Market

There are many reasons why logic may fail and I believe that there may be no logic to the market. A trading market is a chaotic place where different motivations gather at the same arena with their specific motives.

Sometimes it happens during peak and demanding hours and sometimes even random ones. The multiples of participants have varieties of motivations and strategies that the market’s logic cannot be coordinated and boiled down to one specific motive. This is why one strategy or logic cannot be driving the market.

Who is Winning? Who is Losing?

There could be some logic that may work out. Previously, it was discussed that there could not be, but let’s say there are. These logics would then become known through common knowledge. Yet, this title “Common knowledge is a trap” has given the answer away.

It’s quite a statement to make and even to mention quite boldly. But it is truly possible because the market is a zero-sum game. A trader could arrive at the arena to buy from sellers and sell to buyers. This means a trader would need someone to do the exact opposite of him/her at the same time. So imagine that you do a trade. In a sense, you would like to succeed at the expense of the person you have done the trade with. You will think that you are the winner while he/she is the loser. But in the other trader’s mind, he/she is the winner and you are the loser. So who is correct?

The Trading Trap

Common knowledge could then definitely be a trap because there are different types of participants in the market. Most of us are simple traders with no ability to affect market prices or market moves. This is because our money is not heavy enough to affect large liquidated markets.

However, there are some who can affect the price and influence the market. This is the game of the large institutions. They have huge capital which can move markets and by placing orders it will cause a reaction in price. They can make impressions, all kinds of traps and false momentum games around common knowledge.

What is this Common Knowledge?

Common knowledge is pretty much all the ideas that are thrown around in classrooms and the simple/beginner’s market education. Basically, it’s Fibonacci, trend lines, daily pivot levels around moving averages like MA200 and EMA100, etc.

Professional traders know how to work around these indicators, and also know how common knowledge instructs traders to act upon.

Tricks from The Pros

One of the main tricks that the Hedge Funds and large institutions etc. prefer to engage in, is to occasionally allow these common knowledge strategies to work for them. They’re then able to cash money out of these strategies over and again. This creates the false illusion that common knowledge strategies do consistently work.

But if you don’t have enough capital to affect prices, you are entirely subject to the moves of those who do have enough. This is why common knowledge can act as a trap.

A Wealth of Logic

“You can be the best analyst in the world, but in actual trading, you can be wrong many times”

Another reason why strategies can fail is that there are thousands of different logics, some of which contradict the others. Some are momentum strategies that try to catch an already moving market, while others are trying to catch reversals. Some are playing the opposites, while others are playing the positives.

The same strategies applied to different timescales and can also contradict themselves. It depends on the trade scope, to determine whether you’re long or short for the same trade vehicle. These endless amounts of participants with different strategies and timeframes create a chaotic and unexplainable logical system. You can be the best analyst in the world, but in actual trading, you can be wrong many times.

It’s All About Risk Management

Even if you can predict the major moves of the market, your success ultimately depends on how you enter trades according to your risk management strategy.

If you’re able to predict major moves, sometimes you can’t measure the drawdown or the opposite movement that will happen before it moves in your direction. Even so, you won’t have the money or patience to hold on until it turns.

Final Tips

  • Always know that whatever you predict for the market, may not be final.
  • Use your trading plan which is tailored to your prediction but should still have the flexibility to shift if needed.
  • Be open-minded in case the market moves from the preferred position.
  • Be aware of all the variables that can sabotage your plan.
  • Always be prepared to change your plan if something goes wrong.
  • Don’t go all-in, nor be stubborn.
  • Never feel the need to prove your prediction right.
  • Once you enter the market, act on what it shows you.
  • Be flexible and open to changing the course in case of market shifts.

 

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