by PeteB » Sun Feb 04, 2007 12:37 pm
Hi Mimox
Ah the holy grail!
Unfortunately you can't tell - otherwise we (and traders in any other market) would all be millionaires in a week or so.
What makes a price move? Well it's a combination of the money that's already there, and the way that new money comes in. I can see the money that is already there - but I can only guess how new money will come in, for example based on how it is currently coming in, and where the price has been before.
You can of course make the price move yourself - if there is say £30 at the best price to back, then back £50 at that price, and you will eat the existing money and that price will now become the best price to lay with £20 available to lay. So that is the mechanism. But how can I predict that you would do that??
So the game is to predict what other people will do - the traders amongst us would say that this is easier than predicting what horses will do, but it's still not easy.
There are really two cases:
1) The price is moving because something is happening in the real world (a company has announced it is buying another, a wicket has been taken in cricket, a horse drops back in running, a cyclist cracks in the mountains, a tennis favourite has his serve broken etc). If you have up-to-date information on these events, you can make a good prediction at how other people will react to them, and then exploit the subsequent change in price - and as a general rule, people over-react, and then get sensible again shortly afterwards.
2) The price is moving and there is nothing happening in the real world to justify it. Here there is just wild craziness going on, and people tend to follow anything that looks like a trend.
Consider horse racing before the race starts - there are several factors in play: There are backers looking to back horses at better prices than the bookmakers - you can't predict exactly when they will place their bets, but it goes on all day, and peaks when the previous race has passed. There are bookmakers taking these bets. There are also bookmakers offsetting the positions from their core business. There are layers running laying systems looking for the right price to lay at. And there are traders looking to exploit the price movements. People also believe that horse-racing is dominated by insider information, and so if anything happens that looks like someone knows something, then people react strongly. But it's not smoothly predictable - you might be following a slow trend in one direction when most bets and trades seem to be around £100, and suddenly someone throws in £8000 and scuppers the trend....
The good news is that in both cases it is possible to do well - in the first case through good information and judgement, and in the second, by reading the numbers, and good trade management.
What does this mean? There are 5 possible outcomes to a trade: big win, small win, scratch, small loss, big loss. You want to remove the possibiity of a large loss altogether - then if you have more small wins than small losses, you are doing well, and the occasional big win is fantastic. Heavy use of the scratch trade helps here.
So the golden rules are: buy low sell high, take losses quickly, let profits run, add to winning positions not losing positions, and follow the trend!
Good tool support is critical in cutting losses quickly - that would be my favourite next addition to Gary's program - a trailing stop loss for example (the tick offset is great, but tends to make the opposite happen - it takes profits quickly, but does not protect you from letting losses run!)
Hope this comes through your translator ok - good luck and happy trading!