This chapter is from the book
This chapter is from the book
This chapter is from the book
Trading Is a Game
Active financial markets are invariably dominated by traders and trading activity. Although traders and investors share the same objective—to make money—they frequently differ in their approach to decision making. These differences matter and can influence the short-term behavior of market prices. It is important to understand that trading is essentially a game. The objective—to make money—remains constant, but the "rules" change over time. John Maynard Keynes put it this way:
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[P]rofessional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.23
When viewed as a game, some of the apparent inconsistencies and anomalous behavior in the reaction of market prices to trading catalysts appear more understandable. There may not be a rational explanation for all market reactions. The point is, to paraphrase legendary trader Richard Dennis, markets need not make sense.24