“Follow the money” is probably the most important piece of advice I can think of. The late Rush Limbaugh, love him or hate him, said something that will always stick with me. “Follow the money if you want to get to the truth.” This is great advice on so many levels for those of us in the markets, and the idea behind this piece. I truly hope it helps someone out there.
First of, understand where the money is flowing towards, and you will make money in the markets. Recently, the money has been flowing into commodities such as natural gas, oil, and various industrial metals. This is the most important thing to understand, and it literally defines trends. I think a lot of traders, myself included, get into trouble when they start listening to others that are calling for the imminent reversal. I can think of several people who are much smarter than I, that have been wrong for ages – and made a living by putting their bad advice out there. When you look at a chart, if price is rising – that’s really all that matters. Trying to ‘outsmart’ the market is an exercise in folly. Even if you are correct, and the markets has it wrong – in the end they decide the price. Price is everything.
The other way this comes into play for us as the trading public is in the form of news. The reality is that a lot of ‘news’ out there is simply noise. When you look at places like CNBC, it rarely is actionable insight. The news business is simply paid for by advertisers, meaning its about getting your attention. Whether or not the news is correct or even useful is but an afterthought. They need you to click on websites, watch commercials, etc. in order to make a living. That’s the business model.
Analysts, such as myself, can be thought of as conduits for companies. I do analysis that people follow, and the company gets eyeballs on the website. I am paid because enough people follow my work. It isn’t that I am the best, its that people like my work. (However, there is an incentive here, in the sense that if I am consistently wrong, people will find information elsewhere.) Nonetheless, you should understand that I am very much like an actor in a movie, in the sense that I am just a cog in a bigger wheel.
Signals. Well, this is a side gig of mine. It makes sense that I should perform in order to retain clients. After all, if they lose a ton of money following my nonsense, then they walk away. However, if they make money, they stick around. The signal providing business is a side job only though, as it is roughly 5-10% of my income. I also trade for a few prop firms, but anyone trading for a living can tell you that its not easy to do, as the income deviates so much. Some months are great, and others are ‘blah.’
The main point is that you need to always follow the money when you listen to people or news, or even better yet – the market itself. Stop worrying about being right, its not important. Stop worrying about whether or not the other people are ‘smarter than you’, worry about where money is flowing, and the picture becomes clearer. This is an industry that is so full of shit, if it had eyes they would be brown.