some excerpts from my book the art of speculation


HOW IT WORKS 




How does everything come together what works and what doesn’t  in this section I am not trying to tell you about technical analysis or support or resistance lets see what events affect the market and what is the effect of each one of them

some of the major factors affecting the market are
·     the government and its policies
·     the central bank and its policies

·     international markets and their movement
·     movement of commodities especially those who have bearing on inflation like crude 
·     global liquidity
·     various economic numbers like the IIP
·     inflation and where its going
·     corporate earning
these are just some major factors which affect the movement of the market on a day to day basis sometimes one factor will become important and will drive the market and sometimes some other factor will become important it is seesaw a struggle between positive and negative news

the various participants of the market weigh these news and development and take positions accordingly  if they feel that the stocks will gain they will take bullish position and if they think that stocks will go down they sell there is money to be made either ways

so all this factors affect the market but the market is not lifeless person it is made up of millions of persons and entities who take position in the market so its not just the event or the news but the perception of these people about that news that is important so let me add one more very important factor
·     perception of the market participant

this in fact is the most important factor and perhaps this is the reason that stock market behavior comes in the domain of group phycology

just because news seems to be positive that does not mean that the stock is going to go up for example just because some company has given excellent results that does not mean that its time to buy that company what is important is what the market expected of the company if the expectation was still higher the stock may as well go down

in the same way if some company has announced bad results that dos not mean that the stock is going to see a sell off if the market perception was still lower no there could be upswing in the share price

so the perception and reaction of the market participants about the stock is most important and any news regarding it should be seen with that perceptive .

so both micro and macro news affects the market if crude climbs above a certain level the fear of its affect on inflation comes in and we see a sell off and when it goes below certain level we see renewed buying

but then its not that simple it not just as easy as buy when crude is down and sell when crude is high

crude can be at a high and inflation can be at a high and everything on the macro level  can be wrong but still the market could gain 7 to 8% in just say one week well what works there liquidity if fii and other foreign entities have money at their disposal and they think that valuations are attractive you can see sudden upswing without any macro environment supporting it .

So here comes another important factor and that factor is trend as it is said that trend is your best friend. if there is trend you need to go with it even if it does not seem right this may not be true  of a investor but is especially true of a trader

a trader need to trade in the direction of the trend or he risks losing too much and that's where technical analysis comes in

so a trader needs to be everything a technical analyst , a fundamental analyst good at judging the macro and micro environment and you should have grip a on mass psychology all this is required if you want to be successful trader