The Price Value Disconnect

WAIT FOR IT - I thought today would be a good day to run through an important point about trading that should not be overlooked and can not be overstated enough. When you trade markets, there is price and then there is value. These two are not the same, but often trade near one another. During these times when price and value are tracking closely, you do not want to be trading! The reason for this is that you never want to be trading markets at levels that are inside the norm. This would mean taking a position when nothing has happened and the market is stuck in the middle of a consolidation showing no clear directional bias. The idea of good trading is to take positions when there is a significant disconnect between price and value that sets up a rare window of opportunity to take advantage of this disconnect and get in before the window quickly closes. These disconnects happen because the market is filled with too much information at one time and overreacts as a consequence. And then...and only when you want to take advantage of the overreaction...making a bet for good old faithful.....a little guy called 'mean reversion' (I think you might know him).

cartoon oct 23

REAL LIFE LESSONS - I would analogize this to a situation in life where you get some news that is initially quite unsettling, to the point that it triggers a form of panic, whereby you feel like everything is about to change dramatically because of this news and it's all going to fall a part as a result. But the truth is this.....we are built to be able to handle these things and we just need a moment to process it all. What this means is that initial moment is very far off and very disconnected from what the reality actually is. Ultimately, everything reverts back to a new normal and that is precisely the bet we want to be making every time. I hope this can be taken as a good lesson for both life and trading and I believe that if you can make an effort to make it so in trading, it will actually transfer over to your real life in these situations. This is why I love trading and where the real profit from this endeavor comes from. There are so many intangibles to trading that help to give you an appreciation for life and the ability to understand life in a way that offers so much more than any monetary reward. This is what trading is really about.

When the market is flooded with too much information at one time, it creates inefficiencies that present amazing opportunities.

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