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Why Does It Trend?

Feedback:

Michael, I very much appreciate your podcasts you do. As I have been working to do more and more trend following trades, I am finding my job very boring. In a good kind of boring way though! The podcasts keep me inspired. Also a thought for you. Have you spent much time listening to the sports broadcasts on ESPN or other sports channels? I feel like when I flip to CNBC anymore it is like fingers down a chalk board with all of the babbling. I have never been a big sports fan, but I do tune in during college football season a little more. I am now finding that Sports center is becoming like fingers down a chalk board as well. It is the same as CNBC, a lot of research and predictions based on very little other than opinions and drivel that often times never pans out the way one would expect! Thanks again for the work you do!

Does that mean I am not the chalkboard!?

You are definitely not the Chalk board…I thoroughly enjoy your material and it has helped me immensely! In fact I like it well enough I give your books out to some of my clients and bought the DVD trading course! I am going to apologize upfront that this email may get a little long and I know you are extremely busy but there is something weighing in my head that I thought you may be able to shed some light on, or point me in the right direction for some added information. I have been putting a lot of thought into the “Why” of Why a market moved up or down. I have posed this rather simple question to myself “Why do markets move higher or why do markets move lower – essentially why do they trend?” I think I have read nearly all of your material as well as several other books and have done some online research but have not yet found a satisfying explanation of why price moves higher or why price moves lower. I am not being critical of the information I have read and it may even be my own fault that I have glazed over something significant and may have missed the answer to my own question in your writings but for myself the question of “why” a market moves (trends) has been nagging at me for the last several months. As I have posed the question to myself, I have chosen to examine the question in the most general terms and in a way that is most robust to any market. Meaning that I am looking at in the broadest context and not necessarily in the minutia of the every few day moves or intraday moves but more generally why does price continue to generally keep moving in one direction or another for a period of time. From another perspective, I am looking at it in the context of what is the one common element across ALL markets that makes price go higher or go lower. I have two motivations for getting to the bottom of my “why” question. First, I have clients that call everyday with the same dumb question and it goes something like this – “why did the corn go up today or why did the cattle go down today?” I sort of feel like a dumbass when I tell them things like it rained out today, or exports were better than expected or the cash cattle market is stronger because I know that to the root of why a market did what it did has nothing to do with any of my standard answers, but for the moment that’s what they like to talk about and I’m not sure I really have anything better that will satisfy them. So essentially I would like to give them a better answer to their why question. My second motivation which is the stronger of my two reasons for going in search of the “why” is my stronger motivator. My thoughts are that if I better understand the “Why” of Why a market is higher or lower (or trending) I think it lays a better foundation to my own understanding of why trend following works so well. I see that markets trend and your information offers a lot of compelling information for trend following, but I really have been struggling with Why they trend. My thoughts have been that if I can fully understand and articulate why they trend I will become an even better trend following trader. Over the course of the last couple of months I have come up with my own hypothesis to the question and am fairly satisfied at least in my own mind why markets move in one direction or the other but have yet to find any writings that truly validate my thoughts. My hypothesis of the “Why” is so extremely simple that I am sitting here thinking to myself… Can it really be that simple? So here I am posing the question to you… In your writings or in others writings that you have come across, have you found a very straight forward answer to “Why” markets trend or why markets are higher or lower. Essentially we see that markets do trend in one direction or another but why do they trend?

No one knows exactly why. Some don’t like such a short answer… the lack of a fixed for sure answer unnerves some. Don’t let it unnerve you. That’s the trick. The goal is after all to make money, right? The goal is not to know why is it?

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Posted in Feedback, Psychology
One comment on “Why Does It Trend?
  1. Llewelyn says:

    Hi,

    In response to the lady or gentleman who posted the question “why do markets trend”.

    I often asked myself this question because i always thought that if you can plant a logical explanation in your mind as to why trends happen, you can also rest easy that they will continue to happen. This has the obvious benefit of helping you stick to the system during drawdowns, and also helps when you are trying to articulate to loved ones why they should adopt a trend following approach with their retirement funds instead of giving all their hard earned money away to a slick financial advisor with pearly whites!
    In one sense, Micheal is spot on with respect to saying ‘who cares, it makes money’ but I feel you can be an even better trend following trader if you have a suitable answer to the question. ‘Why do trends happen?’.
    I have a couple of my own theories i’d like to share which have helped me live through a drawdown or two without throwing in the towel..much to the benefit of my account.
    Firstly, I believe that the markets are manipulated and that the system we have is geared to make the worlds money rise to the top. Because I believe this it seems obvious to me why trends happen……trends are simply a manifestation of the top 1% robbing the 99%! If you controlled money why would you want stable prices and market equilibrium? You wouldn’t get much richer! You need a mechanism for skimming more cash of everyone else..making markets trend is that mechanism. Secondly, I think behavioural finance gives us some pretty logical explanations as to why trends occur..I.e. it is our nature to follow crowds, we feel safe doing what others do, we suffer from confirmation bias, we feel less pain as long as that pain is shared by others etc. all pretty good reasons as to why markets trend even if you feel my first reason is utter nonsense and misguided paranoia!

    P.s. as you can you tell I’m one of the fools who doesn’t like the short answer..even though deep down I know it’s all that really counts.

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