There is a harsh reality in the financial markets that just a few know.
This reality is that the financial markets change significantly overtime.
But what do I mean by saying that the markets change overtime.
Well, it is the same as saying that the markets are dynamic, something quite obvious, since everybody can see how the prices move themselves not statically, as if they were an egregor, chaotically but with intelligence, with some sense, so to speak.
Dynamic financial markets
Well, as we all know, financial markets are dynamic or changing.
Then, why is this important in the world of trading and investing?
It has a lot of importance, especially in the latter term in which the “changing aspect” becomes crucial.
This is because the fact that the markets, the same as society and the economy, move themselves in a sort of cycles that form some sort of similar patterns.
In this sense we can think of Kondratiev and his cycles applied to the stock markets and the economy, with the famous spring, summer, autumn and winter.
Obviously it is not the same investing in the summer as in the winter.
Things change quite dramatically.
One thing is knowing that the stock market “always” rises and another thing is buying stocks in 1929 in the United States or in 2007 in Greece or Cyprus.
However, perhaps it is not that bad idea to buy the stocks of those two last countries in 2015. Only time will tell.
Besides we have also the possibility that the stock prices go to zero as in the case of the Saint Petersburg market in 1917.
However, generally, it is always good to invest in moments when there have been big drops in the stock markets, moments where volatility is quite extreme.
How to invest in volatile atmospheres?
Investing in those kind of markets has always had good pay offs, especially in classic stock markets like the American, English or the French.
Other moments, like “spring” or “autumn” where volatility is not so high are wonderful for buying stocks and keeping them for many years.
Dynamic markets in the short term.
However, the true importance of the changing character of the markets and the behaviour of prices comes, of course, in the world of short-term trading, where the true financial butchery always takes place.
The example of volatility and investing cycles also apply in the short-term.
Because the simple fact that the movements are more or less volatile depending in which part of the grand cycles we are.
Why is it important to know?
If you are a short-term trader it is important to know that the system that work well certain years is going to fail miserably as soon as the conditions change.
There are many systems that worked during months or years in some determined conditions and ended up failing dramatically a few months later when the markets started to move differently.
This is quite logic if we know that certain systems will do very well in ranging markets and other systems will do better in trending ones.
As there is no such market that is always in one of those two circumstances we will always have problems, evidently.
Winning systems in changing markets
Well, suppose that we find a system that permits us win doing scalping or intraday in some market for some specific time.
We may conclude that we have discovered the Holy Grail of trading.
This can present one problem.
When a market becomes “static”, that is to say with some trend to be “predictable”, it is sure that many other market agents will notice and start taking measures to take advantage of it, which is to say that they will adopt similar strategies to those implemented by us at the beginning.
When this happens, and this is another way in which the dynamic markets work, the quantity of traders on one side of the market becomes too big, in such a way that that side becomes too crowded so to speak.
The “ask” in this case becomes too expensive.
The arbitrage to do profit becomes nearly impossible.
However, the true arbitrageurs will keep having good profits, in other words, those who sell the “ask”.
Escaping the problem of dynamic markets
To be able to escape of from the trap of dealers and market makers we should get out of that short-term bouclé that characterizes day trading and go to systems that give us a different kind of movements.
In this case the best to do is without a doubt doing investing for the long-run, since short-term trading still is quite complicated, only feasible for adventurers.
The changing markets make very difficult to achieve long-term success with day trading.
You have been warned.
Greeting and good trading.