Price & Fundamentals = Reflexivity
George Soros’ theory off reflexivity has influenced traders since he wrote about it in his work The Alchemy of Finance many years ago. The trader Paul Tudor Jones, arguably the best trader of this current generation, won’t hire an individual unless the prospect can give him a suitable explanation of Soros theory on reflexivity. If I may attempt to paraphrase, Soros theory on reflexivity postulates that while economists and business analysts focus on and react to fundamental developments and reports, traders focus on and react to price. A trader needs to understand this difference, or gap, that he DOES NOT react to news, he reacts to price reacting to news. This dynamic, which we see play out in the markets every time a report is negative but the market moves higher, validates Soros assertion that markets DO NOT tend toward equilibrium – which is what most economists believed prior to Soros book – but actually move toward disequilibrium as market prices, propelled by traders, end up influencing the fundamentals. This dynamic of traders reacting to price first over fundamentals, and price then influencing future fundamentals becomes a self-reinforcing pattern which culminates in the familiar boom and bust cycle which marks the history of markets.
Heavy stuff, right? But very simple…know when economic releases are scheduled but focus on price first, last, and always.
Jay Norris
Jay Norris is the author of Mastering the Currency Market, McGraw-Hill, 2009 which is the text book for the intermediate level trading course offered though Trading-U.com see: Trading Courses To schedule a complimentary, interactive tutorial with Jay on determining market direction and hear more about “Live Market Exercise” go to One on One Tutorial Jay’s second book Mastering Trade Selection and Management, McGraw-Hill will be in book stores in 2011
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