Trading on Expectations- Strategies to Pinpoint Trading Ranges, Trends, and Reversals PDF explores the ideas behind the dominant schools of analysis, and shows the validity of each, and demonstrates how each, albeit at different times, reflects what the market is doing.
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Author: BRENDAN MOYNIHAN
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Trading on Expectations is the product of several years of observing the behavior of both financial market participants and financial market prices, and trying to reconcile those observations with my formal education and the conventional wisdom about markets. Academics assume market participants are rational and economists assume an air of scientific precision with complex mathematical formulas, while fundamental and technical analysts deride each other’s methods. However, at different times each of these methods explains what the market is doing. Sometimes market prices can be predicted using the economists’ models. Sometimes market prices follow a “random walk” as the academics claim. Sometimes price is responding to the fundamental news developments and sometimes to the price patterns, trendlines, and breakout levels identified by technicians. This book draws from the different approaches and develops a coherent theory of price movements in the financial markets.
Often lost in most approaches to the markets is the fact that individuals are at the root of markets. Individuals’ transactions create the data which the academics analyze, respond to fundamental data releases, and create the chart lines which technicians scrutinize. People introduce some unique factors to market analysis, factors which the “natural science” approach does not accommodate. Economics is not open to the same type of analysis as the physical sciences with which economics strives so hard to equate itself, because of the human element aspect of the markets.
Asserting that people are at the root of markets, Chapters 1 through 3 establish the need to address the “social” in the social science of economics and highlight the role that the subtleties of the human element introduce to the market. For example, in the speculative markets most transactions are not prompted by a need for the instrument itself—the way most transactions in consumer markets are prompted—nor are the instruments “consumed.” Rather, speculative market transactions are driven by what participants think prices will do in the future. The resulting premise is that the combination of participants’ actions and expectations about the future determines the direction of prices in the markets.
Today’s buy and sell decisions are a function of traders’ expectations about future prices which, in turn, are determined by today’s buy and sell decisions. This back and forth interaction between traders’ actions and expectations explains the emergence of price trends when both market activity and sentiment are going in the same direction, trading ranges when the expectations are mixed, and trend reversals when the variables are at odds.
Chapters 4 through 7 explain the concept behind Contrary Opinion and the Chicago Board of Trade Market Profile® as methods of measuring the expectations and actions of market participants. Both methods are participant-derived; the former by surveying trader sentiment (i.e., expectations) and the latter by identifying and monitoring buying and selling activity (not just prices going up and down). Taken together these methods provide the components of a coherent theory of price movements, reconciling the discrepancies between the academics’ and practitioners’ perspectives. As Nobel Laureate Merton Miller wrote, “The CBOT Market Profile is a unique attempt to bridge [the] communication gap between the doers and the watchers.”
Chapters 8 and 9 put the two approaches together into a single model, the Sentiment-Activity Model. By monitoring participants’ activity (Market Profile) as well as their expectations (Sentiment numbers), one can detect when the market is in a random-walk state (trading range), a coherent crowd-behavior state (trend), and when a chaotic crowd-behavior transition (trend reversal) is occurring. The model describes the conditions—as they unfold—which determine the three states of the market.
Chapters 10 through 13 apply the Model to four markets over the course of time when the book was being written. During the past 10 years, I have had the opportunity to do some teaching both inside and outside academic institutions. In the process, I have found that the most effective way of conveying an abstract idea is to demonstrate the point with real-life examples. Fictitious or contrived examples selected specifically for the occasion fail to have the same impact. Therefore, throughout the book I have, where possible, used real-life examples which actively demonstrate the abstract ideas set forth.
Because of my occupation, many of the examples involve the currency markets and the interest rate market. Some of the examples were selected simply because I was living through the event as it was happening. I made notes and filed them under the appropriate heading, then pulled out the file when I sat down in the spring of 1996 to write the book. Other examples were selected completely at random, citing news and events reported on the day I was writing a particular section of the book.
Market Profile® and Liquidity Data Bank® are registered trademarks of the Chicago Board of Trade which holds exclusive copyrights to the Market Profile and Liquidity Databank graphics. Graphics reproduced herein are with the permission of the Chicago Board of Trade. The views expressed in this publication are solely those of the author and are not to be construed as the views of the Chicago Board of Trade nor is the Chicago Board of Trade in any way responsible for the contents hereof.
Successful traders know that before stepping into the wilderness of the speculative markets, you need a solid understanding of basic market behavior. But the conventional methods often fall short of providing this basic knowledge. Academics assert one thing, economists and fundamental analysts another, and technicians something altogether different. And, seemingly, none of them agree with each other.
Trading on Expectations explores the ideas behind the dominant schools of analysis and shows the validity of each and demonstrates how each, albeit at different times, reflects what the market is doing. Sometimes market prices can be predicted using the economist’s models; sometimes prices follow a “random walk” as the academics claim; at other times price is responding to the patterns, trendlines, and breakout levels identified by technicians.
In this groundbreaking new book, Brendan Moynihan draws on his experience as a trader, analyst, and researcher to develop a method that focuses on the prime mover of prices and incorporates the strengths of the conventional methods. Drawing on the participant-focused Chicago Board of Trade Market Profile and the psychologically focused Contrary Opinion, he synthesizes and modifies the best in these different methods and skillfully creates a single model of market behavior –the Sentiment-ActivityModel.
Moynihan carefully describes how the combination of participants’ actions and expectations about the future determines the direction of prices in the markets. This dynamic interaction between actions and expectations explains the emergence of the dominant phases of the markets: price trends, trading ranges, and trend reversals. What’s more, Moynihan’s unique model enables you to pinpoint the combinations of activity and sentiment that determine the three states of the market as they unfold, in time frames ranging from a single day to several weeks or months. The Sentiment-Activity Model also provides a way to determine how the market is likely to respond to various news items, explaining the apparent anomalies of price behavior in the process. To document his finding, Moynihanprovides illuminating applications over a multimonth time period to four markets: Treasury bonds, soybeans, Deutsche marks, and crude oil.
Offering a new, more powerful way of understanding the dynamics of market behavior, Trading on Expectations is a must-read for all traders in stocks, options, and futures.
Table of Contents- Trading on Expectations- Strategies to Pinpoint Trading Ranges, Trends, and Reversals PDF
Market Activity 44
Long-Term Market Activity 63
The Coherent Market Theory and the SentimentActivity Model 74
Application of the Sentiment-Activity Model 82
Treasury Bonds 107
Deutsche Mark 144
Crude Oil 157
“Brendan Moynihan has studied the ‘real’ economists and found thetruth about how human action and individual motivations determinemarket prices. Trading on Expectations combines the best of thetraders’ economic and technical tools. I recommend this book toanyone who wants to learn how to trade more successfully.” –BrianS. Wesbury Chief Economist Griffin, Kubik, Stephens & Thompsonand former chief economist Joint Economic Committee of the UnitedStates Congress
“In today’s fast-forward society, readers of this book can quicklyabsorb the real essence of Trading Reality that takes years tounderstand. In fact, many traders have come and gone withoutrealizing how successful traders operate. It could take years togather the perspectives of this book. The Hightower Report plans touse the book for training its analysts!” –David C. Hightower,Editor The Hightower Report
“Where most market texts simply reheat and serve the same oldapproaches, Trading on Expectations offers a fresh perspective bycombining the best of several market disciplines into a logicaltheory and workable system for trading all financial markets.”–Michael Zentz Director of Fixed Income Research PegasusEconometric Group
About the author
BRENDAN MOYNIHAN is a foreign exchange trader at First American National Bank. He has worked as a commodities trader, a cash bond trader, and a risk management consultant to several Fortune 500 companies. He designed an economics course for Vanderbilt University and is currently writing a textbook based on the course.
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