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WHAT IS THE STOCK MARKET
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What is the reality behind market symbols, prices, numbers, and graphs? When you check prices in your newspaper, watch quotes on your screen, or plot an indicator on your chart, what exactly are you looking at? What is the market that you want to analyze and trade?

Amateurs act as if the market is a giant happening, a ball game in which they can join the professionals and make money. Traders from a scientific or engineering background often treat the market as a physical event. They apply to it the principles of signal processing, noise reduction, and similar ideas. By contrast, all professional traders know full well what the market is—it is a huge mass of people.

Every trader tries to take money away from other traders by outguessing them on the probable direction of the market. The members of the market crowd live on different continents. They are united by modern telecommunications in the pursuit of profit at each other's expense. The market is a huge crowd of people. Each member of the crowd tries to take money away from

other members by outsmarting them. The market is a uniquely harsh environment because everyone is against you, and you are against everyone.

Not only is the market harsh, you have to pay high prices for entering and exiting it. You have to jump over two high barriers—commissions and slippage—before you can collect a dime. The moment you place an order you owe your broker a commission—you are behind the game before you begin. Then floor traders try to hit you with slippage when your order arrives on the floor. They try to take another bite out of your account when you exit your trade. In trading, you compete against some of the brightest minds in the world while fending off the piranhas of commissions arid slippage.

Worldwide Crowds

In the old days, markets were small and many traders knew one another. The New York Stock Exchange was formed in 1792 as a club of two dozen brokers. On sunny days they used to trade under a cottonwood tree and on rainy days in Fraunces Tavern. The first thing brokers did after they organized the New York Stock Exchange was to stick the public with fixed commissions that lasted for the next 180 years.

Today, only floor traders meet face-to-face. Most of us are linked to the market electronically. Members of the financial crowd watch the same quotes on their terminals, read the same articles in the financial media, and get similar sales pitches from brokers. These links unite us as members of the market crowd even if we are thousands of miles away from the exchange.

Thanks to modern telecommunications, the world is becoming smaller and the markets are growing. The euphoria of London flows to New York, and the gloom of Tokyo infects Hong Kong.

When you analyze the market, you are analyzing crowd behavior. Crowds behave alike in different cultures on all continents. Social psychologists have uncovered several laws that govern crowd behavior. A trader needs to under­stand how market crowds influence his mind.

Groups, Not Individuals

Most people feel a strong urge to join the crowd and to "act like everybody else." This primitive urge clouds your judgment when you put on a trade. A

successful trader must think independently. He needs to be strong enough to analyze the market alone and to carry out his trading decisions.

If eight or ten people place their hands on your head and push you down, your knees will buckle, no matter how strong you are. The crowd may be stupid, but it is stronger than you. Crowds have the power to create trends. Never buck a trend. If a trend is up, you should only buy or stand aside. Never sell short because "the prices are too high" —never argue with the crowd. You do not have to run with the crowd—but you should never run against it.

Respect the strength of the crowd — but do not fear it. Crowds are powerful, but primitive, their behavior simple and repetitive. A trader who thinks for himself can take money from crowd members.

The Source of Money

When you try to make money trading, do you ever stop to wonder where your expected profits will come from? Is there money in the markets because of higher company earnings, or lower interest rates, or a good soybean crop? The only reason there is money in the markets is that other traders put it there. The money you want to make belongs to other people who have no intention of giving it to you.

Trading means trying to rob other people while they are trying to rob you. It is a hard business. Winning is especially difficult because brokers and floor traders skim money from losers and winners alike.

Tim Slater compared trading to a medieval battle. A man used to go on a battlefield with his sword and try to kill his opponent, who was trying to kill him at the same time. The winner took the loser's weapons, his chattels, and his wife, and sold his children into slavery. Now we trade on the exchanges instead of doing battle in an open field. When you take money away from a man, it is not that different from drawing his blood. He may lose his house, his chattels, and his wife, and his children may suffer.

An optimistic friend of mine once snickered that there are plenty of poorly prepared people on the battlefield: "Ninety to ninety-five percent of the brokers don't know the first thing about research. They don't know what they're doing. We have the knowledge, and some poor people who do not have it are just giving the money away to charity." This theory sounds good, but it is wrong—there is no easy money in the market.

There are plenty of dumb sheep waiting to be fleeced or slaughtered. The

sheep are easy—but if you want a piece of their meat, you've got to fight some very dangerous competitors. There are mean professionals: American gunslingers, English knights, German landsknechts, Japanese samurai, and other warriors, all going after the same hapless sheep. Trading means battling crowds of hostile people while paying for the privilege of entering the battle and leaving it, whether dead, wounded, or alive.

Inside Information

There is at least one group of people who consistently get information before other traders. Records show that corporate insiders consistently make profits in the stock market. Those records reflect legitimate trades that have been reported by insiders to the Securities and Exchange Commission. They represent the tip of the iceberg — but there is a great deal of illegitimate insider trading in the stock market.

People who trade on inside information are stealing money from the rest of us. The insider trials of the 1980s have landed some of the more notorious insiders in jail — Dennis Levine, Ivan Boesky, and others. For a while, hardly a week went by without an arrest, indictment, conviction or a consent decree: The Yuppy Five, Michael Milken, even a psychiatrist in Connecticut who traded after learning about a pending takeover from a patient.

The defendants of the 1980s insider trials were caught because they became greedy and careless — and ran into a federal prosecutor in New York with major political ambitions. The tip of the iceberg has been shaved down, but its bulk continues to float. Do not ask whose ship it will hit—it is your trading account.

Trying to reduce insider trading is like trying to get rid of rats on a farm. Pesticides keep them under control but do not root them out. A retired chief executive of a publicly traded firm explained to me that a smart man does not trade on inside information but gives it to his golfing buddies at a country club. Later they give him inside information on their companies, and both profit without being detected. The insider network is safe as long as its members follow the same code of conduct and do not become too greedy.

Insider trading is legal in the futures markets. Technical analysis helps you detect insider buying and selling. Charts reflect all trades by all market participants—even by the insiders. They leave their tracks on the charts just like everyone else—and it is your job as a technical analyst to follow them to the bank.

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