My Personal Theory on the Market

Popular Opinion Many trading books discuss Market Theory. They describe it as a battle between Bulls and Bears: those who want the price to go up vs. those who want the price to go down. Their claim is that the price moves when one group becomes dominant over the other, which I technically agree with. But I believe that this model is misleading because it is an oversimplification and disregards the size of individual players. That’s why my model includes a 3rd market group… the Banks!

My Opinion In my opinion, Banks should not be included in the bulls & bears regardless of which direction they push the market

That means in my model the battle is still between the bulls and bears but ONLY when the Banks are not involved. When banks ARE involved, it’s between the Banks plus whoever is lucky enough to be on their side, against the unfortunate souls who aren't.

Here’s how this works:

Imagine two groups of people. In group A there is one person with a million dollars. Next to him, in group B, there are a million individual people who each have one dollar. Now, for this scenario, assume that those two groups make up the entire market of people.

Both groups have a total of $1,000,00 each to invest, or $2,000,000 in the whole market. So they are both equal, right? Wrong! True, they both collectively possess $1,000,000 each, but the difference is in how that money moves.

How the Market Really Moves The million individual people in Group B are not actually a group. They're a million groups each out for themselves which means they will probably work against each other with roughly half of them betting one way, and half betting the other way. That means their efforts will largely cancel each other out.

However, the single person in Group A will make one decision moving a lot of money in total unison without any conflict at all!

In my market theory, the bears and the bulls in Group B (i.e., non-bank traders like us) are always making trades. It never stops. But occasionally, a bank with a lot of money will step in and add their strength to one side forcing a landslide victory for that group!

Let me give you an example of how this looks in real life…

Bears + Banks > Bulls In this chart (left) we observe 5 consecutive red bars in which the Bank came in and sided with the bears to overwhelm the bulls. And because the banks have so much more money, and because their money acts in unison, they easily shift the balance of power driving the price down significantly within just a few hours.

And when the bank is done, it stops its activity leaving the non-bank traders (bears and the bulls) alone to duke it out in a fairly evenly matched battle that goes almost nowhere. In fact, in this chart we can see that after the banks stepped out of the picture, the bulls turned out to be the slightly stronger party!

After this happens, the bank will make another move and the price will either rise, or fall in a more landslide type of way again. The direction the bank picks next, though, is not based on a coin-toss. It’s based on how the bears and the bulls responded to the previous bank-driven move. Banks want to take the most money possible from the market just like we all do. And because they have enough money moving in unison to move the price in any direction over the short term, they will choose to side with the underdog (bears) and oppose the strongest group (bulls) because the strongest group is the strongest because they have the most invested, and therefore the most to lose to the banks who are going to take it.

And as you can see, after a little extra turmoil in the middle, that is exactly what happened.

My Strategy My objective as a trader (and yours, too, if you want to win), is not to compete with other traders, but to study the banks. Banks make waves. And my goal is to be a surfer that attaches to them and rides their wake. Because, like the individual with a million dollars who can move it all in unison, the banks are the ones who control TRILLIONS and are able to move it in unison and cause the market to move.

The art of short-term trading is the art of knowing how the bank will respond based on what they see the bears and the bulls doing right now. And since I can also see what the bears and bulls are doing when left alone, I can predict what the bank will do next if I understand their decision-making process.

Thankfully after years of observation, I have a general idea of their most important key tenant, which is to “go against the majority of non-bankers.” And that has to be your key tenant as well if you want to win.