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Hey this is Sasha Evdakov, it is December 17th, 2015 and welcome to another episode of let’s talk stocks, where I share with you how to evolve and transform as a trader and within your trading.
In this week’s episode, the core focus is about cause and effect ripples in the stock market. Basically it’s how the market moves, what is the cause and what is the effect and how that pertains to everything that’s happening within your stocks.
It’s an important lesson to really hone in and focus on because there’s a lot of chatter that’s happening lately, especially between oil, the Federal Reserve and the US dollar.
Lots of news
There’s a lot of news, a lot of gossip, a lot of headline that are occurring and it may be impacting your trading decisions and it’s something to be aware of, of how the news pertains to your trades and your stocks and your environment, and seeing a deeper picture about this and how it really applies is vital to understanding your trades and how stocks move and behave.
As we go into the lesson, I do want to cover the market and how it’s doing, we did have the Federal Reserve that announced certain news yesterday about the interest rates going up, and they’re by about a quarter percent.
And what they say typically does move the markets because it trickles down, so if you look at the market, a lot of things over the last week actually were just waiting for the Federal Reserve over the week.
What happens is a lot of the traders, what they do is they pair their positions. That’s one of the reasons why I also decided that ok, we’re going to turn down a lot of my positions as well and since we’re getting close to the holidays, then we won’t be putting on any new positions here until the new year, and that’s just also to get a little break as well from everything.
But you can see that people were taking a lot of positions off right here, as indicated by this bar and the break of this support line. So we broke it before right here, right around November 15th, 16th and then we got back above it.
The same thing happened here, was that we broke lower, a lot of people were waiting for the federal decision and then we got it and then some certainty came in and the stock market popped a little higher, and then today we get again a reaction that goes and counteracts that decision, so on the day that they announced it, the stock market went higher. On the day after today, the stock market went lower.
So why does that happen and why does that move the markets? Or how does this play into the whole market as a whole between the causes and the effects? Is this the thing that’s leading it? Is it oil prices, or is it the dollar and the way that the dollar is moving?
The news only want to entertain viewers
That’s the core of this week’s lesson. And you have to understand that there’s going to be a lot of chatter that happens on the news. There’s going to be a lot of chatter that happens that the news will bring in experts that had it right and then experts that had it wrong, depending on the direction that things move.
And they do this because it builds viewership; it builds viewing time for them and for their channel.
They’re not really there to educate you, per se, that’s not their ultimate goal and focus. They’re there to entertain you, and one of the ways to entertain people or get readership or viewership is to discuss things negatively.
Typically they say that 9 out of 10 headlines on the news or anywhere really are negative, and that’s because it drives a viewership, it drives readership, and this is the same thing that happens in tabloids.
It’s also one of the things that happen in reviews, reviews of books, reviews of products, blog websites that do reviews, anything that’s negative drives a lot more readers and viewership, because people are interested in these things, it spikes a little curiosity in our own mind and brain and it makes us wonder, it counteracts some of those things that are naturally inherent in us.
Where in fact most human beings they want to do the right thing, they want to do the positive thing, but if they can satisfy some of that taboo craving from the negative side, or put a little doubt in their mind to counteract and balance that seesaw effect, then they want to go after and read about it.
This in your trading is going to be a very horrible thing to do, and that’s because when we start looking at the news, when we start reading about how things pertain to the cause and effect, such as when we look at Exxon Mobil here, when we see how it’s been driving and moving lately, oil stocks have been moving lover.
And there will be experts out there on TV, there will be experts out there on articles, news, radio, talking about how oil prices are moving lower, and when oil prices move lower, they move the markets lower.
Then there will be other exerts, or during other times of the month, year, day, where oil prices move higher and they lead stocks move lower. So there’s the inverse that happens, both situations happen, meaning stocks move up when oil prices are down, and stocks move up when oil prices move up as well.
So both things happen and the news portrays this and believes that this is a one way action, cause and effect.
Volume and price
Those of you that have studied my course on the green course stock trading foundations or the technical analysis course. You know that I really heavily focus on cause and effect and in order to explain this as easy as possible, into volume being the cause and effect being the price.
What happens here is when we start reading and looking at the volume and you can do this on any stock really, and let’s just take a look at any kind of stock, company whether it’s MasterCard, whether it’s Apple.
You can see here we have down volume bars that are fairly huge relative to the average 20 day average, 49.3 million, and this cause creates this effect, ok? It creates an effect for 10 - 15% selloff.
We can do the same thing with marathon oil, same thing when you look at the stock charts right here, you see the cause right here with a rise in volume, here is the effect. The effect that happens with prices, and we continue… Look at this volume coming in.
And if you don’t believe me just go ahead and study charts more in depth and then you will be a believer after that. But I’ve talked about marathon oil, I’ve talked about a lot of these oil companies in the past, and we’ve talked about this critical line and this stock is continuing to sell off even further, for $12 marathon oil that used to be at a $40 double tap over here.
This can go much lower, the same with a lot of these other companies, like Exxon mobil and so forth. Just because gas prices are cheap at $1.80 a gallon here and there, that doesn’t mean things can’t continue moving lower. There can be some serious trouble.
If you’re looking to purchase on the scale of one side or the other, are you more favorable to purchase it now rather than somewhere up here or back there? Of course, because they were at a hundred and you’re getting a more favorable price.
The market is what it is
But getting back to the cause and effect, we like to justify as humans in the behavior of what’s moving the market, what’s driving the market, and that’s a curiosity that always hones in to us as a trader, especially when we’re just getting started and I used to always wonder, when I used to have mentors, I always wondered, ok so why is the market moving now? Why is the market moving now? Or next week it’d be, so what’s driving the market now?
And I constantly kept thinking about it, constantly kept wondering, and asking my mentors what’s going on? What’s happening?.
And a lot of the times the answer I kept getting was: it doesn’t matter. It doesn’t matter what’s driving the market. The market is what it is.
And that’s one of the reasons they use the phrase “the market is always right”. The market is always right because it’s a reflection of what’s going on and what’s happening in the current state.
Rather than figuring out the reason of why, it’s irrelevant of why it’s leading this way or moving that way, or moving sideways, moving up, moving down. It really doesn’t matter.
The justification mechanism
And the reason for that is because really we humans try to figure out this justification mechanism. We try to pin something for the move. Whether that’s to the up side or the down side, so if we’re playing to the long side, and we’re playing on the S&P here, to the up side and now the market starts selling off, let’s say in this region, we try to figure out why is it doing that?
If it’s oil prices, or if it’s the Federal Reserve, why is that? The reason if it is, ok that soon should be over and then the market should continue moving higher again, because I’m long.
This happens all the time in a lot of things that we do. It’s that self-justification mechanism, because we’re always trying to figure out the why.
And when you start digging deeper into this, there’s no single cause and effect.
I understand that in the course, in the courses that I’ve spoke at and taught. It is a simple way to explain cause and effect in the market, is that the volume is the cause and the effect is the price.
And really as you’re getting started and understanding the picture, that is really what you should focus on. Don’t tie in so many other factors; because it’s only going to confuse you, it’s going to spin your head around multiple times, really dizzy, like a carrousel and you don’t want that to happen.
Go back to the fundamentals and keys, as far as volume being the cause and the effect being the price. But there’s a lot more that ties into this, as you get deeper and as your understanding of cause and effect grows.
As you mentally grow with your understanding, now you can start applying it at a deeper level.
Some of you might be thinking that I’m already talking beyond or over your head, but you’ll get there, and you might need to re-watch this lesson multiple times or many years later, one or two years later to really digest and understand what’s going on and what’s happening underneath.
Some people never really get it. They always assume that one cause equals this effect. And a lot of the programming that happens, programming meaning in society from news channels, from our day to day life, it programs us to think linearly in cause and effect terms.
Multiple factors contribute to an effect
If we want a long, healthy lifestyle, it’s eating right the only thing that you need to do in order to live a long and healthy life? Probably not, and you can all agree with me on this, that it’s not just about the things that you do, but also the things that you don’t do. So it could be eating the right food, it could be exercising properly, being consistent with that, and even having a healthy loving relationship socially.
It could be that having those friends can drive your moral, and by having a better moral allows you to live longer.
There was a study done not too long ago that’s saying married couples or couples in a healthy relationship, typically, at least the man lives an extra ten years longer. I can’t remember if the woman lives the same age or they actually live longer themselves, but I know that the man typically lives an extra ten years longer if they are married or in a healthy loving relationship, or have socially healthy relationships.
Looking at this to have a long and healthy life, it’s not just about eating the right food. It’s about doing the right things and not doing the correct things as well, such as not smoking, not drinking alcohol, all these kinds of things play into all of this cause and effect, and it’s not one thing points to the other.
When we come into the stock market, we’re typically engrained and retrained to try to figure out a cause and effect because we get tied emotionally to this, we try to justify it, whether that’s the us dollar, whether that’s the federal reserve.
Looking at the Dow Jones, the same thing we’re looking at what specific company is it that’s creating the effect.
What company is taking the Dow Jones lower? And here you can see Apple right here picking up volume, right here is our break, here is our volume picking up and you can see that here is our linear way of thinking, of saying ok, this is the cause and this is the effect, here’s the effect that’s coming in. when in fact there could be multiple different causes.
This is an easy way, looking at the charts, this is an easy way of dissecting exactly what’s happening in the company, and this is why I teach it this way.
As your understanding becomes deeper and for my coaching students, I try to push them a little bit more out of the box.
And as your understanding grows a little deeper, you might have multiple different causes to create that effect. So let’s say apple for example has supply chain problems, they also have distribution problems, there’s a few other problems that are underneath, their fundamentals are potentially great. they have a large cash flow, but they’re not doing anything with that cash, at least not anything to the extreme. So the cash is sitting there.
Again, there’s different things that contribute to that. In addition we’re creating tops over here, ABCD, which if you’ve been following me for at least a year, you know that we’re coming into that ABCD patterns that’s already completing that motion and that move.
There’s a lot of factors that contribute to an effect. So you need to start looking at things at a deeper level.
Things don't happen in a linear way
And when you start hearing these things on the news especially, reading into what the fed does when you ask me “ok what do you think the fed is going to do?” “What is going to happen to my stocks?” “What is oil going to do?” “What do you think is going to happen with the oil?” “What do you think is going to happen with the future of oil prices?” “Should I get into Exxon Mobil?”
And the fact is that as you start looking into all these things, it’s not just a linear way of thinking, you have to go deeper into that level, you have to go deeper into dissecting the analysis of what’s going on and what’s happening.
It’s multiple things. Think of it as throwing a lot of different colors of M&Ms into a bowl and trying to figure out how many of each color there is in a split second. That’s what you’re really trying to do when it comes to figuring out what’s going on with your stock prices in cause and effect.
But for most people, what they’ll do is they’ll try to align every color M&M and figure out and count it out, but it’s very difficult because someone else keeps pouring more and more M&Ms with multiple colors in that bowl. So it’s hard to keep up because it’s dynamically changing.
By now you should probably understand that cause and effect is not just linear. Cause and effect, such as tying stock market prices to oil prices, is not very valid. Which means, what is the news trying to do? Is it really even relevant to watch it? Not really. It’s there for entertainment purposes.
It’s not going to tell you which direction the things will move. The same thing goes with the dollar. The same thing goes with the Federal Reserve. Cause and effect.
Typically things do trickle down, and it’s one of the reasons why news catalysts, like the Federal Reserve, do move the markets, because it is a large thing that can affect multiple things.
Looking at the federal reserve you can pinpoint a large cause and effect thing for that to happen.
For example, if lending and borrowing money now becomes more expensive, which is really what the Federal Reserve does to the economy, if now it costs banks more money to borrow money, or to have money to use money, now It costs the banks more, it trickles down to mortgage prices being higher or mortgage lending rates being higher, that trickles down to the regular person or the investor in buying a home, or the first time home buyer. Now not being able to afford a bigger house, or not being able to afford the house that they want, so they have to go to a smaller house, which also means they have less discretionary funds or money to travel, to buy the new tech toys.
That’s how this affects the US economy and the global economy, because then you spend less internationally, because you might not take that international trip.
As you can see just with the interest rates, and that’s why people make it a big deal, the news catalysts they make it a big deal, is that it trickles down multiple levels.
However when we watch these stories, or we read these stories, a lot of times they seem from our perspective like it’s a linear cause and effect, such as because the fed does this, he market does that.
But remember that it trickles down to multiple levels, and you have to start looking at things as multidimensional effects when you’re looking at the market.
And most traders when they’re beginning, when they’re just getting started, when I first started, I tried to figure out the reasons behind the move.
Focus on risk management
And a lot of times as I mentioned earlier, the reason behind it is irrelevant. All you can do is manage your risk at how you’re trading the markets. That’s really the whole goal of you trading, is to manage your risk and to figure out how best to manage that risk when prices don’t move in your favor.
Because buying a stock, if we bought a stock, let’s say the S&P over here, at this level, the 1900 dollar level, and just holding it and allowing it to run, that’s easy, that’s easy. Anybody can do that.
But knowing what to do, when the stock goes against you, that’s when experience kicks in. Knowing when things go not in your favor, that’s caller risk management. That’s called knowing what to do when things don’t go in your favor.
And the better you are at that, the better that you are predicting and dissecting of that risk to prepare yourself or the risk that’s coming in the future, the better you’ll be at trading, because you are not just a trader, but you’re managing your risk, and that’s why one of the simplest things and ways that I like to share with people is that when you buy a stock, whether is right here at this level.
When you buy a stock at this level, and it continues to move up a little bit, you sell half, ok? If you’re scared, you just take half of your shares off, and now you’re playing with a free hand and letting the rest ride as high as you can.
And then if something happens, you get freaked out, you panic, you get out 100% of your full position, and then you can get back in again later, at another time when you feel more comfortable.
Be prepared for the downs
But for many people what they do is they have no concept or plan when something goes against them, because they’re not prepared for that. And they’re not prepared because they’re not thinking about the potential future of the effects, of what can happen, but as you start thinking, digging deeper, seeing the world a little bit differently, you start evaluating the risk a lot differently.
And I don’t know if for you it’ll be a light switch that comes on and say “wow, this makes sense” “Wow, somebody said something that now… Ok, I’m thinking things differently”.
And maybe it’ll make sense to you during this lesson, and now you start seeing the world a lot differently. Maybe for you it may never make sense, because you might always see things as linearly.
“That guy hit me, and now that car that I have is damaged, and it was all his fault, because he bumped into me”.
When in fact it’s potential, or possible that you hit your breaks a little quick, maybe you were driving incorrectly, or you were slowing down very gently, and because you came to a very quick fast stop, then they actually hit and bumped your car on the back side.
Pointing the finger at a single cause
There’s a lot of different causes and effects. For many people we like to point the finger, we like to dissect the reasoning behind why, and for one it’s again, that justification mechanism, it’s that self-justification that we really try to get past, because we don’t want to put the blame on us.
And that includes with losing trades. We want to put the blame elsewhere, putting the cause and effect on to someone else; it is their burden and problem.
That’s one of the reasons why many people give their money to a broker. They give their money to a broker and that way, they are always correct.
Meaning, if I give my money to a broker and I give my money to a broker right here, and let’s say the stock market goes up, now I am correct, because I chose the right broker, he did a good job and he made me money. So I’m in the right, I am correct; my actions resulted in a positive return for me.
On the other hand, if I chose a broker over here, they invested my money, and the market tanks and sells off, now I can justify and say, well it wasn’t me, the broker in fact did a horrible job, but it was nothing on my part.
So we can justify it both ways to where we’re still positive in either direction. It’s not funny how that works out.
Read the volume
Looking at your stocks, when you’re trading, learn to understand the cause and effect and start looking at things deeper. If you have the green course, if you have the blue course, review the cause and effect module and especially read the volume.
Because 80-90% of the cause and effect in the charts, in the stocks, whether you’re looking at apple, whether you’re looking at any kind of stock, there’s marathon oil, it doesn’t matter, you can choose Facebook, the cause and effect is going to be driven by the volume, because the volume is the reflection of what’s happening in the market.
It puts together all those multiple causes, to show you those causes and get you that output and that effect. That is the beauty of learning and understanding and studying volume.
And that’s why I typically preach it so heavily, but most people want the indicator, they want that easy entry and exit point. Whether that the Mat D, this and that.
Understand that those are light indicators and they have false positive signals, and you have to understand how those work and operate.
After you understand the cause and effect, the volume, the price, the action, the behavior, then you can go ahead and add those additional indicators, but they may only guide you another 5% in your whole decision making process, the other 60, 80, 90% would be something like the volume, the other things that you study, the international markets, the global economy, learning about how these things move together.
When you start putting all these pieces together, the light bulb might just go off, and you might say “wow, I got it” “Wow, now I understand”.
You can apply this to a basic concept of living a longer, healthier life. You have to remember that it’s not just exercising, it’s not just eating right, it’s not just not smoking, it’s not just having healthier relationships.
It’s about multiple thing working together, working correctly, to get you to that destination, just like a car, just like a bicycle, it’s about having the two tires, the frame, having four tires in a car, having that frame, having the engine, the radiator, everything working together to move you and propel you forward.
There's no need to understand everything
You don’t need to understand how the car works and operates specifically within those components, but you need to know how to drive it.
You don’t need to understand exactly what’s going on underneath the stock market, but you do need to understand how to manage your risk and your money, how stocks move, how a car moves, you need to understand those concepts, but you don’t need to understand the full driving force behind it. You need to understand what’s causing the move for you to be able to manage the risk.
Hopefully that makes sense and hopefully you really are starting to digest and come out of this a little bit better, a little bit smarter, a little bit wiser, maybe allow you to grow into a better trader, and if not, you might come back to this lesson, save it and say “hey, I need to come back and listen to this again sometime in the future, in a month, two, three months, five months”
It’s a profound thing because once you get this, once you understand how things behave and act in the market, it really applies to the world around us. So understand that everything that you’re getting, all this noise, all the things that are being fed into you, from the cause and effect of oil prices, the dollar, the Federal Reserve, is a one way, one linear connection that many people try to pinpoint.
And it’s an easy way to understand things. It’s an easy way to say that this is the reason, this is why, this is happening, but it’s really not the right reason. It’s not the full story. You’re getting a small fraction and piece of that story.
Looking at your own investments, think deeper, start evaluating the cause and effect, especially volume, if you haven’t studied the volume with me, then go back to some of the other lessons that we have ad work on the volume, because it really will shed a large light for your trading, for your risk management, and just go back and study some more, so that way you have a clear understanding of why things move the way that they do, and then you can make your trading decisions, but it doesn’t necessarily matter why they’re moving, what matters is how they’re moving and how you’re positioned so that way you can manage your risk.
Whether it’s oil prices, whether it’s the dollar, whether it’s the federal reserve. It doesn’t really matter, it could be terrorist attack, it could be gas prices, it could be a software company, it could be somebody died, it could be some CEO announced something.
It really doesn’t matter. There’s a lot of things that will fuel that cause and effect, all you need to understand is how to drive the vehicle so that you can move forward and progress. That’s what you need to know.