What causes a movement in financial markets? Two market participants can come to different valuations for a security, based on the same information at the same time. This arises out of the Subjective Theory of Value. Carl Menger said that “the measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another.” For one trader it makes perfect sense to sell a security whereas another trader wants to buy it for entirely different reasons and circumstances.

If two individuals come to two different conclusions, they obviously cancel each other out. Once an opinion outnumbers all others, however, things start to move. It is therefore the sum of the identically enforced decisions that leads to a move.

Imagine a freight train which advances according to the laws of inertia: Once this heavy locomotive with all its fully loaded wagons has started moving, it is very hard to reverse its direction. An extreme amount of force needs to be put up to halt the train first.

Money has resembling motion in financial markets because there are countless of market participants involved who need to react and adjust their individual position appropriately – a process which obviously takes a lot of time.

Similar applies to the inertia of crowds. If you are a small trader, use this to your advantage as you can switch your position easily and ride a trend from a very early stage on. The following excerpt from The Book of Five Rings by Miyamoto Musashi transcribes it best:

The way to do battle is the same whether it is a battle between one individual and another or a battle between one army and another. You should observe reflectively, with overall awareness of the large picture as well as precise attention to small details.

The large scale is easy to see; the small scale is hard to see. To be specific, it is impossible to reverse the direction of a large group of people all at once, while the small scale is hard to know because in the case of an individual there is just one will involved and changes can be made quickly. This should be given careful consideration.

In his 1954 work New Blueprints for Gains in Stocks and Grains, William Dunnigan articulated his insights on the philosophy behind trend following:

We think that “forecasting” should be thought of in the light of measuring the direction of today’s trend and then turning to the Law of Inertia (momentum) for assurance that probabilities favor the continuation of that trend for an unknown period of time into the future. This is trend following, and it does not require us to don the garment of the mystic and look into the crystal balls of the future.

Let us believe that it is possible to profit through economic changes by following today’s trend, as it is revealed statistically day-by-day, week-by-week, or month-by-month. In doing this we should entertain no preconceived notions as to whether business is going to boom or bust, or whether the Dow-Jones Industrial Average is going to 500 or 50. We will merely chart our course and steer our ship in the direction of the prevailing wind. When the economic weather changes, we will change our course with it and will not try to forecast the future time or place at which the wind will change.

The main message here is to stop predicting. Every economist tries to predict the future with apparent certainty. Their actual ambition is to strike the big coup for instant vanity. Since their ubiquitous urge cannot be put aside, the individual trader is better advised by ignoring pundits.

You must understand that the market will never ever trade according to your liking but always according to its liking. Trend followers ride those trends as they are offered by the market and hence listen to what the market is telling them. Sitting on a winning position is like riding a fire-breathing dragon that burns its path free and every trader who dares to stand in its way. No single trader who attempts to impress his princess by outsmarting the dragon stands a chance to beat it, ever. It is actually quite an entertaining ride to watch inexperienced traders in chat rooms buying and shorting the market without any sensible reasoning, and have them take one pounding after another.

Being passive by merely maintaining your active position with a properly set stop-loss order can be truly magical.