Another way to say it, understand what makes others tick and you’ll understand what makes the market tick.

To trade only by stats or patterns alone is to be blind to the force that actually moves the market – other people. Yes, even with 70% of ES (S&P e-mini) volume machine generated, its humans who program the algos and decide which ones to use and when exactly to turn them on and off.

Here’s a quote to illustrate my point, from the book, Liars Poker –

“That was how a Salomon bond trader thought: He forgot whatever it was he wanted to do for a minute and put his finger on the pulse of the market. If the market was fidgety, if people were scared or desperate, he herded them like sheep into a corner, then he made them pay for their uncertainty. He sat on the market until it puked gold coins. Then he worried about what he wanted to do”.

The best discretionary traders I know are the ones who develop a feel for the market. And the feel is not entirely about numbers, stats, or patterns, although that’s part of it.  A good discretionary trader is a trader who uses judgment – and part of that judgment is an understanding of what other market participants are thinking and feeling and what they may be anticipating.

When all you see is blinking numbers or lines on a screen its all too easy to forget what you’re not seeing is the key – the people who are ultimately behind the movement of price.

Having worked with large institutional traders, I’ve known this a long time, and two years ago some financial engineers at California Institute of Technology showed this is true with empirical research. Their research showed that when traders are taught to read the intention of other traders – what are they thinking/feeling –  trading performance significantly improves. It was not a fluke, they’ve been able to replicate the results multiple times.

In fact more and more systems – using various degrees of automation – are applying this ‘predict others to predict the market’ approach in some very creative ways. I was in Tokyo a few months ago speaking at a HF conference and I met a financial engineer who’s also a professor at Tokyo University (the Harvard of Japan). He showed me a system for gathering info from a variety of media sources including social media, scraping the data for sentiment using key words, and applying it to automated trading decisions. He was part of a group that was launching a hedge fund based on the strategy.  And it’s not just in Japan, I know of about 6-7 funds based in the US that use a similar approach.

And if you don’t have the capability to scrape social media data and have computers dedicated to listening to CNBC and Bloomberg, what’s the best way to read other people? The first step is to be able to read what’s going on inside you.  This is true for all traders, and perhaps even more so for the self-directed discretionary trader who will otherwise be one of the sheep. It all begins with self-awareness. And unfortunately, self-awareness is usually pretty far down the list of priorities for most traders. My clients know otherwise.