Market Tides and Market Waves


A lesson I always love to pass on to young traders is to deeply understand the concept of tides and waves.


Tides are the biggest waves and motions we see in ocean, caused by the celestial bodies.

Waves on the other hand can be caused by a simple gust of wind.


Markets work in a very similar way.

A tide would be a booming economy for example. Hence the famous aphorism “A rising tide lifts all boats.”

A wave on the other hand could be a news-piece, a long awaited product release, or a promising statement made by a company, causing a single boat to rise or fall out of sync from the other boats.


What must be observed, however, beyond anything, is the strength of the tide. For just as a rising tide can lift all boats, a sinking one can crush them all should the water be too shallow.


A strong tide can break any wave and force the wave to go the direction of the tide. Hence it is wise to ensure that you are never trading against the tide.


Now that does not make waves useless.

Waves are great and accelerated when they follow the tide.

Waves can be the only fun thing around when the waters appear to be still.

But waves that counter the tide, almost always, get crushed.


The more correlated a market is the more the tides rule.


The crypto currency and digital assets market for example is one of the most highly correlated markets I have seen in years. Having looked at coinmarketcap about everyday for the past years, the days where everything is red or everything is green vastly outnumber the christmas-tree days of winners and losers.


When the tides rule it is important to not miss the forest for the trees. One symbol may be poised for a breakout, but 9/10 times the wave won’t be strong enough to overcome the adverse momentum of the tide.


And in the rare occasion that it does, the outlier tends to return to the mean in a steep retracement.


As the old saying goes, “the trend is your friend.”


All too often we need to take a step back and look at the macro trend. Both in terms of timeframe and economics.


Perhaps what you consider a tide is just a wave in a grander ocean.


If you are stuck looking at the 5 minute chart, look at the hourly chart for answers. If you are stuck on the hourly chart, look at the day chart for answers. If you are stuck on the day chart, take a look at the weekly, monthly, or sometimes even entirely different markets. At the end of the day, no asset class rises or falls in isolation. Everything in this world is interrelated. The sooner you see the correlation, the faster you will ride the waves and not get crushed by them.


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