Trading the River






The whole world is simply nothing more than a flow chart for capital—-legendary trader Paul Tudor Jones

In my trading I am always looking for where the capital is flowing. Capital flows where it believes it can either grow or be safe depending on the economic environment. Interest rate policies drive currency valuations and the flow of capital, inflation fears drive money into commodities, mutual fund managers accumulate stocks based on their belief of earnings growth that will drive a stock higher and higher. Bond investors send their money chasing the highest return they feel that they can receive without losing their initial investment capital.

Fear drives capital into safer havens with risk off trading. Greed sends capital chasing high returns with risk on.

Much of stock price moves are nothing more than stocks rising as they are accumulated by professional money managers and then distributed by these same managers as they decide to take their profits off the table for whatever reason. Whether your stock is being accumulated or distributed is really the most important question for the stock trader.

Gold prices are nothing more than trader psychology with true physical supply and demand never even coming into play with more gold being produced annually than can be used that year. The flow of gold prices have more to do with the weakness of the dollar and people using gold as the ultimate reserve currency than it has to do with a shortage or surplus in real supply.

It would do both fundamentalists and technicians good at times to simply step back from their valuation models and chart patterns and ask the simple question: “Where is capital flowing into and where is it flowing out of, and how can I profit from it?”

The flow of capital is why trend following trading works in the long term. Trend followers position their boat with the current.