The simple answer is nothing! All traders and investors watch the same charts, listen to the same news releases, and are subject to exactly the same emotional pressures as everyone else.
However, there is one thing that differentiates these top traders from the rest: they understand the importance of money management and, in particular, the risk associated with each and every trade. In these difficult and testing market conditions you ignore these concepts at your peril.
With Thanksgiving and Christmas on the horizon, markets are even more volatile than usual as banks, financial institutions, and hedge funds all scramble to close out positions for their year end. As traders, we should not underestimate the pressure within these groups to deliver the best possible results for their clients and investors, which is often referred to as “window dressing”. We can see the effects of this quite clearly across all the capital markets. For example, earlier this week the euro suddenly jumped 40 pips out of nowhere, whereas today it has collapsed against the US dollar as a result of the disastrous German 10 year bond sale. It seems contagion has now reached the very core of the Eurozone, and European leaders can no longer rely on a vague, general economic recovery to paper over the deep flaws that lie at the heart of the euro project.
This morning’s dramatic moves in the bond markets will of course impact equities, with many indices fast approaching key support levels. At the end of last week, only the DOW, the All Aussie, and the Shanghai failed to make new lows for November. But this has all changed this week as the Dow hovers just above 10400 and the S&P managing to hold above 1180. For an interesting historical perspective, Thanksgiving last year saw the S&P at almost exactly the same level before it took off in December to close out 2010 at 1261. Whether this will happen this year remains to be seen… Perhaps the key indicator to watch is the VIX, which this time last year, was in the low 20’s but today is grading above 30 – a much more worrying sign.