Market speculation is a zero-sum game. In order for someone to win, someone else needs to lose.
You can think of the market as a collection of players… some weak, some average, and some strong. Your goal is to take action against the weak players and relentlessly separate them from their money.
To do this you'll need an edge.
Now the word edge is thrown around a lot in finance, but what it really means is the ability to exploit the errors of your opponents.
If you can't find these errors, or if your opponents just aren't making them, you can't win.
Why?
Because to make a bet with positive expectation, someone else needs to make a bet with negative expectation.
A bet with positive expected value or "positive EV" means that placing it repeatedly will result in net profits. The outcome of any single instance may be negative due to variance or luck, but over the long-run the bet's edge will express itself and profit.
The opposite is true for a "negative EV" bet. A negative EV bet may win in the short-term due to variance or luck, but over the long-term it'll produce net losses.
To thrive in this zero-sum environment you need a relentless focus on other players' errors. You need to find and exploit them.
How To Find Errors
Finding errors begins with asking the right questions:
- Which market players make the most errors?
- Why do they make them?
- What market situations trigger these errors?
In answering these questions, we can break market errors into two types - unintentional and intentional.
Unintentional Errors
Unintentional errors are made by players who try to win, but then fail because of flaws in their process and implementation. Taking advantage of these errors can be very lucrative.
Here's a
