The prevailing wisdom is that markets are always right. I take the opposition position. I assume that markets are always wrong. Even if my assumption is occasionally wrong, I use it as a working hypothesis. It does not follow that one should always go against the prevailing trend. On the contrary, most of the time the trend prevails; only occasionally are the errors corrected. It is only on those occasions that one should go against the trend. This line of reasoning leads me to look for the flaw in every investment thesis…. I watch out for telltale signs that a trend may be exhausted. Then I disengage from the herd and look for a different investment thesis. Or, if I think the trend has been carried to excess, I may probe going against it. Most of the time we are punished if we go against the trend. Only at an inflection point are we rewarded.
~ George Soros
Hmm…strange one. I guess you have to live and breath trading to get the nuance of what he really means, but to a novice like me it reads like an over-intellectualised way of saying buy low, sell high – if you can pick the turns. Ground breaking stuff.
Markets get it right in the end but it takes time for them to adjust. Opportunities exist if you can identify trend changes ahead of the adjustment. Technical indicators are mostly reactive and tend to lag the market. Some, like money flow and momentum, may warn of impending change through early divergences.