Our brain basically does two things:
- Experience what we expect to experience.
- Use our senses as error detection if reality doesn’t turn out as we expected it to be.
As you can see, what you experience as reality is made up in large part by your brain’s expectations of reality. This is also the case when you look at the market. You see what you expect to see, not what is really happening. Hence command $3: never predict, always react.
You probably have heard the phrases: “buy the rumour, sell the news” and “everything is priced in”. What this means is that when the market is quietly going sideways, traders are in agreement about what to expect. They can still have different priorities, for instance long term versus short term. But their expectations are largely the same. As soon as the expectations of some traders change (measured in how much money they have), the market starts to move till everyone’s expectations are largely the same again. Markets only move if there is a disagreement in expectations.
Expectations travel backwards in time. If you expect next week for a stock to drop significantly, then you would also expect that more traders would start to expect this the day before the stock actually drops. Now you have an expectation of an expectation! But the same goes for the day before the day before the stock drops. This is your expectation of the expectation of the expectation. This continues to be the case until you reach your present moment in time where your expectation will be that the stock will drop any moment now, because of your expectation of the expectation of the expectation ad infinitum.
Hence command $8 is: always trade the expectation of the expectation ad infinitum.
That is why the market moves on rumour and moves sideways on the confirmation of the rumour.