Trade The Journey

Trade The Journey

3D Thinking

Top of the Afternoon! I hope everyone is regaining some normalcy in their life. Every week I like to review what I experienced during the week, especially regarding the Coronavirus. The Virus remains a market mover, heavily influencing a wide range of sectors.

Around the world, vaccination rates are making the slow climb up. Parts of Europe and Asia still have mask mandates and, in some cases, are imposing small lockdowns. The Olympic committee has announced that spectators will not be allowed to attend due to virus concerns in Tokyo.

Most people in the United States feel that the Government would not impose another lockdown regardless of the numbers. There are parts of the United States that show little concern about the Virus remerging. Along with the vaccinated, the unvaccinated have also removed masks from their wardrobe. 

An economy relies on people being able to produce and consume on a reasonably consistent basis. A business plans its activities and expenditures around this fact, and most aren’t prepared for black swan events such as the Virus.

Business supply chains are still attempting to regain their footing. Commodity prices continue to be a concern for businesses as demand continues to rise. China made efforts to curb the high commodities and materials costs. China is a significant consumer and producer of commodities.

When I’m out and about, I try to observe trends among consumers and businesses. People are spending, and most stores are seeing the return of in-person shopping.

When there is a continued positive outlook, people feel comfortable spending. Consumer credit is expanding, which means the consumer is confident that they can repay their debts in the near future.

This bodes well for business profits which translates to higher earnings, albeit slower than the earnings immediately preceding the reopenings. Monitoring companies that did well during the Pandemic can assist you in discovering what the sentiment is among market participants.

Knowing and understanding the prevailing sentiment in the market can help you develop a more accurate market outlook. As I acquire more experience, I see that there’s always a theme in the market. Sometimes its yields or maybe a bearish statement from a key financial player/regulator. The number of themes that can influence the market at any one time is limitless.

Most times, it’s a recurring theme dependant on the business cycle we are in hence the trading strategy of sector rotation. What I have found most helpful to track are bond yields.

Bond yields and prices move inversely. When bond prices go up, the yields fall and vice versa when bond prices fall. Most rates are based on the yields of treasuries, so when they’re rising, higher rates for the consumer and business may be ahead.

Interest costs lower the profit margin for companies and make it more expensive for people to borrow for long-term purchases. High borrowing costs can cause the economy to slow. 

A lot of information is contained in the numbers that pop up on the screen. Money travels where it can earn its highest return. The bond market is twice the size of the stock market.

“In the U.S. alone, bond markets make up almost $40 trillion in value, compared to less than $20 trillion for the domestic stock market. Trading volume in bonds also dramatically exceeds stock market volume, with nearly $700 billion in bonds traded on a daily basis.”

It’s thinking about the market in a three-dimensional aspect; initially, this was a complex concept for me to understand.

I use AutoCAD, a 2D dimensional program, and once you learn how to use the program, it’s easy to use. When I begin using 3D modeling programs, the learning curve was a bit steeper.

To use a 3D program, you had to envision the project’s height, width, and depth. I understood the height and width, but how do you envision a design with mass before it’s completed?

It took me a while to combine the moving parts of the design. I firmly believe that learning how to use 3D modeling programs will add another dimension to your critical thinking process.

Determined to understand and succeed in understanding the 3D modeling programs, I spent many hours learning about perspectives. Ultimately, I received a certificate in one of the 3D modeling programs.

Back to Trading.

Trading is a left and right brain activity. Why are bonds being brought? What is the reasoning behind the purchases? Has the economy reached peak growth? Are bond purchasers looking to lock in rates?

Using your imagination is a crucial aspect of trading. 

A quote on 3D thinking:

“This ability to engage with the 3D world requires the ability to think in 3D, i.e. to ‘see’ behind and through objects in our imaginations – and in reality.”

 Below is a picture illustrating this concept.

This type of thinking has helped me tremendously in options trading. As I watch the options greeks move, I’m learning to envision how the option prices could move. With stock pattern recognition, looking behind the pattern towards the sentiment evidenced through price movement and volume is another example of 3D thinking.

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