Misdirection is a form of manipulation in which the attention of an audience is intentionally focused on one thing in order to conceal what’s really going on.
We know from recent neurological research that the human mind can only concentrate on one thing at a time. Magicians use this limitation to manipulate our perceptions, ideas, and expectations. We draw false conclusions… and then we find ourselves pleasantly surprised in the end. Mr. Market practices the same misdirection techniques, although the purpose is far less benign. Usually someone gets squeezed.
TABLE MAGIC
Attention can be controlled through physical misdirection or controlled psychologically. In table magic, misdirection is often accomplished physically, according to the following principle: a larger movement conceals a smaller (more important) movement. Click here to see an example.
The magician’s exaggerated head movement on the third toss conceals the smaller movement of his fingers palming the ball.
MARKET MAGIC
Psychological misdirection is a similarly subtle process. It is a game, hidden in plain sight that causes unnecessary losses for active traders.
A good example is the sudden reversal that happens on all timeframes, from intraday to daily, weekly, and monthly. Such reversals occur when the market has convinced a significant group of buyers or sellers to look (and keep looking) the wrong way.
One powerful motivator to get investors to sell a security to you today at a discount is to convince them it will be cheaper in the future. The easiest way to influence expectations of future price movement is to move the market rapidly and without warning in the downward direction. The Recency Effect causes observers to interpret the suddenness and rapidity of the move as particularly meaningful – a clear sign of bad things to come.
With the audience now convinced that “something fundamental has changed,” holdings are readily liquidated at a discount. After the selling is complete, the market curiously resumes its former trend, often with a vengeance. If you are an active trader, I suspect that you’ve experienced this surprise reversal phenomenon repeatedly. I hope it hasn’t cost you too much.
The Bottom Line
Beware of being manipulated by the market’s sleight of hand, which is designed to squeeze you into liquidating at a discount. Instead, take advantage of the pattern. On whatever timeframe you trade, even down to a 1-minute chart, learn to recognize and even anticipate the mini-panics. Many are buying opportunities in disguise.
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