Everyone has a (different) perception and basis for buying or selling
Price Movement is a function of the Collective Perception of Buyers & Sellers in a market. When the Collective Perception changes, the Price moves.
If our perception is that is it cheap, we are going to buy it. If our perception is that it is expensive, we are going to sell it.
Were it not for the fact that people must act on their perceptions of situations, price response would be virtually immediate and almost always correct.
NEWS, as many successful investors and traders have pointed out, tends to be the enemy of most traders since they do not know how to use it. The importance of News as it relates to the market is not the News per se, but rather the manner in which news is interpreted. What should, in many cases, be bullish news turn out to have a bearish effect. What most investors have long waited for turns out to be very disappointing. Perceptions of what is bullish and what is bearish change from day to day, from moment to moment, and from trade to trade.
Economic fact must inevitably pass through the perceptual filter called the human brain. People will act on what has been perceived, whether the interpretation is or is not correct. Ultimately economic law will take hold, but it is all too often a long, hard journey from hard to reality. It is the time spent between economic fact and market realization of truth that accounts for more than 90% of all Price activity.
In the world of investing/trading, perception often swings from "flawless" to "hopeless". The pendulum careens from one extreme to the other, spending almost no time at "the happy medium" and rather little in the range of reasonableness. First there's denial, and then there's capitulation.
It is images and perceptions that drive crowds, not facts. Consider the way a stock is going up and up and then there is a minor piece of bad news. Its price plummets, even though nothing has really changed. This is the way the crowd swings from hero worship to vilification once a hero stumbles.
The excessively high or low values are often far away from what fundamental values would ever imply, but they occur. Excessive prices offer great profit opportunities. Outstanding buying opportunities exist primarily because perception understates reality.
The necessary condition for the existence of bargains is that perception has to be considerably worse than reality. That means the best opportunities are usually found among things most others won't do.
The professional community has used Public mis-perception of the facts to liquidate massive quantities of their holdings at premium prices. The opposite holds true at Selling Climaxes.
Not only can we not depend on the market to do anything for us, but it is extremely difficult, if not impossible, to manipulate or control anything that the market does. However, we can control our perception and interpretation of market information, as well as our own behavior.
What can be done to rectify faulty perception? The best defense against faulty perception is a strong offense in investment strategy. The best way to avoid losses due to poor perceptual development is by making your trading plans in a structured fashion and carrying them out accordingly. This will help minimize the possible negative effect of extraneous inputs. By not allowing them to enter into the investment scheme, we eliminate their negative consequences.
"It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be." (Keynes Beauty Contest)
In market games, it isn't your opinion that counts nor even the immediate opinions of others' opinions of whatever asset you are trading. Winning the market game means that you need to deduce what the perception of others will be about in the future.
You make money by correctly predicting the opponent's future perception - not the "facts". You need to be thinking about how the future will play out in other traders' minds.
An important element in the process is, you have to stop at some time and say,
What do other people think?
Why do they think it?
Why do they diverge from me?
What makes me think I’m right and they’re wrong?
If you think about everything the same way everybody else does, you can’t have an exceptional return. If you think differently and it turns out better, you have an exceptional return. If you think differently and it turns out worse, you have a horrible return. But clearly you can’t distinguish yourself if you think the same.
Trading Edges exist because of divergences in market perceptions and realities that result from Cognitive Biases.