In order to keep a line of thought, we will work with the same examples used in those articles. This is another reason for you to read them (if you are still not convinced).
Let´s get to it! We determined that the value of the Ipad is U$400, but that value is not absolute. The reason we say that is because value is based on perception and different people have different perceptions of value. Now we will add attributes to our U$400 Ipad or our buyer and think about this "perception" stuff.
Imagine our buyer is an Apple freak, a collector. Suppose the Ipad we are trying to sell belonged to Steve Jobs. Would it be fair to say, that due to it´s uniqueness, the value should be a lot more than U$400? How much do you think the collector would pay for an Ipad like that? For now, we will say it is worth U$5,000.
But if our buyer is just a normal user, that wants a tablet to navigate the Internet and play games. For him, the U$400 bucks would be a fair value and he could not care less if it belong to Steve Jobs or not.
For a non-Apple fan to buy the same Ipad, the value would have to be even lower. This would be the only way he would to be attracted, a great deal. Remember that price is an advertising mechanism. Just to have a number let´s say U$300.
To add another variable to the equation, we´ll have a retailer, willing to sell the Ipad in return for a profit. Do you recall what a trader is? No, than you should read this: Being a Trader, what does it mean? . For the retailer, that will buy many Ipads to sell in his store, the value is likely to be lower than, cause this is the only way he can make a profit, so if he buyer 100 Ipads, Apple will give him a discount, and value would be U$350. In a way he will charge U$415 in his store.
Here is our Players Summary:
- Collector - U$5,000
- Normal User - U$400
- Non-Apple Fan - U$300
- Retailer - U$350
To take note: "Different players have different perception of value". This was an easy conclusion, now the hard ones:
- In the stock market all players are at the same spot:
- This will make it harder to identify value and...
- ... it will be even harder to identify the players
- All players will be trading with each other, which is actually helpful, but ....
- ... all players will be fighting for the best deals (prices) since they are all at the same place.
- Know the game players:
- Your job as a trader is to understand who are you playing against - as a daytrader, for example, you will be fighting other daytraders to get the best price for a long.
- And more important, who are you playing with - as a daytrader on a long position you want to play with longer time frame buyer
This are the players I consider in the stock market and their time frame.
- Short Term Traders: from Tick chart to 15 minute charts (Daytraders)
- Intermediate Term Traders: from 30 minutes to 60 minutes charts (Swing traders)
- Long Term Traders: from weekly to monthly charts (Position traders)
- Investors: mostly fundamental traders (The Collectors)
The question you probably have now is: how do you determine the value with all these players at the same place, but with different perceptions? The tool to do that is called Market Profile (or Auction Market Theory) which we will talk about in our next article.
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