Welcome to The Matrix Strategy Trading Course! 

The Matrix Strategy is founded on the idea that there are really only a finite number of ways to approach the stock market to make trading and investment decisions.  It is not a limitless, chaotic system, there is some order and structure to everyone's thought process. In fact, we know that most people's decisions in the marketplace are based on either Fundamental Analysis or Technical Analysis, or a combination of the two.  However, we are also well aware of the fact that until this day there has never been any empirical formula developed based on any combination of these two ideologies which gives us a consistent and precise answer to a stock or market's real price value on a day to day basis. Think about it...if we took 20 people (all well-versed in Fundamental and Technical Analysis) and asked them what the true price value of AAPL was, we would almost surely get at least 10 different answers. In other words, even if we are all studying from the same set of books, we all likely develop different opinions about the real value of a stock and overall markets in the short-term and long-term. Now if we believed this was representative of the marketplace, and were then asked to determine what AAPL would be trading at based on all of the answers given, our intuition might be to simply take the average of all the answers.  However, this is incorrect.  You see, we can not simply take the average of all the numbers to get our answer because of the fact that every market participant likely has a different set of characteristics. Each likely has a different risk profile, different time horizon, different profit goals, different information, and more importantly a different amount of buying power.  Assume for example that I told you that of the 20 people we asked, 1 of those market participants had $5 billion dollars of buying power, another had $500 million of buying power, and the rest had less than $1M of buying power....who would you focus on most when calculating what the price of AAPL would be?  Obviously the player who controls the most buying power. Whatever he/she thinks the price of AAPL is, that is what the price of AAPL will likely gravitate to regardless of all the other answers given.  In other words, even if the 18 market participants who controlled $1M worth of buying power each all agreed on a certain price lower than that of the $5B market participant, it would make little to no difference in the actual stock price if the market participant with $5B was willing to pay a higher price.  In other words, when we try and predict what a stock will trade at now or in the future, we really only need to focus on the actions and the strategies of the most powerful players in the marketplace.  What we believe a stock is worth and what strategy we implement as "small" traders is absolutely meaningless.  In other words, the most accurate approach to predicting future stock prices as "small" traders is to rid ourselves of any subjective opinion, and shift our strategy to that of an objective view high atop the system where one focuses on the most important data set in the marketplace....the characteristics and strategies of the most powerful players in the marketplace and how they will react to changes in market environment.  You see what is more important than the actual answers given, is the characteristics of those who are giving the answers. 

Now are the largest players in the marketplace interested in every single stock found in the marketplace? Absolutely not, and this facet is based on the inherent characteristics of each market participant which for the most part remain constant.  For example, most mutual funds/pension funds are only interested in megacaps due to their lower risk profiles, and high amounts of liquidity (something they absolutely need to enter and exit with large positions). Hedge Funds, on the other hand, are much more aggressive in nature and are interested in everything from large caps down to the small caps as they are only interested in achieving high rates of returns (and are willing to achieve them by any means necessary). Short Term/Momentum traders tend to focus on short-term technicals amid small to midcaps and are constantly looking to anticipate any hedge fund involvement.  Short Sellers look for crowded stocks where large hedge funds and/or mutual funds are involved and looking to possibly unwind positions.  On the small-cap side, they look for stocks where there is a large group of "small" money which can be shaken out of a stock easily. And lastly, the Average Joe simply follows stock performance, tending to move toward highly publicized stocks, completely oblivious to the fact that these trades are extremely crowded and ready to turnover.

Over the course of the next several weeks, we hope you join us as we discuss in-depth the characteristics and strategies of each and every one of these market participants, as well as the entire set of inherent characteristics of the game itself.  Remember this is a thinking man's game...there are no clear-cut answers from a single formula or book...like chess, it is about developing a strategy which anticipates all other strategies.

Below you will find an overview of a few of our own Major Theories which comprise the basis of The Matrix Strategy....read them and really take some time to think about them....and ask as many questions as possible, as we will post questions and answers under each topic.  Believe me, if you have a question lingering in your head, you can be certain someone else does as well. 


We really look forward to working with each and every one of you on a personal level over the next several months as we help you unlock the mechanism of the market and take your trading to the highest possible level...for anyone looking to learn, I promise you will learn a lot.



Ryan (Founder of The Matrix Strategy)
rsi@matrixanalytix.com

                                                                                              
                                                           

                         Theories Behind The Matrix Strategy


Subjective Vs. Objective Approach
Because we as “small” traders do not have nearly enough buying power to significantly move stocks in our favor, we must accept that our singular bets are relatively meaningless in the marketplace.  We know that stocks move when a large group of people all want to do the same thing at the same time, and hence a subjective approach where we hinge our bets on our own analysis is rather meaningless when it comes to predicting stock prices. In order to truly master markets and accurately predict the future direction of stock prices, we must shift from a subjective view of markets to that of utilizing an objective view where we must focus on the outcomes of ALL trading strategies of ALL market participants in order to 1) have a complete view of the aggregate effect of these strategies and 2) learn to anticipate the moves of all these different market participants.


Inefficient Market Theory (Liquidity = Efficiency)
The stock market is the most inefficient market of all financial markets because it does not have enough liquidity to accurately value all +10,000 stocks at once. Since the stock market does not attract enough liquidity to accurately value all stocks at once, it uses a phenomenon called "sector rotation" to attempt to "accurately" valuate different sectors at different times.  Yet, since we know the stock market does not have enough capital to "accurately" value all stocks at once, we can surmise that unless there is additional capital being brought into the market, then there is another sector within the market (or in a separate market) which is being valued inaccurately. Furthermore, we know that the market tends to move in herds, and as one sector begins to attract capital, and stock prices within that sector begin to adjust significantly, it attracts even more capital (usually from inexperienced market participants seeking to chase stocks) which results in the market overshooting any accurate valuations.  Hence, the ultimate result is multiple inaccurately valued sectors, and this leads us to a market which is in its natural state inaccurately valued.  Think of sector rotation as a slinky moving from one step to another.  A slinky when it moves, begins to move at one end, this end then stops, and the back end catches up as the momentum drags it forward and ultimately drags the head of the slinky forward again.  It is analogous to the idea that the "smart money" will begin to move first, eventually stop, and the "dumb money" on the back end will chase this momentum and ultimately push the stock price to where it had no intention of going.

 
”Everything That Can Be Manipulated, Will Be Manipulated” 
Because the market lacks sufficient capital to render it efficient, market participants commanding the largest amounts of capital have the ability to manipulate stocks and the overall stock market.  Since we are certain that this occurs and we can assume that those participants who have the ability to manipulate the market and stocks will attempt to maximize profits by initiating positions ahead of manipulation, then we can thereby extract enormous amounts of information regarding future movements in stock prices simply by observing trading patterns and more importantly looking for "hidden" large buyers or sellers.

 
Information Imbalance
Since we know that information is disseminated inefficiently throughout the market (i.e. market participants controlling the largest amounts of capital have access to information that smaller players do not), and we can again assume that participants with valuable information will with certainty try and maximize profits based on the ownership of that information by placing bets ahead of the release of that information to the marketplace, then we can again surmise that we can extract enormous amounts of information regarding fundamentals of a company simply by observing a stocks trading pattern (technical analysis).

 
Technical Analysis
Whether or not one believes in the merits of technical analysis is irrelevant, and any shunning of technical analysis as a tool in predicting stock prices results in an incomplete view of the market and stock prices. We must understand that if large groups of people are using technical analysis to make buying and selling decisions, then it is absolutely essential that we have a complete understanding of technical analysis in order to predict possible future supply or demand for stock resulting from technical buy or sell triggers. Remember whether or not technical analysis works is irrelevant, we are simply trying to profit by anticipating the movement of as many people as possible.


Exogenous Factors
Not all buying and selling decisions in the market are founded on fundamental or technical analysis (i.e. end of quarter window dressing, the January effect, end of year hedge fund manipulation, etc.) While this produces even more inefficiencies in the market, buying and selling decisions based on these other determinants are much easier to predict as they are attributed to our understanding of the character of other market participants which for the most part remains constant.


Hedge Fund Strategies
Many powerful players (especially hedge funds) operate under the idea of "If we carry out Action A, how certain are we that Outcome B will occur?" In other words, if we take a position in a heavily shorted stock and continue to put buying pressure on it, how certain are we could induce a short squeeze and propel the stock higher.  Or conversely, if  we began short selling a stock and put enough selling pressure on it, how certain are we that we could get a large group of longs to liquidate their positions and take the stock lower? This forces us to keep a close eye on stocks with high short interest as well as those that are very crowded on the long side, and extremely focused on any signals of bets being placed ahead of any possible manipulated movements.

 
Anticipating "The Chain Of Demand"
The market rewards those who can accurately anticipate the movement of the largest groups of people....since we know that “dumb money” simply follows “smart money,” our goal as traders is to identify the smartest people in the market and anticipate their movements...in doing so we anticipate the entire "Chain of Demand."