But why, master?

Quotable

“A national political campaign is better than the best circus ever heard of, with a mass baptism and a couple of hangings thrown in. “
                                    H. L. Mencken

Commentary & Analysis
But why, master?

The growth emanating from the global economy seems analogous to the sound of one hand clapping. For the mystics among us, they can still hear the growth engines humming. Many of us hear the sound of screeching; the noise one hears just before a train wreck. Others are likely asking: Who coined such gibberish as the sound of one-hand clapping anyway?

The sound of one hand clapping is a phrase from the lore of Zen Buddhism. It is a koan, as I understand it. According to the “trusty” Wikipedia: The purpose of kōans for a Zen practitioner is to become aware of the difference between themselves, their mind, and their beliefs, which influence how they see the world; and, ultimately, to help them realize their true nature. Once a Zen practitioner becomes aware of their mind as an independent form, the kōan makes sense and the teaching point is realized.

Well there you go boys and girls, all clear now, as my Canadian friends say, eh?

I was thinking about sharing the above with my neighbor, who struck up a conversation with me on my drive way yesterday. I left the bunker aka Black Swan international headquarters and highly sophisticated trading floor full of quants running rampant (most of that was embellishment; actually all of it was) to get my mail, the US Postal variety; my neighbor intercepted me to discuss the market (he knows I do something financial so why not).

My neighbor said he was perplexed by the fact stocks “soared” even though we learned that US poverty rates are soaring (I wanted to tell him that poverty thing was Obama’s little plan to get more people dependent on government so Democrats could increase their voting block; but my neighbor already suspects I’m nutty, so I didn’t share that thought). Anyway, I told him I didn’t think the stock market worked as he suspected.

I said sometimes prices can go up just because they are “too low” on a relative basis; this relative measure is called technical analysis. I said people watch that stuff, or let their computers watch it for them, and buy and sell when their technical indicators tell them it’s time. They, nor their computers, care about the US poverty rate, economic growth, the cost of croissants in Brussels, earnings reports, or the price of palm oil. I told him, that I (and my team of traders at Black Swan; another little embellishment) also use technical analysis, especially for our shorter time frame trades in spot forex and have been telling clients the last few days the euro was due for a technical bounce higher, despite the news.

This technical analysis stuff seemed new news to my neighbor. He asked me how an individual investor was able to compete with that. I told him he can’t compete, explaining what high frequency trading was, and the fact there are people like me staring at charts 12 hours a day, while he is laboring away at his real job.

But the reality is the small investor can compete. He just has to adjust his mindset and his time frames. Intraday trading against the high frequency and bank desks is truly a mug’s game. It’s why when I see these advertisements and promotions telling people how easy it is to scalp intraday pips from the forex market I wince, knowing another group of lambs will soon be led to slaughter at the altar of fx dealers far and wide.

By extending one’s time frame and listening to the market, instead of the news, was a way for my neighbor to compete with the so-called big boys.

It’s simple, but exceedingly difficult. That sentence isn’t incongruous. We simply need to do our best to jettison the continuous feedback loop running inside our brains that attempts to link cause and effect with everything we see or do. That’s all! 

“Most of us come to the market with the notion that if certain events happen, the market should react in this or that way. The market will go up or down because of this event. Let us call this Aristotelian logic, and let us promptly recognize that Aristotle belongs in universities and not in markets.”
                                    Edward Allen Toppel

I know what you are saying: So we all just become technical analysts and forget about thinking about fundamentals? No, I am not saying that. But I am saying if your decision to trade is based only on fundamentals, you better have an extended time frame to let your fundamentals play out, or you best keep your leverage very low and accept deep draw downs while Mr. Market convinces others your view is indeed correct.

I am saying it makes sense to fuse your fundamental global macro view with technicals. And if technicals are flashing a yellow caution signal, maybe you better listen and forget about your story for a while:

“There is only one side of the market and it is not the bull side or the bear side, but the right side.”
                                    Jesse Livermore

Has my “view” changed on the euro? No. I made my first major presentation on the euro back in July 2008, in the great city of Vancouver, B.C. The speech was titled, “The Euro Could Soon Be History.” Some in the audience laughed out loud when they saw the title, as most of the newsletter gurus were all predicting a guaranteed demise for the dollar. Needless to say a lot has transpired since July 2008. And even this year, attempting to trade the euro on fundamentals alone proved a huge loser for me. But, once I jettisoned my desire to “be right,” and focused on the market, it freed me to make money again in the euro.

I share this because I am sure others have faced the same frustrations. And I share this because it is a lesson we seem to learn over and over and over again: We must get our damn egos out of the game if we want to win it!

So, understand business conditions. In the end, they will rule. But there can be an awful lot in between before that happens. That is why we have rules (from Toppel’s “Zen in the Markets”):

  1. Never add to a loser.
  2. Add to a winner only.
  3. Let profits run.
  4. Cut losses fast.
  5. Don’t pick tops.
  6. Don’t pick bottoms.
  7. Let the market make the decisions, not your ego.

Easier said than done and why trading and investing is such an interesting game that in the end exposes more about you than it does about anything else.

The old pond
A frog jumps in
Plop.

Basho