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"If a man will begin with certainties, he shall end in doubts, but if he will be content to begin with doubts, he shall end in certainties.”

                               Francis Bacon

FX Trading – Foiled again? Rambling about trading inside the chop zone!
Ouch!  Another seeming dollar correction is off the rails so far this morning, as it is sharply higher against all comers (yen the exception).  Watching the dollar move sideways since November 21st is like watching an episode of the Twilight Zone–all kinds of game changing global macro events everyday and the world’s major currency just ranges.  Let’s call it the “chop zone,” because that is what it can do to one’s short-term trading account–chop it up into small little pieces:  

Could it be the continued dire economic news from Europe is starting to outweigh the nastiness flowing from the US?  Could it be concern that China may disappoint in a very big way to the downside?  Could it be growing confidence about President Elect Obama’s grasp of the economics?  It could be any, all, or none of those things.  That’s what is so difficult about this market of late.  As soon as you hang your hat on rationales to justify a daily move, it snaps back and whacks you in the face. 

“There are only two types of theories [according to Karl Popper]” taken from Nassim Taleb’s “Fooled by Randomness”:

  1. Theories that are known to be wrong, as they were tested and adequately rejected (he calls them falsified).
  2. Theories that have not yet been known to be wrong, not falsified yet, but are exposed to be proved wrong.”


Our long-term view, as you know, is predicated on a yes to all the loaded questions we asked above.  But the reality is maybe we are simply finding sweet sounding rationales to support the price trend–it is always a danger thinking one really knows. For just as Karl Popper concluded, it only takes one sample to invalidate a theory; it only takes one wrong rationale–driven by the ephemeral fundamentals–to obliterate a price trend. 

We’ve been receiving a fair amount of comments of late rejecting our dollar view.  These comments have rationales ranging across the board supporting their view and why ours IS wrong.  Feel free to write.  But let me explain something if you don’t already know as a CC reader:  


As we’ve been getting chopped out near-term, based on our “technical theories” that have been consistently falsified while lingering in the “chop zone,” we’ve been thinking about this process we call “trading.”  Our conclusion: It is ultimately all a nice little intellectual game that is consistently based on flawed rationales.  Where theory meets reality is our trading account. 

It is by nature a flawed process because we cannot predict and flawed because the part of the trading game that is supposed to provide some modicum of terra firma–fundamentals–changes so rapidly (which most are now recognizing in this cycle).  Thus, we have theory only at the core.  We have at times boiled it down to saying trading is simple guesswork is all!  And we stand by that. 

Now, you might be saying, what good are you if you admit it’s all guesswork?  Honestly, we don’t have a good answer to that question, but we’ll try. 

We’d like to say it comes back to performance and experience and blah…blah…blah…But as you know, a lot of players with good past performance and lots of grey hairs are being carried out in this market.  Game over!

So what does make a good trader (again even the term good is extremely subjective)?  We will go back to Popper for a good answer, thanks to Taleb’s “Fooled by Randomness”:

Taleb: “The reason I feel he [Popper] is important for us as traders is because to him the matter of knowledge and discovery is not so much in dealing with what we know, as in dealing with what we do not know. His famous quote:

“These are men with bold ideas, but highly critical of their own ideas; they try to find whether their ideas are right by trying to find whether they are not perhaps wrong.  They work with bold conjectures and severe attempts at refuting their own conjectures.”

Thus, all we can do: Examine our rationales both fundamental and technical.  Pull the trigger when confidence appears (something that looks at least 50.1% to 49.9%); define how much risk you will take, using a stop, before price action proves you wrong; and constantly and continuously question yourself: Where am I wrong on this trade?  That is a never-ending process of letting in negative information that may explode your rationales.  It’s a process of not falling in love with one’s story, but being the harshest critic of your own story. 

So, what makes reading Currency Currents worthwhile: It is worthwhile only if we ask questions and not pretend to give correct answers. 

And one of the questions we are fumbling with now is a biggie: 

Does it behoove the global economy–global healing and balancing–for the US to have an implicit AND explicit strong dollar policy? 

We have some reasons why we think that answer to that could be yes.  But let’s save that for another day; maybe another day when some trend clarity arises i.e. a move out of the “chop zone.”