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In college my favorite course was called Deviant Sociology. I found morbid fascination in the case studies of junkies, prostitutes, pimps, and the panoply of various sociopaths that demonstrated the extremes of human behavior. The irony is that I am about as average as you can get. I don’t smoke. I don’t drink. I don’t do drugs. I don’t ride motorbikes or drive fast cars. I live an utterly unremarkable, quasi-suburban life in the midst of New York city that contains all the glamor of a PTA meeting.
Extremes have always fascinated me as both a source of great creative accomplishment and horrific human destruction. But when its comes to the markets extremes are more than just an intellectual curiosity. In markets extremes matter but not necessarily in the way you think.
One of the greatest interviews in Jack Schwager’s Market Wizards series is with a gentleman named Larry Hite who has retired long ago but whose wisdom I rely on to this day. One of Larry’s great rules was to always buy the all time highs. Contrary to conventional wisdom Larry believed that all time highs were NOT a signal of excess but rather the start of a massive upmove. Irrespective of the fundamentals, Larry always trusted the record high breakout of an instrument because more often than not it signaled a critical change in market psychology and therefore further gains.
So yes extremes matter. Walk into any FX dealing room and you will see that Daily, Weekly, Monthly, Yearly highs and lows are always written down somewhere, always in full view of the traders. Extremes in price are perhaps some of the best signals we have, because they are the purest, most raw manifestation of what is happening in the market.
The temptation is always to fade extremes, but that is generally a sucker’s move. Trust the price flow. Trust what the market is telling you. As Larry Hite famously noted, “If you argue with the market, you will lose.”