Forex Trading Tips: The Red Light Problem

The Red Light Problem

Imagine that you have to cross a very busy intersection against a red light. (ignore for the moment the fact that I live in New York city where even 95 year old grandmothers can adroitly jaywalk in front of oncoming twelve wheelers with perfect precision). The traffic at this particular intersection flies by at 50 miles per hour, and because it is comes around a curve the drivers have very little time to react to any pedestrians caught in the crosswalk.

Under those conditions -- when would be the best time to cross the street? Clearly as a pedestrian you would want to choose the moment when traffic is at its lightest. Therefore you would want to avoid crossing against a red light during the rush hour or during the busy daytime flow. However, if chose to cross the road at night when traffic is sparse, you still risk a strong chance of being hit by a car since the driver coming around the curve will have no visibility in the pitch black conditions at that time. The answer therefore is dawn. The first break of sunlight is the optimal time to cross against a red light because the road will have minimal traffic but excellent visibility giving both the driver and the pedestrian a fighting chance of avoiding an accident in the unfortunate case that you mistimed your crossing.

Granted this is an idiotic example that is full of artifice. For starters any rational person may ask – why not just wait for the light to turn green and then walk in safety to the other side? When you are crossing roads that is the certainly wisest course of action to follow. However, when you are trading markets you don’t have luxury of such a choice. Capital markets never provide you with an unambiguous green light signal. Trading always connotes risk and the possibility of ruin. In fact if you want to succeed in trading, i.e. if you want to reach the riches on the other side of the road you have no choice but cross against the red light to accomplish that task.

That why the key question in trading is not one of how but of when. Risk is a given and you will never obtain your reward if you sit by the side of the road waiting for the light to change in your favor. All you can do is minimize the possibility of disaster. As speculators we have only one advantage on our side – the power to stay away from the markets when conditions do not favor you.

This week K and I were faced with problem of trading during a holiday thinned session, just as the Dubai World story was breaking across Bloomberg terminals everywhere. Since this was not a standard macroeconomic event, but rather an exogenous shock to the system we had no clue as to its impact on the market (a short term blip, as Adu Dhabi come to the rescue or the canary in coal mine for the second credit crunch leading to a double dip recession across the globe?). So we decided to stand down. In short we were smart enough to know that we were too dumb to make a decision on this one. Sometimes in trading that’s the best you can do as you try to avoid the danger of the oncoming traffic.