Morons to the Right of Me, Morons to the Left
Anyone who still claims that markets are efficient must really not have traded FX this week. The seesaw circus that saw both longs and shorts get decimated as prices lurched back and forth like a drunken sailor made me think of the great William Goldman. Mr. Goldman, the award winning screenwriter of Marathon Man, Butch Cassidy and the Sundance Kid and All the President’s Men is famous for saying that in Hollywood , “Nobody knows anything.”
Certainly it felt like no one knew anything in the capital markets this week which resembled nothing more than a sea of ignorance surrounded by an ocean of uncertainty. We tend to idolize the markets (the tape is always right!) but instead of wisdom of the crowds the market often represents the sum of the stupidity of all of its participants. The price action this week was actually the natural result of politicians trying to do their best with the limited information while investors attempted to assess the risks with even less visibility than the pols.
The “stumbling around in the dark” aspect of the market can very frustrating to new traders who are often caught in the whiplash as they get stopped out on both their longs and their shorts. Novices tend to quit in despair as neither fundamentals nor technicals work and markets appear to be nothing more than a giant roulette table.
However, once you realize that the market is nothing more than a massive sentiment wave, analysis becomes remarkably clear. Over the short run, price action is dictated by feeling not fact. Successful trading therefore presents a massive irony. It requires you to be highly in tune with the feelings of others while at the same time keeping your own emotions in check. You must therefore be very sensitive and dispassionate at once.
That’s much easier said than done and almost all of us succumb to the emotions of the moment picking a fight with the market that often ends in pain and serious loss. It helps greatly to have a plan ahead of time, to prepare yourself in case your analysis is incorrect. But a plan is no panacea. Almost all of us violate it, the same way all of us abandon our diets. Human beings are not robots and the best we can hope for is that our binges are few and far between.
One thing that helps is to have a small account on the side where you can trade freely and make lots of mistakes. Just like a jaunt to Vegas or an occasional glutenous meal, you can blow off steam but limit any long term damage. Think of it as a small sacrifice to the trading gods. And next time you feel frustrated remember that on Wall Street just as in Hollywood nobody really know anything.