TRADER

“Opinions are like assholes – everybody has one.”

Clint Eastwood as Harry Callahan in The Dead Pool (1988)

Quite often I am surprised by the mainstream opinion of the how and why markets move. Without ever having spent any time on price movements (or a historic chart for that matter) it holds true that every person believes that he has an idea of where price is heading. This is most accurate when it comes to such “mainstream” markets such as gold or equity indices and less so, when it comes to wheat, oil, eggs etc. Where exactly this arrogance comes from, is still a mystery to me – it might have something to do with education. For instance, modern economic theory uses most of physics’ mathematical framework (thanks to Léon Walras), which uses direct relationships between causes and effects. Unfortunately, when it comes to the behaviour of humans and their underlying causes, not only is the relationship not direct, but non-linear and dynamic. After all, human behaviour resembles an organic process and has little to do with the reality of vector physics (at least in the sense of causal relationships).  Nevertheless, there is something in our mind which tells us that we have a very clear understanding of something we have never had experience with. And if our empirical data does not match our perception, thanks to our cognitive dissonance we will make it fit.

There are of course individuals who have looked through the economic fallacy and found ways to apply them into their own mental frameworks. One such person is George Soros and his Theory of Reflexivity, about which he writes in length in his books. In short, he states that through the very act of participating in a market, the players change its outlook and bias, in effect altering the fundamentals.  He also separates market conditions into “near-equilibrium” and “far-from-equilibrium” states, arguing that in the former economic theory works well; in the latter, however, a self-reinforcing process begins, which ends in a speculative boom and a detachment from fundamental values. In my mind, it is exactly this separation of the psychological reality of the markets, that has lead George Soros to his success.

And it is the psychology of the markets, indeed, which must be understood first, before any bold claims can be made and linked to quantitative measures and predictions. However, such a task requires hard work, consistency, objectivity and a good amount of abstract thinking, which is a rare quality for a fallible human being. Unfortunately, most people are inherently lazy, comfortable and conflicted, due to the reason that they have not found their true purpose or passion in life. While, quite often, people who are financially free, work even harder, because they have indeed found their purpose in life.

Strangely, whoever firsts starts out in the markets, often begins under the presumption that he has a very clear understanding of what are the true causes of market activity (like some abstract fundamental value). After all, we all like to believe that we are above-average intelligent and the task at hand requires intelligence. If we suddenly find price activity that does not fit our framework, than it is simply, because we have missed some obvious element; and if we dedicate ourselves to watching more CNBC and staying in touch with the newsflow in the future, we will not miss it next time. It is never our framework which is wrong, because it hurts to admit that we do not know anything.

How does this statement suddenly fit into all the charts and bold claims on this blog, you may ask? Well, despite having spent thousands of hours trying to connect the dots and having found (in my mind) remarkable relationships in the markets, which allow me, in some cases, under a limited set of circumstances, to say precisely how a market will react in the near future, I am still the first one to admit that I do not know anything. But this, by itself, sets me apart from the crowd and is a very promising foundation for further objective research. In fact, it is a very liberating experience to admit to yourself and your ego that the value of your knowledge and experience is limited, because it allows you to view the market under a very different light. It allows you to see the world in a non-conflicted way, as if you are a spectator which has nothing to prove in this world.  And as long as you do not manage to tell precisely and accurately, to the detail, how and when the price values of a market will move at least one year into the future, then you have to acknowledge that you are operating in an environment of risk, which you have to monitor and manage. That is why it is crucial to have a money-management system, which is mathematical and independent from your personal opinion, emotions and outlook. And that is, what sets a great trader apart from the casual observer of the markets.