LIFE IS ABOUT BALANCE

We have quite often heard the phrase “The market can stay irrational longer than you can stay solvent” (John Maynard Keynes). One of the missions of this blog is to anticipate the market’s irrational behavior and identify and demonstrate quantitatively measurable ways to forecast inflection points way ahead in price and time. Well, what is the connection between our current reality and the abstract calculations on a chart, one may ask. The answer is harder to crystallize, then one might think and this has been a topic of constant thought and revision over the last years for myself. We all know that the market has a perverse way of doing exactly the opposite of what most people think it should do. And for the most case, 95% of the people lose when they engage in speculation that they do not understand (even though we all like to think we do). On the other hand, this also means that 5% of the people do take all the money and they must be doing something different. It seems to me that, for the most part, their knowledge, understanding and psychology has been kept hidden from the general public.

If we delve into Eastern Philosophies, we will learn that everything in life is about balance – the constant battle of good vs. bad, white vs. black, hot vs. cold, etc. Ying vs. Yang: Though we all have heard about it, rarely do spend a little time and give thought about its true meaning and applicability. Ying and Yang means that there can be no unity without separation; That there can be no good without evil (as you would have nothing to contrast it against). In the context of the markets, this means that they move from one extreme to the other, while just for an infinite small moment shooting by a plane of unity and balance. That is why markets are and always will be “irrational”, in the sense of our own understanding in the Western world.

If we wish to look at the true driving cause of the markets, then we can simply say that markets move because there is an imbalance of buyers vs. sellers. Unfortunately, quite often it can be impossible for us to understand why these imbalances exist. In a sense, they simply do and we have to let go of our constant wish for control and labeling. Some of these factors can in some cases be fundamental, i.e. a huge prospect is seen in a given company and people are buying its shares. However, as the process continues various other factors can play a hugely more important role in the determination of prices. During this day and age, it immediately comes to mind that the macroeconomic reality can force people to be sellers in a market, as in the case of a margin call. Additionally, such factors influence others, so that declines lead to other declines, orders get taken out and market cascades happen on all time frames and scales – from one-minute to monthly charts. This has been termed by Benoit Mandelbrot “Fractals” or “Scale invariance”, though the concept itself is as old as the world itself: “As above, so below”, or the “Microcosm within the macrocosm”. All growth processes in nature are in effect logarithmic and form spirals. That is why a speculative bubble usually ends in a blow-off top with people simply outbidding other people, disconnecting the bidding process from the underlying value of the instrument. In this sense markets are an unique laboratory where all human emotions, hopes and fears are and have been recorded on two-dimensional price-time charts for centuries. Fortunes are made and fortunes are lost, lives shattered and lives improved – it is all there, somewhere, in the price action.

This fascinating interplay between all of these factors is probably impossible to predict in detail and therefore monitoring risks requires one’s fulltime attention and awareness. However, while going over thousands of different charts myself, I have found various patterns and behaviours to be rather identifiable and classifiable. Interestingly, with my methods I have noticed time to be the most important and predictable element in market analysis. This of course leads us to a chicken-and-the-egg problem, which raises cosmological questions about the true reality of our world. Are turning points fixed in time and how much freedom does our human consciousness have to navigate in a somehow predetermined outside world? More importantly, what kind of implications does this view of the world have on our current social structure and conscious intervention, such as politics? Or maybe turning points are simply determinable, because the sum of the effects of cyclic influences are also determinable?

Ultimately, all market analysis boils down to one procedure: Finding a correlation between a given factor and forecasting it into the future, hoping that it will produce the desired effects on price itself. Whether this means analysing and forecasting balance sheets, macroeconomies, price cascades or astrological factors is irrelevant. But since so far very few people seem to have been able to forecast prices consistently and precisely in advance, we have to assume that we are operating in an environment of not fully understandable risk and protect ourselves with probabilistic methods and risk management. Though we, as humans, are typically arrogant and conflicted, at least we sometimes acknowledge that we cannot know everything.