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Thursday June 16, 2005 - 11:26:30 GMT
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Currency trend-following crowd...


“In the market, yesterday is a memory and tomorrow is a vision. And looking back is a lot easier than looking ahead.”

Frankie Joe

FX Trading

We are seeing a whole bunch of volatility in the euro over the past few sessions. With reports still ripe suggesting potential European Union crisis and rumors that Warren Buffet may quietly be capitulating and selling euro, it would be a good time for the euro to surge higher.

“When a long-term trend loses momentum, short-term volatility tends to rise,” according to George Soros. “It is easy to see why that should be so: the trend-following crowd is disoriented.”

Why the disorientation? Because trend-following becomes self-reinforcing for traders that seem to be throwing an increasing amount of money at this market. Back to Mr. Soros: “It is the growth in speculative capital flows moving in a trend-following fashion that makes the trend so persistent; it is the persistence of the trend that makes trend-following so rewarding; and it is the rewards reaped by speculation that attract increasing amounts of capital.”

This, I think, is an excellent explanation of currency market activity. It is logic that can be applied to almost any time frame. We are conditioned, for very good reasons, to believe the trend is our friend. We often assign various reasons for the trend. And when the trend continues, we feel very good that we were able to “predict” why this or that happened. And yes, sometimes we may be right for the right reasons. But, most of the time, if we get it right, we are right for the wrong reasons, I think.

It would save a lot of paper and analysis if were to chalk up any market moves to the “logic of the trend” and the “disorientation of the trend-following crowd.” However, that would be difficult, as our Aristotelian logic drives us to assign cause and effect. Imagine reading in The Wall Street Journal: “The market continued higher on trend-following.” End of story.

I think this helps explain why great traders are great—they accept without hesitation what the market tells them—no ego, no challenge—as they know the market is the Master.

“It is always right and never lies; tells you what to do, when to do it, when it changes its mind; and speaks lucidly in a language you can quickly understand. Listen to the master, and you will never be sorry. You will be rewarded greatly. You have to pay a price however.

“The perfect master is the market itself. The market speaks to us in one language—price. Numbers, if you will. Numbers that you can recognize and differentiate…The noise is your ego’s voice. Stop listening and turn to the only expert worth following—the market,” writes Edward Toppel, in his book, Zen in the Markets.

This view is easy to intellectualize and deep down we know it’s true. Yet it’s immensely difficult to apply. After a couple of decades watching and trading in financial markets you begin to understand the wisdom of in Mr. Toppel’s simple axiom of the Master—but even then you are left with such things as: should I take out some insurance just in case I am misinterpreting the Master? And where should I place that insurance, in the form of a stop-loss?

For now, it seems the Master is telling us the euro is turning higher. We could list a host of reasons why—some would be plausible, others not. But it’s no matter the reason if we get it right.

After all, some one who was a master at listening to the Master, Jesse Livermore, coined the phrase, “Trading is about doing right, not being right.”

We think the volatility is the Master’s way of telling us the “trend following crowd” is becoming disoriented—time to start looking for euro buying opportunities.

Jack Crooks
Black Swan Capital


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