Wednesday June 22, 2005 - 11:39:45 GMT
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Black Swan Capital - www.blackswantrading.com
Currency volatility and Douglas-isms
“Instead of fundamentals determining the exchange rates, exchange rates have found a way of influencing the fundamentals.”
Correction or churning or head fake or bull-trap or bear-trap—it is all a bit excruciating at times, but maybe some Douglas-isms can help!
We know rising volatility is often associated with a change in trend—and it has risen sharply over the past month (see blue line in the chart below). So, we expect this to validate our view that the trend is changing and we are in the midst of a corrective rally in the euro against the dollar.
Those, including us, that rode this “correction or churning” higher yesterday, watched it all disappear today. Our reasons were so right—we thought. But volatility bites us again. But volatility doesn’t really capture what is going on.
We need to view this simply as the battle being waged between the bulls and bears. It plays out for all to witness in each individual price bar or candle—in whichever time frame we choose to see it. This battle is either won or lost, then the next bar or candle begins and the battle resumes. It is the essence of market price action. Seeing this way, I think, can help us better internalize why “each moment in the market is unique”, as Trading in the Zone, Mark Douglas writes.
On the one hand we accept this uniqueness. But, on the other hand we must take a position based on our edge in trading—our view of what will happen next, in order to make money—“You gotta be in to win.” It is quite a paradox!
Our edge is simply our individual kit of tools by which we measure whether the individual upticks and downticks meet our criteria for a trade—while remaining open that we can always be completely wrong—thus the need for stop-loss orders. Our goal is to develop and consistently apply our edge—one that allows us to either trade with a slightly higher than 50-50 win/loss ratio, whereby profits per trade exceed loses per trade. Or, if we lose more than 50% of the time, be sure that our edge produces profits per trade that exceed losses per trade such that we still make profit over time.
We work hard to develop our views—we want validation. But the market isn’t there to validate. As Douglas says, “The consistency you seek is in your mind, not in the market.”
You begin to realize that after a while this game becomes more mental. You live each day with these excruciating paradoxes. Few other professions require such mental gymnastics.
OK…to the Douglas-isms, from Trading in the Zone:
1. Anything can happen.
2. You don’t need to know what is going to happen next in order to make money.
3. There is a random distribution between wins and losses for any given set of variables that define an edge.
4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
5. Every moment in the market is unique.
Bottom line: There is no Holy Grail, no matter what some associated with this industry suggests or promise. It’s a game of seeking out the highest probability trades and being disciplined to exit when you are wrong.
Yesterday, buying euro looked like a high probability trade. All the reasons seemed in place. But as we see today, our reasons and market uniqueness are two different animals.
Black Swan Capital
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