Wednesday July 20, 2005 - 11:29:27 GMT
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Black Swan Capital - www.blackswantrading.com
The way it is...
“In actual practice a man has to guard against many things, and most of all against himself—that is, against human nature.”
Larry Livingston, Reminiscences of a Stock Operator
The euro rallied sharply from its low yesterday early in the US session because the German economy is recovering—we read on the wires this morning. Said recovery came in the form of a rise in a much watched confidence index—ZEW; it rose sharply in July. So there we have it—see effect then assign cause. Nice work if you can get it.
Unfortunately, or maybe fortunately, we can’t live our trading life in reverse. We must pull the trigger first, examine the effect second—then decide if we even care to assign cause third. In the end, it matters not whether our reasons were right, only that we were right—to paraphrase Jesse Livermore.
Yesterday, about this time, based on price alone, it appeared the euro was headed for a major washout. It could have been the start of what we call “euro-revulsion.” The short definition is that long-term players finally throw in the towel and capitulate to the trend, leading to a self-feeding decline that takes on a momentum all its own. You know how this works. You’ve witnessed it as the dollar was plummeting against the euro last year. It is a process where experts everywhere turn to their trusty negative adjective punditry guide and jump on the bandwagon of doom and assign all types of causes after the fact.
We can lament about this process. But, this is the way it is and the way it has to be. It’s human nature. It is the Tao of markets and a process that operates in each and every time frame—it’s fractal. And from a trader’s perspective—thank goodness it does happen or we would have to get real jobs.
“The excruciating paradox of financial markets, that sentiment is most bullish at the peaks when prices have only one way to go which is down; and most bearish at troughs vice versa: at the top there’s no one left to buy, and at the bottom no-one left to sell. This paradox is absolutely central to the working of all financial markets and we need all the help we can to understand it so thoroughly that it becomes par of our nature. The more bullish things are, the more bearish things are,” writes John Percival, editor of the Currency Bulletin and true Master of the market.
So the next time you read why the euro rallied or fell, and people like me try to assign cause and effect, keep in mind it may be as excruciatingly simple as the Tao of markets.
Black Swan Capital
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