In the old movie Duck Soup, Groucho Marx pleads his innocence to his wealthy fiancé, who catches him smooching with a show girl: “Who are you gonna believe, me or your own eyes?”
It’s a phrase I can imagine market pundits repeating regularly, as markets again and again show a blind disregard for the facts.
Take yesterday – a crucial battlefield in the currency wars.
Pundits were predicting what the Bank of Japan would do… and the effect that would have on currencies; what the ECB would do… and the effect that would have on currencies; what the Bank of England would do; and today, a lot of people are talking about potential disappointing news on non-farm payrolls, and what that’ll mean…
When you start looking at the news, it’s hard not to get carried away with facts and theories. That’s great if you want to write a dissertation on global economics. But if you’re trading, the facts don’t matter.
Yes, you read that right: I said that the facts don’t matter.
(Just please don’t tell my kids, who I’ve been trying to persuade to open a school book over half term!)
Traders may talk up the facts – but trades are placed on something far cruder: feelings.
When we look at a price chart, there are a huge number of complex scenarios already built into any price.
In the case of the Japanese yen yesterday, there was a clear belief that QE was coming, but mixed views on how aggressive it would be. Predictions, hopes, expectations, fears – all these emotions were built into the price of the yen.
The actual ‘facts’ when they come out, are just part of that equation.
In trading, nobody cares if you called the BoJ statement spot-on. No one cares if you were right about the non-farm payrolls.
All that matters is whether or not your trade was profitable.
And in the markets, it’s sentiment – not facts – that rule. The successful trader has got market sentiment right, not market facts.
It can be a difficult shift to make – in most areas of life, we’re told again and again that facts rule. It’s what I tell my kids, it’s what Professor Brian Cox preaches at me from the telly, and it’s what commentators bang on about in the press.
In life, we’re generally taught to hold on to the facts, to stand by our convictions and to be loyal to what we believe.
Well, in trading, you can forget all that!
If all the ‘facts’ tell us that the price should be heading down, but it’s heading up, ignore the facts.
The best traders simply follow what’s working. And if what was working last year isn’t working any more, we simply switch our allegiances.
Successful traders are wildly promiscuous.
I’m aware that what I’ve written here is littered with inconsistencies. That’s rather the point.
Just a few weeks back, I was saying that fundamental analysis is back…
Now, I’m not telling you to ignore the fundamentals completely, but please don’t try to predict market direction based on them.
When my son walks to school, I insist that he walks with a friend, but when they cross the road, I tell him that he should never trust that friend’s judgment on when it’s safe – instead make his own decision before he steps into the road. Look at the fundamentals as your walking buddy – but don’t trust it to tell you when to step into the traffic.
Likewise, I’m not suggesting that you chop and change your trading rules on a daily basis, just because ‘x’ rules didn’t work yesterday. But it is essential as a trader to be aware of something I wrote about in Maven last year: the ever-changing cycles of the market.
As patterns of behaviour in the market emerge, market behaviour changes, and new patterns emerge.
So, while we shouldn’t chop and change at random, we should always be ready to adapt to the markets, and not be wedded to one theory or idea that the market has outgrown.