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I question the statement: " NO trading system, how ever advanced,
could have anticipated this 'irrational' decision. "
When I first paid attention to the markets, I naively thought they were
moved by rational fundamental equations. Then from experience, I saw
all kinds of "irrational" market movements coinciding with fundamental
events/news.
>From what I have just said, you would then suppose that I agree with the
above statement. Not so. Then I delved into the murky waters of
Elliottwave, Fibonnaci, technical formations, overbought/oversold levels
and trend indicators.
Now I can apply any of these reasons for a fundamentally irrational
market move.
But sadly, that is still not enough to trade profitably with.
>
> ----------
> > From: Mubashir Nabi <nabi@xxxxxxxxxxxxxx>
> > To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
> > Subject: GEN: Fear Is The Key.
> > Date: Friday, April 03, 1998 3:57 PM
> >
> > Hello RT,
> >
> > Lately there have been a lot of mails about mechanical trading systems
> and
> > what types of indicators make a perfect system. I would like to share my
> > opinion on trading systems and markets they are trying to predict. Let me
> start
> > with a story which took place at the floor of the CBOT.
> >
> > "Soybeans were sharply higher. There was a drought in the Illinois
> Soybean
> > Belt, and unless it ended soon, there would be a severe shortage of
> beans....
> > Suddenly a few drops of water slid down a window. "Look," someone
> shouted,
> > "rain!". More than 500 pair of eyes shifted to the big windows... Then
> came a
> > steady trickle which turned into a steady downpour. It was raining in
> downtown
> > Chicago.
> > Sell. Buy. Buy. Sell. The shouts cascaded from the trader's lips with a
> roar
> > that matched the thunder outside. And the price of soybeans broke like
> some
> > tropic fever. It was pouring all right, but no one grows soybeans in
> Chicago. In
> > the heart of the soybean belt, some 300 miles south, the sky was blue,
> sunny
> > and very dry. But even if it wasn't raining in on the soybean fields, it
> was in
> > the heads of traders, and that, is all that counts."
> >
> > So what's the moral? Fear! The trader were afraid. Afraid that the rain
> might
> > turn the market against them and unconsciously contributed to this very
> fear.
> > NO trading system, how ever advanced, could have anticipated this
> 'irrational'
> > decision.
> >
> > Fear drives the market. Fear of not following the crowd; fear of being on
> > the wrong side of the market; fear of missing a trade; fear of being
> stopped;
> > fear of forces of nature ruining your perfect bet, fear of not getting
> you order
> > filled.... You must have heard the veteran traders saying that a trader
> should
> > be disciplined. In other words, he should be able to control his fear and
> act
> > rationally.
> >
> > But markets are people. Fear is an important part of human psychology.
> And
> > fear - does not compute very well. The vast number of mechanical trading
> > systems available today, try to anticipate almost all the possible
> aspects of
> > trading; but do they have a fear indicator which might alert the trader
> that this
> > time, market may not behave the way it 'should' as it 'did' last time
> when the
> > conditions were similar.
> >
> > If someone can come up with a mathematical model which represents the
> > market psychology, there will be no loosing trades at all. All those time
> when
> > your $3000 trading system said "BUY" and the market broke through your
> > stop like a mad bull, you can rest assure that it was due to something
> which
> > could not be incorporated in your system. Statistics and mathematics can
> > build a trading system, back testing the system can give it a touch of
> some
> > realism. But THAT is history with no emotions (fears) to challenge its
> signals.
> > In real life, market is NEVER obliged to follow its speculations.
> >
> > I am not against mechanical systems, but they should not be trusted
> blindly.
> > Like John Manyard Keynes said, "there is nothing so disastrous as a
> rational
> > investment policy in an irrational world."
> >
> > CONCLUSION:
> > a) You should not follow your system blindly, as it is not designed to
> cover the
> > "irrational" side of trading. You should use your discretion when you
> smell
> > that 'something' which your system is unable to compute.
> >
> > b) Fear is an important ingredient of the market. It should be understood
> in
> > order to understand the underlying markets.
> >
> > Regards,
> >
> > Mubashir Nabi.
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