People seem rattled right now, don’t they?
Wallets have been tight, and fears of a recession have run rampant.
Even though markets and the economy are not the same thing, many voters believe they are. Consequently, in an election year, I suspect the government will push every button and pull every lever to boost the market leading into November.
Speaking of the markets, they have been pretty volatile the last few weeks. They have posted some of their worst days since COVID-19 but some of the best, too.
We find ourselves in a particularly partisan election year, with lots of uncertainty about who is running, what they stand for, and whether they can make a difference – or even do the job.
The situation feels worse because scary geopolitical events (that threaten World War 3) punctuate seemingly endless negative news cycles.
Now, on to the real point ... those things don’t matter and shouldn’t steal your focus. Why? Because that’s the playing field we all have to navigate.
There will be winners and losers. The key distinction lies in whether you choose to focus on opportunities or risk.
So, I thought this would be an excellent time to revisit how to cope with losses and manage your anxieties in “scary times.”
The Anxiety Antidote
During scary times, many people suffer from “I should have ...”, or “if I would have ...”, or “if I could have ...” thoughts.
The problem is that thoughts like those create more stress and distraction.
I’m reminded of a quote.
"When the trough gets smaller ... the pigs get meaner." - Dan Sullivan
Negative focus highlights loss, difficulties, past events, missing things, and what you don’t want.
Think of them as an unhealthy reflex that wastes energy, confidence, and time.
All We Have To Fear Is Fear Itself
I often talk about market psychology and human nature. The reason is that markets reflect the collective fear and greed of their participants... people tend to get paralyzed during scary times like these.
But it’s not the economy that makes people feel paralyzed. People feel paralyzed because of their reactions and their beliefs about the economy. Your perception becomes your reality.
A little examination reveals that most fear is based on a “general” trigger rather than a “specific” trigger. In other words, people are afraid of all the things that could happen and are paralyzed by the sheer scope of possibilities. These things don’t even have to be probabilities to scare them.
You gain a competitive advantage as soon as you recognize that it’s not logical. Why? Because as soon as you distinguish that fear as not necessarily true, you can refocus your insights and energy on moving forward. You can act instead of react. You make better decisions when you come from a place of calm instead of fear... so create that calm.
Even a tough environment like this presents you with opportunities if you watch for them ... or even better ... if you create them.
The Scary Times Success Manual
The goal is to move forward and feel better.
Strategic Coach offers ten strategies for transforming negativity and unpredictability into opportunities for growth, progress, and achievement. They call it the “Scary Times Success Manual,” and what follows are some excerpts:
Forget about your difficulties, focus on your progress.
Because of some changes, things may not be as easy as they once were. New difficulties can either defeat you or reveal new strengths. Your body’s muscles always get stronger from working against resistance. The same is true for the “muscles” in your mind, spirit, and character. Treat this period of challenge as a time when you can make your greatest progress as a human being.
Forget about events, focus on your responses.
When things are going well, many people think they are in control of events. That’s why they feel so defeated and depressed when things turn bad. They think they’ve lost some fundamental ability. The most consistently successful people in the world know they can’t control events - but continually work toward greater control over their creative responses to events. Any period when things are uncertain is an excellent time to focus all of your attention and energy on being creatively responsive to all the unpredictable events that lie ahead.
Forget about what’s missing, focus on what’s available.
When things change for the worse, many desirable resources are inevitably missing - including information, knowledge, tools, systems, personnel, and capabilities. These deficiencies can paralyze many people, who believe they can’t make decisions and take action. A strategic response is to take advantage of every resource that is immediately available to achieve as many small results and make as much daily progress as possible. Work with every resource and opportunity, and your confidence will continually grow.
Forget about your complaints, focus on your gratitude.
When times get tough, everyone must make a fundamental decision: complain or be grateful. In an environment where negative sentiment is rampant, the consequences of this decision are much greater. Complaining only attracts negative thoughts and people. Gratitude, on the other hand, creates the opportunity for the best thinking, actions, and results to emerge. Focus on everything you are grateful for, communicate this, and open yourself to the best possible consequences.
Click here to download the full PDF version.
Final Thoughts
We can pontificate all day long on the short-term causes of the rises and falls of markets, but I don’t think it does much good. I let the algorithms worry about those. It’s the larger trends we have to be personally aware of.
I sound like a broken record, but volatility is the new normal.
- Markets exist to trade, and if there’s no “excitement” on either side, trades don’t happen.
- Trades are getting faster, which means more information has to confuse both the buyer and the seller.
- You’re no longer competing solely against companies and traders like you. It’s like the cantina from Star Wars; you’ve got a bunch of different creatures (and bots) interacting and fighting with each other, trying to figure out how to make their way through the universe.
Pair that with all the fear and uncertainty, and you’ve got a recipe for increased volatility and noise. That means that the dynamic range of a move will be wider and happen in a shorter period of time than ever before. You’ll hear me echo this thought over the next few years as the ranges continue to expand and compress. Cycles that used to play out over weeks now take days or hours. The game is still the same; it just takes a slightly different set of skills to recognize where the risks and opportunities are.
Today’s paradigm - both in life and trading - is about noise reduction. It’s about figuring out what moves the needle and focusing only on that.
The crucial distinction is between adding data and adding information. Adding more data does not equal adding more information. In fact, blindly adding data increases your chances of misinformation and spurious correlations.
My final comment is that there’s a difference between investing and trading, and while humans can invest, if you’re “personally” still trying to trade - you’re likely playing a losing game. If you don’t know what your edge is, you don’t have one.
If you’re investing, I’ll advise you to act like a robot. If you removed human fear and greed from your decision-making - what would you do?
Keep calm and carry on.
Pattern Recognition In Trading
The Market has been volatile recently, with unusually large gains and losses as we enter the homestretch of the election season. Even though many markets are still near their highs, I'm sensing an increase in anxiety and fear in many of my peers.
While some believe that markets are random, others make money using rule-based trading systems that rely on specific patterns to identify favorable trading conditions.
Traders, at every level, search for a tradable edge. Some find it in fundamental analysis, others in technical analysis or chart-based patterns, while still others rely on an algorithmic or execution-based edge.
So, is there some magic unifying equation that defines the Market? Personally, I doubt it. Even though nothing always works, "something" always works in the markets. The challenge is to identify what that is and to ignore the rest.
Though many patterns work, from time to time, when a particular pattern works may seem random, and here is why.
Understanding the Markets.
There is no such thing as a "Market" ... It is a collection of separate traders (each trading based on what they focus on, what they make it mean, and ultimately what they decide to do).
As a result, one of the reasons that markets experience volatility is that different groups buy or sell for different reasons at different times.
Consequently, even if one group trades using a consistent set of rules, a strategy that effectively combats it only works until that group stops trading those rules.
It works the other way too. If a large trader imposes their will, it changes the playing field for smaller traders.
Elephants Leave Tracks.
Smart traders follow the big money.
Large traders like governments, sovereign wealth funds, or mutual funds can affect markets while they buy or sell.
However, when they're done, some other group's strategy becomes the dominant force.
Experienced traders recognize that it is important to understand "who is in control" ... but not necessarily why they are trading.
That means you don't have to figure out every bit of information or rationale behind a strategy to make money. For example, suppose you were about to walk into a movie theater but were suddenly confronted with hundreds of people running in the other direction screaming. In that case, you don't have to understand precisely why it's happening to respond intelligently.
On a superficial level, that's the basis of trend following. It is also an example of pattern recognition.
Most hedge funds now use some form of pattern recognition in their trading systems.
Much of the analysis done to get a trading edge is simply a way to identify "who is in control" and what they are doing ... rather than why they are trading.
Here, we will examine why some traders rely on specific patterns to identify favorable trading conditions.
Some Patterns Are Logical.
Let's look at a common trading pattern called a "Triangle". You can think of the Triangle as a well-contested battle between the bulls and the bears. It is almost like an arm-wrestling match. Inside the pattern, neither side gives up much ground. However, when one side loses conviction, the market surges in the direction the winners push.
Here is a picture of a Triangle and the pattern's likely price projection.
Triangles are an example of a logical pattern. It is easy to see and easy to understand. In addition, it is easy for a trader to use a setup like this to define the likely risk and reward of a trade they are considering.
Why Do Patterns Form in Markets Repeatedly? The Answer is Human Nature.
Markets are not always logical. Some would argue that Markets are rarely logical. If they were, intelligent people would get rich by following their instincts ... but that isn't how it works.
On some level, markets represent their participants' collective thoughts and emotions. So, even though conditions change, the collective response to fear and greed remains reasonably similar.
As a result, many patterns show up in market price data.
In General, Here's What Is Happening.
A move up of a certain degree will be met with some people who fear the move won't go higher ... so they decide to sell. Meanwhile, others will believe the move will trigger a whole different group of people to recognize an opportunity ... so they decide to buy.
The same thing happens with a big move down. At first, it triggers fear and selling. But at some point, to a particular group of traders, the move down will look like a discounted buying opportunity.
At its core, price is the primary indicator of investors' willingness to buy or sell. Things like velocity or slope are secondary, and show the intensity of their motivation.
So, many of the patterns that you read in books or magazines (with names like "head and shoulders", or "cup and handle", or "double bottoms") are all just ways of explaining the natural response to certain conditions.
There is science involved in recognizing a specific pattern ... and art in selecting which pattern to rely on today.
But You Don't Have to Predict Anyone's Action - All It Takes Is An Intelligent Response.
It's the law of large numbers. An insurance company doesn't have to accurately predict when any individual will die; their actuaries have to figure out a reasonable estimate of how many people like that in their risk pool will die during the relevant period ... and price the coverage accordingly. Likewise, in the Market, patterns don't predict what an individual will do; they indicate what the majority will likely do.
So now that you understand patterns, the rest is easy ... right?
Of course, it's not as easy as it sounds because these patterns are being played out across every Market and happen in different time frames as well. That means some people respond to the Market using a much longer time horizon than others. A pattern for them may be noise at a different level of focus.
It may be comforting to see familiar patterns occur whether you're looking at a minute-by-minute chart of the S&P or a weekly chart of gold ... but comfort doesn't make you money. Instead, ask whether what you are looking at is a coincidence or causal. Said another way, does it simply explain what happened, or is it a valid prediction of what will happen?
Since many patterns are playing out across many markets at any given time, a human can't identify, validate, and trade all of them in real-time.
This is where computers and artificial intelligence truly shine. For example, we've developed a pattern mining technology that doesn't rely on traditional technical analysis patterns. Instead, it searches for patterns across various markets and time frames, uncovering edges that humans would never be able to detect on their own.
But even that simply adds more ways to win.
The only thing I can confidently predict is that volatility and noise will increase due to how markets work and the arms race for enhanced technical capabilities and information asymmetry. As volatility and noise continue to rise, what separates smart money from dumb money will likely be the ability to focus on what matters when it matters.
It is hard to do – and even harder to do consistently. But some things are inevitable. While technology may not immediately replace all human traders, it's becoming increasingly evident that those who leverage computers and advanced technology will outperform and eventually replace traders who rely solely on their human capabilities.
We live in interesting times.
Posted at 09:30 PM in Business, Current Affairs, Ideas, Market Commentary, Science, Trading, Trading Tools, Web/Tech | Permalink | Comments (0)
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