Market Manifesto

We speak here of how the crowd seeks direc­tion.
And we speak of seek­ing direc­tion when direc­tion is not appar­ent.

When the mar­ket is in con­ges­tion, we know that direc­tion is uncer­tain. That is what con­ges­tion is, a weav­ing back and forth between upper and low­er lim­its, with the ulti­mate exit direc­tion from those lim­its unknown. Much of our trad­ing method­ol­o­gy involves look­ing at mar­ket struc­ture and sig­nals on var­i­ous time­frames so that we can deter­mine which con­fines of con­ges­tion will be strong, and which will be weak, thus giv­ing us ear­ly indi­ca­tion of exit direc­tion.

We know also that this seem­ing lack of direc­tion itself con­tains oppor­tu­ni­ty. If we can define the con­fines of con­ges­tion, we under­stand the lim­its under which the mar­ket will oper­ate, at least for a time. When we under­stand the lim­its, we can trade against them.

So if the crowd has a sense of pur­pose, a goal, a tar­get, a direc­tion, then we can trade that direc­tion. And if the crowd has no pur­pose, no goal, no tar­get, no direc­tion, then we can trade that inde­ci­sion. In the one case we trade in the direc­tion of the trend, in the oth­er case we trade the con­fines of con­ges­tion.

But what is hap­pen­ing in the under­ly­ing dynam­ics of the crowd as it goes through this process of seek­ing direc­tion, and then los­ing direc­tion, and then find­ing it once more, over and over again?

Crowds can be best under­stood if we look to the fun­da­men­tal dif­fer­ence between a crowd and the indi­vid­ual.

At first glance a crowd seems to be the face­less expres­sion of mob ener­gy with­out thought, mind, or lead­er­ship. But that is not quite right. It is not exact­ly face­less since it con­tains many faces, each feed­ing the oth­er and rein­forc­ing emo­tions and thoughts through visu­al or oth­er com­mu­ni­ca­tion. And it is not exact­ly thought­less since the mob can express many thoughts and may in fact make man­i­fest the unspo­ken thoughts of all. And it is not with­out lead­er­ship since some indi­vid­ual usu­al­ly gives voice to the crowd and starts the chants and cries and move­ment. Fur­ther­more a skilled leader either inside or out­side the mob can plant sug­ges­tions and moti­vate a crowd with pow­er­ful results. So a crowd can have thoughts, opin­ions, lead­er­ship, goals, and direc­tion.

What a crowd does not have is respon­si­bil­i­ty. Mem­ber­ship in the crowd frees the indi­vid­ual from the con­straints of per­son­al respon­si­bil­i­ty for his or her actions. This free­dom per­mits extra­or­di­nary ener­gy out­flow, seem­ing­ly super­hu­man per­son­al and col­lec­tive efforts, and extreme ded­i­ca­tion in pur­suit of a com­mon goal. It also accounts for some of the evil out­comes that may stem from mob action. Stripped of per­son­al respon­si­bil­i­ty mankind may rise to great heights but can also descend into worlds of unspeak­able hor­ror. Human his­to­ry pro­vides us with all too many exam­ples of despi­ca­ble mob action, from the ear­li­est of record­ed his­to­ry to the present. And there is no evi­dence that the future will be dif­fer­ent. Mankind oper­at­ing in crowds is by no means a pret­ty sight.

A crowd with­out direc­tion is not a hap­py group; it seeks direc­tion and pur­pose. A crowd may be unde­cid­ed, but if so it will try to devel­op a pur­pose as soon as it can. A crowd strives towards uni­ty, and prefers to express itself in a sin­gle voice, but can­not do so until all relin­quish dif­fer­ing opin­ions and join unan­i­mous­ly, drop­ping per­son­al iden­ti­ties and assum­ing full mem­ber­ship in the mob.

A crowd with­out a uni­fied goal will divide into fac­tions as ideas devel­op, and these fac­tions vie for dom­i­nance. Fac­tions may or may not invest lead­er­ship in one or more indi­vid­u­als, but as they gain tem­po­rary sway over the loy­al­ties of larg­er and larg­er sub­groups with­in the mob, the crowd will embrace one goal and then anoth­er as it works col­lec­tive­ly to make up its mind. In pol­i­tics we see this as a milling con­ven­tion filled with rumors, chants, speech­es, ral­lies, and tri­al votes as the crowd attempts to come unto sin­gle voice. In the mar­ket we see this as con­ges­tion action.

It is like watch­ing a rug­by scrum as the two teams surge this way and that, striv­ing to move the ball to one end of the field or the oth­er. When you watch from the stands you can see what it is like to be watch­ing as a mem­ber of a crowd but with­out per­son­al­ly being involved in the com­bat, with­out the pas­sions of being on the field. You get one view when you are on the field play­ing. You get anoth­er view when you are in the crowd in the stands watch­ing. And you get still anoth­er view if you are high above the field in one of the blimps, watch­ing down on the field in a god-like man­ner.

Dif­fer­ent kinds of traders par­tic­i­pate in the game from all three types of per­spec­tive – on the field, in the stands, or far removed from the mar­ket with a view made objec­tive through dis­tance.

We advo­cate the third posi­tion, hold­ing one­self dis­tant from the fray and watch­ing the action with as much objec­tiv­i­ty as one can muster. The anal­o­gy of watch­ing a game as though from an aer­i­al cam­era can only car­ry us so far, in that we also watch the action close­ly, exam­in­ing those low­er and clos­er time-frames as our trad­ing style man­dates. But you get the idea.

What does the crowd focus upon? Crowds focus on that which they need or want the most at any giv­en moment. In mar­ket terms this will be either the need to deter­mine direc­tion, or the bar­ri­er to direc­tion cho­sen, or the need to reas­sure itself that the direc­tion it has cho­sen is cor­rect. Thus the crowd seeks direc­tion, or tests the con­fines, or “refreshes” itself by touch­ing base with the most com­mon denom­i­na­tor of ideas, emo­tions, or opin­ions.

A crowd is not patient, but moves to action imme­di­ate­ly. If a crowd is small, and weak, these actions may be incon­clu­sive. If the crowd is large and pow­er­ful, its actions may be sud­den and deci­sive. Just as the strongest fences are no match for the focused ener­gy of huge crowds (remem­ber the mobs attack­ing the Berlin Wall, or the mobs of riot­ers in any of the big polit­i­cal move­ments of recent years), mar­ket forces can break any con­ges­tion. If there is a fence, it will break. If there is a wall, it will be torn down. Soon­er or lat­er one side of the con­ges­tion will give way.

The mar­ket acts much like crowd does when the crowd is assess­ing which direc­tion it will run to next. Some­times it tests exist­ing lim­its to see how strong they are. Oth­er times it with­draws unto itself and sees if its crowd lead­er­ship is intact, and to assess the ener­gy and emo­tion­al pow­er of this mass of peo­ple, and to see if this ener­gy can be mobi­lized into strong, focused con­cert­ed action.

Peo­ple in crowds often seem to be con­nect­ed with an invis­i­ble elec­tric cur­rent that per­mits instant com­mu­ni­ca­tions so the entire group can shift on a dime. Like a flock of swifts or swal­lows or seag­ulls in fight, a crowd can wheel and turn with amaz­ing speed. How does that occur? Where does the lead­er­ship come from? How are the deci­sions made?

It is not cer­tain that we know how crowds decide. There is much spec­u­la­tion about the “mass unconscious” and such hypo­thet­i­cal con­structs, but hard fact is hard to find. We can point out that for an indi­vid­ual the process of mak­ing a deci­sion means assess­ing the plus­es and minus­es of a giv­en move, and weigh­ing the con­se­quences of action. A crowd does not do this. The indi­vid­ual com­po­nents of a crowd have giv­en up their indi­vid­ual abil­i­ty to weigh and con­sid­er. They abne­gate that respon­si­bil­i­ty as part of the price of their mem­ber­ship in the crowd. Thus we have many indi­vid­u­als who can con­tribute their full pow­er to the col­lec­tive ener­gy of the crowd, but who have no per­son­al respon­si­bil­i­ty for that action. This loss of indi­vid­ual respon­si­bil­i­ty also entails a loss of the delay that comes with con­sid­er­a­tion, think­ing through, and eval­u­at­ing. Thus some­times we see lit­tle or no delay between a thought and an action, once a crowd’s move is under­way.

A crowd that is search­ing for lead­er­ship may lurch one way and then the oth­er as it tests each pos­si­bil­i­ty, each propo­si­tion. But ideas or con­tem­plat­ed actions are not test­ed in the way that we might test them as indi­vid­u­als. With­in the crowd a new idea can be adopt­ed with­out eval­u­a­tion and the strength of that propo­si­tion then quick­ly test­ed, full bore, against the bound­aries which are present.

What is a crowd respon­si­ble for? The crowd is not respon­si­ble for any­thing. (Many through­out his­to­ry have learned this to their dis­may.) Indeed the essen­tial char­ac­ter­is­tics of the mob come from its lack of respon­si­bil­i­ty and that is what makes crowd action dif­fer­ence from indi­vid­ual action.

What are indi­vid­u­als respon­si­ble for? That’s a cen­tral ques­tion of west­ern phi­los­o­phy and so we won’t attempt a full answer here. But sure­ly we can set down a few ideas cen­tral to the way that we as traders look at things.

We are respon­si­ble for our thoughts and for our per­son­al actions, those things that we have con­trol over. We are not respon­si­ble for the things that oth­ers think, or for the actions of the crowd.

We are not respon­si­ble for the actions of the crowd, but as traders we wish to under­stand exact­ly what is hap­pen­ing so that we can ben­e­fit from this move­ment. How­ev­er if we become one with the crowd, we can­not do that because as mem­bers of the crowd we give up our abil­i­ty to act as indi­vid­u­als.

We wish to take advan­tage of the pow­er of the crowd as it moves hith­er and yon, test­ing first this lim­it and then that lim­it. Just as the crowd wants to break through the lim­it that we know or believe will hold, we trade against the crowd. When it final­ly breaks though these lim­its and takes off in a new trend, we hop aboard and go along for the ride. But we are fel­low trav­el­ers and not crowd mem­bers. We do not relin­quish our indi­vid­ual respon­si­bil­i­ty and join the crowd for real. We are always ready to jump off the train at the first sign of con­ges­tion entrance.

We know that most peo­ple are not com­fort­able in a state of inde­ci­sion, uncer­tain­ty, or con­fu­sion. There is a strong dri­ve towards res­o­lu­tion, any res­o­lu­tion, which will relieve our uncer­tain­ty. In a crowd, this ten­den­cy dom­i­nates. But as indi­vid­u­als stand­ing apart from the crowd, our abil­i­ty to resist mak­ing a deci­sion on emo­tion­al grounds is our dis­tin­guish­ing char­ac­ter­is­tic. In a most fun­da­men­tal way this accounts for our suc­cess as traders.

It is our abil­i­ty to hold our fire, to make deci­sions based on rea­son as opposed to emo­tion, to func­tion with­out the sup­port of oth­ers in a crowd, that make us able to trade suc­cess­ful­ly. It is the ulti­mate form of inde­pen­dence.