Market Manifesto

We speak here of the psy­chol­o­gy of con­ges­tions, and espe­cial­ly of con­ges­tion entrance.

A con­ges­tion is a known area. It is known because we stop at the edge and dou­ble back onto areas where we have already trav­eled – areas where we are psy­cho­log­i­cal­ly com­fort­able.

We under­stand the lim­its of con­ges­tion, and it is as if we are liv­ing in the known uni­verse. We under­stand where we are. We live between bor­ders. While we know that even­tu­al­ly we must tread beyond these bound­aries and ven­ture into the new, at the moment we walk on famil­iar ground, and accept these lim­its with grace.

In a con­ges­tion the big ques­tion is: “Is this all ?” In oth­er words, can we rely on the con­fines of con­ges­tion as we under­stand them at this moment? If so, then we can relax and explore these lim­its with con­fi­dence, try­ing to place our trades as close to the lim­its as we can, and reap­ing the har­vest that has grown in these cul­ti­vat­ed fields.

The “known uni­verse”. If we can draw a line around what is known, so that we under­stand the lim­its of the areas that we call con­ges­tions, then what a won­der­ful under­stand­ing we have achieved. To know where the edges of the con­fines of con­ges­tion lie – well, that is tru­ly a gift, akin to being giv­en per­mis­sion to make mon­ey with con­fi­dence and free­dom. If we know the bound­ries, then we can approach the mar­ket like a field to be har­vest­ed, a known oil reserve to be tapped, a gold deposit to be mined. This is not explo­ration, but exploita­tion. We are not search­ing for the gold, or seek­ing the oil – we know where it lies and our only task is to become effi­cient in extract­ing it.

This is the nature of con­ges­tions. Known ter­ri­to­ry, estab­lished lim­its, a wel­come oppor­tu­ni­ty, a gift from the uni­verse. Con­ges­tions mean plen­i­tude, and cer­tain­ty, and safe­ty, and secu­ri­ty.

We might point out that con­ges­tions are not excit­ing, and not usu­al­ly a source of pro­found stim­u­la­tion. They gen­er­al­ly do not set the pulse pound­ing, nor bring sweat to the brow. The chal­lenge is instead to become orga­nized, and steady, and effi­cient, and relaxed, and con­fi­dent, and clear-eyed about exploit­ing the resource at hand.

Like any field where the bound­aries have been under­stood for a long time, there are known tech­niques avail­able and tools read­i­ly at hand. Learn these and you will be suc­cess­ful. Want to be a den­tist? Learn the prac­tice of den­tistry. Want to be a farmer? Learn how to farm. Want to trade con­ges­tions? Learn the knowl­edge that has grown up over the years, replete with spe­cif­ic tech­niques, spe­cif­ic tools, and spe­cif­ic meth­ods.

Once we reach the out­er lim­its of any dis­ci­pline or ter­ri­to­ry, we have set the bound­aries and can call a halt to break­ing new trails and thus begin the process of devel­op­ing an effi­cient under­stand­ing of the areas so defined.

When Mer­ri­weath­er Lewis and William Clark led the Corp of Dis­cov­ery up the Mis­souri riv­er in search of the water pas­sage between the Atlantic and Pacif­ic oceans, they set out to map unchart­ed ter­ri­to­ry, break­ing the trail, try­ing to estab­lish the out­er lim­its of what was known. And although they did not find the North­west Pas­sage that they sought, they did suc­ceed in care­ful­ly mea­sur­ing the riv­er routes and moun­tains that lay between the Mis­sis­sip­pi Riv­er and the mouth of the Colum­bia Riv­er where it emp­tied into the great Pacif­ic. Of course these explor­ers did not map the entire inte­ri­or area of the vast con­ti­nent, but by defin­i­tive­ly estab­lish­ing the out­er lim­its, they made huge strides in that direc­tion. With­in months after their return, hun­dreds of traders and trap­pers and explor­ers and adven­tur­ers had set out and begun the process of fill­ing in the gaps – now a much eas­i­er task because they had the advan­tage of know­ing the lim­its of what lay ahead. The great North­west was no longer unchart­ed ter­ri­to­ry, but an area of known lim­its. Psy­cho­log­i­cal­ly the dif­fer­ence is immense.

Some peo­ple are not con­tent with con­ges­tions. They rail and fret, look­ing for a way out of the “prison” of con­ges­tions. They feel con­fined. For them, the lim­its of con­ges­tion are per­son­al­ly lim­it­ing, and the only chal­lenge they desire is the chal­lenge of how to man­age a break­out. They love con­ges­tion break­out trad­ing, of which we will speak in anoth­er essay.

Well, to each his own. And so it should be. But we need not pick one over the oth­er. All of our per­son­al­i­ties have some mix of plea­sure in effi­cien­cy and plea­sure in adven­ture. Does it not make sense to match that aspect of your per­son­al­i­ty to the type of trad­ing that the mar­ket presents us with at any giv­en time? And since the mar­ket spends the great major­i­ty of its time in con­ges­tion, can we not learn how to sub­mit to the dis­ci­pline of con­ges­tions and learn how to till the rich, fer­tile fields here, and reap the har­vests for our­selves? For cer­tain­ly there are immense amounts of mon­ey to be made in trad­ing con­ges­tions.

In think­ing about the psy­chol­o­gy of con­ges­tions, and of enter­ing into con­ges­tions, two spe­cif­ic aspects come to mind. The first is the nat­u­ral­ness of this feel­ing of con­sol­i­da­tion. We can see it in our emo­tion­al lives on a reg­u­lar basis. And the sec­ond is the dan­ger of that famil­iar trad­ing error, whiplash.

Let’s look at nat­ur­al emo­tion­al con­sol­i­da­tion first.

The corol­lary to con­ges­tion trad­ing in our inner life is the end to a nat­ur­al run-up or cool-down of our emo­tion­al life. If we think about our emo­tions and our per­son­al psy­chol­o­gy using the metaphor of our mar­ket analy­sis meth­ods, we can say that in a trend run we expe­ri­ence high­er and high­er pos­i­tive or neg­a­tive emo­tion­al lev­els. Per­haps we are expe­ri­enc­ing one suc­cess after anoth­er in a steady unbro­ken stream of upbeat events. First we have some mar­ket wins. Then some­thing great hap­pens on the fam­i­ly front. Then we win some pro­fes­sion­al award. On top of that the tax man gives us a huge refund. Our favorite sports team wins the cham­pi­onship. In our own sports effort we rise to a new lev­el and make a break­through in our golf game. On top of that we lose the five pounds we have for months been try­ing to lose and through all this our mar­ket win­nings con­tin­ue to mount. It is as if we can­not do any­thing wrong. We’re feel­ing fan­tas­tic, things just couldn’t get bet­ter. We even start to think that it’s scary – will this trend nev­er stop?

But then it does. Some event stops the steady rise of new emo­tion­al highs and we come down off our high­est high and con­tin­ue side­ways for a while, not nec­es­sar­i­ly at a bad lev­el but in ter­ri­to­ry that we rec­og­nize as famil­iar, not a new high­er lev­el each day. We have stopped the emo­tion­al trend run up and we have entered con­ges­tion. We find that the famil­iar con­fines and lim­i­ta­tions of our per­son­al­i­ty are wel­come, even very wel­come, and we use this time to con­sol­i­date our under­stand­ing of our­selves, and to get famil­iar with our improved sit­u­a­tion in life.

This is a very nat­ur­al process. It is not sur­pris­ing, and noth­ing to be con­cerned about. It is the most nor­mal process in life, real­ly. We take big steps for­ward, and then we stop and get used to it.

The psy­chol­o­gy of such emo­tion­al growth is also the psy­chol­o­gy of con­ges­tion entrance trad­ing. It is as if we say about the trend just end­ing, “Whew, that was some­thing .… Now it is time to set­tle down and we see where are.” And off we go into a peri­od of con­sol­i­da­tion.

Of course all this applies to a big emo­tion­al run to the down­side as well, when every­thing gets worse and worse and worse, with each day more dis­as­trous than the last. At some point this stops, and we say, “Whew, that was tough, glad that stopped, now let’s see where we are.…”

Con­ges­tion is a nat­ur­al process. We can and do learn to embrace it. Nat­ur­al con­sol­i­da­tions are nat­ur­al events. We expe­ri­ence the com­fort of the crowd when we join in a trend run. And then when that ener­gy abates, and the crowd los­es its pos­i­tive ener­gy, we look for con­sol­i­da­tion, and a return to more famil­iar ter­ri­to­ry. This cycle is the flow of life itself, and it is reflect­ed in our nat­ur­al emo­tion­al lives.

When we speak about the psy­chol­o­gy of con­ges­tions, we could also talk about whiplash. Whiplash is the dark under­side of con­ges­tion. It is the dri­ve for effi­cien­cy run a‑muck, like slav­ery on the old South­ern plan­ta­tions that was the evil side of effi­cient agri­cul­ture.

Every trad­er knows about whiplash. It is what hap­pens when you sell sup­port or buy resis­tance. It is a com­mon self-induced trad­ing injury.

This is what hap­pens. You’re watch­ing the mar­ket, and just as you think that the trad­ing is about to take off to the upside, you hes­i­tate and then jump aboard, know­ing that you are a bit late but glad you now have a posi­tion. But almost imme­di­ate­ly the pic­ture shifts dra­mat­i­cal­ly and you are caught as prices reverse to the down­side and force you to cov­er. You have been whip-lashed. Instead of get­ting on board a trend, you bought resis­tance, the resis­tance held, and you are the pat­sy for the day. Sim­i­lar sit­u­a­tions occur with equal fre­quen­cy on the down­side, where you sell short only to find prices sharply revers­ing and hang­ing you out to dry.

Sell­ing sup­port and buy­ing resis­tance is a clas­sic trad­ing error. Begin­ning traders make this error often, and it is usu­al­ly because they do not know how to cor­rect­ly iden­ti­fy sup­port or resis­tance lev­els. They miss it on the focus peri­od and they espe­cial­ly miss it in the con­text-set­ting high­er time peri­od. Whiplash occurs with great reg­u­lar­i­ty in con­ges­tion trad­ing, since the mar­ket is con­stant­ly bang­ing up against the sup­port and resis­tance lev­els that lie in wait for the unwary neo­phyte trad­er.

When we sell sup­port and buy resis­tance, we lose mon­ey, of course. The only rea­son why we do this when we do, is because we do not see the sup­port and resis­tance that exists in the mar­ket. The most com­mon rea­son we do not see it is because we have not placed the mar­ket action in the con­text of the high­er time peri­od. We do not see the con­fines of con­ges­tion, we do not see what has cre­at­ed these new lim­its, or we do see them but we believe that they are no longer valid. The next most com­mon rea­son is that we are allow­ing our­selves to be gov­erned by the sen­si­bil­i­ties and the judg­ments of the crowd, which always wants to go short when prices are weak and go long when prices are strong, regard­less of the real­i­ty of the sit­u­a­tion.

Con­ges­tion trad­ing demands that we act inde­pen­dent­ly of the crowd, or we will get chopped up. It demands that we derive our under­stand­ing of the mar­ket from sev­er­al time peri­ods. It demands that we expand our view so that we see what is real­ly occur­ring.

If we can’t do these things – that is, if we can’t become self-aware and inde­pen­dent of the crowd, and take a larg­er view of how this con­ges­tion is placed with­in the high­er time frame, then we are bound to lose. We will get suck­ered into sell­ing short just as the mar­ket looks like it is dump­ing, and we will con­stant­ly be buy­ing antic­i­pat­ed break­outs that turn out to be break­out fake-outs, false break­outs that quick­ly turn around and bite us.

Con­ges­tion trad­ing can be extreme­ly reward­ing finan­cial­ly. But in order to tap into this con­stant source of wealth you must have con­fi­dence in your inde­pen­dent mind, a high degree of self-aware­ness, and the abil­i­ty to place the cur­rent activ­i­ty (the “known world” of the focus time-peri­od con­ges­tion) into a larg­er con­text (the sup­port and resis­tance matrix on the high­er time peri­od.)

Whiplash can be avoid­ed if you go by the book and do your analy­sis in the prop­er way.