Market Manifesto

We speak here about the psy­chol­o­gy of trends.

A trend can be hard to trade, and we can learn a lot by think­ing about why this is so.

The best trend is a trend that starts out of a con­sid­er­able con­ges­tion. And the best time to get on that trend is the moment that it begins. And yet that is often dif­fi­cult to do, because the move is often rapid and gives the trad­er lit­tle time to get used to the idea that this move is a new trend.

Many if not most traders wait until the trend is estab­lished and then paus­es, before they try to jump aboard. Often they are tim­ing their move exact­ly wrong, when the trend in ques­tion has paused for good rea­son, name­ly that it has reached high­er time peri­od sup­port or resis­tance. This fre­quent­ly means they are buy­ing resis­tance or sell­ing support—a clas­sic and expen­sive trad­ing error.

In oth­er words, most traders wait for con­fir­ma­tion of the sig­nal before they take it, and this delay means they miss the oppor­tu­ni­ty and place them­selves in dan­ger. Iron­i­cal­ly this is exact­ly the oppo­site of what they think they are doing, which is to grab the oppor­tu­ni­ty and to do so in a man­ner which increas­es their safe­ty and reduces risk.

There are two ele­ments to over­com­ing this prob­lem.

The first is by rec­og­niz­ing and under­stand­ing the nat­ur­al human incli­na­tion to stay with that which is known as opposed to that which is new, and unknown.

The sec­ond is the train­ing that is nec­es­sary for a trad­er to learn how to take the sig­nal when it occurs, and not to delay or hes­i­tate until more infor­ma­tion is avail­able for “con­fir­ma­tion.”

Lets talk about human nature first.

We car­ry with us huge illu­sions about our basic nature as human beings. In our image of our­selves most of us stress our free­dom of will, our abil­i­ty to make ratio­nal deci­sions and to act in our own best inter­ests based on our analy­sis of a sit­u­a­tion. And even if we act on our emo­tions as opposed to our intel­lects, we believe that we act as an inde­pen­dent sov­er­eign indi­vid­ual, with utter free­dom to do as we think appro­pri­ate at any giv­en moment.

How­ev­er the present writer believes that this is not entire­ly true. The fact of the mat­ter is that as humans we have the pos­si­bil­i­ty of some inde­pen­dence of action, if we work at it very hard, devel­op a high lev­el of self aware­ness, and main­tain con­stant vig­i­lance. But under nor­mal cir­cum­stances, this much-vaunt­ed sense of per­son­al free­dom is a huge, and dan­ger­ous, illu­sion.

Much of the activ­i­ty that we ascribe to “freedom of choice” is real­ly age-spe­cif­ic behav­ior that is in com­plete con­for­mi­ty to the con­ven­tions and social stan­dards of a par­tic­u­lar sub-group of soci­ety. Seen in a super­fi­cial way, we could say that the dic­tates of fash­ion deter­mine our actions. Seen at a deep­er lev­el, there is a much more fun­da­men­tal expla­na­tion for our ten­den­cy to imi­tate oth­ers in a group with which we have a sense of iden­ti­ty.

This deep­er expla­na­tion is relat­ed to the way we under­stand the nature of human­i­ty. In our view, man has more in com­mon with herd ani­mals or ani­mals with a strong social struc­ture, than is com­mon­ly rec­og­nized. Our thought process­es might tell us that we act inde­pen­dent­ly, but our actions usu­al­ly prove dif­fer­ent­ly. We base much of our lives on obser­va­tion of oth­ers, imi­ta­tion, iden­ti­fi­ca­tion with a small or some­what larg­er sub­group of soci­ety, reas­sur­ance of our sense of “place” and sta­tus and “belonging.” Our most fun­da­men­tal feel­ings of secu­ri­ty, trust, “rightness,” and accep­tance are tied direct­ly to our obser­va­tion that we have a secure mem­ber­ship in a sub­group of the human species.

Much can be learned from study­ing ani­mal behav­ior and watch­ing how dif­fer­ent kinds of ani­mals behave in dif­fer­ent cir­cum­stances. Hors­es, for exam­ple, are fun­da­men­tal­ly herd ani­mals, and have a cer­tain sense of “rightness” that depends on how close­ly they stand to one anoth­er, who leads and who fol­lows, and how they act in dif­fer­ent sit­u­a­tions. A horse in a nat­ur­al set­ting that moves too far from the herd feels dis­com­fort until that sit­u­a­tion is rec­ti­fied. A horse in domes­tic ser­vice depends on rou­tine and con­stan­cy to replace the feel­ing of herd com­fort. Pri­mate groups offer oth­er exam­ples, and bands or packs of chimps or upland goril­las have elab­o­rate social struc­tures that bring order, com­fort, and secu­ri­ty to the mem­bers of the group. Oth­er exam­ples abound. The study of prim­i­tive cul­tures and indige­nous peo­ples is also most instruc­tive, par­tic­u­lar­ly if one focus­es on the crit­i­cal aspect for our pur­pos­es, the rela­tion­ship of indi­vid­ual free­dom to the group stan­dards. There are com­plete­ly under­stand­able rea­sons why such behav­ior pat­terns devel­oped in the course of evo­lu­tion. The point is that the recent few thou­sand years are an insignif­i­cant pim­ple in the course of his­to­ry, and that we Homo sapi­ens car­ry with us hard-wired behav­ior pat­terns which we share to greater or less­er extent with many oth­er crea­tures on the plan­et.

Once you get this idea of observ­ing mankind as an advanced species of social ani­mal there are a lot of insights that will come your way. The trick is to ask the con­ven­tion­al ques­tion a lit­tle dif­fer­ent­ly: ask not “how are we dif­fer­ent from oth­er species?” but “what do we have in com­mon with oth­er species?” Besides increas­ing your sense of awe and humil­i­ty in the face of cre­ation, this ques­tion will lead you towards use­ful infor­ma­tion in your devel­op­ment as a trad­er. Specif­i­cal­ly, you will enhance your under­stand­ing of the dis­com­fort you feel when you move away from the group. This dis­com­fort is keen­ly felt when you are among the first to jump on a new trend. Remem­ber that a trend by its very nature is vio­lat­ing the con­fines of what has become accept­ed as a nor­mal price fluc­tu­a­tion and is mov­ing into new and unchart­ed areas.

In mod­ern soci­ety huge amounts of pro­pa­gan­da sur­round us at all times, pro­pa­gan­da designed to increase our sense that we are not sub­ject to pres­sures or influ­ences of the group. Obser­va­tion of the facts, how­ev­er, will strip away this false rhetoric and reveal the under­ly­ing truths, which are that we just plain feel more com­fort­able when we have our mem­ber­ship in a group val­i­dat­ed on a reg­u­lar basis. When we move away from the group, under nor­mal cir­cum­stances we become pro­gres­sive­ly more and more uncom­fort­able.

Mod­ern life per­mits a great deal of social frag­men­ta­tion and con­sumerism thrives on the dif­fer­en­ti­a­tion of sub­groups, so we tend to focus on the dif­fer­ences between us and oth­er sub­groups, and to see these dif­fer­ences as sup­port­ing our belief in our indi­vid­ual “freedom of will.” But reflec­tion and obser­va­tion will show this to be wrong, that we in actu­al­i­ty have only a small amount of indi­vid­ual free­dom of will, and that in many if not most cir­cum­stances we do not use the lit­tle that we have.

This small sliv­er of free­dom that we actu­al­ly do have is where we can grow and change as humans, and it is in this are­na that we can become bet­ter traders. We can iden­ti­fy deci­sions that we think we make with free will but which are actu­al­ly based on the anx­i­ety and dis­com­fort we feel when mov­ing away from the crowd. Then we can work with our increased under­stand­ing and our tech­ni­cal com­pe­tence to make new deci­sions that fly in the face of our nor­mal dis­com­fort. We can learn to make deci­sions that run counter to the nor­mal crowd. There­in lies the abil­i­ty to grab onto a trend as it first appears.

So we see that the nat­ur­al human incli­na­tion to stay with that which is known as opposed to that which is new, and unknown, is a deep root­ed char­ac­ter­is­tic of mankind. Cer­tain­ly it is help­ful to under­stand that.

But how about the sec­ond ele­ment here? Under­stand­ing is great but how do we train our­selves to fly in the face of these feel­ings of dis­com­fort and take an action which sets us apart from the crowd?

We do this by under­stand­ing and rec­og­niz­ing the pat­tern we are look­ing for and train­ing our­selves to take that pat­tern in a com­plete­ly mechan­i­cal man­ner, not giv­ing our­selves the time to reflect or wor­ry or feel any­thing. And we do it by rec­og­niz­ing that these feel­ings of dis­com­fort are always present when mov­ing into a new area, and just have to be endured. They are not going to dis­ap­pear or go away and they are com­plete­ly nat­ur­al and an inescapable part of the con­di­tion of being a human being liv­ing on this plan­et.

We are sup­port­ed in this activ­i­ty by the pat­tern research we do pri­or to trad­ing. This research uncov­ers for us the prof­itable pat­terns to trade. Once we know that the pat­terns we seek out will, in a large sam­ple, prove to be extreme­ly prof­itable, we can pro­ceed to trade them with height­ened con­fi­dence, and use that con­fi­dence to reduce or elim­i­nate the nat­u­ral­ly occur­ring feel­ings of dis­com­fort.

And that’s how it’s done, folks.

Per­haps there is one more ele­ment here that could be addressed. Some traders expe­ri­ence dif­fi­cul­ty because they have trained them­selves to grab a trend quick­ly, but they have trou­ble stay­ing with it. For one rea­son or anoth­er they jump out too quick­ly, either tak­ing prof­its too soon and step­ping aside or giv­ing in to a ten­den­cy to trade counter to the trend in low prob­a­bil­i­ty sit­u­a­tions. Both are relat­ed to the dis­com­forts and anx­i­eties out­lined above. The trad­er might think the trend “has to” stop because it has gone “too far already.” Or he might think he will be extra clever and jump on the counter trend and reap dou­ble rewards, only to be creamed as the mar­ket con­tin­ues in the orig­i­nal direc­tion.

If grab­bing a new trend means fac­ing down dis­com­fort at some­thing new, stay­ing with a trend may mean you have to face down anx­i­ety on a con­sis­tent basis. It helps here to have a clear under­stand­ing of the larg­er pic­ture, so that if the trend has legs, you will under­stand that, and be able to play your cards well, expand­ing and increas­ing your posi­tion as appro­pri­ate. Seen in the right frame­work, the trend will be under­stand­able, com­fort­ing, and you will be secure.

The crowd is not always wrong. When it is right, it has incred­i­ble pow­er and can sweep every­thing along with it. Think of a migrat­ing herd of wilde­beests in Africa, huge num­bers of ani­mals on the move from one part of the con­ti­nent to anoth­er dri­ven for­ward by deep forces far beyond the under­stand­ing of the indi­vid­ual or col­lec­tive con­scious­ness of the herd. When the mar­ket ener­gies shift, we encounter forces sim­i­lar in scale and con­se­quence. It behooves us to learn how to stay with the herd when it responds to such major and fun­da­men­tal shifts in ener­gy.