My wife does yoga, which if you met her family you would realise that is not the only form of mental illness her family. Some of the people she does yoga with are prone to what I would call demented magical thinking. You know the type, we never went to the moon, the contrails planes generate at high altitude is actually the government spraying mind controlling chemicals and it was the Rothschild who planned and executed the 9/11 attack. They live in a world immune to facts, their world is populated by vibrations and energies and not the sort of energies that conform to any portion of the known electromagnetic spectrum. Apparently that part of the electromagnetic spectrum we can actually measure is owned by drug companies who don’t want you to know that jamming a hot rock up your bum cures acne or some such thing.
The interesting thing is that this sort of thinking infects traders. I maintain a dump email account which I use for website subscriptions, mailing lists and anything else I don’t want cluttering up main email accounts. I have noticed something interesting in some of the market related spam I get – the more difficult the market becomes the more traders resort to magical thinking. The latest example is intriguing in that it comes from someone who claims to e a mechanical trader yet their current charts are plastered with Fibonacci retracement lines and other cycle bullshit that are all designed to try and offer a prediction as to where the market might go. This reaching for the magic potion is to me either a panic measure or a desire to appeal to the nuff nuffs of the world.
Consider the chart of CBA below.
This chart tells me a few things. there seem to be two major trends in action and a period of consolidation which is finding support at around $80. This all the information that chart conveys – I can posit a future cause of action based upon what price does subsequently. For example I could decide that if I were holding the stock that a break below $80 might trigger me to begin selling the stock. Whereas a confirmed break above $84 might trigger new long positions. However, these are my actions based upon what the market might do. Note, I said might – not will. These are reactive tactical decisions not predictions – the only thing I can predict is what I will do. This is the key element of true mechanical trading – it is reactive in nature. Future price trajectory is completely unbeknown to the trader. I completely understand the emotional desire for certainty but this certainty is denied to us and it should never be an excuse to resort to magical thinking.
The market will do what the market will do – your job is to simply respond.