Short Term Trading Weekend Lounge: 9 - 11 July, page-37

Hi DD

Sounds like you are referring to the Icarus Syndrome(?).

Last year, the Fed and every other central bank pumped huge amounts of money in to the system. By doing so they manufactured a mathematical positive expectation for risk. That can easily lead to over confidence for participants.

During the week I watched a finance blog in which the speaker explained an FX trade which had zero chance for profitability on either side but was probably stable.... so the idea was to lever up 200x's with the broker and apply the capital to something else which had a potential 0.01% profit. With that kind of insane risk taking happening it shouldn't surprise that when the Fed recently announced they were keeping their thumb firmly on the scales but hinted they might not push down quite as hard it sent a shiver through the market.

I don't put much faith in systems. That's because they almost invariably fall foul to randomness. A system involves determining the parameters of the maximum deviations from the mean and then devising a money management to cope with those deviations. The term 'black swan' is in the language for a reason.... there is always the extreme outlier lurking to completely blow away your assumptions. The longer a system works successfully the larger the sample size you have generated and the greater the likelihood for the improbable event...

What I notice about the human condition is just how much people inhabit their personal psychological bubbles. Broadly speaking there are 2 categories. The consensus view and the idiosyncratic. When I hear somebody express the consensus view I can usually see they are merely repeating what they have been told. Such individuals lack curiosity and they don't ask questions. The consensus view is frequently totally wrong but due to it being the majority opinion it steamrolls reality for sometimes a considerable period so people following the consensus often do well enough. Passive investing in an index fund springs to mind.

The disturbed soul who ventures from the herd is the second main type. Of these it branches out to those who adopt the alternative universe approach and join the tin hat brigade (conspiracy theories and such... sort of another consensus position) and the other branch, those who question and seek facts. Here the wonderful diversity of delusion and self deception has infinite scope. It's hard to get the facts but it's even harder to not cherry pick the ones which suit your disposition. The struggle is to arrive at a sane appraisal of reality. If you succeed then you will find yourself in that happy place of disagreeing with literally everybody else... which is itself confusing because if you are completely mad that will also be the case. Tricky.

If I make a good trade it's not easy to know when it is over. The sands are always shifting. I will take profits along the way but I will also push something until it breaks. I am finding it is best to have about a dozen different things on the go at the same time with another dozen things hanging in the air as possibilities and not place myself in the position that any single decision can destroy me.

When the Titanic set sail the captain and the crew knew full well there was an out of control fire in one of the coal holds. The company which built and owned the ship was on the verge of bankruptcy so it was a matter of financial survival that the paying customers got to enjoy the ride. The rest is history.

In my opinion, so too with the current market conditions. The central banks went full steam ahead on money supply and everybody in the market got the chance to be a little richer. With cheap money the trade off has been slimmer margins and the need to take ever greater degrees of risk to get a return. Just as with the Titanic, the captain and the crew know there is a problem deep in bowels...