Wednesday, May 02, 2012
What a difference a day makes. "Sell Aud? Australia? Where's that? We are back to selling Europe again".
TMM's Bloomberg IB chat bias-o-meter would have us believe that we are about to have a Euro panic similar to that of 10 days ago. If that is any indication of the size and commitment of short term positions then really the price moves so far aren't that impressive. We will not get sucked in (though we may get spat out of existing positions).
But it doesn't matter if we are right or wrong in our method, prices change because people decide levels at which they are willing to trade. So no matter how much we believe in our methodology, no matter how much it can mathemematically be proved correct, no matter how much our theory, or even what we thought was everyone else's theory, tells us we are right; if everyone else is reacting for different reasons then our ultimate reward for rightness (profit on price movements) will remain elusive. Which is a long winded way of saying the market will remain irrational longer than we remain solvent. This is of course why it is imperative to understand what drives other people to make decisions as much as understanding our own.
We often see the markets as a massive poker table around which sit thousands of players, all with their own different reasons to play and ways of playing. Understand all of them enough to pre-empt their actions and you can profit greatly. But that's nigh on impossible so we tend to group the types. We have in the back of our minds ideas for a piece on all the different types we have encountered over the years but that is for another day.
Instead today we have knocked up a behavioural model of how the markets work, very much from our own perspective. It's remarkable in its familiarity. No prizes for guessing which one we are.