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Tuesday, January 25, 2011

The Market … is the Market

This entry is a re-post of a blog entry that I wrote at another site some time ago. I have edited somewhat so that it is current and makes sense for today's date. Also, do not forget there is another entry today regarding "Johnson & Johnson (JNJ) Earnings" ..

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Rather 'zen' like statement eh?

But I think too many traders, and especially those who are attracted to the markets because of preconceived, emotional, economic biases ... forget that simple fact. Especially with comments and concerns regarding the U.S. Dollar. For the last two to three years, everyone and their brother has a thought regarding the U.S. Dollar.

To some extent, we should care about the U.S. Dollar and it's direction. We should have thoughts, and understand it's movements. We should care, because it's a market. The market, is how we work. But too many people want to include “the future of world peace” and associated drama into the U.S. Dollars price movements.

Have you ever been in a work environment, say … an office, where someone wants to include their personal life and drama, into the work that everyone performs? I remember about 14 years ago, I worked at a corporation, and the drama in the office, was “the boss” having sex with “the coworker”. Of course, then the backbiting began. Of course, "the boss" is friends with another co-worker. And that second co-workers sees "love blossoming". Of course, the third co-worker just got a crap load of work piled onto their plate, so then the accusations of “favoritism” began. The accusations of unfair criticism of the whistle-blowers. It was this big huge drama. And none of it had anything to do with our work at hand.

As traders, all we have to be concerned with ... is the work at hand. Which is price movement. That's the work at hand. Add just a touch of leverage to the equation, say, even 3 to 1, and it doesn't matter what is happening. That's just simple math. If you're trading profitably with reasonable, 3 to 1 leverage, and you're earning U.S. Dollars profitably? Then in the end, it doesn't matter that the U.S. Dollar is losing value. Anything else is politics. And over the years I've seen many traders ruined because they wanted to add their political bias into their trading. I saw a very recent example of this as a matter of fact, with someone who was otherwise ... a very intelligent trader.

Or perhaps traders even develop an emotional attachment to their “home” currency.

Of course, some thoughts and emotions are only natural. An American trader looks at the U.S. Dollar sinking and thinks "Awww man, the home team is down to the 15 yard line!" . And I don't care who you are, if you are an American, and you're a trader? That small emotional spark is there. I always tell traders: Look for the best in a situation, and always look at the other side of the trade.

For example. I'm a Michigan guy. Yeah ... that means the University of Michigan. I know we have college football fans amongst us. Now very soon, we'll see U of M face off with Ohio State. This must be one of the most classic rivalries in collegiate football. Am I rooting for the U of M?

Well, the wife and I were enjoying a beer and some chicken wings with very close friends of ours last night, at a local restaurant. Aaron. Just a great guy. Well Aaron is more of a Michigan fan than I am. And he said:

"You know Dan? I hope Michigan gets creamed. I hope it's a 30 point slaughtering. Then, maybe ... we can get the changes implemented in coaching that we know needs to happen."

That's the thought process of a good trader. Yes, there is the 'downside' emotional reaction to the "home team" being down.. But I tell traders to always look at the other side of the coin. Look at "Uncovered Interest Parity Theory", and how sovereign funds can take advantage of that fact, to buy into the U.S. Dollar heavily at the current time. Look at the mathematics of wealth destruction and how the carry trade will actually result in the U.S. Dollar Index ... eventually ... soaring to new highs during the unwind. Look at all of the data. Not just what people want to throw in your face, while they try to twist you to the bias in their 'book'. Because when you look at all of the data? It's funny how that helps negate your natural emotional reaction, and helps you to trade better for your book.

It was funny. About a year ago, I remember someone looking at me, and tried to invoke some sort of emotional response out of me. I knew what they were doing. They looked me dead in the eye with the fiery voice of righteous indignation and with an accusatory tone asked:

"So what you're telling me is ... you don't care. You just don't care about any of it!!"

The funny thing there? Was that they expected me to take offense.

I simply congratulated them, that they finally understood my point.

The markets don't care what your political bias is. They don't care about your economic bias. They don't care where you live, and what your home countries currency is, or that you don't like another nations policies. They don't care that you think Sarah Palin is misunderstood, or hot, or stupid. They don't care that you hate Keynesian economics. They don't care that you think we should be driving electric cars, or H3's. They don't care that you think the gold standard is the panacea for all mankind. The market … doesn't ... care. It's not the place for drama.

Because the market … is the market.

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