Illusion and Opportunity in the Age of Instantism

by Jake Bernstein

There is an old saying about the markets that while humorous may be very apropos to today’s markets. This is how it goes “if you buy you lose and if you sell you lose but if you don’t trade then you have missed a great opportunity”. Given the massive market volatility that has come to characterize the markets these days there are many traders who believe that every day presents a trading opportunity. When we consider the fact that there are potential trades in stocks, futures, options, LEAPS, FOREX, spreads and even more, we are inclined, at first blush, to agree with this point of view. But when we think things through clearly we realize that this is not so. Let me explain what I mean.

We live in a world that is getting “faster” every day. In this world of “instantism” we have slowly but surely been conditioned (some would use the term brainwashed) to believe that faster is better or that immediacy is more efficient or that quick response is preferable to slow response. In some situations this is true. In the case of a medical emergency or a natural disaster, immediate response and attention can save lives and suffering. However, it does not necessarily follow that fast is good in all things. Some things in life are meant to be taken slowly, to be digested, to be savored or better yet to be considered and evaluated before actions are taken.

To a great extent the trend toward instantism is a function of advertising. Is fast food good food? Does fast service at a restaurant equate with good service or quality? Are fast price executions in the markets good or not good? Consider the fact that markets all over the world can move sharply and quickly in one direction or another in response to news. Even news that is essentially meaningless in the big picture can cause a 100- point swing in the Dow Jones averages. Market response to news, whether the news is truly relevant or not, has never been as violent or as dramatic as it has become in recent years. The reasons for this state of affairs are not only related to the speed of communications and electronic order processing but primarily to the prevailing psychological set of traders and investors. We have been led to believe or we have allowed ourselves to believe that unless we act on a situation or what we see as an opportunity, we will lose money or stand to lose potential profits. Due to the fact that we have adopted or adapted a given mind set with regard to the markets we become frustrated when we see large intraday market swings and find that we have been unable to capitalize upon them, or what’s worse, the fact that we attempted to capitalize on them but we lost money. We look at the TBond market, for example, and see that the daily price range might be $1500 per contract and we say, “this is a wonderful thing…I love the volatility…I should be able to capture at least $500 of that range. I’m not asking for much”. To begin with this assumption is specious. Why? Because many market moves are random. They cannot be predicted. To believe that you can consistently make money on random events is to set yourself up for frustration. And if you set yourself up for frustration you will lose your discipline and the result will be more losses.

Trying to predict and to trade on the unpredictable is a fool’s game. That being said, I am not suggesting that random behavior is typical of the markets. I am not a proponent of the Random Walk Theory. Rather I see the market as an auction process. Random behavior or “noise” is part of any process. In the markets, random behavior increases as the time span of the sample decreases. In other words, there is a greater degree of random effect in a 10 minute chart than there is on a daily chart. This is why short term and day trading is so difficult to do successfully.

Consider this analogy: you buy a stock mutual fund every month. You continue to buy regardless of news or the trend. You don’t watch the price. You don’t live and die with every price move up or down. Fifteen or twenty years later you have accumulated a large profit without much stress and with no attention to the minute details of the market. Could you have done better? Possibly. Could you have traded every twist and turn in prices and made more money? Possibly.

Many years ago Marty Zweig (who has been considered by some to be a stock market guru) released a study claiming that swing trading market turns within a trend produces more profit than a buy and hold strategy. And that may well be true IF YOU HAVE THE RIGHT TOOLS to time all the swings and IF YOUR DISCIPLINE is solid. The bad news is that most traders have neither of these prerequisites.

Face the Facts

The fact is that you will not be able to trade all market turns. The fact is that what you see in trading ranges in any given market cannot be captured daily with consistency. The fact is that you are far better off capturing a small move that is predictable than attempting to capture a large move that is not predictable. What you lose in potential profits can be achieved through a larger position. Do not allow yourself to be seduced by the promise of profits based on short-term volatility. Do not allow yourself to be a victim of the hype that assaults us daily through the media and through the markets themselves.

As a Point of Interest

Not long ago I started my new HOT TRADES hotline. As of this writing (and depending on reasonably good price fills) virtually every recommended trade has been profitable. Many of the more mature and experienced subscribers to my hotline have thanked me. Those who are less experienced or who have allowed their thinking to be distorted by the prevailing hype of instantism have called me with questions such as “Jake, why did you miss that 30 tick move in TBonds”.

The answers are simple: First, and foremost, I can’t get all the moves in all the markets. Second, not all moves are predictable using my methods or, for that matter, any methods. And finally, I direct my attention to certain patterns and relationships that I know to be predictable. I want a small predictable piece of the pie that I can maximize with clear and objective profit maximizing methods. I don’t want to try and chase after moves that are either too risky or essentially knee jerk reactions to news.

There is always a difference between what we COULD have gotten and what we CAN realistically achieve. I like to tell people that if I had been born in the United States I’d try to campaign for the Presidency. There are many “if’s” in life and in the markets. We need to focus on the reality of what can be achieved rather than to look at opportunities and dwell on what could be achieved.