Monday, April 27, 2009

The fallacy of oneness!!!

Market correlations sometimes become so strong that it is difficult to believe that they will cease to exist one day. From the 1st day of my watching the quote screen there has been news. I have seen news being bombarded on everyone from financial journalist some of whom have never seen a trading platform. They report that Market 'A' closed down or up due to Market 'B'. This is nonsensical to say the least.

As a student of intermarket analysis, it is difficult for me the explain the fallacy of correlation. To be a student of the markets one has to be a student of psychology. Mass psychology is difficult to analyse as it involves many individual. It is always dual in nature. False in its projection and true in its action. We are unable to respect the individuality of each market participant as a decision maker and the combined decision of the market as a whole. This dual relationship leads to the dispersion in prices. Think of prices as thoughts. Most individuals have their own thoughts, some use others' and yet someone have none. Or some market participants dictate prices, some use this dictation and yet some others use the product. From my own experience, I think there are just one in hundred individual who 'wants' to dictate the price. The one who has his own price. It can be right of wrong, low or high. But there is a price, which the market has to accept as an input. Out of this 1 percent there are some individuals who are able to convey the correct price to the market, through their actions. The force of action in the markets being the application of money.

Duality, leads us to perfection. But perfection will lead us to death. Market participants generally follow the direction of being 'guided by the price'. Ironically the tag line of this blog is the same - 'An unbiased view of the markets guided by prices'. Unbiased changes it all. Nonetheless, market participants are trying to get towards the third category of participants. Those who have no thoughts or to say prices of their own. They just take what is given to them. Most of the technical analyst and fundamental analyst fall in this category. They take the historical data of prices or any other parameter and practice a closed vision. Their trading methods become like a auto pilot with no 'sense' of the future but all the inventory of the past.

What is necessary is to move towards the progressive market participants. I call them the alpha. They are the beginning to the deep wealth that can be explored inside the daily pandemonium of financial markets. Alpha would always have the inventory and would know exactly what it tells. It would be ready to share and analyse(give and take) other's inventory of prices(thoughts). But the only difference it has from the other two forms that it would have its own prices.

I was curious to find out that whether current market conditions are as chaotic as they were in the last or the crisis before that. I realized that conditions are less chaotic today. History tells us that the current pace of economic degrowth is one of the worst, if not worst. Even the economic indicators are worse than they were in the most other recession or economic crisis. The public reaction to the events have not been same though. Human beings grow and evolve. People have evolved, they understand that economic growth and degrowth are part of the story, like joy and sorrow. These are the laws of nature so to say. But again as human progress is one phenomenon which is against the law, the change or progress in the market participants sentiment is too against the law of the nature. Market participants have grown. Today we may have very few people who belong to the third category I called the alpha, but they are very large in number than they were. I know this to be true. If it were to be any other way, we would have been at the same economic stand point as we were before alpha started rising.

I have mentioned this concept of rising ticks in financial markets. What it means is that with every passing day, there are more and more financial instruments being traded and added. This leads to a rise in number of ticks traded. Each individual in its own capacity trade more frequently than before. This has been possible due to decrease it transaction costs, increase in technology and a general progressive nature towards the understanding of the financial markets. I have been a critical of this rise. But now I believe this is the one of the few things that has added or raised the bar for rationality in financial markets. Though the concept is again dual in nature, that it involves an increase in lesser degree irrationality and a decrease in higher degree rationality. With a rise in higher degree rationality, meaning long term correctness of the prices the progressive nature of participants is realized. If market participants are evolving and are becoming more efficient than what is giving 'in'. There has to be something which has to given in. Again progress is the eddy. It cannot the explained. What just rises in the entropy. This doesn't mean that markets are progressing towards death, they are actually progressing towards being in a conscious state of correctness and still being away from it. 'The duality'.

Needless to say that my writing and communication skills are inferior to convey exactly what I believe. I still feel market participants who understands this duality would know. And a closing thought is to still know that life and death is a constant occurrence. It is not applicable more anywhere than the financial markets. We evolve every time we perish.

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