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For traders who make money by trading the trend in the markets, the fourth quarter of 2011 was amazingly confusing . Whether it was mainland Europe’s so-called PIGS seemingly intractable debt crisis, ‘revolutions’ in the Middle East, or the political maneuvers by American politicians focused on while not dealing with the  growing  national debt that cost the United States its AAA credit rating, traders had to be incredibly nimble and flexible to switch sides from bull to bear with every government intervention out of Europe. 2011 generated a lot of market-changing headlines. A monster earthquake in Japan, with epic flooding, violent regime change in Egypt and Libya, and Europe’s constant attempts to get ahead of a worsening debt crisis sparked wild fluctuations in all traded markets. Even now borrowing costs for Italy and Spain are close to their euro-era highs and worries about the European banking system remain high. The ECB no doubt will continue to buy all the time they can with free money in a hope of a magical fix to a spending problem that politicians have no political will to change. The euro,  has only shed 2.5 percent against the dollar—hardly what traders would expect from a currency euro bears believe may not survive.

The 4th quarter of 2011 had mind-blowing volatility, every single headline punished trend following traders.

Yes, the bears were right we were in a downtrend until 500 billion in 3 year loans were offered from the ECB. So what was the right thing to do, be short? Follow the downtrend?Or, bet that the ECB would eventually come to the rescue? You had to do whatever your method is, follow the trend from a technical basis if you are a trend follower or trade a discretionary bet on a reversion to the mean if you were a swing trader. Your method, your rules, your style. You can’t let the market change who you are as a trader.

It was a rough quarter to stay ahead of swiftly changing sentiment. Governments with their endless interventions have propped up zombie car companies, zombie banks, dead solar companies, and punished savers with inflation and low interest rates.

When the economic history books are written, and traders speak of 2011, it will go down as the year when political risk trumped economic principles, when company earnings, supply and demand, and interest rates were no longer the driving force in the markets. The FED and ECB had the wheel and were taking us where they thought was the best place to go. Unintended consequences be damned.

“I can’t remember a year when politics had such a big impact on capital markets,” said Ron Florance, head of investment strategy at Wells Fargo Private Bank, which oversees $157 billion in assets. “Maybe during the crash of 1987, but that lasted for a day. This has lasted for 365.”

“The bigger the politics quotient, the more volatile the markets,”Russell Napier said. “And it isn’t going to get any better next year.” (Strategist at CLSA Asia Pacific Markets, a Hong Kong-based brokerage)

What to we do as traders? Follow our system, manage or risk, keep our head in crazy market until some patterns once again emerge.

With the ECB with their finger in the dam of European debt and the $SPY fighting hard to break and stay above the 200 day moving average it is time for us to fasten out seat belts and follow the price wherever it leads us. Price quotes never lie, they know all things,  until it all changes.