Paul Tudor Jones' Quote
Paul Tudor Jones’ Quote

Guest post by Christopher Ebert @OptionScientist

With regards to #2, I must admit I too was once hampered, and to this day occasionally experience the hampering effect from time to time .

What released me from that was a realization that there will always be some influential entities that can induc
e something to go up or down to suit their whim. No matter how much each of us understands, we can never understand each of those potential whims. Thus, there will always be events that defy logic, since the logic for the move only makes sense if one also understands the whim. The best a trader can hope for is to recognize the logic in hindsight and learn from it. When the logic becomes self-evident, we can grow as traders if we realize that such logic is part of a repertoire.

The longer we trade, the more we realize that the extensiveness of the repertoire makes it almost impossible to predict anything at all. While we may be lucky enough to occasionally see repetitions in the repertoire, early enough to act on them before they become self-evident, the vast majority of success is likely to come not from recognizing those rare repetitions in patterns, but from the broader price action.

Certainly, it is not entirely ill-advised to watch out for tornadoes when the temperature is in the 90s, dew point is in the 70s, and the atmosphere is providing significant wind shear and convective potential energy. Tornadoes are part of the repertoire. Yet, the folks who wake up and say “It’s 90 degrees, I’m jumping in the pool” are likely to enjoy the day 99% of the time. The worrier who manages to escape the tornado misses out on all those great pool days. And in the end, the tornado sirens alert everybody to the danger, pool-goers and shut-ins alike.

The result is that those traders who strive to understand and rationalize each situation do indeed succeed in predicting the future occasionally, but it becomes impractical to base one’s existence on those predictions. Those traders who seize the moment for what it is, with little if any need to understand “why” things are the way they are, tend to benefit from the situation fairly often.

It’s not necessary to be a meteorologist to enjoy a day in the pool. All one really needs is a look at the thermometer surpassing 90 degrees. To look too deeply beyond that 90 degree reading can often hamper more than it helps – keeping pool-goers cooped up indoors on a hot day out of fear – keeping traders out of profitable trades. Trusting price action is as important to enjoying the stock market as trusting the thermometer is to enjoying the backyard swimming pool.