Traders and investors believe that in the capital markets there is no place or should be no place for magical thinking. I have observed otherwise, asserts Jake Bernstein in the first of three weekly parts.
Insecurity and uncertainty foster the growth of magical thinking. In ancient societies and even in contemporary Third World societies, mythical thinking and magic are common and when it comes to medical cures, surprisingly effective. The shaman or medicine man through the power of suggestion can affect cures and treatments. Anyone who underestimates the efficacy of myth and magic in such societies or even the power of positive thinking and belief in contemporary societies would be mistaken.
Traders and investors believe that in the capital markets there is no place or should be no place for magical thinking. I have observed otherwise. The insecurity fosters the growth of magical and superstitious thinking. It emanates from a lack of objective trading methodology and ignorance of market structures and concepts.
If you think my claim is outrageous or erroneous, humor me for just a little while as I explain myself. While it may not seem obvious that there are traders who engage in superstitious behaviors, I find that unfortunately considerable myth and magic continue to impact trader thinking and actions.
In this three-part series, I will highlight some examples of my claim while offering potential solutions to effectively eliminate such subjective approaches to trading and investing.
Let’s begin by looking at some examples of what I mean by myth, magic, and superstition in trader behavior.
“Sell in May and go away” is a commonly heard expression. Supposedly it is based on fact but not knowing the facts and yet believing them is a form of superstition. We have the technology to test the claim and take it from the level of a myth to the level of the fact.
“Turnaround Thursday” was frequently heard on the trading floors in Chicago on Wednesday afternoons and Thursday mornings. Many traders believed this superstitious claim without looking for verification.
“The death cross” and “the golden cross.” I have heard these superstitions hundreds of times at seminars, webinars, and business television and radio. Are they true? Do you traders believe them without validation? If so then they qualify as market myths.
“The head and shoulders” and “the reverse head and shoulders.” Supposedly these are chart formations that have predictive value. Of course, the formations are highly dependent upon the observer. Show the patterns to five different traders and you’ll probably get three different opinions. I categorize such formations as myth rather than fact.
There many others. I’ve barely scratched the surface. Out of courtesy to those true believers who take refuge for solace in these market myths, I will not name names. After all, I don’t want to make enemies let us take a brief look at the first market myth “sell in May and go away.”
What does it mean? What should you sell? Do you sell your stocks and futures or should you go short? Do you sell calls or sell puts? There’s a big difference in what you do! When in May should you sell? Is there a date? If you go way, when should you come back? Should you stay away for the rest of the year? Should you come back all at once or inch your way back? What are your odds of success? Is there profit maximizing strategy for this procedure? How often has it worked? What convinces you that you wrong? And the list goes on.
If I have aroused your curiosity, then come back for the next episode of this drama.
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