Forecasting, Causality, the Black Swan, and Your Edge
What was he looking for, the stranger inquired? A key, said the mullah. Where did he drop it? “In the house” replied the mullah. Then why was he looking in the dust outside? Because here he was in bright sunlight, whereas in the house it was dark and difficult to see.
“It happens to us all the time. The solution to worthwhile problems is never out there in the open. The key to financial markets is elusive. It must be so, by definition. The price-discounting mechanism ensures that the majority are always looking out there in broad daylight, when the key is somewhere else, in the shadow.”
“Finally, one had to see if there were other relationships which had any predictive value for currencies like inflation, trade, money supply, oil prices, economic growth, et al. So far, the conclusion is that few such relationships and none of the relationships that most observers seem to rely on are useful for predicting the dollar.”
—John Percival, The Way of the Dollar
I think this is where the trend followers get it right. They don’t try to explain all (or any) of the reasons why prices are heading in a certain direction; they simply want to “ride the bucking bronco” for all its worth, to quote Dunn Capital Management’s founder Bill Dunn.
So, we started off with a seemingly simple and sensible equation. But in this short time, I think I have shown it is neither simple nor sensible.
So where does this leave us?
I am not sure where it leaves you. But it leaves me with a few conclusions:
“It’s tough to make predictions, especially about the future.”
Currency trading, unlike other asset classes, is primarily a sentiment-driven vehicle.
Join Jack at a Live Event