Here’s a different way of viewing the markets and the game of trading, which I particularly like – the market is a mechanism for self-deception.
This idea comes in part from the world of military strategy. Deception is a key principle of warfare, as stated by Sun Tzu in one of his most famous quotations:
“All warfare is based on deception. Hence, when able to attack, we must seem unable; when using our forces, we must seem inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near.”
… Sun Tzu
If we can show the enemy something that he wants to see, and that he perceives to be certain, then his decision making processes will become predictable and we can position our forces to successfully inflict defeat.
Can we apply this idea to the markets, and to the game of trading? Absolutely.
Before we discuss how to apply this concept to the markets, let us first consider which role we play in this game of deception.
I’ll repeat the above key statement, “If we can show the enemy something that he wants to see, and that he perceives to be certain, then his decision making processes will become predictable and we can position our forces to successfully inflict defeat.”
Are we the deceiver… attempting to move the market and tempt other traders to position themselves incorrectly against the true market bias? I wish I was… but I don’t have sufficient capital for that, and I don’t imagine you do either.
No… we are the deceived… we are the one being tempted to position ourselves incorrectly, or to make poor management decisions once in a trade.
So who then is the deceiver?
The market exists as a result of net orderflow, created as a result of the net sentiment of all market participants. It is not capable of individual thought, and does not exist with a sole strategic objective to wipe out your account (as much as it appears that way at times). The market simply exists.
It is us who decides how we will perceive and understand market movement. If market movement shows us something that we want to see, and that we perceive to be certain, it is because we alone have decided to perceive it this way.
In the market environment, we are both the deceiver, and the deceived.
“We are never deceived; we deceive ourselves.”
…Johann Wolfgang von Goethe
The market is an environment that promotes self-deception.
So, how can we use this model to trade the markets?
Let’s return first to the military context. Recognising that we are the one who is likely to be deceived, how should we operate on the battlefield if we wish to survive?
- Be aware of the potential for deception, especially when faced with a “certainty”;
- Seek opportunity when deception is recognised, by adjusting tactics to counter-attack from an advantageous position; and
- Always ensure an exit strategy to minimise damage upon recognition of having been caught in a trap.
In the market environment, this applies in the same way.
- Be aware of the potential for self-deception, especially when faced with a “certainty”.
- Aim to maximise your profits through recognising when others are being deceived, and trading against their position.
- Aim to minimise your losses through recognising when you have been caught in a trap, allowing prompt action to exit before suffering catastrophic damage.
So… the basis for trading in accordance with this model, is one of recognising deception in the market.
We’ll have a look at some examples of this in Part Two to this article, next week. In the meantime, if you like this concept then have a look at some of your previous trades from this different perspective. Review some of your winners – who were you trading against, and what were the signs that they were being deceived. And your losses – were there signs that should have alerted you beforehand to this potential deception, or signs after entry that could have minimised further drawdown?
More to follow…