Guidance systems

We are often reluctant to admit that we need guidance. After all, many of us were raised to develop a large degree of self-reliance; to be able to ‘leave the nest and fly on our own’. Learning to be independent is a good thing, because you have to be able to find your own way, though you are not obliged to do so. But, even if you are striving to be independent, that does not mean you should not seek directions when you reach particular decision points.

Those who seek to teach see the need to be guides and willingly take pupils along a path, literally and metaphorically, to steer them in desired directions–towards right things and away from wrong. Parents are one set of teachers, when it comes to how they raise their children, and many realise that you have to be a constant and consistent guide if you want to increase the likelihood that children will not ‘go astray’. We can be like shepherds, and as they know, the flock may not always be willing to be steered.

That said, those being guided need to be willing. You will see that children often take a parent’s hand willingly. Of course, they will show more independence as they grow–as they should. But, adults seem less willing to offer and take the hand of other people–literally and metaphorically–in guidance. You can sometimes see that striving for independence, which may even look like rejection of help. Try to watch a couple dancing, where one does not want to follow the lead of the other: it often ends as a discordant mess. Perhaps, we reach a point where we feel we know all we need to know, so bristle at notions that we can still learn from others.

This notion of guidance comes into the work area too, though organizations are very different in the range of what they see as the need for mentoring. Many take the ‘sink or swim’ approach, arguing that if you cannot figure it out for yourself then you will not fit. That builds one kind of work culture, which may seem abrasive or lacking in some sensitivity about how people are different. I guess the argument is that those who cannot thrive in that sort of environment should go elsewhere to be happy. Other organizations see a need to nurture a sense of ‘how to’, and in so doing create a different kind of culture, where part of the ethos is about transferring what you know to those who are new or need to know. I wont argue that either culture is right or wrong, but I know which I prefer.

Last weekend, at a party, a former colleague and I were recalling times when on a mission (work assignment abroad) having no idea how to do the task that had been set. No one could or would explain how to proceed with a spreadsheet, that seemed either unwieldy or full of unknown instructions so that data input were producing results without further action. The only guidance given was something like “Don’t try to change the spreadsheet. Do your best to get the right result.” In such situations, I know that people have been gripped with panic and distress. I have heard the sobbing behind the closed hotel room door or through the adjoining wall. Asking for help may be categorized as weak. Offering help may be categorized ‘disabling’.

I wrote earlier this week how the mere offer of help seemed to generate a solution, so my heart is in the camp of those who seek to help and guide.

Over the past few weeks, I have appreciated the guidance and mentoring of a foreign exchange trading professional–he offers this on a paid or voluntary basis, and tries to do it for individuals or groups. I have also tried in recent weeks, with a friend, to do some mutual mentoring. What you learn is that guidance is about seeing possibilities and probabilities, and learning to question in a systematic way. That systematic framework helps in the making of better choices. The choices made may not stop bad things from happening, but having considered the options you are equipping yourself to shift the balance in your favour.

In foreign exchange trading, some systematic approaches are very technical, involving lots of indicators, and they have their adherents. But, adhering to a system does not mean that it is right for others or that it is likely to produce better results than other approaches. Many years ago, as a bridge player, I came across KISS (Keep it simple, stupid!) I am tending toward simpler things.

In the world of trading, you should never forget that there are always two sides: those who are looking to buy are facing those who are looking to sell. The two sides are not balanced much of the time, but the relative strength of each side becomes evident as price directions develop. But, if you watch price movements, you will see there is a lot of back and forth. Buyers win for a while; sellers win for a while. That is why markets are often in ranges, sometimes narrow, sometimes quite wide.

All traders can work within these ranges. What mentoring has helped keep in mind are that the two sides of the market are constantly in play. It has also helped in recent times is to see that one is better positioned if one is not committed to one side of the market. You are with buyers when they seem to dominate; you side with sellers when they seem to rule. That is easier said than done. But, the professional mentor is showing that the signposts for direction are not difficult to read, but you have to be ready to read them without a bias for them to point in one direction.

It was interesting this week when my friend and I were trading and discussing developments, exchanging messages online. I told him that I was looking to buy as a currency pair fell to a particular level. He asked me why did I not join the sellers. I explained that the level reached was one where buyers had appeared on a consistent basis, and I was looking to do likewise if the level held. It held, and then the pair pushed higher in line with renewed buying. I could have been wrong, and momentum could have pushed down further. I got what confirmation I wanted from price signals and the market rewarded me for that. But, even with confirmation, if things work against the trade I need to know that I made my choice on some good basis. I would then need to reassess to see if I should exit the trade for a loss or see if support comes in lower and then moves back in my desired direction. That’s how markets are, and you have to go with them wherever they lead. They are difficult to lead against their wishes.

However, I have not figured out how to read the signposts consistently. One challenge–and it is a constant–is to remember the basic lesson and not let it be distorted by ‘noise’. That noise comes in the form of chatter, oral and written, which represent opinions. While those opinions may have much validity, they cross the grain of the focus of the basic lessons. When the chatter is allowed to sway your decisions it is uncanny how often you see that the basic lesson you ignored was proved a better predictor than the chatter.

The ‘noise’ also comes in the form of news events. Data releases are one of the regular catalysts for market direction. Markets work on whether the data are in line with, worse than, or better than, expectations. While markets may react to the actual data, what is unknown is how much impulse the news will give or when that impulse will occur. You may be perplexed when markets do not react immediately to data that deviate significantly from expectations, but that lack of reaction tells you that for the moment at least the market is focusing on other things. Discounting divergent data may tell you about sentiment, too, and that the market is set in a particular direction, for the moment. If markets do react, you need to judge the intensity of reaction, and its duration. If it reverses quickly that is as telling as if it continues. But, what the basic lesson also stresses is to avoid being at the whim of news: better to stand aside and wait for the news to arrive and then try to judge reactions to it, rather than finding that your position is being buffeted by the rocky motion that comes with the news. Patience and waiting for the right conditions is something that traders need to do, but it is hard to develop and maintain. In other words, do not try to trade the news, but wait to see how markets react then decide what to do.

Two other major catalysts exist in the markets: policy decisions and unexpected events. I will combine those two. Policy decisions (which can sometimes just be statements rather than actions) tell you whether what you expected has an underpinning in actions to be taken by a major player. While markets thrive on speculation about what policy will be, confirmation of policy is important. However, markets are also good at reversing direction once policy has been confirmed: they got what they were expecting, now time to get out. I wont go into the specifics of any policy decision, right now, but ‘buying the rumour and selling the fact’ happen very often.

Unexpected events are shocks, and there are normal reactions to shock–flee or fight. In recent weeks, we have had a string of shocks in the form of popular uprisings in North Africa and the Middle East, then earthquakes in New Zealand and Japan. They each had their individual and collective impact on financial and commodity markets, including those for foreign exchange. You can try to rationalise what effect the shocks will have, but the markets will tell you their reaction and you need to decide whether to follow it, fight it, or stand aside. The impact may be short or long in duration.

When shocks occur their impact can be as devastating in financial markets as the actual events are in the place concerned. They can create windfall gains, for which we would say thanks, but they can also create large losses, for which we would say no thanks. This week has seen that play out.

But even with a shock, markets have technical levels that will come back into play. Judging how long the effects of the shocks will take to respect the technical levels is hard, but those levels are guide posts, and can help in seeing the directions that are more probable. If you feel you cannot judge, then stand aside.

I am sure there are many traders who wished they had stood aside this week, as the Japanese authorities alone and then with the help of other G7 governments, decided to intervene to weaken their currency after the earthquake caused an acceleration in its strengthening.

Shocks are not common, but they make for nervous conditions. No one likes to lose money and the risk that will happen for unforseen reasons can make for much discomfort. In such conditions, play small and keep things tight, are good mottos. If you are really worried, close your positions and take all risk off the table. It’s better to sleep well than to have restless nights. Other opportunities will come along.

I was surprised to see that one of my stops hit for a loss just after trading closed in New York on Wednesday afternoon. A sudden wave of sell orders had hit the US dollar-Japenese Yen, after it closed before its previous all-time low. After a few minutes of frowning and reassessing what had happened, I decided that it gave me the opportunity for a new trade, looking for the move to reverse, which it did, and I recouped my loss and made a decent net gain.

Guidance helps you to steer your course as well as to stay confident that if you feel you should not participate then that is the right thing to do. As we have often told our older daughters, “If things are happening at a party that make you feel uncomfortable, then leave. Don’t worry about the risk of being unpopular.” Parents might say also say, “Choose your friends well and keep away from bad company.”


About The Grasshopper

Professional international economist, recently retired from an international organization. I use blogging as a way of organizing my ideas and thoughts about a range of topics. I was born in Jamaica, and spent many years being educated, living, and working in the UK. I lived in the USA for a few decades, and worked and travelled abroad extensively. My views have a wide international perspective. Father of girls. Also, married to an economist.
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One Response to Guidance systems

  1. Pingback: Guidance systems | Grasshopper Eyes The Potomac | Midia Social

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