The Madness And Wisdom Of Crowds

The Madness And Wisdom Of Crowds

Whenever a market reaches multi-year highs or lows you hear from both the perma-bulls calling for even more upside and those who immediately start listing reasons why the latest high is too high.  

The Madness And Wisdom Of Crowds
The Madness And Wisdom Of Crowds

Or in the case of something like oil, why the low is so low producers will stop producing it. (OPEC hasn't gotten the memo.)

Sometimes you'll hear that a tanking stock is a great bargain, which, if the company doesn't tank as well, it might be. Priceline was such a "dog" some years back. In other cases, the low price is more than justified and people start to question the judgement of anyone who still cheers for it. Jim Cramer's advice to hold onto Bear Stearns stock ("Don't be silly!"), fairly or not, is the most famous example of the latter.

Extreme prices tend to invite extreme opinions. It's understandable. Uncertainty is hard to live with. Sometimes, just to avoid the discomfort, we'll fill the void with anything, even a wrong conclusion.

Let me be clear: I am not saying the current trend in any market is going to continue or not continue. Our job at Nadex is not to tell you how to trade, just to give you a fair and transparent venue in which to trade with limited risk. That's why this chart has no labels or numbers—it could be any market in any time frame.

The madness and wisdom of crowds

Trading is about the art of the probable. You seek an edge that let's you say that one thing is more likely to happen than another. But part of being a successful trader is accepting that you can't know the future. You have to embrace the uncertainty.


A friend and trading mentor of mine, who's been at it for 30 years, says he wakes up every day (at 3:33 am exactly), looks in the bathroom mirror and says to himself, "I know that I don't know." That's the certainty he starts with, the premise that sits behind all his other decisions.

Once you realize what you don't know, it's easier to look for what you do know. And what you know is the price. The prices the market has traded at in the past and the current price. Ultimately, the only truth of the market is the price.

Price marks the point when a buyer and a seller agreed to make an exchange and the transaction took place. It actually happened. It's not what should happen or what some billionaire or TV star says he thinks will happen. It's a real thing and you can believe in it like gravity.

And like gravity, markets tend to obey Newton's laws. A trend is just a market in motion remaining in motion until it's acted on by an outside force. The thing you have to accept is that you can't know for sure what that outside force will be.

Plenty of people have expressed opinions on what the stock market will do when the Fed finally raises interest rates, but the truth is, no one knows. So how do you make an investment plan in the face of such uncertainty? Because once you realize what you can never control, you also realize what you can.


It's probably obvious that I'm not talking about "trend-following" as a model or tactic, a set of algorithms or equations. I'm talking about a way of thinking, a way of choosing what to focus on. You can't control the market, but you can control your mind.

In practical terms, that often involves zooming out to see the larger movement of which the current choppy price action might be a part. As volatile as it is on a particular day or week (with the VIX climbing and people freaking out), it might be a tempest in a teacup when you look over the last several weeks, or months, or even years.


When WTI Crude Oil futures fell from over $100 in 2014 and hit their low of around $45/barrel in January, some were surprised that it got that low; others were surprised that it stopped at that level. What was so special about $45 a barrel? It wasn't a break-even for production costs or a number set by OPEC. Then again, nobody knows the exact production cost of oil.

So how did some traders know that $45 was major support? By drawing one line connecting the low prices from 1998, 2002, and 2009. The market trended down, fast and hard from the highs of 2014, and stopped at that line like someone had told it to.

The assumption behind technical analysis is that someone did tell it to. And that someone waseveryone, a collective intelligence that is greater than the sum of its parts. Some traders believe, with good reason, that the market as a whole was aware, some people consciously and others perhaps subconsciously, that a low at $45 would be a logical extension of an up and down pattern stretching back decades.

Or to put it another way, one person can look at a chart and see madness, where another sees wisdom. It depends on what you know you know.

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