Markets are complex. Many interconnected variables influence their behaviour. Yet quite often even the best analysts or neural networks find themselves on the wrong side of the market. The steady decline in oil and commodities is a good example of how commodities companies trading companies and hedge funds have totally failed in understanding the deep routed weakness in the oil complex.
For many the collapse of the oil price has been a no brainer for years. The recession, shale oil, fuel efficiency, increased production by OPEC, and new technology are only a few of the many reasons why oil had reached a multi decade top. Yet traders and pundits have been calling a bottom to the slide for a year and even putting their money where their mouth is. This contrarian play is deeply routed in the nature of human psychology and trading or is it.
Behind every single tick move in any instrument is a notion of interconnectedness. Statistically a price can go either way in each single tick. It is not possible to connect one tick to another based on complex mathematical algorithms or formulae. So humans invent complex or simple reasons why 2 prices may be connected. This starts with simple moving averages and continues with complex algorithms. We inherently go from phase shift, where no connection exists to chaos theory where every event could influence that particular tick.
This paralysis of analysts in itself causes panics in the market when black swan events happen and leads to extreme volatility. In effect markets are self fulfilling prophesies of themselves. High frequency traders are very successful in this environment and fund managers and many hedge funds are totally useless. Conventional technical analyses or fundamental analysis have no place here. This is the work of the turbo charged trading algorithm trading differentials of price in seconds and milliseconds. In chaos theory there is order. It has to be found and is often microscopic.
The reality of price differentials are a mix of both phase shift and chaos theory. Apart from perception nothing connects 2 ticks in any market, yet humans have developed complex theories to explain movements in any 2 variables. These theories are universally used and accepted and therefore have become norms for traders globally. Yet the most successful traders are the ones that have absolutely no bias on any timeframe and treat each tick or candle or price as new unconnected event. The steady observation of these unconnected events creates a momentum that magnifies during high volatility black swan events creating immense moves in the direction of the trade.
