New Market Dynamics for 2009

The current crisis is not similar to Japan’s banking crisis, the Great Depression, or the Crash of 1929. There are many fundamental differences, to name a few:

In 1929:

• There was no internet
• No electronic trading, no global markets
• No derivatives
• No way to easily create 100 billion in electronic money by the click of a button
• No globalization
• China was not a leading manufacturing base
• Oil had not peaked, oil was just beginning to be discovered, many of the big elephant fields would not be discovered for years
• No global warming
• Fixed currency system
• No iPods, MTV, Obama, Ricky Martin

In this environment, automated systems can flourish, but they must include new market thinking.

New FX Systems should:

• Take into account large, variable spreads. If you can work around that, if the spreads tighten, it can only improve system performance.
• Have account protection circuit breakers. No matter what the strategy does, it should close all trades and shut down trading if the account protection (say 5%) is breached.
• Utilize hedging and advanced money management
• Trade in dynamic lot sizes. Instead of a signal generating a single ‘buy’ or ‘sell’ signal, systems should constantly add and subtract size on an existing position.

EES analysis indicates a combination of ultra-conservative, traditional investing (such as in physical gold, physical cash, and investing in local businesses within 50 miles), combined with high frequency automated trading of any market (although we prefer FX), is the way to trade the next 3 years. The market is too volatile to time it correctly and business is too volatile for traditional analysis to predict future price.

Disclosure: none

Comments

[Nick Gogerty:]

You may be interested in reading Kindelbergers Manias, panics and crashes or The Panic of 1907.

Things really haven't changed that much. The news and noise gets around faster, but the rate of human response and nature of human response remains the same. We have new tools and toys but the game remains the same.

2008 Nov 04 11:43 AM