Did you miss the $17 move in COMEX Gold yesterday? A lot of people I see around town ask me casually about gold or crude oil. Now that gold is over $1,000 everyone feels foolish buying it at these levels. They reason that they’ve missed the move and should wait for it to come back down. (Click on any chart to enlarge).
Feb COMEX Gold
A couple of big down draft days around Thanksgiving probably shook out the weak hands or stopped out the trend followers. Then you had the big pull back that everyone was waiting for. How many of your colleagues, family members, or friends who ask you about gold bought the pull back? My guess is not many. Everyone wants a deal – a baker’s dozen. Taking action is an emotional and self-awareness issue, not a financial one, and it’s hard to do when you don’t know what you’re doing or have doubts.
Below is the chart of the front month in crude oil. It looks like it’s been up for the last 10 days or so in a row. What is the probability of that? You can bet that there were plenty of speculators who sold short just on the assumption that if you keep flipping the coin, sooner or later you’ll get tails after a run of heads.
Feb NYMEX Crude Oil
The thing to remember about trends is that they are unpredictable. They last longer and can have a greater magnitude than market watchers can fathom. But the spectators love to talk about them!
A trader who acts like a trader will have Stops in before the market starts to move. Trading as a trend follower takes some faith and conviction. That’s why trend followers focus on process, not on outcomes. Most folks need and want more money and better returns, but they cannot overcome their emotions – especially fear and doubt. And the last thing that they want to happen is to look foolish in front of a person they need validation from.
Where do you think the chart below is headed?
How about this one?
“Those who have knowledge don’t predict. Those who predict don’t have knowledge.”
– Lau Tzu
“Why do people think they’re smarter than the market long-term? What gives them that confidence? I guess people feel dumb if they can’t predict what the market is going to do in the short term. They’re too proud to admit they don’t know what to do when they’re wrong. They don’t have the capacity to understand the digits that are scrolling by on the bottom of the television. I don’t. It’s too much noise. That’s why we rely on our system.”
-Bill Dunn
Michael, the notion that a long run of flipping heads is improbable is fallacious, is it not? Every flip is exactly 50/50 right? Is that the point you are making in terms of the power of the trend?
It is not. Each flip itself is 1/2 or 50% probability.
To calculate the probability of a “long run” in flipping heads, you’d
have to multiply the probability of flipping heads for each successive
flip. Here’s an example of a moderate run of 5 consecutive flips coming
up heads:
.5 x .5 x .5 x .5 x .5 = .03125 or 3.125%, making the odds 31:1 against
– I’d say unlikely.
.5 = probability of 1 head
.5 x .5 = probability of 2 heads in a row = .25 or 25%
.5 x .5 x .5 = 12.5%
.5 x .5 x .5 x .5 = 6.25%
.5 x .5 x .5 x .5 x .5 = 3.125%
So if you bet me that you’d get a run of 5 heads in a row, 96.875% of
the time when you flipped the coin 5 times, you would not achieve the
outcome. Notice you only need the first flip to come up tails to bust on
that particular group of 5 tosses. The remaining four don’t matter when
the first one does not meet your criteria.
Only in 3.125% of your “group of 5 flips” would you achieve 5 in a row.
Hope that helps.