The market is never irrational - it's just that we can't always understand its reasons. All trading is based, in one way or another, on the notion that "history repeats itself": whether we look for patterns in the charts or correlations with fundamental data. Now I'm an historian by trade, and I can tell you that history doesn't repeat itself, it only seems to. We have, for example, recurring events called "wars", except that no two wars are alike. The Marxists spend zillions of hours trying to discover what made revolutions happen. A revolution was a spontaneous uprising of the masses (the French Revolution). No, it was a disciplined action by a centrally-controlled party (the Russian Revolution). It was caused by poverty and discontent. No, it was caused by a "revolution of rising expectations". You had to take the cities, from which you could control the countryside (Russia again). No, you had to take the countryside, from which you could surround the cities (China). No, you had to organize and arm youselves in the mountains, then capture the capital (Cuba).
It was inevitable and you just had to wait for the right conditions. No, you had to create the conditions. Etc. etc. etc. Doesn't it sound a lot like conversations between traders?
Now you can throw up your hands and declare that "the only law of history is that there are no laws of history". Yet historians persist in trying to analyse and explain. I wouldn't have become one if I hadn't thought it was possible. But the real "lessons of history" don't take the form of crude parallels between events that superficially resemble each other. They consist of insights into human behaviour and character. Chamberlain, who relied on the "lessons of Sarajevo" (allegedly: if great powers allowed themselves to make commitments to small states, then local conflagrations could turn into World Wars.) Therefore he really thought that by selling out the Czechs at Munich he had ensured "peace in our time". All the idiots since who babble about "the lessons of Munich" are bad historians, just like Chamberlain. Churchill, on the other hand, was a good historian. He was able to judge Hitler from his behaviour, knew what kind of man he was dealing with, and knew what he was capable of. The postwar leaders of the Soviet Union, even though they also presided over a totalitarian state, were men of a totally different stripe: they had survived by being yes-men to Stalin and they had a defensive, not an aggressive mentality. Oh sure, they tried to push here and there, wherever they could, but a mass invasion of Western Europe and World War III were the furthest thing from their little bureaucratic minds.
Bottom line: people make history, and people make the market. Understand people (in all their irrationality), and all the forces that push and pull on them, and you understand both.
People say that emotion is the trader's enemy. Wrong: emotion is the trader's instinct. It's a good guide, but you have to know how to use it. Provided you've done your research and understand as many of the pushes and pulls as you can, depression signals a buying opportunity, exhilaration tells you it's time to sell.
And then there are the common virtues, which are also instincts. Prudence tells you you'll often be wrong, no matter what you do, so you should limit risk by limiting leverage and diversifying. Patience tells you to ride things out: it's darkest before the dawn. They're tried and tested rules of any kind of trading, and they apply to currencies, too.
My portfolio happens to be going all the wrong ways at the moment, and on paper I'm now down 3% on the month. It happens, get used to it. 3% is not a disaster, a month is a short time-frame. My positions were all entered into carefully, and the chances are overwhelming that most of them will pay off sooner or later, no matter how "irrationally" things seem to be going at the moment. I may do some rebalancing, but I'm not panic-selling.
End of sermon. Any theories about what's happening?
would have nuked China or gone to war against
