To look for the reason that markets flights are unpredictable in their development and duration leave aside everything you think you know and look at the evening sky in winter (You may have to do this via YouTube if you don’t have the patience, time or weather). As dusk approaches Starlings, nesting in their tens of thousands suddenly take flight, they pack together in a tight cloud, like a shoal of fish, and dance across the evening sky. The cloud gets bigger and bigger, and it dances and shapes itself most beautifully as they feed. This is a murmuration of Starlings. It is a beautiful thing to witness.
As the last rays disappear of light disappear, as they must, so does the murmuration. Speculative markets operate in the same way.
Craig Reynolds, a pioneering computer scientist, built a computer model that recreated something similar to a murmuration when he realised that it was governed by each bird following three simple rules. Nearby birds would move apart, distant birds would move closer and all of the birds would try a synchronise their direction and speed. That simple interaction of individual nodes produces something pretty close to a murmuration. And pretty close to a speculative market.
A little further research revealed that starlings monitor the speed and direction of the nearest seven birds to them. There is no master plan, just individuals looking at the closest thing to them. Chaos creating a chaotic boundary.
How does this help you as a speculative investor?
Think of another theory, the butterfly wing theory. Here, a butterfly flaps its wings and causes the air to move, and the chain reaction pulls in more and more other actions that eventually create a hurricane. Murmurations are the same; there can be millions of birds in a murmuration, just one of them going rogue for a moment can set off a chain reaction that moves the entire flock in a different direction. It’s impossible to predict.
So how DO you make money out of speculative markets?
You can’t predict the trajectory or velocity of the market. Still, enough speculators think you can to enable the real profits to be taken in two ways, one is a slice of each trade, it doesn’t matter what the market does if you are getting a sliver either way, and the other is to absolutely know the market has just moved before anyone else realises it has happened, which brings it back to those clever IT guys down in Canary Wharf, sitting on top of the internet node with computers that would shame the NSA, arbitraging the market nanosecond by nanosecond.
If you want to bet on markets, you can expect to stand in one of two squares, the 25% of speculators who make money overall, or the 75% of punters who lose money overall. Remember it is a zero-sum game so for someone to lose someone somewhere else must have won.
You don’t make money in the market, you make money because the market exists.
If you want to come out of a speculative market with the same money you went into it, the best thing to do is to sit at the edge and admire the show. Let the starlings in the market lose their cash.
Don’t be a Starling.
