We have heard some of these expressions before...and no doubt to some degree have experienced them ourselves in a positive and negative way.
Perhaps the joy of simply
being carried by the tide...or the helplessness of fighting the tide.
And what about the exhilaration of triumphantly riding a wave into shore...or the desperation and panic of being unceremoniously dumped by one (the proverbial 'wipeout')?
And what about the exhilaration of triumphantly riding a wave into shore...or the desperation and panic of being unceremoniously dumped by one (the proverbial 'wipeout')?
These are valuable lessons to learn in respecting the sea...but these can also be just as valuable lessons to learn in respecting and surviving financial markets like the Rand, and understanding the forces that move them and their ever-restless nature.
The fact is, there is a lot in common between the sea and the market...
A cursory glance at the sea would not pick up much, except that it never
sleeps, and is constantly changing.
But observe it over a period of time and you will see that it has cycles and moods. And too that there are different degrees of forces or trends that drive its apparent random activity.
But observe it over a period of time and you will see that it has cycles and moods. And too that there are different degrees of forces or trends that drive its apparent random activity.
And so it is with the markets as well – the more we observe them, the more we see patterns and cycles to these seemingly random fluctuations, and various degrees of trends (actions and reactions) superimposed on each other.
This what we hope to cover the next post or two, with this one being centred around the TIDE in markets.
Of primary importance is the major trend in any market (one spanning several years), which can be represented by the tides of the ocean – the underlying trend caused by the major pulling forces of the sun and moon.
Remember how, as a kid, you built that beautiful sand castle well away from the sea edge?
...only to see the waves steadily getting closer and
closer
...and no matter how much you try and protect your castle,
eventually the waves flatten it
...and you need to start all over again? – further up the beach!
Yes, the tide – this primary force and cycle of the ocean – caught us out many times as kids. And it still catches us out time and time again (when last did you get your towel soaked by the advancing sea?!)
And why?
Because we tend to look at where the sea is now, and make our plans around the fact that the status quo will remain – instead of finding out:
- The current trend (rising or falling tide), and
- The historical limits of these trend cycles (low and high water marks)
And then using this information to make informed and intelligent decisions.
And we make exactly the same mistake with the markets.
How often we make decisions based on where the market is right now, without any concern as to what the trend is,
or what stage it is in (early or mature)?
Or worse still, we extrapolate the current market trend indefinitely into the future (as crazy as expecting an ever-rising tide), instead of understanding the direction of the current trend, and how far the market is expected to go before reversing – based on historical trends.
Or worse still, we extrapolate the current market trend indefinitely into the future (as crazy as expecting an ever-rising tide), instead of understanding the direction of the current trend, and how far the market is expected to go before reversing – based on historical trends.
And the result is DISASTER!
Look no further than the Swiss National Bank (SNB) for an example – when they decided back in 2011 to build a sand castle to protect the Swiss Franc from dropping below 1.20 Francs to the Euro.
The tide (primary trend) was against them, but they thought their sand castle would hold up.
Which it did – for a while...until 15 January 2015 at 11h30 (South African time) to be precise...
Click to see full size...And then - BAM! GAME OVER!
Just like our sandcastles as kids, it was only for a while until the enforcements gave in, and the sandcastle was swamped by the underlying tide. Eventually the tide won – as it always was going to.
This should be a lesson for all Central Bankers, and all those exposed to currency swings, whether importers, exporters, investors or traders alike -
DON'T EVER fight the tide! You WILL lose!
It was a lesson I learned back in 2004! And an expensive one too...
We earned foreign currency in our investment management business, and
from 1993 to 2001 we had seen the Rand steadily depreciate from R3.00 to R13.85 to the Dollar,
which was great for an export-based business.
And we merely expected it to continue....
BUT then - the tide changed...
...and it trended the other way for 4 full years - strengthening all the way back to R5.60 to the Dollar by early 2005!
And what did we do?
We fought it all along the way, because it did not suit us! (...sound familiar, Mr SNB Chairman?)
The result? A very costly a lesson learned in the School of Hard Knocks.
The fact is, we could have avoided this if we had the right information, and had recognized that the Rand had reversed its 30 year upward trend in 2001.And we merely expected it to continue....
BUT then - the tide changed...
...and it trended the other way for 4 full years - strengthening all the way back to R5.60 to the Dollar by early 2005!
And what did we do?
We fought it all along the way, because it did not suit us! (...sound familiar, Mr SNB Chairman?)
The result? A very costly a lesson learned in the School of Hard Knocks.
And I want to ensure that you learn our lesson - without the Hard Knocks part!
There is a lot more to surviving the sea than just the tide, and there is a lot more to surviving the markets than just the primary trend...
...but ONE lesson at a time, starting with the first and most important one -
8 replies to "Respect the Tide, Ride the Wave, Watch the Ripples - Part 1"
Great wisdom James. Thanks so much for sharing it with us.
Will watch the Tide very careful from now on !!!
Thanks, Laurens! Yes, a valuable lesson to learn and apply to the market.
Hi I wonder if James might like to comment. With the proverbial tide going out with the GBPZAR for about a year in a downward channel from close to R19 to arounf R17. IE is it about time the tide turned and the Rand started its path of further weakness into the Rtwenties and may not weaken as far as R15/R16 as suggested. Thanks
Doug, yes it would appear we could be heading back towards recent highs and perhaps a bit above, before we see more weakness. It's been a bit of a 'neap tide' the past year or so, which as you know, is followed by a 'spring tide' - larger tidal movements each way. Could be some interesting months ahead on the Pound/Rand...
Hi James, thanks for that great market/tide metaphor, I did notice a strengthening in the rand yesterday when the Gold took a jump. Considering we are greatly effected by our commodity in SA what do you think about the Property market in SA at present.
Is investing in SA still a good step.
Hi Kenneth, interestingly, the Rand is not as tied to Gold as we all think - see my blog post Demystifying the Rand’s Relationship with Gold as well as Gold's actual effect on our economy in our Rand Exposé report.
On property, I would be hesitant to invest in SA - I believe SA property prices are a bubble that must burst - see the interactive chart on the Economist site and you will see what I mean.
Dear James
life is a cycle,start with our own life and carry on with nation,up to all Humankind on this earth.
You are learning fast from our American friends to give us a booklet to read but not really touching the subject of... currencies $/Rand mainly.
We know the story of the sea and we understand the resemblances to the financial market.
As you said one need to observe,taking history to account.
In my humble opinion the most important piece of information is to be patient,have deep pocket
and above all have big ....balls.
I really don'd mind paying you if you add value to my trading
thanks
yoel
Hi Yoel,
Yes, life is full of cycles, even financial markets. This was an expensive lesson I learned myself - on the Dollar/Rand, though this applies to all financial markets.
We need to observe and take history into account, but that is not sufficient, because as humans, we don't learn lessons very well from history - fact is, we tend to make the same mistakes in the same circumstances over and over again. This is so in financial markets more than any other, because in such conditions we make EMOTIONAL decisions. What is needed to be successful is to take the emotion out of our decision-making, through 1) objective information (like our forecasts) and 2) an objective system using that information, which has proved to be profitable over a period of time. And then, 3) the discipline to stick with this system - even when your emotions are screaming to do the opposite. And when it comes to actual forex trading, you need 4) good money management, risking only a small percent (max 2-3%) of your capital in any trade. Without these, no matter how deep your pockets or how big your..., you will lose in the end.
Trust this helps.
Regards
James