Random Thoughts – Human Trading Biases

Seasoned traders are all prone to biases.

For some weeks now, I have been re-conditioning my brain that I should not look at Iron ore prices when trading the AUD, trying hard to erase the the mental association I have developed over the years that Iron ore, being their biggest export (followed closely  by Coal), should have any influence on the AUD dollar’s strength. And of course, the biggest export market of Australia in their trade weighted basket would be China – nearly 25% (Source : RBA), and thus the importance of the economic health of China.

We have built associations into our minds of the main influences of each currency. And the truth is that Iron ore prices has little correlation with the daily or even weekly movement of the AUD dollar.

AUD VS IRON ORE

Not all are like me. For instance, some of my friends do not even read the news when they trade, giving everything up to technical analysis, a tempting but difficult idea especially for me because of a certain personality disorder, I suspect.

Thus I continue in my unsatisfactory quest to connect monsoon rainfalls to the Indian rupee and watch the El Nino for signs of crop failures and of course, Gold to the South African rand.

Speaking to friends in the markets, it is interesting to see how their common associations as well.

For instance, KRW is associated with global trade and Samsung handphone sales, MYR is commonly linked with Palm oil prices, PHP is affected by offshore repatriation flows from workers, AUD traders also watch China closely.

Then we have the geographical associations – IDR, PHP, MYR and THB etc.

There is no escaping these because global flows rule the markets and indices tend to group currencies and economies into regions. And with the global trend of governments and central banks getting involved in the markets devaluing currencies, diversifying national reserves and sovereign wealth funds, fundamental analysis do not work anymore.

The big danger of my AUD and Iron ore association is that AUD, like the rest of the currencies has become part of the global risk on risk off trade and more lately, has become the world’s favourite carry trade.

Hot money does not usually care about long term prospects unlike the case of INR which has become a “Modi-trade”, banking on Modi to work some magic on the Indian economy that the market has already pre-empted in driving the Sensex and NIFTY to a lifetime record high. http://www.bloomberg.com/news/2014-09-07/blackrock-bullish-as-modi-optimism-burnishes-yield-india-credit.html

Much like Indonesia that rallying for the “Jokowi” reason, the Jakarta Composite breaching a record high today.

For these developments, I am surprised that their respective currencies have not reacted in tandem.

Chart : Nifty Index vs USDINR

nifty vs inr

Chart : JCI vs USDIDR

jci vs idr

That is my heuristical bias at work again. The reason for the INR and IDR staying put could well be that the contagion from the rest of the EM basket which is looking weak in recent days as the market digests the effects of the ECB surprise devaluation and the prospect of the FOMC next week.

The human mind cannot handle too many rules or factors. We stick to the familiar and that works against us sometimes. Most of all, timing could be against us because others are not thinking the same thing at the same time. That is why the appeal of just pure technical trading which takes away the malady of thinking too much.

Yet charts also pose a danger in recent years to the technical trader as computer algorithm programs smell out the chart points to plot the demise of chart traders by triggering their stop losses.

An example would be the EUR back in May which I wrote about in https://tradehaven.net/market/fx/the-market-philharmonic-orchestra-presents-symphony-eur-carnage/.

In the current world order, economics matters much less central bank actions which then depends partly on certain economic parameters.

I have simplified it to just 3 or 4 central banks that matter while the rest play secondary roles with their limited global influence. Between the 4 central banks’ balance sheets, there is enough ammunition to rule the world.

Besides the 4 central banks, which are the US Federal Reserve, European Central Bank, Bank of Japan and People’s Bank of China, the over riding factor would be market positioning and sentiments.

That is why it is simply infuriating to wonder about Iron ore prices, the monsoon, El Nino, record stock markets and Samsung sales. Wondering has become a long term strategy that, at best, underperforms the mediocre automated trading robots that are so good at second guessing what the average trader is thinking.

Yet the success of the robot is dependent on the number of flawed human traders out there and perhaps, lesser robots.

And that is the reason why I will still continue to follow Iron ore prices and the monsoon because when the robots start to think, they will be going down those lines eventually.

For those who are interested, here is a link to a full length documentary, Floored which depicts the electronic trading revolution and not quite different from what is happening now in the world of forex trading. http://www.youtube.com/watch?v=tCcxr-fyF4Q