Shark Radar

Broader review of the most significant events worldwide
Nov 30, 2020, 4:28 PM GMT

Snow is Falling. Sell Snow!

Pit Traders At the New York Stock Exchange

Most traders are familiar with a popular meme depicting several traders in a room, where one of them is looking through a window and observes that "snow is falling". Another one hears him and declares that he is now going to sell snow. This funny spin of the 'broken telephone' game offers a trading twist to the old 'monkey see, monkey do' saying.

Essentially, the market represents one giant framework of incessant information transition, which is bound to cause many such misunderstandings. The unfortunate outcome for trading 'monkey-doers' in such cases is regrettably manifested in huge losses more often than not. But why is it that traders continue to react blindly to news and trends without giving them a second thought?

Part of the explanation lies in mass-market psychology. Most traders feel compelled to react swiftly to any financial news that entails the possibility of quick profit-making. Say, for example, you have just heard that a major Norwegian ETF is planning to purchase a considerable amount of Bitcoins, as a part of their new strategy to diversify their portfolio with cryptocurrencies. You believe that the move is going to have a noticeable impact on the price of the Bitcoin, so you react immediately by opening a long position yourself. The logic, at least at face value, appears sound, but reason is not the biggest determinant of your actions in this particular case. Rather, it is the fear of missing out (FOMO) on a seemingly good trading opportunity.

Oftentimes traders misconstrue such behaviour for being analogous to trend-continuation trading. It is not. Riding on an established trend entails a careful examination of the behaviour of the price action as well as placing timely and measured orders. Instantaneous entries of the former kind, in contrast, are typically being inspired by 'gut feelings', which is what makes them so dangerous.

Over the last few years, social media has played a considerable role in exacerbating these tendencies by polarising traders' opinions. The market has become quite reactive, frequently responding to even minor changes to the underlying sentiment with massive and overblown volatility outbursts.

Being able to discern credible evidence from intermittent noise on the market has always been important in trading; however, the need for emotional detachment in analysing data has never been as great as it is now. This is especially true in the context of today's highly sensible market.

One thing worth remembering is that it does not really matter what you believe should be the logical market reaction to certain news in any given case, as much as you need to understand what the general market deems to be logical in that particular instance. Otherwise, you are just selling snow.