Market Psychology & Temporary Insanity

By Gary, www.fxlight.co

March 2014 – I am not a lawyer but I believe one of the more fascinating aspects of studying the law is the concept of “Intent” to commit a crime. You see it is not really enough to commit a crime, the prosecutor must prove that the accused had “intent” or intended to commit the crime. For most people this idea seems ridiculous and they assume that the act of committing a crime is enough to prove intent. “If you didn’t intend to do it, then why did you do it?” would be a reasonable retort and that is fair enough.

But if you stop and think about it, don’t we all do things that qualify as accidents, that is to say committing an action that had unintended results? Getting too excited at an auction and paying over the odds, or breaking the law by speeding to a meeting you are late for. These would be a temporary lapses of an otherwise sane person.

Add to this the properly insane who by legal definition cannot intend to do something illegal. Insane people do not know the difference between right and wrong and so therefore are presumed not to have the ability to have intent as legally required in a criminal charge. The law is fun isn’t it!

There is also temporary insanity. This person is deemed to be sane before the act and sane after the act – but “insane” at the moment the criminal act was perpetuated. Of all the legal defenses I’ve read about, this one fascinates me the most.

Then there is mass market insanity and where we get to the interesting bit. The market is always right, is of course true, and certainly any time I have ever tried to reason with the Forex market it has not listened to me. Over long periods of time I totally subscribe to this idea but I also study Japanese Candlestick patterns which was originally a psychological study of price action and temporary insanity in 17th Century Japanese rice markets.

Personally I prefer to trade Forex over longer time frames but then the market can be insane for long periods of time. Didn’t Keynes say something about “the market remaining irrational for longer than you can remain solvent”. So where am I going with this insanity?

Shinzo Abe’s government in Japan is conducting a policy that is virtually guaranteed to make the Yen substantially weaker. Starting last October the yen has lost ground relentlessly to the dollar as the Japanese government began its debasement of the yen. Today, however, the yen has regained more than 4 big points – from above 105 to 100.74 at one point and now trades in the 101’s – against the dollar. And all the while the Japanese have re-iterated their intent to proceed to debase the yen. My target for 2014 is 110-112 vs the Dollar but other sensible people are projecting as high as 200! I am not saying that the greenback is anything special. Let’s just say if both have fallen out of the ugly tree then neither looks pretty, but the Yen hit every ugly branch on the way down. It could just be that in times of uncertainty the Yen is seen as a safe haven. After all EURCHF is back in the 1.21’s so there would seem to be a risk off trade in forex at least with the Yen benefiting too.

So how long will this insanity last? I don’t know but I am looking for technical opportunities to get long. I think that the best trades are when the fundamental and technical analysis all point in the same direction. The 200 day SMA held twice in October and once in November and sits patiently at approx. 100 vs the Dollar as does previous triangle resistance turned support on a weekly time frame. That’s not a bad entry point if we get to 100 or even down into the 99′s for a period. If instead this market rises and we can close above 103.50 then perhaps that is a good entry level but the point here is that markets are simultaneously efficient but are also managed by humans whom as I have discussed are prone to bouts of insanity. USDJPY is case in point in my opinion where it’s like we are trying to sell a second hand car to a guy and are talking it up, while at the same time the original owner is in the back ground hitting the car with a baseball bat. Sooner or later the customer will lose his enthusiasm for this asset.

Psychology

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