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Observation – Reflection and Decision

Posted by bobbysrinivasan on June 20, 2016

It is customary among investors that whatever they observed about some economic event like an interest rate hence their mind will build a story around the observation and reflect on the story that they built. For example, on June 3, 2016 the US Federal Reserve announced that the job creation for the month of May 2016 as 38000. This was contrary to the consensus expectation of 160000. Immediately the investors mind reflected on this data announced and concluded that the US economic growth is definitely heading lower, especially when the fed announced that the April 2016 figure was revised downward significantly.

 

The nature of reflection will take into consideration the current data along with some historical data. Since President Obama became president 8 years ago in the US, the job creation has been vibrant with more than 2.4 million jobs per annum created.

 

This was also due to enormous pumping of funds which they called it quantitative easing (QE1, QE2, QE3) which ended after nearly 6 years of continuous pumping of additional of liquidity (nearly 4 trillion dollars were added). It now appears that unless further pumping is done the US economy which is in fledgling recovery will revert back to negative growth leading possibly to recession. This data is expected on June 29, 2016.

 

The market on receipt of this slowdown in job creation became volatile with the US dollars value came under pressure. The value of gold per Oz jumped from $ 1210 to 1290 an ounce in just a few trading days. The US dollar index came down nearly 2% while the values of Euro and Yen appreciated against the Dollar.

 

Now let us revert back to observation. Observation based on facts became the starting point. Reflection on it clearly indicated to the trader that all is not well for the US economy. This was followed by his decision to sell the dollar against gold and other major trading currencies for a handsome profit.

 

Unlike observation which is made at the point in time, reflection takes the trader to a different realm. Is it an outlier event? Will the job creation bounce back? Is it seasonal? Is it the aberration of the way data was collected? Were their strikes in the US which created the situation? While holding his current position he will ponder over as to what can be expected for the month of June when the data will be released on July 8, 2016.

 

The whole process of decision making is highly dynamic. During the next one month our trader will be looking for more and more evidences either to stay with the current position or to book the profits hoping to trade in the opposite direction. People who rush to call trading a gambling activity are missing the point which is that trading when engaged properly is fully data supported. It not only uses the current data but the near term historic data as well.

 

For a professional trader, it is like watching a Tamil serial. Why? While watching in the now, the watcher will want to predict how tomorrow event may turn out. This way he becomes part of the serial itself. But in trading there is the third stage of involvement after observation and reflection which is decision making. It is here that the belief in oneself must be strong. This is where both Warren Buffett and George Soros excelled and proved that one can make huge profits in the financial market.

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