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Author: [US] Robert I. Webb Alexander Webb

Source: Huazhang Economic Finance (ID: hzbook_tzlc)

At around 14:40 Beijing time, according to the People’s Daily client news, Donald Trump took the lead in obtaining 270 votes and was successfully elected as the new US president.

First, the British Brexit, and then Trump was elected, the global black swan is frequent, how does the black swan attack?

The Black Swan event (English: Black swan event) refers to an extremely unpredictable and unusual event that usually causes negative reaction or even subversion of the market chain. From the subprime mortgage crisis to the tsunami in Southeast Asia, from the September 11th incident to the sinking of the Titanic, the Swiss National Bank abandoned the euro-Swiss franc exchange rate and the Swiss franc soared. Black swan exists in all fields, regardless of financial markets, business, economics or personal life, it can not escape its control.

In general, the "black swan" event refers to an event that satisfies the following three characteristics:

First of all, it is accidental.

Second, it has a major impact.

Third, although it is accidental, human nature prompts us to make reasons for its occurrence after the event, and more or less think it is interpretable and predictable.

Market situation and market sentiment

Market shocks can create or destroy wealth in seconds, so how can traders make a profit and protect themselves in these fluctuations in the market?

You are not dealing with yourself, so it is important to understand how other market participants see the market. Not only do you have to know what market sentiment is, but you also need to know the current market situation.

For example, is the economy expanding or contracting? Is it in a bull market, a bear market or a trendless market? The market situation may have an impact on the impact of a market shock on prices.

Negative news may be overlooked in the bull market, and may also have small-scale effects, but the duration is shorter than the bearish news in the bear market. Conversely, Lido news may be overlooked in a bear market and may have a small-scale impact, but will last shorter than the same news in a bull market or a no-trend market.

If you think that the effects of a market shock may be limited, then this will affect your trading judgment. If it is a more short-term transaction, then the risks associated with it will also affect the size of your transaction.

The volatility index (VIX), also known as the fear index, is one of the indicators for measuring market sentiment.

In general, the Volatility Index is a fear scale for investors in the market, especially in the US stock market. Investors are afraid of negative market shocks.

Volatility will change over time in the market. It is not surprising that the market is under pressure and the volatility of the period of uncertainty is relatively high, such as the Asian financial crisis of 1997-1998, the global financial crisis of 2007-2009 and the subsequent European sovereign debt crisis.

This is shown in Figure 1-1. Figure 1-1 shows the volatility index performance of the Chicago Board Options Exchange from January 1990 to November 30, 2012. Unsurprisingly, the S&P 500 stock index usually has a big divergence from the volatility index.

Market shocks can happen at any time. However, you can be prepared to profit from market shocks during all periods of high market volatility.

Imagine if your ideas have been digested by the market, then can it be worthwhile? If you have missed the opportunity, then your point of view is geometric?

For example, although you know that high prices are not sustainable, but the bubble lasts long enough, and your cognition is worth a few big dollars? As analyzed in Trends, Fashion, and Bubbles, according to Ziemba and Ziemba (2008), the managers of George Soros's Quantum Fund made this mistake during the Internet bubble. They correctly analyzed that it was a bubble, but they expected the bubble to burst earlier than it actually did; as a result, the Quantum Fund short-selled the bubble and lost $5 billion.

Make a trading decision

The process of trading decisions can be divided into five aspects: transaction identification, opportunity selection, execution of transactions, disk monitoring and transaction summary.

Transaction identification is the skill to find potential profitable trading opportunities.

The Opportunity Selection is an additional check on potential profitable trading opportunities to narrow down the list of opportunities. You have to choose the best trading opportunities, which are the most profitable trading opportunities at a specific risk level.

Executing a transaction means submitting an order and executing it after making a trading decision. Large orders may require more attention from us because their execution may adversely affect market prices.

Disc monitoring requires close attention to positions or positions to determine when to withdraw from a losing trade, or when to withdraw from a profitable trade, or to add a position to this profitable trade.

The transaction summary often occurs after the position is closed. Traders have to judge why they first entered and played, and also judged how much experience the deal has accumulated.

5 simple questions

Regarding each potential trading catalyst or market shock, traders must ask themselves five questions.

Which market(s)?

Which direction?

How big is the position?

how long?

What is the risk?

Maybe you can add the sixth one: Will the price trend of a certain market affect the prices of other markets? Asking these questions is easy, but finding the answer may not be easy.

Is market rational?

Alan Greenspan’s commentary on irrational exuberance and its market reaction highlights a phenomenon that has been discussed in detail by legendary trader George Soros, the principle of reflexivity.

Soros believes that financial markets are not effective, and this assertion has a astounding meaning for price stability and the financial system as a whole. On June 10, 2010, in a speech at the Vienna Spring Member Conference of the Institute for International Finance (IIF), he said:

“I have developed a set of alternative theories about financial markets. This theory argues that financial markets do not necessarily tend to balance; it may easily generate asset bubbles. The market cannot correct its excessive behavior...

“... First, the financial market is far from accurately reflecting all the useful knowledge, always providing a distorted view. This is the law of error. The degree of market distortion may vary from time to time. Sometimes quite subtle, and sometimes obviously……

"...Secondly, financial markets do not play a purely passive role; they may affect the so-called fundamentals that they are supposed to reflect..." (the author emphasizes the focus)

He believes that compared with traditional economic theories, the market is not only ineffective, but in fact it is often wrong. This is because the market is made up of many individual participants, those who are born to make mistakes.

This fact is highly relevant to investors because it underscores how uncertain the market is about what is or is not a good asset – and also highlights how quickly the change in opinion is.

If Soros is right as one of the most successful hedge fund managers, then he still has considerable credibility – then market participants must be vigilant and careful when choosing “safe” assets. In addition, this theory also shows that because the market is very prone to bubbles, cyclical crises are more likely to occur than financial theory shows.

Although some people like to think of the market as purely rational, in fact the two emotions of fear and greed play a very important role in the market. A sudden shift in market participants' risk appetite reduces the price of risky assets relative to safe assets.

Perhaps ironically, with the reputation of George Soros and the influence in the market, it has created its own reflexive situation. The Wall Street Journal revealed a rumor heard by Kidder Peabody's emerging market bond traders:

"... Soros's fund is buying Peruvian currency. He ordered his traders to buy Peru's bonds... Peru's currency rose, and Kidd's bonds soared by about 500% in six months."

Does this mean that Soros himself can cause the appreciation of the currency? no. But his reputation and influence have attracted other traders to trade and push prices higher and faster. This is often the case in the market. positive

As will be discussed later in this book, David Einhorn is shorting the stock of Green Mountain Coffee, and Carson Bullock's shorting of Sino-Forest's stock is an example of a trader's behavior as a catalyst for trading.

The market's response to Warren Buffett's change in security assets is the same. Even so, the concept of “the bubble is as easy to balance as the market” is not universally accepted by Soros.

Huazhang Economic Finance (ID: hzbook_tzlc) original starting, the content is excerpted from "True rules: seven kinds of counterattacks of the black swan moment", the content has been deleted, if reproduced, pay attention to this public account and leave a message.