Chapter 10 - Deception and Charts
The 2000s, (although technically this slide should be going up)
Tin: hold my beer?
Trapping
Tempo Fakery
This was a textbook Sperandeo-123 with the breaking bar not retracing even a little bit. Many shorts piled in roughly at the arrow. Despite being a model of technical analysis perfection, it didn’t hold, the trend resumed and bears are getting ground to bits. This trap is also enticing new shorts who will prolong the agony. Copper the public’s bets.
Markets vs. Moths
- Deception is ubiquitous. Every lifeform is a master at it, from virii to homo sapiens
- To ignore deception is a ticket to disaster
- Sensible sounding advice like
- Long-term charts are paramount to gaining the proper perspective
- Look for repetitive cycles
- Make a note of key highs and lows
- Measure the time between highs and lows
- Markets go through inactive and active periods; trending and non-trending
- Momentum shows trends
- Take a consensus approach with different indicators
- VN didn’t make these up they are quotations from best-selling books on technical analysis
5 major lessons showing things are seldom what they seem
- The Natural Order
- Artie (VN’s father) would take him for walks through the wetlands (back when they existed) around Brighton Beach Baths
- Nature is beautiful and you can learn a lot from it
- Concealing, decoys, distraction, playing dead, Trojan Horses, key to winning in all sports
- The various tactics of nature applied to sports, feinting, fading back, suddenly springing to life, faking handoffs, etc.
- Even Chess Players Cheat (decades before Neimann!)
- Writing down a blunder on the scoresheet before playing a different move and changing it at the last second, to throw off opponents who might be reading the sheet
- Poker face in poker and chess
- By Hook or by Crook
- Hook serve in tennis
- Borotra playing dead on the court
- Primates and Deception
- The purpose of a big primate brain might be to deceive mates
- Only lemurs use no trickery in the primate family; they have the smallest brains
- Deceptive Technical Patterns
- VN has a conversation with Magee (of the famous Edwards & Magee) but it’s not clear if it’s real or not. He seems to be mocking the naivety of simple trendlines and moving averages
- If monkeys and insects can deceive, it seems that speculators should pay more attention to it than does Magee
- Viruses invade bodies
- Ants enslave other ants
- Moths evade birds
- General defeat generals
- Girls and boys, con men, magicians, financiers, poker players, economists, mystery writers, painters using trompe l’oeil, actors, novelists adding twists to plots, etc, etc
- Weak hands get shaken out at just the wrong (or right, depending on your view) time
Ecological Theories of Deception
- Energy used for deceptive behaviour crowds out other life-enhancing features; balance must be struck
- Camo is better than running fast, because it works without expenditure; if a zebra escapes from a lion there could be a second lion around that he won’t be able to escape; better not to be seen at all
Circumspection and Distrust; An Economic Theory of Deception
- Oliver E. Williamson’s theory
- Businesses act the same as plants/animals in a jungle
- ‘Transaction Cost Economics’ - economizing on transaction costs is mainly responsible for the choice of one capitalist organization or another
- Institutions achieve efficacy
- Institutional environment - rules gives rise to
- Governance - of contractual relationships within parameters dictated by beliefs and behaviour of
- Individuals
- Madison, in the Federalist Papers
- “As there is a degree of depravity in mankind which requires a certain degree of circumspection and distrust, so there are other qualities in human nature which justify a certain portion of esteem and confidence.”
- Williamson calls this depravity - ‘opportunism’; the use of guile in pursuing self-interest
- Organizations develop sanctions for governance, that maximize profits while mitigating Machiavellian opportunism
- Buy or sell decisions according to Transaction Cost Economics
- Price
- Hazards (guile)
- Safeguards - norms, customs, rights, laws, courts all make safeguards less expensive; in societies where these are lacking safeguards are expensive; this can include creating a hierarchical organization where internal matters can be settled internally; pre-emptive; can make new rules to control employees by fiat; endogenous preferences - propaganda to control thinking and respect the governance structure
Principles of Deception
- VN studies war, sports and nature as a preliminary to studying deception in markets
- Predator and Prey
- Much energy is lost in direct battles because both are so adept at their respective offensive and defensive tactics
- Indirect approaches saves energy for both parties
- Deceptive techniques emerge
- One side gains the upper hand and their tactic is passed on by genes, learning or sentences
- Then the other side counters this new tactic; the balance is restored
- This is the arms race
- BH Liddell Hart
- After studying a long series of military campaigns he became aware of the superiority of the indirect approach
- A direct assault of new ideas provokes stubborn resistance; intensifying difficulty in changing outlooks
- The indirect approach is fundamental to politics, sex, commerce
- Suggesting there is a bargain to be secured is more persuasive than urging someone to buy
- The surest way to get a superior to accept a new idea is to convince him that it was his idea
- The aim is to weaken resistance before overcoming it
- Draw the other party out of their defenses
- The Decoy
- Example from the Old Testament
- Sisera attacks Israel with 900 iron chariots
- Warrior priestess Deborah advises Barak of Kedesh to raise a force of 10k Israelites and hide them on the slopes of Mount Tabor
- A smaller force led by Deborah, lures Sisera’s army along the river to a narrow marshy plain below Tabor where the chariots were bogged down
- Then the 10,000 swooped down from the mountain and decimated the Canaanites (also the first ambush?)
- The False Gift
- The Trojan Horse story
- The horse was designed with beautiful carvings to look like a trophy to entice the Trojan’s greed (Laocoon - beware of Greeks bearing gifts)
- The doors were concealed with cunning bolts
- Sinon - a double agent was left behind by the Greeks. He was paid to tell lies about why the horse was left behind and the consequences if it was refused
- The horse was intentionally built so large as to be impossible to bring inside the gates without removing part of the wall; the mainstay of their defence
- The Greek ships were hidden miles away in Tenedos
- When Laocoon hurls a spear at the horse to prove that it’s hollow, the gods send a serpent to eat his sons and make it seem they were angry with him for his lies. (when the gods are not on your side, there isn’t much you can do)
- The Holdup
- A variation of playing dead
- May 1940; British ship Scientist is bound for Liverpool carrying tons of chromium and maize.
- The Kasii Maru, a rusty freighter is flying the colours of Japan, neutral at the time, and approaching them
- The Japanese sailors are lounging aimlessly ,a woman pushes a pram on the deck
- Suddenly the swastika flag is raised and a shell is fired as a warning shot
- The crew is hostaged and the ship is scuppered
VN really pads out this chapter with detailed descriptions of mimicry, playing dead, but he rarely brings it back to the marketplace as he’s having so much fun.
- The numbers in the major economic announcements are completely meaningless, subject as they are to revision, errors
- Sometimes the move can happen day before or day after the announcement - an ambush
- Stationary prices seem to be a favourite trait of bulls rather than bears
- Long-term basing (ranging) followed by a fantastic move is as common as flies
- Soft commodities are notorious for playing dead - the long growing cycle magnifies the influence of price quirks
- However then they can suddenly quadruple rapidly and wipe out the complacent; even the opossum will bite after playing dead
- VN seems obsessed with ants; they can only detect each other by smell, and so many other species have developed the ability to mimic their scent and prey, enslave or parasitize colonies
- VN’s Cloaking Conjecture (my name for it)
- Moves will be inversely correlated with those that occurred following the one most similar day the previous year
- April 17, 1995 - USDCHF - up from 87.6 to 89.08; a gain of 2.48
- The most similar rise over the past year was March 31, 1995 when it rose 2.97 points from 85.91 to 88.88
- April 3, 1995 (the next trading day) it rose further
- So the April 18 prediction is for a decline
- This doesn’t work (why use it as an example then???)
- However VN does an 8 year test that confirms the hypothesis (I guess I should test this myself. Any interest in hearing about the results?)
- Correlation between the most similar move and actual move the next day is -0.10 which has only a 2% chance of occurring by chance (but what about time frames less than a year? And how is ‘similarity’ being defined?)
- The Swiss franc is a particularly deceptive market
- Of 100 different similarity relations tested, analyzing the most similar x days out of the last y days, only one showed a positive correlation with subsequent moves (the one he used as the example above??)
- “Considering the prevalence of trading techniques that use similarities as their base (nearest neighbour, neural networks, clustering), it is no wonder that dealers consistently make billions a year in trading profits by coppering their customers.”
Disruptive Behaviour
- The most spectacular form of deception
- Quails feigning injury
- Squid spraying ink
- Skunks spraying skunk…musk?
- Ants (again!) spray pheromones mimicking the slave targets ‘danger’ signal which puts the whole colony into a panic and allows them to carry off victims leisurely
- Dow
- Small warning crash of 503 points on Oct. 19, 1987
- Bigger crash on Oct. 20, 1987; futures halted
- Scares bulls out
- 250% rise over the next nine years
The 2000s, (although technically this slide should be going up)
- Grain markets are worst for this
Tin: hold my beer?
Trapping
- Angler fish
- Trap door spider
- The most common deceit in markets. Too many examples to list.
- British pound September 1992;
- After some ranging
- Breaks the five year high
- Trap is set
- Shorts rush to cover
- New buyers surge in
- The pound plummets to 1.40 in four months; a 60 cent decline, $40k/contract
- Worse than being eaten alive, says VN
Tempo Fakery
- VN’s fencing instructor has something to say about this incident
- This is an example of a Tempo Fake
- Start with a small jot down; then close up unexpectedly at 1.965
- The December pound changed its tempo by delaying its actual move
- This causes speculators to misread the market or withdraw
- Curiously, the rest of the examples VN uses are all currencies
- Redoublement - a renewed attack in fencing
- A pause causes anticipation of a reversal but it just continues
- We are perhaps seeing a textbook example of that in CHFJPY
This was a textbook Sperandeo-123 with the breaking bar not retracing even a little bit. Many shorts piled in roughly at the arrow. Despite being a model of technical analysis perfection, it didn’t hold, the trend resumed and bears are getting ground to bits. This trap is also enticing new shorts who will prolong the agony. Copper the public’s bets.
Markets vs. Moths
- VN advises that these examples we’ve seen have no predictive power
- The market is rich enough to provide counterfactuals for all simple phenomena
- Arguments by evolution are often circular
- Attribute X is beneficial for survival.
- How do we know?
- Because it exists.
- Why does it exist?
- Because the organism survived.
- What appears to be deception might be pure chance.
- Lowly moths can survive bird attacks. Imagine what Mr. Market can do.
- Market life is hazardous.
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