Any time you get up in the morning and go through the day, you are assuming certain things. You are making plans for the future, assuming you will be living and healthy, etc. You are assuming the future will be better than the past.
You cannot possibly go through life without making certain assumptions, for you cannot know everything for sure. You can know some things for sure, but not everything.
Assumptions have to be made in trading as well.
Reasonable Trading Assumptions
Anytime you place a trade you take on risk.
There are reasonable assumptions that can be, and have to be made to place a trade, even a wildly profitable one.
And there are other assumptions that are made that are not prudent.
As an example of a reasonable assumption, take Soros shorting the british pound in 1992 and breaking the Bank of England. Going short 10 billion of British Pounds, you have to make certain assumptions. You have to have certain expectations of what you believe the market will do.
As Stanley Druckenmiller, the man who conceived of the trade said in the book More Money Than God, about the potential risk of the trade:
“I didn’t think that sterling moving to the other end of the band was remotely possible. I felt very strongly that just couldn’t happen because these economies were so ass-backwards. So yeah, theoretically it could have gone to the other side of the band. I didn’t even consider it, to tell you the truth.”
So there you have Druckenmiller describing the low risk of the trade, due to his interpretation of the global macro economics of the countries. Getting the global macro right, and you can make such reasonable assumptions.
And it led to a profit of over $1 billion dollars for the Soros funds.
Unreasonable Trading Assumptions
There are some other assumptions that are made that are not prudent.
Take an example of the people who were long EUR/CHF prior to the removal of the 1.20 floor and the pair dropping to below 1.00 in a single day Or the people who were short CHF futures (equivalent of being long USD/CHF), prior to the Swiss National bank removing the 1.20 floor.
All these people were making certain assumptions. Not very good assumptions. They were not based on the global macro reality of the situation. Being long EUR/CHF based on what scenario? What powerful global macro scenario that will move the market in a bullish fashion? Especially considering the EUR was under pressure on various other currency pairs.
Someone told me that they lost over $100,000 on this, when there was simply no reason to lose anything.
Being long EUR/CHF was like being long the British Pound before it was going to plummet in 1992. Yet, people don’t learn form history. Part of the reason can be because they are stuck purely analyzing the market though the lens of technical indicators and charts. Where there is so much valuable information that exists outside of the chart, that can be tapped into to develop that lucrative trading edge you seek.
You can far better protect yourself and profit from such situations, by learning and mastering Global Macro Trading, which is the highest form of trading on the Trading Profit Ladder.
Most people assume things about the market, that aren’t true. If your “Trading Checklist” of what a good trade looks like consists of purely trendlines, fibonacci ratios, moving averages, etc, then you are leaving lots of money on the table. You can make as many assumptions you want about those things, but if they don’t generate order flow, then it is not a high value decision.
Learn to make proper trading assumptions and decisions, based on things that can actually cause the market to move!
Shatter every last smidgen of false assumptions you may have about the market with the Mastery Course.
Heartbreaking Story
These assumption traps don’t just occur in the financial markets, they happen in life as well.
There is a local story of a child that drowned in a family pool.
The way the story was told to me, the family was having a party in their fairly large backyard that had a pool and grill area.
Normally, the family hosting the party would hire a lifeguard. But on this particular occasion, they did not feel it was necessary, as it was family invited over and that everyone would look out for each other.
Fast forward to one moment during the party, where everyone was on one side away from the pool. The child snuck away from the group to play in the pool, and drowned. A truly heartbreaking story, illustrating the horrors of making false assumptions.
Personal Example
Robert Ringer calls this the Assumption Trap and talks about in his book Action:
“There’s only one safe assumption in life: The person who assures you that everything is all right is all wrong… Show me someone who cares enough about what he’s doing, and I’ll show you someone who doesn’t make many assumptions.”
As a personal example, one time I wanted to go long the equity market a few years ago. I felt it was in a bull market, but I was scared to pull the trigger. I kept constantly worrying about the market gaping -5% or -10% against me. And I missed the move on that one. Whether it was a prudent assumption to make I will not know. But I stopped caring and I moved on to analyzing and trading the current moment.
Thankfully, I did not make that mistake when I bought Apple and it rose +70%, described completely in my special training.
Therefore, there are potential gaps in the market that you can be reasonably worried about, and gaps that you should not be worried about and cannot possibly predict.
The key is to switch to a far more rational, scenario based trading philosophy taught in the Mastery Course. When you can adopt this mindset, you can be far more effective at both spotting the false assumptions and making the right assumptions.
You Don’t Have To Know It All
Don’t misunderstand me here. You should be prudent, but that does not mean you should be doing an endless amount of research in the hopes of spotting that tiny clue that may or may not help you. There is a certain point beyond which no more research is going to help you, and you are better off waiting, as there is a time element associated to certain great trades. And then you call it a day and then close your trading platform and go enjoy life. I had to better learn that recently over the past few years.
As George Soros said in his book Soros on Soros:
“I don’t like working. I do the absolute minimum that is necessary to reach a decision. There are many people who love working. They amass an inordinate amount of information, much more than is necessary to reach a conclusion.”
“If a story is interesting enough, one can probably make money buying it even if further investigation would reveal flaws.”
So get that firmly in your mind, that you don’t have to know everything in order to make money. And that requires a system to identify and organize the most important information, revealed in the Order Flow Mastery Course.
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