The headline is a famous quote attributed to John Maynard Keynes.
In May of 1920, Keynes was a Dollar bull and a Deutschmark bear, and had loaded up positions heavily according to this belief. To his dismay, the Dollar refused to strengthen and the Deutschmark started a 3-month rally. This, according to Keynes, defied all reason and logic.
He was wiped out.
Keynes learned a valuable lesson.
You might think that Keynes’ behaviour here was strange, or perhaps even rare. On the contrary, one can see traders betting against markets that keep stubbornly doing what they aren’t meant to do, all the time.
One such market right now is the Aussie dollar.
The AUDUSD opened the year at 0.7200 and is now trading nearly 500 pips higher.
There were three areas on the way up where price encountered resistance and many retail traders decided to short the pair at those levels, convinced that it was time for price to start going down.
Let’s see where most retail traders have positioned themselves, as the Aussie has climbed:
The green line represents price, from January 1 to February 2, 2017 (scale on the right hand side).
The red line represents the percentage of traders who are long (scale on the left). You’ll notice that as price goes up, more and more traders get out of their long positions (cutting their winners early) and start piling into short positions.
In fact, while the Aussie has rallied 500 pips (or so) in the month, retail traders went from being positioned 68.8% long to 62.2% short! Said another way, each time to Aussie broke through resistance and reached new highs for the year, more and more traders took short positions, while price has been going up.
You’ll find this behaviour all over the place – we’re programmed to think that markets have “gone far enough” and “must surely turn around now”. But they don’t have to.
Let’s throw another spanner in the works. If the majority of retail traders who trade the AUDUSD are now short, and keep piling into the short, will there be any new sellers left to drive price down? No. Guess what happens to a market when there are no new sellers? It goes up.
Are you stubbornly fighting the markets moves?
There are many tools that can help you to deal with this error (and its one we’ve all made).