Gann wisdom & madness of the trading crowds
by, 30th-April-2008 at 05:21 PM (1151 Views)
Some simple, but interesting stuff for commodity traders from Kleinman,
reminding us of the disconnect, between the reality of market news
and the madness of the crowds. He says:
" In 1928, the great trader W.D. Gann made the following observation:
The history of the world shows that there never has been a time when there was a great demand for anything, whether it be a product of the mine, factory or farm, that sooner or later a supply in excess of that demand did not develop. This is but a natural law."
... and on the recent parabolic rise in spring wheat:
" There are three major lessons a trader can learn from this.
1. Never fight the adage "the trend is your friend." This is especially true during major uptrends. Who could have forecast oil at $119 per barrel a few months ago? Top picking this one has been expensive for the short seller.
2. Its not the news but how the market reacts to the news thats important. Certainly its the news that sets the public perception, but you must be alert for divergences between the news and market action. It all has to do with expectation versus reality.
Look for the divergence between whats happening and what people think is supposed to happen. When the big turn comes, the general public will always be looking the wrong way. There are certain ways to analyze reactions to news (or even a lack of news).
Moves of importance invariably tend to begin before theres any news to justify the initial price move. Once the move is underway, the emerging fundamentals will slowly come to light. A big rally (decline) on no news is almost always very bullish (bearish).
Its generally not good practice to buy after a lot of very bullish news or sell after an extremely bearish report because both good and bad news are often already discounted in price.
3. Markets like this nearly always seem to top out in the same way. When close to the end of a major move, markets become wild. Volume is huge, activity is feverish and erratic, and the imagination of most traders blossoms. If youve had the vision to ride the trend to this point, your payday has come.
However, in extreme markets, men and women of reason lose all sense of proportion. They start to believe the propaganda that the world has literally run out of this or that, but it never happens. In the late 1970s, the Hunt Brothers ran silver from $5 an ounce to more than $50. They felt it would go up forever but forgot at some price Grandmas silver candlesticks come out of the cupboard and drop into the smelter.
The richest men in the world (at that time) lost all sense of reason and proportion--and $2 billion in the process. Rice traders: Take heed, and remember what Gann told us. "The history of the world has shown that there has never been a time when there was a great demand for anything that a supply in excess of demand didnt develop."
Full article, available at:
have a great day