Dramatic and Sudden Events

In daily life, we are used to normal events and average changes. They make us feel comfortable and safe. So our minds are programmed to think in a normal and average way. But things that cause fundamental changes in all aspects are sudden and dramatic events.

This principle applies to the trend-following trading very well. The trend-following trading uses sudden changes of market behavior, such as breakout, to enter a trade; it ride along to expect a dramatic trend; and it uses a sudden abnormal reaction against the trend to exit a trade.

Also trend-following uses the stop loss to control the risk. So if a dramatic and sudden event is against a trade, the trade has a small loss. If the event favors a trade, it has a huge profit.

Currently, a dramatic event are developing in the global financial system. The following chart gives us a nice picture of it.



Where does this event leads to us? No one knows. But I feel the interview below is very interesting.

RAY SUAREZ: Finally tonight, we return to a subject on many minds these days: the financial crisis. Our economics correspondent, Paul Solman, checked back in with one particularly prominent voice in the investment world and his colleague, who guided his thinking.

Here is the pair's sobering conversation on what may lie ahead.

PAUL SOLMAN, NewsHour Economics Correspondent: One of the world's hottest investment advisers these days, Nassim Nicholas Taleb, author of "The Black Swan," who's been warning of a crash for years, betting on one, and winning big.

He's been ubiquitous in the financial media of late, from cable TV's "Colbert Report" to the BBC's "Newsnight," where he was infuriated by what he called "bogus accounting."

NASSIM NICHOLAS TALEB, Scholar and Author: The first thing I would get immediately, immediately, I would suspend something called value at risk, quantitative measures of risk used by banks, immediately.

PAUL SOLMAN: We sat down with Taleb and the man he calls his mentor, mathematician Benoit Mandelbrot, pioneer of fractal geometry and chaos theory. And even more than feeling vindicated, they're both scared.

NASSIM NICHOLAS TALEB: I don't know if we're entering the most difficult period since -- not since the Great Depression, since the American Revolution.

PAUL SOLMAN: The most serious situation we've been in since the American Revolution?

NASSIM NICHOLAS TALEB: Yes.

PAUL SOLMAN: Professor Mandelbrot, can that possibly be true?

BENOIT MANDELBROT, Mathematician: It's very serious.

PAUL SOLMAN: More serious than the Great Depression, possibly?

BENOIT MANDELBROT: Possibly. I hope not.

...... See the source below for the full interview.

Source: PBS: Top Theorists Examine Rippling Economic Turbulence