The Law of Cause and Effect

Cho Sing Kum
31^st Dec 2002

People like to give reason for price movement after the event. You get this every single day without fail if you read news.

The chart shows you the effect as can always be detected by technical analysis, the cause of which was created in the past. There are many tools available in technical analysis to do this. Basically you identify the effect and then to trade that effect. The cause... well it is already history long before you see the effect.

On the chart in Fig 1., notice what was already happening in July and August of 2001. The Dow was confined within a bearish descending triangle formation which occurred at he same time as a Squeeze in the Bollinger Bands. Pay attention to the downside break. It happened in late August 2001.

So don't blame the wrong parties for what happened in the market no matter how much you hate them. The fall was aggravated but the market was already structurally weak otherwise the aggravation could not have happened.

 

It was the same in the Singapore Straits Times Index. See Fig 2.

It is a habit of retail investors in Singapore to curse and swear at the management of listed companies, their CEOs, the Government, enemies and so on. If you have the same habit, stop it because there is no way you can ever know the exact causes. You can speculate but you can never be certain. The more you do it, the more you are like a back-seat driver. This is not going to help you in your trading.

If one day, you realize that news lead you to misunderstand things and events, then you have to re-look at how you want to handle news.

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