Economic comment and media hype direct and create commonly held views. Once a market believes in a commonly held view, it will eventually break sharply against that view. The size of the move in the opposite direction is a function of the level of disappointment in the coming reality. In other words, a gap forms between what public consensus expected to happen and what actually happens in reality.

By observing events, savvy futures traders can make money on the developing gap in two ways:

1. by patiently waiting as consensus builds, then acting as the break in consensus occurs, or
2. by aggressively searching for the contrary scenario that will precipitate the break.

As the public grows disenchanted with the inability of the consensus view to live up to expectations in reality, it will try to protect its investment by moving in an opposite direction. By acting at the point of greatest confusion — the point at which the market starts to turn but before it is in full retreat — can profit, often significantly. The stampede against the formerly held consensus creates a new trend which grows, building a new consensus about the correctness of this new path. Despite the stunned pronouncements of television commentators, who seem to be perpetually caught off guard, the cycle endlessly repeats, creating price points on which savvy futures traders can make money.

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The media is quick to focus on the emotional volatility of the populace, and in doing so, often fans the flames of public opinion, increasing emotional panic simply by reporting it. An excellent example is the subprime mortgage disaster in the home loan industry. When first reported with big, black headlines and dire warnings, the reality was that only a small percentage of the total number of mortgages had been made to subprime lenders, and only a tiny percentage of those were actually moving into foreclosure. Initially, most realtors and loan industry officials were not particularly worried and saw what was happening as an uncomfortable but necessary real estate market correction after several years of wildly inflated housing prices.

Widespread media coverage frightened many homeowners, realtors and lenders, leading to all out panic in a fairly short time. The media started issuing dire predictions that the disaster would affect the economy and the market responded. As a broad group, the “people” have always demonstrated a herd mentality. It’s what drives trends. One person acts uniquely, others think he must be on to something important and are quick to follow suit. A trickle turns into a stampede and pretty soon the herd is on the move!

That’s what happened in our subprime example. By constantly increasing its focus on the subprime problem, by continually predicting negative economic repercussions, media attention actually increased public panic, which affected the markets, which impacted the economy, which increased public panic … and so on in a vicious cycle. By dint of its overzealous attention, the media helped the disaster it had forecast become reality.

Futures traders need to look beyond the media hype and dispassionately observe the movement of the market. Don’t allow yourself to get caught up in the emotions of the herd. Trust yourself, trust your system and stick with it.