2 of the worst methods people use to trade

Has gold’s rally got much further to go? Will the volatility in equity markets continue in the coming months? Most traders attempt to answer these questions through a careful study of the economic fundamentals (with mixed success).

But in the underbelly of the retail trading industry lurk a few novel solutions to the problem of predicting markets.

Astro-traders study planetary motions, solar winds, and the like, in the hope that they’ll reveal some lucrative information about shifts in market spirits.

The exact theory behind this is a bit mystifying (it seems to have something to do with the Earth’s “magnetosphere”, and how this relates to the stress levels of market participants), but its proponents vigorously resist any association with conventional astrology and horoscopes. Tweets like this don’t really help here:

Long before astro-trading, the otherwise well-regarded William Stanley Jevons came up with an apparently significant correlation between sunspots and the business cycle.

His logic was a bit easier to follow: Sunspots influence the weather, which in turn influences crop cycles, forming the basis of a business cycle.

Interestingly, while both of these ideas are obviously widely discredited, buried deep within their apparent insights is a slight overlap with more respectable (although still controversial) areas of economics.

The idea that human psychology plays a role in market behaviour was popularised by Keynes with the term “animal spirits”. And the more recent explosion of behavioural finance as a field has continued in a similar vein.

A 2003 paper published in the Journal of Finance (Good Day Sunshine: Stock Returns and the Weather) even found a positive correlation between equity returns and sunshine, bringing to mind some of Jevons’s work and leading some to conclude that money could be made off such a finding.

This is not to say that there’s even a grain of truth to astro-trading or sunspot theory. But the impulse to explain the fast-changing, chaotic movements of markets in terms of something beyond the news flow is obviously a pervasive one.

Unlike proponents of astro-trading, however, Keynes refrained from charging $3,600 for sharing his ideas.