News-Inference Matrix

As I get more bullish, the more fears I have for the market. I am automatically attracted to such news that is opposite to my position in the market. The kind of news that gives strength and feeds my fears. Now that I am long the Nifty for eg. I keep reading about the fact that the Greek bailout terms have not yet been agreed to and keep worrying about a fallout of such a non-agreement. It is not that I was not aware of this issue when I went long. I was aware of it and I went long despite that knowledge. But now, that I am long, I keep worrying about this piece of potential negative news.

The only good thing in all this is that I am aware that I have this problem of focusing on only those things that feed my fears. This awareness has made me decide that while I might hear news, I will never trade on that nor try to draw any inference from that. Essentially I have tried and block reading news as much as humanly possible.

I am asked sometimes whether my decision to ignore news will not backfire on me? Other than the fact that sometimes I am not aware of some important news and come across as ignorant, I have not really been impacted by my blocking out news. Before you get really upset with this assertion, let me prove that ignoring news is the best policy mathematically. To get benefited by any news there are two essential requirements. One you need to focus on the news that the market decides to focus on. Two, you need to draw the correct inference from that news. So the only way to benefit from any news is if you focus on the correct piece of news and draw the correct inference. Attaching equal probabilities to all events, the chance that NEWS/DATA will benefit you is only 25%. This can be more easily depicted in the beautiful quadrant that I have drawn and attached along with this note.

While there are some people who will take such probabilities, knowing my own abilities, I decide to pass and refuse to make even an effort to analyse any news. Therefore, the only way I can make a living in this market is by following (mindlessly) my system. Currently, it requires me to be long. I will cut my long and go short if Nifty trades below 5263.

Focus on the wrong news and draw the correct inference Quadrant  I	Focus on the correct news and draw the right inference Quadrant IV
Focus on the wrong news and draw the wrong inference Quadrant II	Focus on the correct news but draw the wrong inference Quadrant III