I lay out my best available insight about the currency markets each week in this letter. I tried to sound "smart." Often I tried to convey some sense of prescience that I have about currencies. But I have no "gift of hindsight," few of us do. I know that. And because I have seen some very strange things happen over the years that has drained more money from my trading account than I care to talk about (or let my wife know about), I approach markets as a game of probabilities. I think it's the right way to do it.

What I mean by a game of probabilities is this: I do the best I can in my fundamental and technical analysis; I do all I can and try to do it with discipline, focus and consistency. I do this to try to gain an edge. But I know there is never such thing as certainty; one can never have enough brain power or computing power to harness the mind of the market. It's not because the computing power isn’t available -- it is. It's because the players in the market do not make "rational" decisions all the time.

When push comes to shove, the big moves in the market are driven by good old fear and greed -- base human emotions. The fear and greed and irrationality of millions of players can't be modeled with much degree of certainty. That's a problem for economists and experts who believe they can create some type of Holy Grail model to forecast price action. They simple don't have the mathematics available yet get their arms around irrationality in a modeling scenario. And there is no reason to think they will anytime soon.

If you are going to use probability to model a financial market, you had better use the right kind of probability. Real markets are wild. Their price fluctuations can be hair-raising -- far greater and more damaging than the mild variations of orthodox finance," writes Benoit Mandelbrot, The Misbehavior of Markets.

Note: Benoit Mandelbrot is the person who created fractal mathematics. He is a brilliant man, to say the least. And he has been shunned to a degree because he has never bought into financial orthodoxy that starts out with "the rational man."

Bingo! "Real markets are wild." The massive volatility we've already witnessed in the currency market, after only the days of trading this year, prove Mr. Mandelbrot right once again.

So, does this mean we should be defeatist and believe we can never win? Absolutely not! If you attack the market with the mindset that it is a probability game -- interspersed with wild and unpredictable movements -- that already can give you a substantial leg up on the crowd.

For a probability mindset forces a degree of perspective and discipline that most other players don't have; it provides perspective and discipline that allows you to preserve capital when others are losing theirs. And a probability perspective allows you to develop an investment style guided by your edge. And if you only play the game when your edge tells you the probabilities now seem inched slightly in your favor -- your chances of winning improve dramatically when measured over the long term. And that's the name of the game -- long term investment success.

It's in our reach.

Jack Crooks
Black Swan Capital