Shared by JohnH

We met Christopher when he wrote about his Black Swan Protection Protocol http://austrianschool.blogspot.com/2010/02/black-swan-protection-protocol-approach.html He’s recently launched a new site and has more market-centric NNT related content (see Blog) I’m sure you’ll appreciate. Check it out http://www.scalavolpe.com/index.html

Let’s come back to the present.  On May 6, 2010, the Dow Jones fell nearly 10% in a matter of minutes.  Not weeks.  Not days.  Not one day.  But minutes.  Now, it’s true that it recovered significantly from that low point before the trading day ended.  But we mustn’t allow that fact to cloud the basic truism that the market could plunge by so much, with a rapidity never seen before.  Again, this leads us to the fractal concept: if the market could plunge 10% in one day, why can’t it plunge 10% in one minute?  Could it plunge 22% in one minute?  Or perhaps more?  On May 5 had you suggested such a thing, you’d be looked at as crazy; on May 7, realistic.

The bottom line here is, as investors we should consider the power of applying fractals to our hedging strategies, by stepping outside convention and imagining what the possibilities might be based on the evidence at hand.  This will undoubtedly remove many of the limits we often self-impose on what’s “possible” in the markets, and allow more creative hedging approaches to flourish.