Edge types, efficiency, etc

Hi Dustin,

Please excuse the ignorance, but what is opg, moc (market on close?), and error trades?

I had a feeling the ES would be a tough place to start. I suppose YM, NQ, and TF aren't much better. I suppose this is why I felt as if the market almost seems to knowprecisely what I aim to do. Anyway, i'm not sure I'm willing to give up there, but you all definitely have convinced me to look more closely at equities.

Quote from Dustin:

Illiquid posted the only info that really made any sense. There is one factor you aren't completely grasping, and that's the importance of an inefficient market. Trading ES or something similar is like becoming a race car driver and heading straight for Nascar. You are competing against the best there are and you will lose. On the other hand equities provide situations every day that you can at least attempt to exploit (opg's, moc's, error trades, volume climaxes, breakouts etc). In more volatile times ('07-08) equities became extremely inefficient and edges were abundant, especially in the reversion category.

You are welcome to try to trade any market you like, but I believe the success rate in equities to be multiples higher than futures, commodities, and options.
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I tend to be more inclined to follow a mechanical or systematic approach, but I'm trying to be open to anything anyone honestly can make work. I know intuitive/subjective methods aren't testable per se, but I know they can work. That said, I'd prefer to stick to mechanics.

As far as Gallacher goes, I agree. I almost think he doesn't realize he suffers from a bias of his own: He seems to be in love with the idea of ONLY outsmarting the market with fundamental knowledge; perhaps to a fault. I don't question his intellect as he clearly is a sharp mind, but I do think he's let the bias block his ability to see some technical methods that may do better than his "PLODDER" suggests is possible. He seems to just simply dislike the technical way, he often references it as being boring and unsatisfying from a creative point of view. I find myself feeling quite the opposite. I am much more interested in math, and mechanics than I am about reports, news, and the like, even if he's correct about the greater importance of it.

In regard to Larry Williams. Well, he is of a totally different ilk. I can't decide how I feel about him. I'm of course fascinated with his performance in '87, and his daughter's '97 performances, but I know it's so clouded with controversy one wonders what there is to believe in there. Even if it is true, was it luck? His methods seem highly model selection biased, or curve fit, so I can't imagine how most could hold up in the future. Alas, I don't know quite enough to judge. I know he is highly criticized, but how did he pull off the things he has? I know he also lost a lot during attempts at fund management though. He really confuses me.

Quote from Gabfly1:

In time, you will be able to establish specific rules to exploit market behavior. Speaking only for myself, I would hesitate to rely on intuition until those rules are established, tested and firmly in place. I'm curious to see how illiquid responds, since your post was directed at him.

Oh, as for your earlier reference to a couple of authors, I think Gallacher has some very good things to say, although he is, in my opinion, a tad too negative on TA. By TA, I refer to its most basic form rather than much of the nonsense that passes for it. As for Williams, I would suggest you keep your distance. Most thinking people do.
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Quote from New2thegame:

...I know some say (Including Gallacher) that you can trade technically so long as you have a valid fundamental reason to go in the direction of your signal. This at first glance seems to make a fair amount of sense, but it this required? Are there no edges to be found simply from price action and chart patterns alone anymore?
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That's a great question. Here is my opinion, which you should salt according to taste. First, if you are going to use a technical method, then that method should have already proven itself to you in backtesting and in real time. Then, once you have a technical setup based on your established criteria, do you wait until the fundamentals correspond? If you wait, then your method's risk parameters get jumbled on delayed entry. So, if you follow a technical approach at all, you have to do so in a timely manner. You have to follow the entry/exit rules if you expect your technical method to even have a chance at working. Therefore, if you tested the method and it works, why wait?

Further, how do you define a "fundamental" reason to take a trade? It would not only require interpreting those fundamentals as well as anyone or better (hard to have an "edge" there), it would also require that you accurately gauge how other traders would interpret that same information against your guess regarding their prior expectations. So this game requires both guessing and second guessing by default. Further, relying on fundamental information as a precondition to entering the market requires that you have access to those fundamentals as soon as the biggest, most well-connected players. (And what are the chances of that happening?) Otherwise, you will be late to the party. And then there is the small matter of the markets confounding fundamentalists time and again for extended periods at a time. As Keynes had correctly pointed out, "The market can stay irrational longer than you can stay solvent."

So, to bottom line it, if the fundamentals are there, but the price action does not support entry, you should not take the trade. If price action identifies what appears to be a low-risk entry based on your tested criteria but there does not yet appear to be any fundamental basis, then you should still take the trade. Stated differently, I think that having corresponding fundamentals are a "nice to have" but they are not necessarily a "need to have."

Just one fly's opinion.
 
Quote from New2thegame:

...In regard to Larry Williams. Well, he is of a totally different ilk. I can't decide how I feel about him...
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If you read Gallacher, then you know his view of Williams, which I happen to share. Williams is a cartoon character. Some people believe in cartoons.
 
Quote from New2thegame:

I
In regard to Larry Williams. Well, he is of a totally different ilk. I can't decide how I feel about him. I'm of course fascinated with his performance in '87, and his daughter's '97 performances, but I know it's so clouded with controversy one wonders what there is to believe in there. Even if it is true, was it luck? His methods seem highly model selection biased, or curve fit, so I can't imagine how most could hold up in the future. Alas, I don't know quite enough to judge. I know he is highly criticized, but how did he pull off the things he has? I know he also lost a lot during attempts at fund management though. He really confuses me.
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FWIW, Larry's "advisory" site is IReallyTrade.com. Although he is mostly retired from it, he posted results for the last few years there, if you care to peruse.
 
I will check out that thread in hopes to uncover what OPG stands for and is.

So, as far as MOC goes, I know this as a method to exit the market not as an adavantage. Would you be willing to shed any light on the suggestion that it can be used to make money with?

I see RMBS had something of a large sigma event. I suppose you could have made a mint if you had been short or long, depending on timing, but how would someone intentionally time such things?

Thanks,

Quote from Dustin:

OPG (Don you got a live one here!)
http://www.elitetrader.com/vb/showthread.php?s=&threadid=3334

MOC-yes market on close, although they haven't been anything special for some time.

Errors-Look at RMBS last week for an example. That ended up being broken by the exchange, but sometimes they aren't.
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I appreciate the input to on of my original questions. Thank you for the consideration. I tend to agree with this assessment, but it's always interesting to get the take of someone more experienced.


Quote from Gabfly1:

That's a great question. Here is my opinion, which you should salt according to taste. First, if you are going to use a technical method, then that method should have already proven itself to you in backtesting and in real time. Then, once you have a technical setup based on your established criteria, do you wait until the fundamentals correspond? If you wait, then your method's risk parameters get jumbled on delayed entry. So, if you follow a technical approach at all, you have to do so in a timely manner. You have to follow the entry/exit rules if you expect your technical method to even have a chance at working. Therefore, if you tested the method and it works, why wait?

Further, how do you define a "fundamental" reason to take a trade? It would not only require interpreting those fundamentals as well as anyone or better (hard to have an "edge" there), it would also require that you accurately gauge how other traders would interpret that same information against your guess regarding their prior expectations. So this game requires both guessing and second guessing by default. Further, relying on fundamental information as a precondition to entering the market requires that you have access to those fundamentals as soon as the biggest, most well-connected players. (And what are the chances of that happening?) Otherwise, you will be late to the party. And then there is the small matter of the markets confounding fundamentalists time and again for extended periods at a time. As Keynes had correctly pointed out, "The market can stay irrational longer than you can stay solvent."

So, to bottom line it, if the fundamentals are there, but the price action does not support entry, you should not take the trade. If price action identifies what appears to be a low-risk entry based on your tested criteria but there does not yet appear to be any fundamental basis, then you should still take the trade. Stated differently, I think that having corresponding fundamentals are a "nice to have" but they are not necessarily a "need to have."

Just one fly's opinion.
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OK, I didn't read all 11 pages :), but here what comes from my experience:

1). Never trade long. Intraday is the max you can afford. Reason - nobody knows what will happen overnight. For example (and I take it to the extreem), company can close business overnight, and all shares/futures/options etc will become useless. The only market that you can afford to stay in several days in a row is Forex - currencies do not disappear overnight.

2) Forget about fundamentals. In the "economy" where bubbles are normal, and nobody cares about company performance, as long as money are given by govt to their close friends for nothing, fundamentals mean nothing.

3) Moneymakers have enough money to drive market into any direction they desire; also, I strongly suspect (of course, I don't have any proof - if I had, I would be long dead :)) that they coordinate with each other where to drive the market. The consequencies are as follows:
- the only way for moneymakers to make money is to steal from others;
- therefore, market moves in the direction where the MOST people will lose money, and moneymakers will win. Simple as that.

Fro example, take the CAT move yesterday (I made some money off it). It had no reason whatsoever to rise, but it run up well (against the market!). You should have read all the screaming of people who were losing their shorts :)


4) Whatever your strategy is, do not let your emotions to make you step away from it. I started my fully automated system back in May. At first, I had no nerves to watch how it was going negative, so I manually was exiting with losses. As soon as I stopped to even watch it, and took my hands away, it started to work as intended - profit is about 100% a year (extrapolated, I'm not through my first year yet).


Good luck!
 
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