Global Macro Trading Journal

God I love this man:

"I am not well qualified to criticize the theory of rational expectations and the efficient market hypothesis because as a market participant I considered them so unrealistic that I never bothered to study them."

- George Soros

From this speech
 
Quote from darkhorse:

God I love this man:

"I am not well qualified to criticize the theory of rational expectations and the efficient market hypothesis because as a market participant I considered them so unrealistic that I never bothered to study them."

- George Soros
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It's always an interesting topic for discussion.

To a large extent, criticisms of concepts like EMH seem rather like pronouncing the GFC, housing bubble etc. to be "market failures/failures of capitalism." It's not 'wrong' so much as evincing a basic misunderstanding about what is being claimed - the kind of simplistic absolutism that only a PhD'ed professional academic is capable of. 'Efficiency' is a hypothetical concept around which markets oscillate with varying levels of friction, and once you introduce leverage and wholesale manipulation of every imaginable sort by all manner of government authorities (which has of course gone on far longer than just the past few years), all bets are off.
 
Quote from darkhorse:



Hume wasn't trying to be an ass. He was making a point about causality and uncertainty.

From a technically and semantically correct point of view, all scientific laws are actually "predictions" -- claims on the future based on observations of the past, e.g. "Water froze at 32 degrees fahrenheit yesterday and today, so it will also freeze at 32 degrees fahrenheit tomorrow and the day after."

If we want to get even more obtuse, we can expand Hume's point to mathematics. Two times two equaled 4 yesterday, but will it do so tomorrow? We can't know for certain -- who knows how the universe might change tonight -- we can only "predict" that yesterday's math will be tomorrow's.

And yet, it should be obvious to any common sense individual that using the word "prediction" in such instances is unhelpful.

It is clearly useful to distinguish between 1) probability assessments based on mathematics and scientifically confirmed hypotheses, and 2) expectations of a future event not based on hard math and rigorous parameters.

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The need for prediction is reversely proportional to the amount of information one has.

Imagine 4 individuals in the middle of a dark night.

1. Old one. That one observed sun rises for 4 billion years
2. New born. Has not seen a sunrise yet.
3. 1 day old. Seen one sunrise
4. An alien on a death star about to blow up the planet. That one has successfully blown up 2000 planet out of 2010 tries.

So the question in front each one of them is what are the chances that there will be a sunrise in few hours?

My guess is as follows:

1. 99.999999999...% sure for a sunrise
2. 100% sure that night is the normal sate no sunrise
3. 50% chance
4. 99.50248756218905472636815920398% no sunrise

1,2 and 3 are so wrong....

Follow the insider....The one with the info that matters.
 
Quote from Specterx:

It's always an interesting topic for discussion.

To a large extent, criticisms of concepts like EMH seem rather like pronouncing the GFC, housing bubble etc. to be "market failures/failures of capitalism." It's not 'wrong' so much as evincing a basic misunderstanding about what is being claimed - the kind of simplistic absolutism that only a PhD'ed professional academic is capable of. 'Efficiency' is a hypothetical concept around which markets oscillate with varying levels of friction, and once you introduce leverage and wholesale manipulation of every imaginable sort by all manner of government authorities (which has of course gone on far longer than just the past few years), all bets are off.
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Yep -- it's a useful concept in the abstract, taken way too far by mediocre minds.

I greatly enjoyed Beinhocker's "Origin of Wealth" re, origins of academic / neoclassical error, and other topics relating to the economic dangers of black and white thinking, overly simplistic models etc.
 
Quote from Daal:

Its irrational to me to be willing to drawdown 20% with a normal system and the same % with an system that is vastly superior.

I'd be willing to go 25, 30% probably even more with a system or trade that is excellent. That is my point, maybe you think differently but I'm in this for the money
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I'm just making a point that there is no 'proof' of risk-preference, it's a taste like enjoying chocolate or preferring women with big boobs, you can't say someone is wrong for feeling otherwise. I agree with betting more on the best bets, of course.

Still, trading for a 20% max drawdown will crimp your returns compared to accepting a small chance of a 30% or 40% drawdown. A 40% drawdown might happen once per career, and you will make more than twice the CAGR by taking twice the risk. 15% per annum with 20% max DD (once), versus 30% per annum with 40% DD (once) - which do you choose, and why?
 
Quote from darkhorse:

Yep -- it's a useful concept in the abstract, taken way too far by mediocre minds.

I greatly enjoyed Beinhocker's "Origin of Wealth" re, origins of academic / neoclassical error, and other topics relating to the economic dangers of black and white thinking, overly simplistic models etc.
More...

What's interesting with EMH is that economists never claimed 'real world' business (supermarkets, banks, oil companies etc) were in perfectly efficient markets. Economists seemed happy to accept that in the real world, actual efficiency and competition was high but not absolute. So, why not the same in financial markets? If a Steve Jobs can have an edge over the CEOs of Samsung, Nokia, and so on, why can't a George Soros have an edge over the typical Fidelity star manager?

What's also strange is that many of the 'insights' of behavioural finance e.g. loss aversion, uncle points, trading on emotion rather than rational expectation, were known to speculators for centuries due to hard-earned insights from speculating gargantuan sums of money against the best competition in the world; yet they were not taken seriously in academia and theory until some professors paid students and unemployed people a pittance to play games in college labs for meaningless stakes. Funny world.
 
Quote from ivanbaj:


Follow the insider....The one with the info that matters.
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Agree, that's the premise behind 'trading price action', and why one should defer somewhat to price behaviour even if you have huge conviction.

Here are some challenges though:

1. Who has 'inside information' on what will happen in 2015, 2020? There is no such thing. The only edge in the real future is pure talent (with some modifier based on effort) i.e. the ability to forecast probabilities of future events more imaginatively and precisely than the competition. Think Keynes' "Economic Consequences of the Peace", or any great growth stock or secular boom investor.

2. What about when the insider gets it wrong, because some exogenous variable overrides the information he is relying on? Imagine someone looking to take over a bank in 2006, then getting wiped out by the GFC. Insiders are not infallible, and all major busts will tend to roger them spectacularly. In fact, because they *normally* have a huge information edge, they are far more vulnerable to outlier events. The humble information-non-privileged speculator will never ride a gargantuan position down to oblivion, because it happens to him every so often. An elite insider may be right 50 times in a row, so never learns the principles of fallibility, he just reads it with idle curiosity in a Soros or Taleb or Popper book (maybe Hume if he is smart, or the ancient Greeks if he is diligent too), and pays it little mind. Just like a boxer gets trained to absorb punches, a speculator gets trained to fold positions when they go really sour. An insider never really learns that skill, which is why you sometimes see truly rich people blow up in spectacular fashion.
 
Quote from darkhorse:

This is why I like the classic trading books. Kovner made this exact point 24 years ago...
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I think Livermore made it about 100 years ago also :D But nothing wrong with repeating correct and unconventional insight!
 
Quote from Ghost of Cutten:

I'm just making a point that there is no 'proof' of risk-preference, it's a taste like enjoying chocolate or preferring women with big boobs, you can't say someone is wrong for feeling otherwise. I agree with betting more on the best bets, of course.

Still, trading for a 20% max drawdown will crimp your returns compared to accepting a small chance of a 30% or 40% drawdown. A 40% drawdown might happen once per career, and you will make more than twice the CAGR by taking twice the risk. 15% per annum with 20% max DD (once), versus 30% per annum with 40% DD (once) - which do you choose, and why?
More...

I was just using those numbers as example. I'd be willing to drawdown 100% under the right setups
 
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