Quote from Mike805:
Nitro, bear with me, I am relatively ignorant when it comes to many strategies (I am a stock trader only) so forgive me if my comments rub you the wrong way.
No problem.
The price action is almost always random. When we enter into the market, (not as hedgers or arbitrageurs but as speculators) we do so because we believe there is information content that tells us that the market is not pricing that information correctly in the short term.
I agree, speculation assumes a certain personal monetary risk due to this radomness. However, you can limit your risk significantly by choosing the right information content. For example, "the market not pricing information correctly" doesn't really register with me - I believe the market prices correctly at all times.
Let's make sure that we agree on what it means when we say that the markets are correctly pricing in information. If the markets are pricing information in at all times, then
Quote from nitro:
There is no a priori definable quantity that exits as information (MACD readings, moon phases, S/R - whatever you use to extract knowledge at any instant in time) such that, when you give the B/A spread and take comissions into account, will give you a probability of success greater than the expected loss from giving up the B/A spread and comission costs, by acting at that moment in time. If that is true, and if the markets are correctly pricing information at all times, then by definition you cannot make money in the markets through the attempt to use skill. You may still make money on any given small sample (luck), but over time, your expected loss will be the negative of (B/A spread + comissions).
Since I beat the markets all the time, the market cannot be pricing in information correctly at all times. Or maybe it is, but then it's players are not interested in picking of the hundred dollar bills that are just sitting there waiting to get picked up, which is a roundabout way of saying that not
all markets are pricing information correctly at all times.
The entities that move prices in the short term will often produce relatively repeatable price behaviour, they will use the prior price action as a guide and hence fullfill their own expectations. Sometimes this future behaviour is clear as day, other times it makes no sense. There exist IMO, given a timeframe, a set of information that allows you to decide whether sense is being made or not, i.e. there exist behaviour patterns that the herd will repeatedly produce.
Well, this is one situation where things get interesting. This argument is the one that leaves me open for doubt that I may not have a complete picture of the markets. Let me rephrase what you have just said in a more "scientific" way, so that we can use more accurate language. It is possible for a system to be completely random at one level, and yet when all the actions are taken together, somehow
emergent properties that was not present in the system's individual components! Somehow, the [mathematical] laws of a large collection of "things" act by "laws" that were not present in any of the components! That is the theory of "mobs" and is so true.
This is one of the greatest realizations of modern science. For example, it is thought that Gravity and in particular Inverse Square "Law", is an emergent property of the Universe. You only see structure when many chunks of matter come together, but each individual chunk of matter has for all praticle purposes zero gravitational effects.
Think about it this way - if markets are random, then your expentancy no matter what you do is the B/A spread (plus commissions.) Now look at any SIF and look at the B/A spread. Why do you think it is always the tighest it can be, and with size? Do you really think theare that many stupid people out there that are willing to make a market when there is information content in one direction or another? No! The reason there is size at the B/A is that a large percentage of the time, the best estimate of price at some future time is the midpoint of the current B/A. So MMs adjust their B/A based _ONLY_ on Fair Value calculations and order flow, and believe that if you give them the B/A spread at ANY TIME DURING THE DAY, on average you will lose. So in fact, the markets themselves are telling you that they believe they are random on average.
Most of this makes sense to me but what is an SIF?
I get tired of writing the same thing all the time. From now on SIF means Stock Index Future.
I like this line "Do you really think theare that many stupid people out there that are willing to make a market when there is information content in one direction or another?", but I find it contradictory. Lets say information (past and present) drives prices, fair value needs to account for present information. If you use fair value as a means to dictate future price behaviour then wouldn't this be a means by which such information will get "priced into the product", i.e. the info will move the price in relatively predictable manner?
If you do this and show a profit over a long time and after comissions, then your methods are better able to gauge market direction than most of the players during pockets of predictability. I am assuming that you are a trend trader and are not shadowing MMs. That is your pocket of predictability, but the actual path it takes once you are in a trade is as unique as each of our fingerprints, and it will "stay on course" until the reason for the pocket of preditability is intact as a driving force - a very unlikely situation in all but the most coherent markets.
Well I am a trend trader when I need to be and I do shadow MM's. I essentially am constantly looking for all types of repeatable behaviour. Say yesterday was a run up and then a sell-off, major R was tested and not broken. Minor S was broken and not retested. These are relatively predictable ideas because many people believe in them. Peoples beliefs will always be changing hence these ideas may stop working for an indefinite period of time (hence becoming unpredictable). In general, I look for those pockets of predictabilty and constantly refine my approach to stay "current" with my selected time-frames behaviour.
Those things may work. I have never found them to work. However, I leave room for doubt in my mind that someone is able to somehow see emergent property where I cannot. FWIW, most of the studies on this sort of Technical Analysis, both by academics and the research I have done, disproves that one can do this through the use of Technical Analysis
only.
Here is the problem with all this though. Talk is cheap in the markets. Look at the thousands of people they interview on CNBC each year, and I would say that 85% of those people don't make money from the markets or do better than sticking your money in an index fund. And yet they are all so willing to give advice!!!!????
Recently, Citigroup fired it's entire Technical Analysis staff. I just wish that someone, for the sake of science, would step up and say, I look at lines on my screen and I make money
consistantly and I am willing to prove it.
I have only heard of one case where someone uses this type of Technical Analysis of SIFs along with an understanding of the markets and made money. But it was not clear
to me whether it was his T/A that made the money, or if it was his structural understanding of the markets that made him money.
Those are all good words to live by, but when put up against actual practive they mean very little. To me, every price looks good as an entry, and at the same time every price looks erratic and risky because even in pockets of predictabilty, anything can come by and infuse new information into the market that takes price back to a random walk, etc.
You are right, it is easy to speak in cliches. I also find it funny how anyone can say this but when it comes to doing it... well that gets into another realm of personal discipline which I believe few people have.
Yeah, talk is cheap in the markets.
I do think we trade very different markets, but I will say certain stocks at certain times display very predictable behaviour (there I go speaking in cliches). The fact is I spend more time not doing anything and looking for good behaviour rather than dealing with chop. I do believe that if you watch a product for a given amount of time you will be able to identify chop versus "sense" and start to be very selective.
nitro
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