Quote from Arthur Deco:
TZ, you describe the world of the rational, logical, systematic trader. I am an irrational, illogical, unsystematic trader. Just because it is indefinable doesn't mean it isn't an edge. And what is wrong with guessing? Let's not pretend that systematic trading is not guessing, especially in the midst of a vexing drawdown which exceeds experience. Almost every trade I make is a winner. You can argue that such a high win probability passes on a multitude of higher risk trades with higher reward. But by no means is what I do guessing.
It might be nice to construct a tree which branches out at various decision points. If monks did it it would be very illumminating.
You've seen my recitations on good reads that show the humor of the CW. Some in that venue think they are rational, logical and systematic.
You have to admit, though, that they would not turn down the path labelled deduction. Why did they always take the inductive fork and do "claiming" of rational, logical and systematic? I see you calling TZ those words and yet he isn't. He is a CW type guy.
Each of the many branches that occur after strolling away on deduction path from the induction/deduction fork contain most of what is termed here (mathematically speaking) edges.
The first branch I came to was periodicity. This characteristic simply sets up the "loop" aspect of trading.
Another close by branch was the deduction of how money is made in markets: price change. This deduction is very fruitful for edges.
After that I found that the operating point of the market migrated instead of jumped around on various multidimensional matrices. From a quant point of view the various levels of market strength (as defined in funny maths) confirm this when induction is disregarded. (See strong form of EMH on page 207 of Fox).
Twin modes of ES market pace vs volatility (i.e, Y = 8E-05x +2.3741 with R^2 = 0.472) show how the boat is rocked from one gunnel to the other.
By deducing a market paradigm, a person gains in knowing the market's measure and the relationship of the market's variables. This branch is where most of the low hanging fruit comes from.
On page 70 of "Musicophelia" (Oliver Sacks) a quote begins "My brain makes up patterns......" This is a deductive reference backed up by Tufte in EI and TVDQI on the information contained in illustrations. By learning deduction and NLP's function in a paticular type of mind, edges appear in many forms. The particular mind type is the informed and differentiated mind. The mind can be differentiated by doing methodical drills that relate to logic in information display of markets.
Information display is not inductive. The most informative deductive examples involve parts of "loops" where, mathematically, additional degrees of freedom are added and the cases of integrated parts show the orderly migration of the operating point of the market. As anyone discovers from reading the history of mathematical deduction in the financial industry, these sets of cases came first in market analysis history. (Search convergence and divergence). The edge discoveries come in finding what comes between the two items mentioned. (there are six reliable cases).
Pictorially, geometry is the most powerful deductive simple math for illustrations. Knowing that fractal sentiment overlaps is a very strong deductive advantage. Knowing that the overlap is expressed in each market variable is even more advantageous.
Knowing which variable precedes the other is advantageous as well. All of this comes from deduction and not induction.
How does a person come to the point of not predicting because it is trivial (mathematically speaking)? Through deduction.
What is the determinant for knowing that probability is not required for trading successfully? This is a logical deduction. (See Bayes and Carnap and Keynes)
None of the above details out an edge a person can jump right on and use to make money. The above are all just branches that have zillions of edges that I would call twigs growing out of the deductive branches.
Here is an interesting beginner twig. If you recognize that trends ovrlap and you know about how periodicity causes loops, why not just trade using reversals at the same point in each trend. Here are two possible points to consider: RTL BO's or FTT's before RTL BO's. Why not just trade dominant traverses of channels? The three corresponding volume signals for these three patterns are: R2R's and B2B's at troughs; R2B or B2R's on peaks: and R2B's or B2R's on troughs. Of course all three can be combined and while using reversal trades throughout.
For these there are no DD's and the sharpe is very high since there is no "net" aspect. What is the expectancy by staying on the right side of the market all of the time that these combined trades would yield? LOL.....
The branches along the deductive path all provide twigs that eliminate dealing with DD and having to sideline during RMH's.
So, its time to prove the above. Proving induction is done with Excel spread sheets. What proves deductive processes? It may be that the mind can be tested. Try a read of "Mindfulness in Plain English" by V. H. Gunaratana.
