Home >

# Gladiators, Swords, Rolls, and You

1. If you have not realized it yet, trading has a lot of common with gladiating (in case the verb does not exist, let us coin it on ET and spread it to the world "from this place and time" as JFK said once). Wall street is ancient rome, and you the trader is a gladiator. You have cuts to prove it, and hopefully the bankroll of a champion. It does not matter which camp you are on, each day swords are aimed at your head to make it roll.

You can defend yourself, but in the long run you need a sword with many edges to make head rolls--- the heads of Benjamin Franklin and co that is, on the back of their greenbacks staring at the inside of your wallet which is inside your deep pocket.

The mantra of the gladiator, the modern that is, is to hit them where it hurts the most: their pockets! The rest is just details.

For this you need swords with multiple edges. Build the edge of your swords is what I want to discuss and write about here. Hopefully you can join, and tell us a little bit about your battles, you edges, and how you build them. You can toss in there examples of heads that rolled before you, even if you did it just on paper. If Walt Disney can do it and crowds cheer them for it why shouldn't you!

There are three types of edges (you can subclassify of course and have other types):

1. The certain edge. This means that your edge will cut your opponent but never cut you, and you are certain.
2. The probabilistic edge. The one that cuts you and your opponent. But over all, which means multiple fights with your opponent, you end up bleeding less than him, and you win at the end.
3. The almost certain edge. Is the edge in between 1. and 2. It is the edge that you can rely on and have proof, that with a probability of almost one, you will win on each trade. But it is not certain.

All the above types of edges exist.

Now how one can go about finding such edges? Your best friend is: Same causes lead to same effects is a scientific principle. This requires one to think under the surface, and present a logical explanation. Then one uses numbers to ascertain whether or not one has a correct thesis.

This usually leads to an edge of type 1 or type 3.

What if you did not have the luck/skill to build a model of causes and effects, or just want to reduce your search time for such solid edges? Answer:

1. Find correlations between a variable A and a variable B.
2. If there is a correlation (negative or positive) and this correlation is strong, then B may probably explain (in part or in total) A, or vice versa.
3. Once you have your correlation, you need to establish whether there is a cause and effect relation between A and B.

If step 3 does not lead to anything, you are at your own risk to use the result in step 2 to build a trading system. In my view that is what I consider as a gambling trading system. You can win of course, but it is just because you worked things in a way the odds/rewards are in your favor, and not because you really have something fundamental behind your trading. If the climate change, your whole gambling system turns the other way, and you become the gambler and your opponent the house while in your head you are still under the illusion that you are the house. So you have to be sure you are always the house in a gambling trading system. You may also have to deal with the potential moral dilemma that comes with such realization.

I can go into further details, but i just wanted to provide a framework with the aim to spark things up and with the hope of getting others to respond and contribute.

I just wrote these comments while taking my breakfast, so please ignore things that are not of your taste such as typos, comparisons you do not like, etc.

2. you made me think of this commercial.
CMS Forex. The Arena.

3. The war analogies, continually perpetuated by the Financial Industry equivalent of those selling 'picks and shovels' to chasers of dreams, serves no purpose for the individual trader. Even in a zero-sum marketplace, the war analogies fail to accurately capture the relationship between market and trader. War, and its âbattleâ analogy equivalents, engenders the involvement of emotions into the mindset of a trader. One need look no further than the rise in Program Trading to see how many traders have attempted to remove emotion from their trading. No, markets, and the traders who use them, represent a symbiotic relationship, and not, an antagonistic one. Without a marketplace, traders have no job, and without traders, markets cannot exist.

If one chooses to discard the war analogies, and instead, view all markets from a different perspective, then one has an opportunity to 'see' the individual responsibilities charged to each participant in the symbiotic relationship. The market has its job to do (provide the 'signals' for the trader), and the trader has a job as well (act on those 'signals' - once received). Whatever method a trader chooses to employ in an effort to profit from this relationship matters not nearly as much as learning to avoid the internal daemons of fear and greed and their influence on trading.

If I have said anything with which you find disagreement, feel free to ignore my post. I wouldn't want to upset your breakfast.

4. I did not know that traders can inspire "film" makers.

Also I want to ask traders: what is your edge(s)? Which type is it? How did you develop it (them)?

I once heard someone say, I go long when my back hurts, and go short when it does not hurt and I have slept well many days in a row.

5. Spydertraders post is accurate for me, a symbiotic relationship exists btw the trader and the market. The idea of battleing with the market is a noob mentality.

6. Batteling implies picking a side and fighting for it, if you remain unbiased, then no need exists to "pick" a side but rather wait for the market to provide signals from which the trader can profit. If its the long side, fine. If its the short side, also fine.

7. Spy: Thanks for worrying about my breakfast! I take other points of view well, and in fact thanks others for sharing them.

But isn't that the market (in doing its job), chews and spits out any trader who opposes it.? When it moves and it constantly does (just one tick), it chews exactly the same number of dollars and give them (minus commish and spread) to those who do not oppose it. At each tick, there are winners and losers. How could internalize this?

8. War analogies are harmless and to the contrary add color. It is ignorance to try and displace them as they crop up everywhere in the world of business. They allow the user of such analogies to draw sharp distinctions and their purpose is as practical metaphors in business lauguage.

However the process of making money from a market is not war action. It is not a war. It is a docile process of syphoning money (your net profits) from the market. You are running a conduit from the market into your pocket. For daytrading (eg CL, YM) you use an accurate methodology to do this as a continuum, Open to EOD. Attention, calm, intelligence and control are appropriate descriptions of this very pleasing activity.

9. That is a good point of view. And that is not what I meant by batteling, although I understand what you mean. The ultimate trader is someone who has to do ZERO fighting (just pick the winner, side with it and reap the reward).

But you are left with the problem of knowing which side you are on. Do you know that with certainty? And if not which type of edge you have? How do you develop it? Etc. One has to make sure that he is not under the illusion of being with the winner side of the market!

10. Words like opposition are exactly at the root of the problem here. Opposition implies there is another side that one must be in constant conflict with. If you remove the word opposition from your understanding of how the markets move, you'll see that it moves because of the collective actions of people. People's actions produce patterns and those patterns can be seen as opportunities. Those patterns either create an inbalance where opportunity exists to sell or opportunities to buy.

11. Well yes, the process of learning how to read the signals correctly and acting upon them in a timely fashion is a difficult one. However, I feel this is the best road to take. Otherwise you are stuck making "predictions" based on your opinions and the collective actions of everyone else do not care what your opinions are

12. Here is someone whom I think is a winner. I never did, but I will read his posts. This man has no illusion as to what he is doing, the means he is using, the context in which he is doing it, and the dangers that may exit around him (even if they do not exit in fact).

You deserve your name!

13. I would even say that it is probably the only winning road to take if one is a short term trader! If one is an investor then things might be different!

14. So what your saying is the market knows where your trade is and what your emotional pain threshold is as well ?

Wrong,

The market just does it's job, find liquidity and facilitate the auction process.

It cud give a rat's ass about you

15. You just presented proof that have absolutely no concept of what's going on in the markets,

You just said all money is transferred to market participants except for the money from commissions (fine) and SPREADS.

A stock has a bid in at 129.90 for 2000 shares and an offer at 130.00 for 1000 shares. Behind that 1000 shares at 130.00 there are no offers until 130.35.

I buy the 1000 shares at 130.00 and then place an offer at 130.35. If someone else wanted that stock at that price, it's too bad because he missed it and will have to pay up. He will buy 130.35, and even though there may be no bid until 130.90, thus creating a 45 cent spread, the "spread" is going from his hands to mine. Think of that transaction in a vacuum - imagine a market with no bids at all, and only one offer at 130.00 for 1000 shares. The market has never traded before and there only exist 1000 shares of this company in the float. I buy that 1000 shares at 130.00, and then put an offer up at 130.35. Someone then buys me at 130.35. He then decides he doesn't want the stock and puts it back on the offer at 100. Nothing has changed in the market from the beginning to the end, except that 350 has gone out of one trader's pocket and into mine and a different entity has ownership of the company and is trying to sell it. A spread isn't an actual cost. Is the cost of a spread negative if immediately after "paying" it an algorithm jumps in and bids 30 cents higher?

When money goes out of one trader's account because he paid the spread, it goes into the account of a market maker or scalper or some other market participant.

To be honest, I'm kind of skeptical of what your intentions are in starting this topic because of the way you attempt to come across through your language as a guru/expert when the actual extent of your market knowledge is so minimal that the simplest concept of how the wealth transfer works completely evades you. Who are you to be classifying market edges if you have no idea of what you're talking about.

16. Let me say the following (with some questions):

1. Who pays the analysts, the brokers, the market makers, the stock exchange fees, the investment bankers who underwrote the IPO? These people have to be paid somehow. Tell us who pays them,and they make no risk. We know that they make a lot of money!

2. Your explanation of the facts in not complete. But let us accept it as it is. Could I ask this: is not your explanation also valid in a Ponzi scheme? And we know that the Ponzi scheme aas viewed through your prism looks good.

3. I hope that in answering point 2, you may know realize that what you looked at is the left side of the price vs. time mountain. How about the right side when the price heads back to zero (lower than where it started at IPO time)?
4. You should know that at IPO, the initial investors get their cut.
Those have really sold a real business, and obtained safe money.
5. In case you question the right side of point 3, what is the number of stocks that ended up at zero. Have you ever visited the graveyard of stocks that started above zero (IPO) and ended at zero at one point in time. If the company is a growth company, this means that dividend was not paid and nothing was paid back.

Such stocks are the largest graveyard of NEGATIVE sum games if you count only the traders who got involved after the IPO. And that include you Mr. Knowledgeable! If you doubt my assumption how many .com 's fit my description. And we did not go back in time!

Do not be fooled by indices. They forget their dead, and include just the best of the crop. The graveyard and junk yards are full (and some of your money is likely there) of negative sum stocks.

You seem to have looked at things from your views! Change your seat,and may be you will see other things!

17. Which type are futures spread trades? I am thinking they are type 2.

18. Ok sir well you seem to be the knowledgable guy here. So let me get to the bottom of it. How many thousands of dollars must I shell out for your special insights into the best kind of edges? \$5999 for a seminar?

19. This is a very good post, and I am glad that it has sparked intelligent conversation from the other traders.
***
Intra-day trading is like being engagaged in a fight like those first seen in The Matrix which happens at super human speed. Position trading happens at regular speed, and long-term trading (weekly, monthly) happens at a much slower speed.

I developed my edge through countless hours of observing and recording of data, finding the causal relationships (if there were any) between the different factors that I obsevered in real-time, building a model on what then should happen (when x, y and z) were in place, and then putting it to the test ... over and over again, just like any scientist would.

I also found along the way that you must get your subconcious to understand and agree with whatever it is you want to do, so you must have your psychology in place as well.
***
At then end-of-the day, trading is like a form of combat that requires strategy on the level of The Book of Five Rings by Miyamoto Musashi where you:

i) know your tools,
ii) understand how to implement them successfully
iii) know how to read the conditions for engagement
iii) press the oppotunity when the battle is going your way
iv) retreat to do battle again and again when any particular conflict is not going in your favor

Same as any other engagement where there is a loser and a winner (speaking of which, the Patriots are gonna show you the difference between the boys and the men tomorrow).

20. Quite often they are number 2, very rarely are they number 3, and number 1 is a very interesting group indeed (and includes many legal, quasi-legal and illegal players!)

21. Re: the premise argument made by "riskfreetrader," I think you have to water down the analogy a bit.

Simply put - you can always quit trading. The individual soldier, however, can very rarely "quit" being at war. Not without serious consequences. If you are a soldier fighting in another nation and you "quit" before your contracted time is up - you have serious problems. If you are an individual defending your turf from an invader, "quitting" basically means leaving your country and trying to survive elsewhere. A very big ordeal.

Many of the acts of heroism/desparation that you see in war are often the result of an individual feeling they had no choice. In trading, you almost always have a choice.

To quit trading, you use the phone or email to say "close out my account" and you provide the routing # and etc. for your bank account. Easy. You get a job and find another way to make money. Life goes on.

To split the difference, I would say trading is similar to combat sports - particularly the martial arts. But even in UFC mix martial arts fighting - some of the toughest guys you will ever meet get to make the choice to "tap out" when they have had enough.

If a UFC fighter wants to retire and he has contractual obligations, he may have the option to "buy out" the commitment.

Sgt. Soldier does not have that option.

22. I have never given a trading seminar (The seminars I gave are scientific seminars only). I have nothing for sale at the present time. Sorry I cannot sell you anything (except maybe some options if you want to take the other side : ).

In more seriousness now Sir, I appreciated reading your response. I had a similar thinking to yours some years ago, but then when I looked at stocks that once were the rage of the market and then just years later were OTC or worth nothing, I had to think otherwise.

They say the market is bullish over the long run, but that is for the indices which are dynamically managed--The new best of breed are added, and the less good are removed. DOW, SP500, ND100, are in effect doing portfolio optimization. It is just not done explictly as in a mutual fund.

If you are making money then it is really what matters, and I congratulate you for it. I am sorry if I wrote something that made you think I want to sell you something, but it is not intentional. However it is true to I have taught friends and family what I think I know about the market (in addition to other people when time permits, and I love doing it). If I were to do it at a larger scale, I would just pay google to do the job for me and I will pay them from the business profits.

23.
24. Great post.

That's why these threads are always so interesting. Other traders, who face the same system, technical and psychological problems can discuss them and present their perspectives.

25. I agree with you.

Go PATS!

26. I agree with your post. The war and battle analogies are there to make rookies think trading is a fight they must overcome and to make traders think that trading is much harder than it really is.

I was told to think of trading as an auction. The price goes up until nobody will buy anymore. the price goes down until nobody will sell anymore. It stays that way until something changes. Its really that simple.

Sometimes it changes fast because new players come into the auction, or because existing players get impatient, or existing players see a sector move and re-evaluate their prices.

But it is really only an auction and when I think of it that way it keeps me from buying at the tops and selling at the bottoms.

Just my opinion.

27. But there are always buyers at the top, and sellers at the bottom. So, what you wrote is not the fact. Check any chart, and you will see a significant number of buyers at the top, and ...

28. "There are always Buyers at the top and Sellers at the bottom" does not invalidate jaronimo's statement. Surely, someone with your insight into market dynamics can see that.

29. >>>>There are buyer at the top, but there aren't any at 1 tick past the top. At least for now...

30. Sorry but I just copied and pasted what that person wrote, and I did not mean it and do not meant in a negative way.

I agree that it is an auction. I think the stocks auction will lead to the exact opposite of what was written. I think that at the top there should be a maximum number of buyers, and at the bottom there should be a maximum number of sellers. As for each buyer, there is a seller, at the top and at the bottom, we should experience a maximum volume!

Essentially when a maximum number of people join what I called the battle, that signals the end of the current battle, and a new battle begins (up or down). I then just join the opposite of the trend that took place before I notice a maximum volume.

Did I miss something?

I would also add that if I see a maximum volume, and after it volume drops and prices continues up, I will go short when the volume almost dries up (which I think is what the other writer had in mind).

Stocks auction are I think different from familiar auctions,because you put for auction something that was just auctioned a tick ago.
Therefore, the most common price is the price that involves the highest numbers of buyers and sellers. The top and bottom should be in the area where the volume is at extremes.

31. And I just copied and pasted what you wrote.

Again, your claim that jaronimo's statement was rendered inaccurate by your follow up non-sequitor remains false. In addition, your additional tangential verbosity also failed to invalidate jaronimo's statement.

Evidently, you have.

32. That is true, and that is why the market goes down: it steps back to find the buyers. When it is stepping back, it deals with smarter and smarter buyers as these buyers are looking to buy the stock at a price which is lower than the price at the point where volume was high.

If I were in such a situtation I would buy only after volume dries up during the retreat, and the prices started going up with more volume and higher price than the day before. I will not be the smartest guy in my buying, but I would know that I am close to the smartest guys.

In addition, I know that no one consistently buys at the bottom and sells at the top---except as they say "liars".

33. Sorry but I do not understand the aim of your comments. Readers will judge what I wrote. Again, my thinking, as per my previous posts, is that bottoms and tops should involve a maximum number of sellers and buyers, with some exceptions (for instance on the way up, when price goes higher while volume is decreasing. In such case ,the top is when volume goes to the other extreme(almost dry).)

Overall, extreme states of volume lead to bottoms and tops. And tops and bottoms involve high volume. Therefore maximum number of sellers at the bottom, and maximum number of buyers at the top. Check the charts to see whether what I wrote is true or not, but it is just my thinking. I do not mean to invalid or validate anyone's point of view.

34. Its really not that deep a post that I made that it requires so much thought. Its just a simple fact in my mind that helps me trade profitably.

To me, trading is not a battle because I am very competitive and I would have to win that battle at any cost and every time I fought the battle. Thats impossible with the market. No matter what I do or think, I cannot make the market do something it does not want to do. I can only see what the market is doing and try to pull some money away by following and understanding what I am seeing at that moment. If I try to fight the market or impose my will it almost always costs me money.

If I think of the market as a sale, or a simple auction, its much easier. If I see that the market is an auction and price goes up until nobody will buy anymore, it keeps me from buying because I realize that at this moment nobody will pay more than the current price. So that means I would be buying something that I could not sell for a profit. If I think that way, its very easy to walk away from a trade knowing that at this moment its a bad trade.

Trading should be easy. By thinking about it the way I do, it makes it easy for me. If I use the battle scenario I tend to be in a more aggressive, winner-take-all attitude, and that costs me money.

My goal in trading is not to conquer the market and leave it bleeding in defeat and begging for mercy. My goal is to take easy money from the market.

I don't think the proper attitude is to look at the market and think "I can conquer this", I think the proper attitude is "If I buy now, can I sell it for more in a very short time because many people still want to buy here?" But thats just my opinion and what works for me may not work for everyone. Some people feel life should be unnecessarily complicated.

If the war analogy works for you, more power to you! Just keep in mind that the highest award in real battle, the Congressional Medal of Honor, is usually awarded posthumously to its recipients.