Despite my "advice" I am always battling this internal "not letting winners run" demon. I am always trying to re-evaluate a winner and look for a great exit. This costs me money more often than not. Two examples are from the last two days. CTTY yesterday and ISPH today. Both of these stocks I got great moves on, 4 figures plus total for each, but if I had allowed more room for the each of these winners to breath...well, the results would have been much better. This is really very difficult to anticipate. How often does a stock move 300%+ in a day?? Not very often. How often does a stock move 1-2% and then turn around.. a lot more IMO. I am still stuck with the belief that most profits will be taken away from you if you do not carefully protect them. I am not experienced enough yet to anticipate huge moves and more so, I am not willing to give up unrealized profit. Mike
"Demons" only exist when you're unsure of yourself or your plan, which is what I'm going through at the moment. I may end up doing exactly the same as what I'm doing now, but it's only after coming to an understanding (asking questions, compiling statistics, exploring alternatives etc) that I will be able to execute without regret.
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. 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. 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. 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. nitro
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. 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. 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. 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 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 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. 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.
The pitfall is calling something "random" just because we don't or cannot possibly understand or comprehend something in it's entirety. A person unfamiliar with art history will look at a Pollack painting and call it "random" splashes of paint; someone listening to atonal impressionist music for the first time will say it just sounds like a random collection of notes. Similarly, traders confused as to why a market went up instead of down on apparently "good" news will cite randomness for that seemingly inexplicable move. But the alternative way in looking at market movement is to say that it is actually completely and utterly non-random; unless there are people or institutions whose purpose in life is to buy and sell securities randomly while losing on commission and the spread on each transaction, I think it's valid to say that each and every "jiggle" up and down, in whatever time frame, has some reason behind it -- somebody is behind the button on every trade that comes across the tape. Just because it's impossible to know what all the reasons are, or conclude with any certainty what the overriding impetus behind any move is, does not mean we have to resign ourselves to the concept that the market is random. Whether we condsider the market random or not doesn't change anything about the market, but it has everything to do with how we connect with it as traders. Many times a current move will completely baffle those who cannot find a good reason for it; only later, in retrospect, may the reasons (if ever) become clear, but by then the opportunity for profit has already passed -- it has already been discounted by those with superior information or forecasting ability who have collectively "created" that move. So perhaps "in effect", most of the time market movement might as well be random for those of us who cannot percieve any edge in holding a position, and thus remain flat. However, once a trade has been opened, that itself is a claim that one comprehends something the majority of the market has yet to realize and should subsequently discount with future purchases or sales, or in other words, that the current market is wrong, and needs to move this way or that. A trade in this sense is not exploiting some "pocket of predicitibility" that anyone can stumble upon, but an outright prediction that in the near future the majority of others will need to pull the same trigger you just did. Looking at the market in this way is the polar opposite of viewing it as random, yet both are viable for trading. I think randomness is a concept that some traders choose to apply to the market because it makes it easier to psychologically accept the inconsistent (not in the derogatory sense) results of trading in general, much like how professional poker players continue to bet the percentages over the long run and are not discouraged by outcomes of individual hands -- how can one get mad at a random selection of cards? In contrast, some traders will prefer a more causal 'schema' of why a trade was entered and ultimately succeeded or failed; their satisfaction in trading, beyond profit, comes from (apparently) figuring out a piece of a puzzle before everyone else. Either way boils down to self-delusion in the end, but I think it's safe to say one can go on living happily with or without god -- it's just a matter of preference
First, to get it out of the way, let's define random so that we are not talking past each other. There are many different definitions of random depending on the science that is trying to get it's hands around it. For our purposes, this one sounds good: Random: A condition in which any individual event in a set of events has the same mathematical probability of occurrence as all other events within the specified set, ie, individual events are not predictable even though they may collectively belong to a definable distribution. Note the way that it is defined in Thermodynamics. Random : (thermodynamics) a thermodynamic quantity representing the amount of energy in a system that is no longer available for doing mechanical work; "entropy increases as matter and energy in the universe degrade to an ultimate state of inert uniformity" This definition also will be useful in the markets, so we will keep it. I will continue later... nitro
No problem. 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 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. 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. I get tired of writing the same thing all the time. From now on SIF means Stock Index Future. 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. Yeah, talk is cheap in the markets. nitro
I dont think the market is completely random. The key phrase, imo, is as nitro said, "a large percentage of the tiime". There are brief instances when it is not random and that is our edge. The last two days are a good example of when you have a huge edge. Wish they came along more often. edit: I am speaking from an intraday point of view only.