Re: Hierarchy of traders at a market turn I'm just wondering: besides traders, how about investors, market makers and hedgers for their roles, timing and weighting affecting a market (say, crude oil) turn.
I would classify investors in the 401(k)/IRA/pension plan/endowment category, where they aren't trading in and out, so at any given turn, if that turn lines up with their own cycle for putting money into or taking money out of the market, they can end up anywhere among the other groups. If they are lucky, they can buy near a bottom, for example, but that isn't their conscious objective like it would be for a trader. Hedgers, from everything I've seen, are dumb money. They might occasionally get it right (I remember reading something about Southwest Airlines being fairly successful in anticipating the oil price spike in 2008, for example), but on net, they are losers. I think of their losses as being akin to the premium one pays for insurance one doesn't use and successful speculators are the insurance companies, since they bear the risks the hedgers don't want to bear. Hedgers can lose money to either smart money or the smartest dumb money, depending on the "quality" of their (net-losing) hedging models. Market makers are a bit different, since they don't have the option of staying out of the market. I've seen conflicting evidence for their ability to make money on their trading, so I can't say they always fall into one camp or another. I definitely disagree with the theory (sometimes seen on ET) that market-making is some kind of license to print money.
A good thread. I wish the good model of yours works well as expected! BTW, what do you mean "the stages"?
There are no "real" or "fake" turns in the markets. There are only turns. Everything you see is real. If you start thinking that some turn is a fake, then you may think as well that a whole trend is a fake and you will miss it. Obviously, some players always try to bluff but their moves are as real as they can get. The way to deal with bluffers is to stick to your position, not try to determine when they do not bluff. That will get you nowhere.
"Real" or "fake" may not be the best terms (in fact, I once started a thread called "Stop worrying if moves are real" in response to the many posts worrying about just that), but some of this will depend, as I said in the initial post, on your timeframe. If you are trading as a daytrader, a "real" turn can be one that lasts a few minutes or hours, but if you are trading a larger timeframe, a turn that lasts that long but then reverses will potentially take you out of your position. So, perhaps I would exchange "actionable" and "inactionable" for "real" and "fake". For example, I trade the ES on the Hourly timeframe, by which I mean that I wait at least a few hours for a set-up to materialize (just a preference) and I measured one month's worth of hourly fluctuations (taking the absolute measure of the difference between the top and bottom prices of the hour). Then, I looked at how many points out of those fluctuations I was able to capture. It was close to 2%. Now, that equated to about 50 ES points for the month. With only 5 contracts covered by a $25K capital base, same as a PDT would need, that extrapolates to almost $150K in annual pre-tax earnings, which is about 5 times the median US income. If you compound those earnings into additional contracts and get up to 10, you're almost a 1%-er in the US. Point being, you don't have to capture every little squiggle to make serious money in the markets. In fact, one of the things I look for in judging someone's posts on ET is how many of the squiggles they claim to get. Too many and I wonder why they aren't the richest person in the world, since clearly their approach, being so wonderful, should be traded at close to Kelly or optimal f, so why would they be so great at developing a strategy and so terrible at position-sizing? Anyway, different point. The other thing about trends is that even if you miss one because it doesn't fit your model for trade trigger, another one will come along afterward. My model spits out a valid trade every 3.5 days on average, but the range in between is from multiple trades in a single day to 20 days. Since the turn of the calendar year, it's been especially long in between trades. I know what is happening in the markets to cause that, I just don't know (nor would I think it possible to truly know) why it's happened. I'm willing to simply accept that fact. Well, what I'm actually doing is trying to diversify instruments to increase the number of valid signals. As I know you know, porting an approach from one market to another is not trivial.
Thanks! It's a topic that I've been thinking about more lately, so I'm glad to have some feedback. The "stages" are my trading model, so I can't really divulge them. It took a lot longer than I would have liked to figure out that this was what I needed to figure out, but I'm at the point now where I can get very accurate results from my quantification of the stages. Of course, just as I figured it all out, the market started acting a little differently and now doesn't provide the same number of trade triggers it had been. In my opinion, this is different from saying that the stages are no longer valid, it's that they aren't the ONLY way a trend can reverse itself and that the market has been doing the "other kind" of reversal more frequently lately. I had always known about that "other kind" of reversal but was never able to quantify an approach to trading them, so I ignored them. This was not an issue when those kinds of reversals were only 10-20% of all reversals, but during the initial months of this year, it's been closer to 50% of all reversals. I have some speculations as to why this type is so prevalent now vs. earlier, but they are just speculations. My hope is that the ES will revert to earlier form and start giving me more valid signals. Of course, I can't control that. But, out of the three states a trader can be in (in the market making money, out of the market, in the market losing money), I prefer "out of the market" to "in the market losing money". Also, as I mentioned in a post above, I am trying to see if my hypothesis that these stages are actually universal to all markets, not just the ES, is true by testing the waters in other markets, starting with the Euro. Initial results are promising.