i trade (mostly) index futures, specifically the dow. the dow is a proxy for supply and demand among institutions, it is less frenetic than the ES (and has a better spread) and it is price weighted, not cap weighted (i hate cap weighted indexes...) but i digress when I am trading the dow, i realize that over 90% of the volume is represented by less than 8% of the trades. iow, a small # of traders trading large blocks largely MOVE the market iow, part of edge that can be developed is FADE the retail trader, and piggyback on board the institutional trader. futures are zero sum (unlike stocks) . every single dollar marked to market in my account COMES FROM somebody else's loss (unlike stocks). the net for positions is thus zero realizing this makes me humble. i just have to be Better than other traders. how? by exploiting my edge: patiently waiting for setups with high positive expectancy, and only executing trades then. MOST traders trade impulsively, emotionally, and without discipline. most traders use lagging indicators. i don't i don't use any "indicators" in the conventional sense. institutions HAVE to position in the markets. that's how they make money. and knowing how they operate (and when) can offer edge. i have also been very successful at poker, another zero sum game. why? because i am better than other players. same as trading. it's really that simple. but the cards (unlike the market are RANDOM). the poker PLAYERS are not random. that is what makes them beatable. it's a dynamic system. but it is beatable the market is not random. nor is it normally distributed. academic morons like golfer don't even understand that. to understand the markets, it is much better to study psychology, and chaos/complexity theory, and game theory (which is all about managing risk and making intelligent bets/strategies on future outcome), then the discredited absurdities that come when one ASSUMEs things about normal curves and gaussian distributions. complexity/choas theory can (and do) explain how a market can crash 20% in one day FAR FAR more often than a normal distribution of prices would predict this would happen. why? because the market is full of irrational, self-interested, herd following, emotional lemmings. they are many things, but they are not random i have run a trade mentoring business, and i have found that Phd's and the like are the types of people that are usually too arrogant to be good traders. the market is always right. PhD's think THEY are always right. it's an ego thing "The fact is this: The markets are a lot more random than most traders want to think it is. It is also a lot less random than most academics want to think. " absolutely. part of edge, and being consistently profitable is recognizing those (relatively) rare opportunities where there is a statistical edge in what will happen next. some days i might sit there patiently watching for 4 hours before i enter a trade, and that trade might last less than a minute. so what? e most traders do not have the kind of discipline and emotional makeup. that's good. they provide liquidity most traders (i would say less than 5% in my experience) enter trading with a solid business plan, an understanding of game theory and concepts like Kelly Criterion, risk of ruin, and the fact that given sufficient "n" the unlikely is almost certain to happen to you. you can double down and triple down on losers 20X in a row and make money, and then have the one trdae that wipes you out. that's why you have to have the discipline to only play positive EV strategies and to be patient, disciplined, not overleveraged, not undercapitalized etc. trading has very little barriers to entry. a couple of grand, a computer, and an internet connection and any putz (even wall st. golfer) can trade against the best in the business. compare this to (say) golf. you can't just walk up and play against tiger woods for 10k a hole, or enter any major pro event. trading is thus VERY simple. all you have to do is press a button!!! that is what can make it SO profitable for a good trader, because the vast majority of retail traders are pressing buttons without understanding risk/reward, discipline, market structure, etc. and their stop runs, margin calls, etc. fuel some very nice (and predictable moves)
Well said , Whitster ! You should write a book. Chaos theory, yes. Patience for the moment when everything comes together for that explosive or not so explosice 1-way move. For me the market is going from very random modus to very predictable modus and the other way around, all the time, clue is to see when this happens and act on it. it takes time and a lot of study and experience to become good at recognizing these transitions
if your graduate program is research/scientific oriented, it will without a doubt help you in your market indeavors. The research ability will help in finding opportunities, the paper can help land a good market oriented job, or raise money. best luck.
"ask any broker who some of the WORST traders are and they will tell you it's PhD's (in various fields), medical doctors, and lawyers why?" they probaby have this impression because on average these professionals in high paying fields have more to lose, and consequently lose more. It is a given, almost axiomatic, in brokerage that active traders lose or underperform and generally lose money. But, the real problem with this statement is it considers "graduate degree" or "higher education" in some generic way. for trading, it is not all equal. A research or scientific degree, and the kind of inquisitive person who studies these fields, is more likely to do well in today's more sophisticated trading world. It is part the self selective process, part the scientific skills one learns in a good program.
"lol please run a histogram of daily S&P returns. It's very close to a standard normal." --- In what world or fantasy land do you live in? All you have to do is look at the previous history. How do you explain Oct of 1987? Or August of 1998? Are those price distributions normal? How do account kurtosis and skewness of never being zero? or Hurst Coefficient never being 1/2? Those are FACTS you can't disregard. ...Now I can understand why you call yourself WallStGolfer31. You remind me of that kid we had in the office, the trader wannabe that couldn't make it at our firm. We always sent him out on errands by saying, "Hey kid, GO FER coffee!!" or "Hey dufus, here's $20. GO FER donuts!!"
Regarding the present financial orthodoxy (Efficient Market Hypotheis and its offsprings like CAPM, Efficient Frontier, Black-Scholes Model etc etc) , I would say that the science of economics is Newtonian (or even pre-Newtonian) in an Einstein world, still a loooooong way to go, dear academics.
excellent point market behavior is human behavior human behavior is HARD to predict. ask any psychologist it doesn't follow that no positive expectancy bets can be made on behavior in certain cirucmstances
some evidence against the standard theory ; 1. The standard theories would estimate the odds of that final August 31, 1998 collapse at one in 20 million, an event that, if you traded daily for nearly 100,000 years, you would not expect to see even one. The odds of getting three of such declines in the same month were even more minute: about one in 500 billion. 2. From 1916 to 2003, theory suggests that there should be 58 days/ 6 days/once in 300,000 years for DJI daily movement over 3.4%/4.5%/7%. In fact, there were 1001 days/366 days/48 days of such event 3. A Citigroup study in 2002 found unpleasantly sharp price swings in several currencies....the biggest fall was a heart stopping 7.92% or 10.7 sigma. The normal odds of that: Now if Citigroup had been trading dollars and yen every day since the Big Bang 15 billion years ago should it have happened, not once.
golf clap a big part of chaos theory is how (relatively) small perturbations in a system can have HYOOGE (and somewhat unpredictable) effect. the classic "butterfly flapping its wings in bolivia causing a hurricane in guatemala"... thang again, market behavior is HUMAN behavior. the market is a giant feedback system. market makers and institutions are generally selling strength and buying weakness, retail traders are chasing ticks where their (not so robust) indicator is saying "breakout" or some such. different people with different NEEDS (for example, a hedging commercial producer), entering trades for different reasons, based on different analysis. it can often seem random. it is never RANDOM. it is COMPLEX there is a difference and in the case of many market crashes (like you mention), it was often SMALL perturbations that had effects that, as you put it, are basically statistically almost impossible (much like a scalper being consistently profitable is not possible if trades are random)... also note that the market has never (to my knowledge) gone UP 20% in a day, or had the sort of extreme one-two-three day market moves UP vs. the moves down. the drift bias is (obviously) up. that's a function of the fact that wealth is created in the system (stock market) , since stocks are a proxy for businesses, that also create wealth. yet, despite the drift bias being up, these extreme and basically statistically impossible crashes happen with NO counterpart on the up side that is because fear and panic are strong emotions.
I, too, have had trouble buying into the fact of market randomness. Obviously, every trade being put through with a reason behind it. Different traders doing different things can sometimes make a chart (which is mapped psychological behavior) and price movement random, but each trade has a purpose. Good trading