Random or Competition?

[counter_violent]

We all are really.
The only way you can guarantee future performance is looking back
in hindsight after quitting trading minted.

Until then we all tread a fine line, in the vain hope of reaching that goal.
Its a gamble - a calculated one maybe, but the outcome is not certain.
Then again most things in life are the same...

That sounds pessimistic, I'd prefer top call it realistic.

A big wad helps.
You can get away with allsorts.

 

[DionysusToast]

I think there is a fundamental mindshift required in most traders.

You hear people come out with stuff like "risk on, risk off". The context in which it is used is of there being this huge market with people moving money from one place to another on a daily basis for long term investment. That you can piggy back the "big guys" who for some reason are psychotically changing their long term investments every 3 days.

It's as if the market is one thing and the trader looking at it is another. As if the trader is looking at a bunch of participants that are going to act a certain way and then he or she will try to jump on that move.That the other participants and the trader are separate entities making decisions for entirely different reasons.

Similarly, with value concepts. The trader is looking at the market to see where participants might find prices 'cheap' or 'expensive'. You then capitalize on the market reacting to that. Are any participants really thinking "this is cheap now?" or is everyone thinking "the other guys will think this is cheap - I'll buy"?

I'm not sure if I'm getting the point across but you ARE the market. The market is YOU. Don't think the other participants are doing anything nobler than you.

Many people look at themselves and the market as 2 separate entities making decisions for 2 separate reasons. The trader expects the market to do something and then the trader will jump on to that.

The problem in my view is that this is what EVERYBODY is doing. Everybody is trying to anticipate what everybody else is doing.

It is a mistake to think that the whole market is rational or is investing and that you are above it all speculating. The whole market is speculating. Everyone is trading based on what they think everyone else is going to do.

I think a rudimentary understanding of game theory helps to see through the facade of looking at the market as some sort of rational group-thinking entity making decisions for grander reasons than your own. That is not to say that game theory will necessarily help your trading but it will help you understand the fact

 

[Liquid validity]

I think there is a fundamental mindshift required in most traders.

You hear people come out with stuff like "risk on, risk off". The context in which it is used is of there being this huge market with people moving money from one place to another on a daily basis for long term investment. That you can piggy back the "big guys" who for some reason are psychotically changing their long term investments every 3 days.

It's as if the market is one thing and the trader looking at it is another. As if the trader is looking at a bunch of participants that are going to act a certain way and then he or she will try to jump on that move.That the other participants and the trader are separate entities making decisions for entirely different reasons.

Similarly, with value concepts. The trader is looking at the market to see where participants might find prices 'cheap' or 'expensive'. You then capitalize on the market reacting to that. Are any participants really thinking "this is cheap now?" or is everyone thinking "the other guys will think this is cheap - I'll buy"?

I'm not sure if I'm getting the point across but you ARE the market. The market is YOU. Don't think the other participants are doing anything nobler than you.

Many people look at themselves and the market as 2 separate entities making decisions for 2 separate reasons. The trader expects the market to do something and then the trader will jump on to that.

The problem in my view is that this is what EVERYBODY is doing. Everybody is trying to anticipate what everybody else is doing.

It is a mistake to think that the whole market is rational or is investing and that you are above it all speculating. The whole market is speculating. Everyone is trading based on what they think everyone else is going to do.

I think a rudimentary understanding of game theory helps to see through the facade of looking at the market as some sort of rational group-thinking entity making decisions for grander reasons than your own. That is not to say that game theory will necessarily help your trading but it will help you understand the fact

How does a big fund arbing your chosen instrument in the 'wrong direction'
fit into that then?
With FX (and by definition currency futures) the participants may not even
have profit as a motive at all if they are hedging...

BTW, I'm not saying the bold highlighted points don't work.
Just pointing out that they are not as certain as you suggest for the
reasons mentioned.
Every participant does not have the same motivations, goals or views.
That makes it less clear cut.

 

[DionysusToast]

How does a big fund arbing your chosen instrument in the 'wrong direction'
fit into that then?

Doesn't matter - why are they arbing the instrument in the first place? Speculation that it will revert to mean. Why will it revert to mean? Everybody is Arbing it back to mean.

It's not as if the arb works for any other reason than everyone will jump in if the divergence is too great. So the arb works not because there is some "other reason", some "mass market reason" a convergence will occur that the arber leans on in his trade. The arb works because people arb.

With FX (and by definition currency futures) the participants may not even
have profit as a motive at all if they are hedging...

I agree - but only monkeys trade FX. Lets face it - with FX you aren't even trading the same market as the major participants, you are playing against your broker.

With currency futures, I do agree that it's a little more pure in terms of following a behemoth.

BTW, I'm not saying the bold highlighted points don't work.
Just pointing out that they are not as certain as you suggest for the
reasons mentioned.
Every participant does not have the same motivations, goals or views.
That makes it less clear cut.

I totally agree and there are some days where long term position is going on because of a shift in perception of the fundamental outlook. Still on those days it is all about shifting position to take advantage of what "the market" aka "everyone else" will do. Those long term positions move the market and that starts the move the long term position wants to take advantage of.

In terms of legitimate hedging in the markets I trade, I think it takes a major back seat to speculation. When you get to "true" commodities such as the grains, you have more legit hedging but still a huge amount of people second guessing people that are second guessing people.

 

[Triggerfish]

It's as if the market is one thing and the trader looking at it is another. As if the trader is looking at a bunch of participants that are going to act a certain way and then he or she will try to jump on that move.That the other participants and the trader are separate entities making decisions for entirely different reasons.

Different traders have different understanding.

Similarly, with value concepts. The trader is looking at the market to see where participants might find prices 'cheap' or 'expensive'. You then capitalize on the market reacting to that. Are any participants really thinking "this is cheap now?" or is everyone thinking "the other guys will think this is cheap - I'll buy"?

Cheap definition cannot exist on its own, it depends on the understanding of the trader, hence they all fall into their rightful place.

I'm not sure if I'm getting the point across but you ARE the market. The market is YOU. Don't think the other participants are doing anything nobler than you.

.....yet the market can MOVE without you?.....it is not you, it is the OTHERS!

Many people look at themselves and the market as 2 separate entities making decisions for 2 separate reasons. The trader expects the market to do something and then the trader will jump on to that.

The problem in my view is that this is what EVERYBODY is doing. Everybody is trying to anticipate what everybody else is doing.

The problem here is the word "anticipate".....as not every trader SEES what they think they SEE.....and there is a difference between anticipation and knowing what is going to happen.

It is a mistake to think that the whole market is rational or is investing and that you are above it all speculating. The whole market is speculating. Everyone is trading based on what they think everyone else is going to do.

.....traders falls into their rightful place based on their understanding.

For the OP, what exactly does competition mean?....definition please.

 

[barjon]

..............The problem in my view is that this is what EVERYBODY is doing. Everybody is trying to anticipate what everybody else is doing.

It is a mistake to think that the whole market is rational or is investing and that you are above it all speculating. The whole market is speculating. Everyone is trading based on what they think everyone else is going to do..................

Toastie

Would be even more so if ES was a stand alone game. It doesn't stand alone though, does it? The trail goes right back via the main index and funds etc to Joe Public and the money flow (in or out) from investment in the constituent stocks.

 

[Liquid validity]

Doesn't matter - why are they arbing the instrument in the first place? Speculation that it will revert to mean. Why will it revert to mean? Everybody is Arbing it back to mean.

It's not as if the arb works for any other reason than everyone will jump in if the divergence is too great. So the arb works not because there is some "other reason", some "mass market reason" a convergence will occur that the arber leans on in his trade. The arb works because people arb.

Well the main point was not why arbing works, rather that
at a certain point in time, someone could hit an instrument in the
opposite direction to that taken by retail directional traders.

I agree - but only monkeys trade FX. Lets face it - with FX you aren't even trading the same market as the major participants, you are playing against your broker.
With currency futures, I do agree that it's a little more pure in terms of following a behemoth.

Completely agree as far as FX bucket shops go.
That wasn't what I was driving at though.
FX with IB, MB or LMAX is not the same as a bucket shop.

Anyway, having said that, pretty much the only two people on this
site who actually walk the walk regularly and consistently in public
(wacky and flash) both trade spot FX (if I remember rightly,
flash uses what would generally be considered a bucket shop as well).
That is not as clear cut an argument as it used to be:
Dueling markets: Forex futures vs. spot forex

I totally agree and there are some days where long term position is going on because of a shift in perception of the fundamental outlook. Still on those days it is all about shifting position to take advantage of what "the market" aka "everyone else" will do. Those long term positions move the market and that starts the move the long term position wants to take advantage of.

In terms of legitimate hedging in the markets I trade, I think it takes a major back seat to speculation. When you get to "true" commodities such as the grains, you have more legit hedging but still a huge amount of people second guessing people that are second guessing people.

Fair point, I agree.
Although as Jon points out, ES is a derivative, based on 500 stocks.

 

[DionysusToast]

Well the main point was not why arbing works, rather that
at a certain point in time, someone could hit an instrument in the
opposite direction to that taken by retail directional traders.

Of course - and their reason to do that would be......

Completely agree as far as FX bucket shops go.
That wasn't what I was driving at though.
FX with IB, MB or LMAX is not the same as a bucket shop.

Anyway, having said that, pretty much the only two people on this
site who actually walk the walk regularly and consistently in public
(wacky and flash) both trade spot FX (if I remember rightly,
flash uses what would generally be considered a bucket shop as well).
That is not as clear cut an argument as it used to be:
Dueling markets: Forex futures vs. spot forex

Well - my simian reference was just a joke. It is true that both members do have opposable thumbs.

Fair point, I agree.
Although as Jon points out, ES is a derivative, based on 500 stocks.

500 stocks that are driven by people speculating based on what they think everyone else will do.

It's a big circle jerk. Of course there ARE people that use the markets for the purpose they were intended for. Remember when an IPO was a means of raising capital and not an opportunity to give people the shaft ALA FB? The secondary market was created as a necessity because if people brought IPOs, they'd have to have a way to sell them.

In the main though, I think I am right overall and that it's somewhat pedantic to pick the flies out of the argument. Most people are in this to take money off other people. That makes it a game. If you play a game, you have to recognize that the other participants are playing the same game. So if you label yourself "trader" and label everything else "the market that makes rational decisions based on non-speculative, non-gaming rational", then I think you are screwed.

It is very hard for me to get my point across but I agree with you L_V - my point is not "pure" and I shouldn't have put in so many "every's".

I do think a speculator that thinks everyone else is investing is dooooooooomed.

 

[Liquid validity]

It is very hard for me to get my point across but I agree with you L_V - my point is not "pure" and I shouldn't have put in so many "every's".

TBH that is all I was really getting at
That is why I mentioned the arb argument.

You take a trade based on the tape / dom,
and some arb outfit hits the other side after you.
Obviously that is not a common occurrence, its just an example.
Thats all I was getting at, nothing is pure and simple.
Everyone is exposed to that kind of thing, there is no escape from it.

 

[DionysusToast]

TBH that is all I was really getting at
That is why I mentioned the arb argument.

You take a trade based on the tape / dom,
and some arb outfit hits the other side after you.
Obviously that is not a common occurrence, its just an example.
Thats all I was getting at, nothing is pure and simple.
Everyone is exposed to that kind of thing, there is no escape from it.

Nothing is pure I agree.

What I am getting at is the traders perspective. Many people see themselves as one thing and the other participants as something else.

People are playing the same game. Game theory helps you to understand what is going on - how you are trying to guess what guessers are about to do. Nothing more.

I haven't seen a way to apply game theory to the markets personally, other than it helps you to stop over-thinking things

Game Theory with Ben Polak - YouTube

 

[Liquid validity]

Nothing is pure I agree.

What I am getting at is the traders perspective. Many people see themselves as one thing and the other participants as something else.

People are playing the same game. Game theory helps you to understand what is going on - how you are trying to guess what guessers are about to do. Nothing more.

I haven't seen a way to apply game theory to the markets personally, other than it helps you to stop over-thinking things

Game Theory with Ben Polak - YouTube

Yes I agree

 

[kimo'sabby]

Here's one view of the market, as you can see, it incorporates three ideologies - AMT, Game Theory (competition) and Random Walk.

The diagram(scribble) above illustrates a common daily scenario on the ES.

So what's happening?

The market bottoms out at 50, and trades through to 55. You should notice that once the market begins to trade up from 51, the lower whole price is not traded again (i've over-exaggerated/simplified the price action of this). 52 is traded at last, 51 is not traded again, and the market moves onto 53, and so on. This is what i would call the, The Auction Game. Note: The price action does not necessarily mirror or represent the detail of order flow.

The Competition: The competition will depend on the strength of the whole market, or the initiator, if there should only be one major concern involved. For example, light volume is an easy target for a larger participant(s) within any game scenario.

Random Walk: I understand that as soon as i post on the bid or ask, everything could, and does change. I believe the market can only be viewed through actual trading results, and not through backtesting or hindsight.

Very basic and crude, but nevertheless, an explanation of sorts.

 

[Triggerfish]

The market bottoms out at 50, and trades through to 55. You should notice that once the market begins to trade up from 51, the lower whole price is not traded again (i've over-exaggerated/simplified the price action of this). 52 is traded at last, 51 is not traded again, and the market moves onto 53, and so on. This is what i would call the, The Auction Game. Note: The price action does not necessarily mirror or represent the detail of order flow.

The Competition: The competition will depend on the strength of the whole market, or the initiator, if there should only be one major concern involved. For example, light volume is an easy target for a larger participant(s) within any game scenario.

Random Walk: I understand that as soon as i post on the bid or ask, everything could, and does change. I believe the market can only be viewed through actual trading results, and not through backtesting or hindsight.

It is interesting why you call it "The auction game" under the price move from 50 to 55/beyond, why would this definition of the term be applied to this move alone and not that of other times, in fact, at all times when the market is opened. After all, it is price alone that is being traded in any given time.
Under you OP, you mentioned cause/effect.....can we relate what this move is?.....is this a cause.....or an effect?.....and why?.....and how does "Random" relate to this cause/effect?.....if one can see?.....can they both exist at the same time?

On Competition, strength alone cannot exist by itself as it depends on something else.....so where does "strength" come from?.....you also highlighted the word "initiator" which is of great importance but without understanding to most, it is just a fancy word.....so what has the word "initiator" got to do with the "strength".....more importantly why? and how?

On Random walk, understanding is what one has not when starting yet they force a system to fit what has happened before through back-testing and formulate a trading plan.....how can a deluded self create a winning system/method when one is deluded especially when one does not know oneself is blind?

 

[DionysusToast]

Under you OP, you mentioned cause/effect.....can we relate what this move is?.....is this a cause.....or an effect?.....and why?

:clap::clap::clap::clap::clap::clap::clap::clap::clap::clap:

Many people spend years looking at effect hoping to find cause.

Fact is - you can analyze the markets all you like. They can only go up or down. It's 50/50 - up,down - toss a coin.

Trouble is - lots of little fish don't understand the difference between "UP" and "STRAIGHT UP". It'll go up - 50% chance. It'll go STRAIGHT up - that ain't 50%.

You gotta have the b@lls to place a bet, to cut if you are wrong and to give it enough room to work out. If you keep betting it'll move vertically from where you are, you will end up with close to a 100% loss rate.

 

[kimo'sabby]

On Random walk, understanding is what one has not when starting yet they force a system to fit what has happened before through back-testing and formulate a trading plan.....how can a deluded self create a winning system/method when one is deluded especially when one does not know oneself is blind?

As a retailer, starting out on your own, you have nothing. So how do you create something, from nothing?

Experience? Results are the experience, and if you can't make money from one experience, how does this relate to the next experience, in a random market?

 

[kimo'sabby]

It'll go STRAIGHT up - that ain't 50%.


What is it then?

 

[DionysusToast]

It'll go STRAIGHT up - that ain't 50%.

What is it then?

That very much depends on how close to "Straight up" you place your bet and the volatility of the instrument. Also of course on where your target is.

In the extreme, if you placed a long trade on say the DAX with a 1 tick stop loss and a tiny little 10 tick target, you'd get taken out most of the time.

On the one hand, you have the theoretical 90% loss rate but break even P&L that such a stop & target would yield. On the other hand the volatility would probably see you hit more that 90% of the time.

Add into that mix a little bit of hope and you would most certainly be looking at 100% losers.

 

[Shakone]

.

 

[Liquid validity]

On Random walk, understanding is what one has not when starting yet they force a system to fit what has happened before through back-testing and formulate a trading plan.....how can a deluded self create a winning system/method when one is deluded especially when one does not know oneself is blind?

Yes that is curve fitting.
Curve fitting and back testing are not the same thing.
Curve fitting is a blind arbitrary choice of parameter values (usually too many)
to give the desired result.
Basically its the abuse of backtesting.

Backtesting is purely an historical simulated execution test, nothing more.
Nothing replaces forwards testing.
The battle between optimization and curve-fitting

 

[Triggerfish]

As a retailer, starting out on your own, you have nothing. So how do you create something, from nothing?

Experience? Results are the experience, and if you can't make money from one experience, how does this relate to the next experience, in a random market?

There is nothing to create.
Experience will provide results but results are not usually what one is looking for.....this is nothing more than a progress that leads to something. If one experience is not ideal, the next experience (with the same cause) will not create a different effect.....so we are going round and round and round. I wonder if there is a purpose behind experience and what exactly is it that we are looking for?....what is this "something?"