In he mean time in an other part of the internet universe
Hello:
My name is Madan I am relatively new to this discussion board; however, I have been trading for about 5 years, and have had a decent run till date. I usually refrain from passing judgment on others' trading methodologies or quest thereof; however, in this case, I thought to share my thoughts on your rather long email (and on other emails you had sent in the recent past). Please do not take this as anything else but a sincere and honest effort by a well-wishing colleague to share his thoughts with the hope that it might be beneficial to you. If this missive accomplishes its goal, then well and good; if it doesn't, I believe, an effort is never wasted.
You started out your email with a hypothetical question "WHAT IS THE BEST WAY TO INVEST/SPECULATE/ or TRADE?".This, my friend, is the million dollar question. However, the true answer to this question lies "inside" you, and not outside. In other words, your personality and belief system dictates your trading style. If one doesn't start there and build a "system" around it, they, most probably, are going to fail (I put the word system within quotes, because a system can be either mechanical or discretionary; again depends on your personality and belief system).
Based on my reading of your emails, you come out as a person who "believes" in mathematical analysis of the markets. If so, you should delve deep into the subject and understand the idiosyncrasies of that method. You are correct in your believes until you are proven wrong by YOUR analysis and not based on other's comments.
Further, should you believe that black box trading is the only way to make money, then you should once again study the algorithms. Remember, when it comes to events that involve human emotions, and we all know trading in the markets does, we will always find ways to validate our beliefs; that way, our mind acts as a beautiful illusionist!
As for me: I started out in a hedge fund working as a quant trader; I worked in strat arb strategies, volatility based strategies. Although I started out believing in mathematically based strategies, my experience made me a disbeliever out of it! This is not to say that those strategies do not work; au contraire, they do work.
However, I was not comfortable with it because the foundations of mathematics employed is not "solid" - In other words, finance is NO physics!. Unfortunately, many people fail to take this into consideration in their eagerness to employ mathematical models in their trading endeavors, since this approach seams to be in vogue today. Those who are successful using mathematical models understand their limitations (even nobel prize winners make errors in judgment when using mathematical models -- e.g. LTCM -- since no, and I repeat NO, human activity can be captured by a mathematical model). Moreover, these mathematical models suffer, in my opinion, from, what Soros in his book "Alchemy of Finance" calls reflexivity. Having said all these, there is indeed a place for mathematical models: for those who understand them and believe in them.
My experience with mathematical models, made me a believer in non-mathematical world. The more I looked into Black-Scholes, the more "flaws" I saw; flaws not in the model per se, but its applicability in the real-world. To make a long story short, I devised a scheme that analyzed volume; and lo behold, it worked for me! emphasis on: "for me". Ever since, I have been trading based on volume analysis, for I believe in that analysis. Further, SMI's course and Mr. Williams book opened up a new avenue of knowledge for me to tap into. Now, the markets looks like a beautiful movie unfolding before my eyes!
Just remember, for every Simmons (statistical models, non-discretionary --a.k.a. black box -- based trading), there is a Pete [size=-1]Steidlmayer (statistical models, discretionary based trading); for [/size]every George Soros (macro economics models, discretionary based trading) there are numerous hedge funds trading macro non-discretionary models; for every Paul Theodore Jones (trend-following, discretionary) , there is a Ed Seykota (trend-following, non-discretionary) ; and for every Stephan A. Cohen (non-discretionary trader/market- maker uses "market information" ), there is a Linda Bradford Raschke (discretionary trader uses "market information" ).
Which one of the above mentioned, or not-mentioned, are you? How do you define success in trading? What is the best time-frame to trade: day, short-swings, intermediate- swings, long-swings, or buy-and-hold? The answers depend on your belief system and on your personality. We all believe in what we want to believe; the best of us take an account this bias into our analysis.
All the best in your quest.
-Madan.
