There was a time when to succeed in the developing world you needed a flag, a carefully marked out border, an airline, and a despotic leader with lots of foreign bank accounts. Before that time the world was pretty much a feudal realm with lots of self appointed leaders.
The recent events in the Middle East show us a new acceptable form of global politics. Random territories, controlled by different groups with conflicting sectarian and tribal links. Borders that are nonexistent or highly porous. Armies often number in the hundreds and drive around in Toyotas, pillaging, and massacring. The so called authorities hide in massive fortified citadels protecting their oil. Has anyone ever seen Mad Max, or Game of Thrones. This is a mix of the two. Ironically, Iran is now seen as saviors in this mess. The pariah state condemned by most of the world has gone full circle. How bad are the baddies, when Iran is a goodie ?
In a world of high tech gadgetry, can a couple of 1000 lightly armed men with no air-support really take the world hostage and cause a panic in the oil complex. Then there are the Kurds. A nation that spans four geographic countries, that has no real state but now has the capacity to negotiate and sell its oil in the open market and pretty much do anything it wants. In the middle of this, real nation states like Iran and Turkey struggle to cope with the enfolding crises and somehow get condemned for not following global political and human rights norms. The ultimate questions are being asked and not answered. Were we safer in a world with the likes of Saddam Hossein ??? Who knows.
This is the brave new world of the high frequency traders, super speed news. A world where we can lose an airplane but can locate our Ipad at the touch of a mouse. Its a new world for politics, but also for trading. Most independent traders still look at systems and use indicators. 90 % fail. At any particular moment 10% are succeeding and a few percent are doing rather well. What do the 10% do that is so successful. They wait, they don't trade. Not trading is your best trade. They play Poker. Hang out with the kids and keep a very close eye on things.
They know what moves the market. A market is never over bought or over sold. It is at exactly the right price in that moment. Indicators on most instruments have been over-something for days or months with no reversal.
They just wait. The most difficult thing for a human being in the age of action. Waiting And when the small band of pirates run towards the oil, or when the Bank of England dude talks up the pound or when some random correlation signals a black Swan in a market. they move. With all their available resources. Intensity that you can not believe and an unsurpassed conviction in the trade. You cant really get that conviction with a lagging moving average. The 90% lag and fail, like their indicators. Like the hooded guy on the Iraqi border. They go as fast as they can wiping out all the stops along the way and clearing the table. Then its back to the drawing board.
Now, don't get me wrong, all this requires a ton of preparation. Sure you look at the charts checking out Fibonacci, Ichimoku and other exciting, colorful names from the last millenia , but do they actually trade on it, unlikely. Its funny how oil really did not go up that much after the ISIS business, but it went up quite a lot in the weeks before. There were no secrets, all the info about the impending madness was a Google search away. The eagle eyed algo or the able trader pieced it all together. Everyone else was saying oil was overbought 2 weeks ago. The 90%. That is the new paradigm of politics and of trading. By all means, follow the noise, it is louder than ever, but enjoy the quiet, while you wait.
For more on poker and patience check out the aptly named Mercenary Trader link
Showing posts with label noise trading. Show all posts
Showing posts with label noise trading. Show all posts
Tuesday, 17 June 2014
Friday, 13 June 2014
Trader Dynamics Toolkit: Noise trading
The massive moves in oil in the past days made me wonder why loads of people sit and stare at the multitude of indicators on their screen all day. If you look a bit further back you will see oil has been moving for a couple of weeks, quite significantly. If you search in Google you will notice that there were stories about ISIS and Iraq and the impeding crisis around the same time. Suddenly, you have a neural trading system, which would normally cost, you an arm and a leg. But this kind of trading based on noise is age old. Even Edwin Leferve read the ticker and made quick trading decisions based on it in the 1920's
There are all sorts of labels for Traders based on what time-frame and system they use to trade. Everyone has heard of the swing trader and day trader or position trader. In my many searches on the web I discovered a label for a trader I had never seen before. Noise Trader. Actually, it was coined in a report written by Andrei Shleifer and the famous Lawrence H Summer titled “The Noise Trader Approach to Finance” . Link at the bottom of the page for your information.
Many of you think I am mad to think that a 21-year-old document has any relevance to modern-day trading. I agree its all pretty boring until you get to page 28 and positive feedback trading. “The key to success, says Soros, was not to counter the irrational wave of enthusiasm, about conglomerates, but rather to ride this wave for a while and sell out much later.” It goes on to say that this could lead to a bubble but can make you very rich in the short-term. Even back then they were scared of the noise traders as they suggest taxing them to the hilt. Well 20 years later and after a series of bubbles nothing much has really changed.
I guess that means all great traders are noise traders. Now to me that makes perfect sense. The false prophets and market Gurus that peddle indicators and mechanical systems inherently dismiss the one real mover of markets, Sentiment. Yes, some people say much of this is built into the market and I totally agree, if you are a high frequency trader, but most of us are not. For them lagging means a millisecond for us it could be hours or days. It is not bad if you want to make a few great trades, but to be a real trader you need consistency. That means trading well, most days for years. The only way to do that is to follow the successfull crowd, and follow it as perfectly, as you can.
So the question comes down to how one measures noise and sentiment in the markets. Most of trading these days is done by machines and even in dark pools where there is no transparency. The few indicators for momentum are based on the price anyway and are pretty much useless. A friend was following sentiment based on his Twitter posts. That is not a bad idea but its a bit like standing outside a football stadium and predicting the results based on the crowd cheering. You will get it right sometimes but you would be blind, literally.
The answer to all this is very much in built in the strategy. There are a host of analogies traders use, riding the wave, jumping on the bandwagon,and buy low, sell high. The implication for these statements is a fundamental shift in a market, towards a certain direction. Too many traders, these days want to know the whys and the how's. None of that is relevant.
The real questions are ”is the market moving ?” and “why aren’t you in it ?”
The Noise Trader Approach to Finance
http://scholar.harvard.edu/shleifer/files/noise_trader_approach_finance.pdf
There are all sorts of labels for Traders based on what time-frame and system they use to trade. Everyone has heard of the swing trader and day trader or position trader. In my many searches on the web I discovered a label for a trader I had never seen before. Noise Trader. Actually, it was coined in a report written by Andrei Shleifer and the famous Lawrence H Summer titled “The Noise Trader Approach to Finance” . Link at the bottom of the page for your information.
Many of you think I am mad to think that a 21-year-old document has any relevance to modern-day trading. I agree its all pretty boring until you get to page 28 and positive feedback trading. “The key to success, says Soros, was not to counter the irrational wave of enthusiasm, about conglomerates, but rather to ride this wave for a while and sell out much later.” It goes on to say that this could lead to a bubble but can make you very rich in the short-term. Even back then they were scared of the noise traders as they suggest taxing them to the hilt. Well 20 years later and after a series of bubbles nothing much has really changed.
I guess that means all great traders are noise traders. Now to me that makes perfect sense. The false prophets and market Gurus that peddle indicators and mechanical systems inherently dismiss the one real mover of markets, Sentiment. Yes, some people say much of this is built into the market and I totally agree, if you are a high frequency trader, but most of us are not. For them lagging means a millisecond for us it could be hours or days. It is not bad if you want to make a few great trades, but to be a real trader you need consistency. That means trading well, most days for years. The only way to do that is to follow the successfull crowd, and follow it as perfectly, as you can.
So the question comes down to how one measures noise and sentiment in the markets. Most of trading these days is done by machines and even in dark pools where there is no transparency. The few indicators for momentum are based on the price anyway and are pretty much useless. A friend was following sentiment based on his Twitter posts. That is not a bad idea but its a bit like standing outside a football stadium and predicting the results based on the crowd cheering. You will get it right sometimes but you would be blind, literally.
The answer to all this is very much in built in the strategy. There are a host of analogies traders use, riding the wave, jumping on the bandwagon,and buy low, sell high. The implication for these statements is a fundamental shift in a market, towards a certain direction. Too many traders, these days want to know the whys and the how's. None of that is relevant.
The real questions are ”is the market moving ?” and “why aren’t you in it ?”
The Noise Trader Approach to Finance
http://scholar.harvard.edu/shleifer/files/noise_trader_approach_finance.pdf
Saturday, 7 June 2014
The Grey Zone
This has been a month of great moves. All month the financial media has been talking up a massive fall in the US markets yet the SP and Dow have been racking up record after record. How do we reconcile the vast ocean that separates perception and reality ? We have been told every day that traders are shorting the market, yet 100s of points later the market is still rising and will most likely continue to climb.
This is a phenomenal learning curve to experience for any trader that sincerely believes the rubbish that comes from analysts and financial journals. The market will eventually fall but in the interim it will wipe out every short contract in iits way. Believing in the hype and calling tops or bottoms and preempting changes in market direction is a brokers wet dream. No sane person attempts that unless they have vast amounts of margin capital or inside information.
In the age of computers, algorithms and vast permutations the simple trader that trades accounts under 10 million dollar is safer following the market. He gives up a few pips at the top and a few pips at the bottom but he makes that up in not getting snowballed for weeks on end my market makers that are happy raking in massive amounts of margin calls on short positions.
The Noise trader approach where you piggy back on the larger market moves and stay in as long as you can until there is a turn in sentiment has been the preferred trading method for many of the most succcessful traders. In fact it was so effective the famous Mr Summers wrote a paper about it. Check out the paper below on Noise trading. And see if it works for you.
The Noise Trader approach to Finance
How Noise Trading Affects Markets: An Experimental Analysis
This is a phenomenal learning curve to experience for any trader that sincerely believes the rubbish that comes from analysts and financial journals. The market will eventually fall but in the interim it will wipe out every short contract in iits way. Believing in the hype and calling tops or bottoms and preempting changes in market direction is a brokers wet dream. No sane person attempts that unless they have vast amounts of margin capital or inside information.
In the age of computers, algorithms and vast permutations the simple trader that trades accounts under 10 million dollar is safer following the market. He gives up a few pips at the top and a few pips at the bottom but he makes that up in not getting snowballed for weeks on end my market makers that are happy raking in massive amounts of margin calls on short positions.
The Noise trader approach where you piggy back on the larger market moves and stay in as long as you can until there is a turn in sentiment has been the preferred trading method for many of the most succcessful traders. In fact it was so effective the famous Mr Summers wrote a paper about it. Check out the paper below on Noise trading. And see if it works for you.
The Noise Trader approach to Finance
How Noise Trading Affects Markets: An Experimental Analysis
Subscribe to:
Posts (Atom)