The new paradigm of trading and politics: Follow the noise

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



      

Trader Mindset Toolkit: Playing chicken and winning

Trading is essentially about confidence. Confidence in your system and confidence in your ability to take the trade and follow it through. This confidence does not appear overnight but involves a bit of cultivation and perhaps a change in behaviour. Inevitably, lack of confidence stems from conflict within and outside. One of the best ways to manage conflict is using a well-known theory from Game theory called Chicken.

In game theory the game of chicken involves two seemingly rational people driving full speed towards each other in cars. The point of the game is to overcome fear and stay on course. The driver that gets scared and swerves away is the loser. The problem, of course, is that if both stay on course, then both will crash and die. The principle of the game is that while each driver prefers not to yield to the other, the worst possible outcome occurs when both drivers do not yield.

But, of course, it does not end there. True tacticians say the winner accepts the inevitable and throws his steering wheel out of the window right before the collision. This clearly states his intention and forces the other driver to yield.

The game of chicken is so dangerous that it would be nice if we could just avoid it. But an unfortunate reality is that we are faced with the same reasoning, every day we live and trade. In the uber competitive world of markets, one has to learn how to play the game of chicken. Here are a few strategies that can help you be the winner:

1. Dig in

In the game of chicken, your flexibility is a weakness. One of the best solutions is to prove that you will not change course. Limiting your options, and metaphorically becoming immovable like the steering wheel incident, can show the other side that you will not back down.

2. Pretend: Get a reputation for being tough

If you can’t credibly limit your actions, the next best option is to get a reputation for being tough so people don’t bother believe that you are serious.

3. Go for broke

Sometimes you cannot lock in your actions but instead have to fight head on. In this case it might be wise to show you are serious by going for broke.

The player that has nothing to lose is more dangerous and such threats will be taken more seriously.

4. Raise the risk to your actions (MAD)

Brinkmanship is a strategic move where you raise the risk of the game–bringing everyone closer to the brink–unless the other side relents. While you may prefer not to use these tactics  you have to be aware of  them as your opponents may employ them. MAD (Mutually Assured Destruction was a good example of this)

5. Withdraw from the game

Walk away, if you do a quick assessment and realise you are totally out numbered and out gunned then you retreat and regroup.

6. Get lucky: change the game

In some situations, you can avoid the game of chicken by being creative. Change the game and you can create incentives to cooperate rather than intimidate.