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Conflicting information

  #22 (permalink)

Geelong Victoria
Posts: 113 since Jan 2015
Thanks: 45 given, 90 received

tpredictor View Post
Some more food for thought...

What types of jobs pay the most? Simple repetitive jobs or jobs that involve complexity, nuance, and difference. The jobs that repetitive and simple do not pay as much as the complex jobs.

Traders talk about consistency. But, does consistency arise from doing things consistently or from constantly adapting to changing markets? If a consistent set of actions produces a consistent set of results, the work is generally thought of as simple. But, if a different set of actions are required to produce a consistent set of results then the work is thought of as difficult. Rationally, discretionary trading should not be as consistent as systems trading but should be more robust. But, what do most discretionary traders desire the most? Consistency. Anything a human trader can do consistently then a computer can do more consistently.

Should patterns exist in the market? Think about why any pattern could exist: a group of traders are acting in a consistent way that causes them to lose. If any group of traders consistently lose then they won't be in business. Where is the edge suppose to come from -- from trading then? New blood? But retailers aren't trading. Why would a group of any traders act in a consistent way? The source probably historically came from three sources (1) Non rational/emotional investors, (2) technical traders, and (3) large traders who were sloppy with their orders or who due to informational asymmetries could not be an expert in all matters. Today, there aren't many retail traders and large traders have access to advanced order routing. What group is left? In futures, possibly only CTA's and systematic traders who do not have access to advanced order routing. But, the fourth source is simply risk exchange.

I have an idea for a while and the idea is that most small traders are actually more skilled then most larger traders. But, why do most larger traders win then when we know that most small traders lose? The reason is that most small traders employ min risk/max skill/max leverage combination while most large traders employ max risk/min leverage/min skill strategies. Max risk will always be rewarded provided you do not blow out because it offers an intrinsic source of profit, risk.

All edge is based on proposition of asymmetrical advantage. But, when large traders can trade tons of strategies automated strategies, the proposition of asymmetrical advantage should be questioned. There are few asymmetrical advantages. Also, do not expect to find edge in low liquidity or other such products either because there is no barrier to entry for large funds.

What's the cap implied for a trader today? One possibility is to look at what firms pay their quantitative analyst and traders and if you looked at the job sites: it isn't that much! Glass door suggest anywhere from 50k to 120k while we might imagine the firm must make more to pay the trader, the firms also have benefits of scale. What does this suggest? It suggest you must accept a lower return if you want to find less competition in any trading product and you must still overcome your lack of scale disadvantage.

The entire financial industry is built around the middle man. Nobody wants to trade because trading requires betting on an uncertain future. Finally, what is the true source of profits in the markets, imo? Market cognition. As for conflicting information, conflicting information must be considered carefully. Generally, you will need new information to resolve conflict.

As for trends, I think it was Michael Harris from PriceActionLab who explained it quite well. To profit from trends, it is not enough that trends exist in the market but the profit that you capture from the trends must exceed your losses from the chop. If markets have prolonged flat periods then trend following strategies will break down. Even if one accepts trends may exist in the market, the resulting supposition that they can be captured in a systematic way that outweighs their losses can still be questioned.

You keep bringing them the bad news, it is pretty accurate but no doubt it will be vehermently challenged all the same.

Cheers John

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