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Fundamentals vs Probability [Edge]

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Fundamentals vs Probability [Edge]

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  #1 (permalink)
London UK
Posts: 8 since Aug 2020
Thanks: 12 given, 11 received

Hi all, I have been pondering this question for over a week now and still not quite sure how to word it, so I'm just going to type and hope its not too much of a waffle

My question is; Is a fundamental approach to trading a completely separate discipline from a trader who uses a more probabilistic/statistical edge, or should the two go hand in hand?

I started my trading journey about 7 years ago while renovating a house. First 18 months sifting through all the BS online before discovering Amplify Trading in London who I did some trainning with, and who I still follow to this day. The house renovation took me about 5 years and was my priority, and so was in no rush to put money on the line in the markets until I had more time to commit and felt ready. So I spent a good 2-3 years studying trading, the Global Macro situation, and decided commodities where going to be my focus, primerily WTI Futures (USD & 10YR), and so brought other things into the mix; seasonality (hurricane season, October maintenance, summer driving, and winter demand). Having a natural interest in geo-politics, learning about OPEC, shenanigans in the Middle East & North Africa, piracy off the East coast, not to mention COVID and Trump, all drivers affecting supply and demand.

When I eventually sat down to work on a trading plan and begin manually trading in a sim for full trading sessions Monday-Friday, my level of understanding of the current situation on a day to day basis gave me confidence in my trading ideas. Initally I only used very basic technicals for my entry and exits, and wanting to get the most learning (opportunities) out of a trading session as possible I focused on the 5min charts. After 5 months I was up just over $1000 trading 3 full sized CL contracts, so I was basically flat. Looking back at the chart at the end of each day I could see it moving $1 on avergae and wanted to work out how I could capture a decent portion of that daily move. It was only after hearing another Futures trader (Anthony Crudelle) say in one of his "Develop your Edge" YouTube shows, about how he was flat at the start of his career and didn't push into profit until someone said to him 'look longer term'. Once I started to look longer term using the 30min and 60min charts was I able to capture a nice chunk of the daily range that I had been aiming for. I also dived deep into Market Profile and focused on the price/range extremes, which also help with capturing bigger and better winners. MP and price ladder or Pivot Points and price ladder, depending on which platform I was using.

See.. waffle, still with me? lol

So fast forward to today, and due to the pandemic and a reshuffling of my finances, I found myself 'temporarily' continuing my trading journey by falling into sports trading, mainly trading order flow on pre-off horse racing. Very different product but all the same psychology, both trader and market, as you'll find in any day trading environment. I don't think this is available in the US yet, but you are on the cusp of it, lots of opportunities heading your way.
I started off trading order flow, using what I had learnt from Futures over the years, with some degree of success, until New Year 2022 when my intenet threw a wobble and due the the fast nature of racing markets managed to lose x56 my average win in about 10 seconds, almost half my account. I had two options, laugh or cry, I chose laugh... followed by a good cry lol.
I reduced stakes, shook it off after about 3 weeks and continued trading like I had been before, but grew frustrated with the time it was going to take me to grow my account back to where it was, and so with big events and opportunities approaching in the weeks ahead I deceided to deposit the lost amount back into my account to take advantage. With seasonality and my mind affected by loss aversion I have spent the last 6 months getting nowhere, a very slow shallow downward profit curve, to the point my confidence and even my desire for any trading is dangling by a thread.

I recently re-read Mark Douglas's Trading in the Zone, and he tells us to trade like a casino, by developing an edge that has a probablistic outcome. Now I can understand this if you are mainly technical based trader because you are looking for, and can back test, repeatable patterns in order to find an edge with a positive expectancy. I believe this is called quantitative analysis. I can see that taking this approach to trading would help dealing with periods of loss aversion, if you find an edge that you are confident enough to execute knowing that over time you will profit then there is no need to fear individual losses.

But he also finishes the book by saying that once you have a probablistic edge, you can then advance onto thinking more subjectively and intuitively. Which I think is considered a more qualitative analysis trading approach. I feel I had already achieved a subjective and intuitive approach to trading global maco and commodities through my extensive study, and wonder now if by persuing a probablistic approach to sports trading and it affecting my confidence and desire to trade generally, am I putting the progress I had made with commodity futures in jeopardy.

I should add in here, as this is a Futures forum, that my current deviation into sports trading is only a means to further my trading journey by working on my trading psychology more than anything, with the aim of creating a better mental framework before returning to trade Futures live. The financial risks and tax implications don't compare, but neither do the rewards.

This brings me back to my original question; Are quantitative and qualitative analysis approaches to trading completely separate thought processes, do they/should they be practiced together, or is it upto the individual trader; one, the other, or both? Is it OK to take a purely qualitative approach to trading or does long term success require quantitative analysis, something I'd find difficult when trading random macro events.


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  #2 (permalink)
 Mr Nasti 
Orlando, FL
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This is an interesting question, and I am squarely in the camp of thinking that both fundamentals and technicals can, and should be integrated. Ultimately, the two forms of analysis complement one another… one is very good at giving the “why,” while the other is very good at giving the “how.” Both are important parts of the story the market is telling at one time, and I think to some degree, reflect the thinking of market participants on different timeframes.

As a strictly discretionary trader (mainly off major levels and order flow in conjunction with catalysts), some of my most important work is to constantly develop and track hard statistics about how any given play is performing…. In other words, despite being discretionary, I have a set of plays that I maintain stats for in real time. And I spend more time and effort tracking them than executing them. They all have very specific types of market behavior and other criteria that allow them to be analyzed in samples, and this is crucial to understanding their edge; when it is present and more importanly, when it isn’t. A purely discretionary approach can and almost certainly should be, quantified, and I agree with Douglas on the hugely important point of us trading a distribution when we initiate a position instead of taking an individual trade.

As to your question about whether you are putting your development as a futures trader in jeopardy with a foray into sports betting, I’d argue the opposite is true. Understanding the nuances of different trading methods and vehicles only broadens your thinking about speculation, allowing you to perceive what is going on in markets of any kind more clearly. This is coming from the point of view of someone with significant experience trading equities, futures, bonds, and options. There is always a chance that the smallest nuance you learn in one vehicle can lead to success in an entirely different area.

You should probably feel good about diversification of strategies and vehicles to a point… then once you find something that really works for you (the stats will clearly tell you), it is best to exploit that for as long as possible while continuing to tinker with other things to maintain flexibility to changing market conditions.

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  #3 (permalink)
Zuerich / Switzerland
Posts: 926 since Sep 2021
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Well said and I agree there too. I make an analogy from my point of view:

The fundamental analysis at the respective time, since this must be made again and again, shows the house in which the life plays itself so. The probability shows what can happen in this house at this moment, but not necessarily.

In other words, the fundamental is what drives the market in the deep background. It is the big steamer which gives the basic direction in the market. In this fundamental direction, however, changes of direction are always possible which are within the range of the currently given direction.

To implement this in the trade: The big picture (fundamental analysis) on the chart (year, month, week) shows me at the given time the general direction of the market and the bandwidth (probability) on the chart (day, hour, minute) shows me the reaction or the currently given sentiment in the market at this specific moment.

So the big picture at the time of my analysis, whatever it includes, is this how I assess the main trend in the market. In order to position myself in this market at this moment with a trade, I calculate with the probability where and how my range is in the possible range. It is one way to do "Swing Trading", as I have the possibility to calculate any personal range in any going up/down market in the big, given range.

In other words: I cut a possible piece out of the whole pie (range) with this approach. This way of trading has not much to do with pure TA trading, although TA knowledge is also very helpful there.

I hope I have not expressed myself too complicated here, basically I want to say it is not a "fundamental or probability" but it should be, at least in my experience, a "fundamental and probability" approach.

Any way: Wish every body a nice weekend.


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  #4 (permalink)
London UK
Posts: 8 since Aug 2020
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Hi guys, thanks for the replies, both very much appericated. I have read them several times yesterday and this morning trying to think about what is being said.

Its good to here that my current foray into sports trading is potentially not a waste of time, sending me off track. If nothing else it has taught me to trade order flow using price ladders more effectively. I am still working through a period of loss aversion, and in hindsight think I have been frustrated to the point of self sabotage, possibly to encourage/force myself back to Futures where I was making positive progress. Looking at my approach to Futures, where I took years to reach some level of competant understanding, compared to sports, which I haven't really followed with any enthusiasm throughout my life prior, and literally jumping into live markets with both feet, probably with unrecognised over confidence as well, the two approaches do not compare. There's no leverage in sports trading either.

I can relate to discretionary trading off major price levels and looking for a catalyst to confirm or deny my trading idea, but trying to quantify that is still a bit lost on me at present. Im guessing you dive a lot deeper than simply categorizing your plays as A, B, C, D trades.

Would an example of a plays 'hard statistics' be something like; volume by price, event type, catalyst severity, and reaction severity.... Basically breaking a play down into as many components as possible, or in Douglas's words, all possible known and unknown variables? And then tracking the data in something like Excel?

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  #5 (permalink)
Legendary Market Wizard
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A wise man once said, "There ain't no point in beating a dead horse. But there ain't no harm in it either." So I'll simply repeat the following. Whatever, crude or refined method one follows in ascertaining change or its likelihood, it essentially boils down to surviving against one's own incomplete intellect or a misfired bout of randomness, in controlling the risk, and in executing a set of consistent ideas day in and day out, so that chance can prevail. Of course, that is much easier said than done, because if trading is to be described succinctly, it should be characterized as a "nuanced integration of skills, discipline, and capital".

In essence, these skills have always remained constant i.e., proper money, trade, and emotional management. But, let's step back in time for a second. In order for prices to change, the market required new information. And this new information took time to disseminate among market participants. During this period of dissemination and acceptance of a new perception, prices would move and even (sometimes) trend. And, while this new information was disseminating through the market, there were obviously many different opportunities to profit. Those who were able to anticipate these price changes before they started, were said to have a variant perception. And, those who were were second or third were called trend followers. This was back in the day when the markets actually existed to discover price, and fundamentals mattered..

The market and its past history is identical for all observers. Yet, the market and the its future are understood uniquely by each. There will always be debate, since no two minds are alike. Prices used to change due to the imbalanced anxieties of buyers and sellers driven by their anticipations. Sometimes they were correct, and sometimes they were incorrect. The puzzle back then was about anticipations, about speculations, about a supposition of the next moment, next minute, next hour, next day. Whether you were right or wrong was and still is, a post trade assessment.

So, this leads me to re-offer the single most plausible and economically rational reason why none of this matters anymore. The markets have changed. And, while the principles outlined in the first paragraph should remain etched into your collective consciousnesses, any approaches tailored to past markets, should be discarded with yesterday's trash. Those markets are never coming back! Modern market structure is a completely different animal, or more appropriately, machine. And, you can't trade today's markets like the ones that "used to be." The markets are infinitely more systematic and electronic now, which means there are less people involved. Price discovery is almost instantaneous. Market makers are constantly hedging their exposure, more and more retail traders are trading options, and CTAs are deeply embedded across every asset class.

I've had this discussion ad nauseum in the past, but it still bears repeating. If you are going to trade today's markets; you first, have to understand today's markets - especially who drives price. And, more importantly, you need to watch what they watch. Taking it a step further, you have to recognize and understand the regime you are trading. This will give you an idea of where your focus should be concentrated. That is, we are no longer trading in a QE environment. We in are in a tightening global FC which has resulted in a strong dollar, high real rates, and very illiquid markets. For now at least, STFR is the way to go; always cognizant of the fact that short squeezes of magnitude will often take place due to short gamma/short delta positions, and pervasive left-tail sentiment.

Best practice should entail a more tailored approach that is relevant to today's market dynamics and regime. Follow what's being watched by those who are actually driving price. Filter out the information that is is irrelevant. Because, if you don't understand the game that is being played, you're just going through the motions. And, you're the one that is getting played.

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