An interesting question. I will answer as an intraday ES trader.
I think most people tend to look at the market and look at themselves as separate entities.
In other words, they see the market as one entity and themselves as another entity trying to guess what the market entity will do next.
It is as if the market entity thinks one way and the individual trader entity (i.e. YOU) thinks another way.
The majority of the time, the market is a driven by a collection of people all trying to guess what the collective will do. People are all trying to guess what 'the people' will do next.
It is the result of that guessing that drives the market.
There are other times (the minority of times) where the markets are less driven by short term speculation/guessculation.
Paradox is the wrong word for it. I'm not sure what the right word is.
In terms of the question, the observation does not change the reality of the market. The market IS observation. It is people speculating about what speculators will do. Observation will not change the machine because the machine is the result of observation.
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Last edited by DionysusToast; June 14th, 2013 at 01:17 PM.
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Even the Heisenberg / Quantum theory is very interesting I can not see any easy integration for traders.
As an economist I am following market theory: given any product/service etc. that offers a win into the future
more buyers are coming in. When the win perspective is near zero - less buyers will enter. At the moment
the line of future gain is zero or negative the last buyer is entering the market - making as the first a negative win.
As market prices are turning lower - more and more sellers step into the game - be it forehanded buyers
or empty sellers to push price down. The more price is oscillating back - the more sellers are coming in.
This means squeeze out for former buyers. Until the price level is rotating back up again and attracting new buyers.
Looking at every single transaction and every market contributor (buyer or seller) - we need to see that at the
moment you are opening a position (aka buying a product for future gains) you are IN THE MARKET.
So price development matters! Differentiating between scalpers (few seconds), daytraders (some hours),
End of Day traders, Swing traders (days) and buy and hold strategists - they ALL are part of the SAME
market, with a different goal scenario, stop loss setting and risk strategy. Main point is to see that ALL
market participants (with an open position) are part of the SAME market development - disregarding any
individual timeframe or strategy.
To see them coming in / getting out means: the latest market participants will step out first - the long
term strategies are acting much slower. This principle is known in market theory as "Last in - First out"
or opposite "First In - Last Out" - FiLo principle.
Machines observing markets, indicators and even individual traders are not capable to see where the
positions were opened that are being closed right now - nor there is transparency of who is doing what under
which time condition in that given market - we only can observe the bid/ask price and the given bid/ask
volumes in any price category. There is only a sneak view on the size of the trades to see if big players
or a lot of individual transaction had taken place with some extra charting instruments.
To see a development of price in any financial product we need to observe the rotations in price between support and resistance levels (any timeframe) to take a positive gain with any given trade.
Who the market drives is really irrelevant - be it machines or individuals - the result of the last trade is the
given market price at that very moment.
So to resume - a indicator can not change anything in the market. There is just a reflection of prices
that are accepted by buyers/sellers more than others - this means: some levels of pricing are traded
much more than others and are tending to be some "magnetic" points that are more interesting for
market participants for putting orders like "new" or "stop loss" markers within the market.
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I don't think the machines do because they have no emotions or cognitive abilities, so in my mind it wouldn't make a difference if it's one computer, i.e. the exchange, or one billion computers connected to the exchange. But the people watching the machines do, so who is watching and when they are watching may have an impact, I'm not convinced either way really.
about some time ago, I was also trying to figure out the quantum wave function associated with the price movement and related operators mathematics for my system. unfortunately not a single operator can extract complete information from the wave function. and that also under certain conditions.
However I will say there exists a level of ' grail '
People, machines, observation, timescales - always fascinating but fortunately irrelevant. Most participants think buying causes prices to rise and selling causes prices to fall. That is of course completely incorrect - rising prices cause buying and falling prices cause selling, otherwise there would never be any exhaustion or capitulation events, or wave structure for that matter.
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Of course, although I don't think it has anything to do with quantum physics. A more useful theory is that of the OODA loop. A quick Google search will give you all you need to know, but in short it stands for Observe, Orient, Decide, Act. In any sort of interaction, it describes the cognitive flow of the participants. When more than one actor is involved, they are each running their own ooda loops that are changing in real time in response to new stimuli. Some of those stimuli are provided by the actions of the other participant(s).
This model can help illuminate many competitive situations, from personal combat situations to military strategy to business models. For example, you will hear people talk about getting inside someone else's ooda loop, which means you have accelerated the pace of change to where your opponent can no longer keep up. You've seen this taking place with smart phones. Some, like Blackberry, were unable to keep up with the rate of change, and Samsung has shortened its development cycle as a way of combating apple.
Ok, so how does this apply to trading? Let's say that I am a trader who notices a certain market phenomenon. For the sake of argument the market tends to reverse at certain swing points. So I write a program to fade those swing points. Suddenly the reversal levels should get stronger. But now you, another programmer, realizes that, with enough size, you could make these faders puke that level. So now your program is selling big size at that level, and the level begins to fail. Soon, other traders notice and now you see less resistance and more people jumping on at and before the swing point.
That is why the market always adapts and changes, and why algo traders are always tweaking their programs.