There is an ok preview of Patterns of Speculation on google books although its a bit deceptive as none of the math heavy parts are in the preview.
I think with this question though you have to keep in mind that this stuff may not scale to small time frames.
Even qualitatively there are some obvious things that on longer time frames would make shorting a bit different than being long. Just the long term upward dript of the stock market, GDP tends to go up over the long haul, people aren't dollar cost averaging short positions in 401k accounts. There is also basically no incentive for a firm to cook its books in a way that understates performance. You are never really going to have a massive jump to the upside because a firm suddenly announces its been understating earnings by 30% the past 5 years.
Its interesting you would see different distributions with stuff like ags, I guess there you could see an actual far better crop than what was expected.
For short term trading though I'm not sure you really want to have any kind of bias like this.
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- The mathematically heavy stuff is in the last chapters of the book. The book only analyses daily data, and the difference between U and S class peaks are shown for longer time frames
- There is also a bias in short term trading. The 60 min chart of ES below shows that the topping patterns are flat compared to the bottoming patterns. You also can look at the average true range (24 hours rolling), and will see that the average volatility during a bottoming process is higher as during the topping process. The vix, which measures volatility is called the fear gauge, as volatility increases during troughs and declines during peaks.
- The only exception would be single stocks which can show sudden upward volatility, when a takeover is announced. For index futures a combined takeover of all underlying stocks is rather unlikely...
Last edited by Fat Tails; July 28th, 2010 at 03:56 PM.
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1. Nature of Trades: A trader is either opening a new position (new business) or closing an existing position (old business). When entering new business a trader is not under pressure; at the most (s)he will miss out on a profitable move. When closing old business the trader has a much greater sense of urgency, either to lock in gains or to prevent big losses. This sense of urgency on the parts of traders can have a big impact on the way an instrument trades.
2. Nature of the Market: Using a broad classification, I think there are two classes of instruments. Those instruments in which
a. The financial participants in the market are net long
b. The financial participants are net even
Almost all commodities and physical assets belong to the class (b). For every futures buyer there is a futures seller. Further the market acts a conduit for producers and consumers to interact. Though there is a spot market also, it has the same dynamics as the futures market.
Most financial instruments, belong to class (a). There are organizations which issue these instruments and the investor who buys them. The organizations who issue companies, governments etc. are net short. They cover their positions rarely, with stock buybacks, mergers, bonds reaching maturity etc. With bonds, the debt is typically rolled over and supply typically increases with time. The market for these instruments is hugely net long.
For class (a) instruments, price drops happen much quicker than price rise. This is because on the whole the participants in the market are net long and hence any close of old business happens to be a sell and occurs with a greater sense of urgency. Further these markets can remain overbought for a long time than oversold. Most of the time, we are in a bull market, and most of the participants who short are the shorter term traders who cover soon.
Note that the past few years have been an exception. The trading in the market is increasingly being dominated by shorter term players and hence moves both up and down are sharp. This is also typical of bear markets. The short-term traders are typically trading against the investors (who are typically heavily long), so when they cover the shorts, you have quick rallies, and when they sell, they are often selling with the investors and hence you have quick falls too.
For class (b) instruments, like commodities futures, the financial participants are on both sides as the market, since the futures are net neutral. Though there are real producers (net sellers) and real consumers (net buyers) the shorter term price movements happen primarily because financial participants (speculators). Since the speculators are both long and short, the closing of old business happens equally on both sides. You have sharp rallies and sharp drops. There is not much asymmetry.
Note all the discussion is about short term movements and not about secular or cyclical fundamentals driven moves which happen in longer time-frame.
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Absolutely agree. Net long means that a majority of market participants suffers from losses, if price goes down. Fear spreads and the face of fear is high volatility and sharp troughs.
Commodities and physical assets are also different with respect to geographic dispersion. You might have a short squeeze at Cushing, Oklahoma, which does not affect the price for Brent Crude at IPE. Another point here is that price cannot fall below production cost, as producers simply withdraw from the market. Production cost puts a floor below price. However, shortages can put pressure on the takers. Some of the airlines were overhedged for fear of further price increases for jet fuel, and had to pay for it when prices went back down. Also note the recent problem with the chocfinger hedge fund that cornered the cocoa market. For physical commodities emotions and fear are on the upside, which explains the inverse relationship between flat troughs and sharp peaks.
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I think this are times for difficult stuffs for me. Developing strategy is done, I just wanna see what makes certain types of trendlines, legs, SR lines working in short/long strategies for many-many years and why others dont work, and why the difference betwen short/long working circumstances.
Curious to see how hard to undestand the books above. All Brooks' Book seems to be quite clear for me, but I think many many things is missing from The Serious Trader, of course this is understandable. My biggest problem with Al is that he is (1) not clarifying the differences between long and short and (2) all the techniques seems useful but he is not talking about when ? For example "Dont trade against a trend" seems to be just something for the hopebuyers but is very-very less if really wanna make money. If you dont trade against the trend and try to get into the market when the trend is clear for anybody it has a very big propability that you will be stucked at a peak.
I see that prices makes same patterns almost anywhere on the graph so the question is that can you sense that the pattern is forming at a key turning or trend resuming area. For example the same high propability entry point can be very dangerous if just before that an other high propability entry point accoured - in this case the previous high propability entry point becomes only secondary to the one occoured before. So one second leg entry can be very-very dangerous if it is happening after a fade type turning point ( or any other high propabilty entry point ).
So books are good, but they are hiding the really most important thing in trading which is: how to use the super-hiper indicators and price ation stuffs together in sync and not seperatly. That is why the books you mentioned can contribute for my picture about the markets.
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