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Lots of us have enjoyed Daniel Kahneman's work with "Thinking, Fast and Slow" being very popular. It certainly affected my thinking about the processes I should use in trading.
There's a new one, just released, "Noise" subtitiled a flaw in human judgement that might be similarly influential for discretionary and systems traders. So, search Noise Kahneman at your favourite bookseller if you're interested.
( I didn't post it under psychology because I think it will be more relevant to your day to day trading processes than your emotional happiness but that might be the wrong choice )
There are a number of indicators to measure "noise" and I find them very useful in trend following. Noise is a sideways movement within a trend.
Here is an example showing the recent noise in the Russell 2k using a spread in the efficiency ratios. The spread is simple, the efficiency ratio of Russell less the efficiency ratio of a benchmark, in this case, the Wilshire 5k.
Cheers,
Sody
EDIT: just finished the video, I guess my definition of noise is different from the video's definition. I will leave this post up just in case, but it does not really apply to the conversation, sorry.
"The great Traders have always been humbled by the market early on in their careers creating a deep respect for the market. Until one has this respect indelibly engraved in their makeup, the concept of money management and discipline will never be treated seriously."
I think Kahneman is highly overrate, but so are most of Nobel prize winners.
I read "thinking fast and slow" and I found that there was very little added value, but I am math major and an electronic engineer so I have a slightly different concept of what science is.
I think that if you want to understand noise you should apply science. Make an experiment, take a "noisy" enviroment and trade it with a risk reward ratio and see the results.
Why are you so worried about noise?
Take a noisy enviroment, model noise as gaussian and trade it.... in theory you would become millionaire in a couple of month. In a couple of years you will be richer than Bill Gates.
"Noise" is an empty word, what does this word mean? why something is considered noise and something no?
Overhyped, yes. Overrated, I don't think so. Also that book is a decade old so it's been metabolizing sort of speak into the collective understanding now. At the time it was pretty ground breaking.
I'm not even sure what that means?
Like a gaussian model that has been proven and over and over doesn't fit how real markets work due to the fat tails?
Otherwise the market AREADY does that?
Again. I don't understand what you are saying. Sure, but the markets not gaussian? I guess that's what your saying?
It depends on what your measuring.
This always bugged about Al Brooks. He always used to say that theres no such thing as noise. I noticed he doesn't say that anymore. Hmmmn
One the other hand Nassim Taleb completely ignores it in "The Black Swan" stating if you can't know it... it doesn't exits. That always bothered me too. He has since clarified as well.
What does this have to do with "noise"? Everything!
Both men denied the the existence of the other and both were wrong.
So WHAT is noise? It's a ratio of the SIGNAL to NOISE right?
So what's the signal? If theres no noise in the signal theres no problem.
If there is... then thats "noise".
My conclusion is there is ABSOLUTELY noise! And it's irrefutable. It's part of the equation.
Noise is sideways movement; markets move up, down, or sideways. After all, sideways are often classified with patterns in the form of market indecision. As far as methods to measure noise.. ADR, price density, fractal dimension, or my favorite efficiency ratio. Try combining a trend system and oscillating system without those and I can almost always guarantee the results to be curve fitted.
Sody
"The great Traders have always been humbled by the market early on in their careers creating a deep respect for the market. Until one has this respect indelibly engraved in their makeup, the concept of money management and discipline will never be treated seriously."
...although slightly off topic, but I dont think so, highlights the issues with standard measurements. Such as the sharpe ratio and it's cousin the SQN.
Again although not directly related to noise it's so profound you can see the glaring measuring errors within the existing tools.
Profitably and Quality Measurement.
PQM: See formula below. It's just beautiful! And far more accurate than anything before it as far as I'm concerned.
I can't understand you either, I am not saying that the market is gaussian, but normally when you talk about noise in terms of Signal to noise ratio, you normally assume that there is some level of noise that is gaussian and above it there is the signal. This is how we engineers model that. The theory is easy, and also non engineers and non mathematicians understand it.... and that's part of the problem.
The reason behind the gaussian noise comes from how the electronic components generate noise. It's a model that has some reason to exist.... in the market it has no reason to exist. I think that at some point someone trying to be cool started to use the term noise and to apply scientific concepts to an endeavor which has nothing to do with electronics.
I will make you an example of why I don't think in terms of noise. Many traders, including big institutions, use the ladder. They see the orders on the DOM and they decide what to do to the tick level. If they see a big order resting on the ladder they will either get scared or try to gauge if the rest of the market partecipants are so strong that they hit it.
If you look at candles you will see choppiness, but the smalll movements that you see in the 1 min or 5 min charts they all have a reson to exist. There is somebody who is trading.... and it's not me and you, it's someone who's trading 100 or more contracts per trade. Do you think that if noise existed he would be so naive to trade on such a small timeframe? NO.
He trades because he is pushing the market to hit the big order, he pushes and then let the market retrieve and then pushes again and some other big trader is doing the opposite.
I watch it happen everyday.... I can explain every single 5 min, bar of the day, I can even explain the 1 min bar.... and I think every trader who's been trading long enough can. This doesn't mean that I would take part in every trade, but the market is not random, because people don't take random choices with real money.
Retailers are negligible, so big money know what they are doing.
What SodyTexas said is correct. There are 2 components to a "rough" system, we can call it noise and structure. You can see it in this mandlebrot set
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you have the structure (the buddha looking thing) and all the stuff coming out of it. In the stuff new structures arise, to infinity. So neither the noise nor structure is the source of error. Not seeing the whole picture is the error. Who can see it? A small boy with a wooden spade.
Coming, they can't be denied. Going, they can't be detained.
Well sure they did and that's the problem. Noise AS DEFINED by traders is either smaller timeframe moves that don't generally affect them and on the other hand the UNKNOWABLE noise that seems larger than the signal causing confusion. The latter is the one that keeps us up at night.
I think this is backwards. If they have enough size sure they may be able to move the market and if that's part of their strategy that makes sense but I doubt that's the norm. If this firm existed wouldn't they have already taken over the world?
Ya this WAS Al Brooks stance for years too. Never understood that.
To answer your question yes IT IS NOISE. If I trade off monthly charts... daily's are noise. If I trade weekly charts, hourly charts ARE noise. If I trade hourly charts why would I stare at ticks?
But again, it's the fact that there is as much noise (as in you don't know what's going to happen vs what your sure of) or I'd say MORE in the markets than signal and HOW do you measure THAT?
Right now it's generally a version of P/L divided by the Std Dev of the Profit and loss. Which is flawed anyway.
Ya sure maybe market makers in thin markets but generally in the index futures I believe it's far less possible.
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OK ya lost me on that one. Sounds a little hyperbolistic.
Sure. I can tell ya what happened with 20/20 vision too? Does absolutely nothing for you in the future.
People do NOTHING but take random choices with REAL money! Including "BIG MONEY". They just think it's logical. If we were truly honest with ourselves and logical we'd probably realize we shouldn't trade at all. Just invest for the long term in an index. What is it %35/%65 now?
That couldn't be farther from the truth. Big money as a group are for sure trained better, have access to huge... absolutely HUGE amounts of capital, and scores of resources retailer could only dream of. (Maybe they could throw us a few PhDs?). And more computing power you could ever even use. So what?
They are either using leverage or balancing a risk model to achieve a certain level of return for a given risk level.
The goal is to NOT lose money (that's unsaid) and secondly it's usually to beat the benchmark S&P plus the risk free rate of bonds ect... ect... whatever.
Also if retailers are negligible which they ARE but we are gaining a tiny share more and more as time marches on. Look at what happened with Game Stop. Lol
So who moves the market if all the smart money knows what's going to happen?
And WHO are these "BIG MONEY" movers? Institutions like pension funds? Large investment banks? Hedge funds which can be as large as a larger fund, although not usually... down to a one man operation. Or how about HFT firms? (Which probably makes up a somewhat large part of the daily volume in the index's)
What about hedgers and arbitrators?
I think I am still misunderstanding something here?
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