...For the rest of us you'll have an easier time trading on informational inefficiencies.

Can you give an actual trade or recent example of this as i am not sure what you are talking about.

Can you give an actual trade or recent example of this as i am not sure what you are talking about.

Sure so for instance the most obvious example I can think of is that the Federal Reserve started saying as early as September 2021 that they would wind down their buying programs and then start raising interest rates. We started to see high core CPI again in November of 2021 as well. So to everyone paying attention at the end of 2021 it was obvious that we'd see rates rise, but the market didn't really start pricing this in until January. January being a time of year when many businesses that deal with bonds adjust their holdings and strategies.

Or how about an inefficiency on a lower timeframe? The non-farms payrolls for June 2020 was expected to be massively negative, and the actual came out massively positive. Yes there was a big jump on the news release, but it was such a massive change in expectations that it was more than reasonable to expect a trend day. It was a huge win even if you waited for the NYSE open to take a long.

Or how about a more nuanced one? Last Thursday CPI came out above expectations again. I took a long on micro treasury futures for a quick 5bp rise in interest rates. I took the quick profit, and ended trading for the day. However, there was a massive amount of options positioning going into the move. As those options unwound we saw the entire move retrace perplexing traders everywhere.

I bring this last item to emphasize that it's not about "fundamentals" per say. Changes in expectations about future flows or fundamentals do predict future flows, but there's plenty of other drivers that have nothing to do with fundamentals. For instance gamma hedging, or end of month fund rebalancing. If you know how the hedge funds and market makers trade then there are select cases where you can very accurately predict their flows. But you typically need information outside of just the price and volume you get from the exchange. Past price and volume is somewhat effective at predicting volatility, but it is not very predictive of direction especially on a short timeframe.

The impact of large metaorders tends to follow a square root law. At first the impact appears to scale linearly with the number of orders, but as the order gets larger the impact does not increase as much. This can be expressed with the equation:

P = Y * σ * sqrt( Q / V)

Where σ is the volatility, V is the overall volume traded on the day, Q is the size of the metaorder, and Y is a scaling factor between 0 and 1 that is unique for each instrument.

This leads to the unintuitive result that 1% of the volume can be responsible for 10% of the volatility

P = Y * σ * sqrt( .01V / V)
P = Y * σ * .1

In other words it is not strictly true that the more people trading on a signal the better as there is a point at which the additional volume provides diminishing returns. To make money you want to be in early enough when the impact is still linear.

But there's another nasty consequence of this. A large metaorder being executed the other direction still at the beginning of its impact curve will have more impact on price. In other words it makes you vulnerable to a large move in the opposite direction.

We can think of a group of retail traders acting on the same technical signal as a single metaorder. The net effect of all traders buying into the signal and then exiting will on average end up with price being lower than it actually started. Their initial orders leave a wake behind them that makes price move more easily on the other side. Only the traders that are able to get in at the very beginning will be able to make profits.

The end result is a market that is very statistically significant, but also one where it's not practical to make money on your impact alone. Consistent profits can only come if you are able to predict the volume before it comes, and any purely technical signal that can do that will offer limitded profits if not disappear entirely. That's why after decades of trying nobody has ever been able to prove publicly that such technical analysis methods actually work using empirical data. Anybody that finds one is going to keep it to themselves because if they don't the signal will stop working.

Surely it can be done, and large institutions like Renaissance Capital are able to find them by investing millions in infrastructure. For the rest of us you'll have an easier time trading on informational inefficiencies.

I do absolutely think patterns are random...it is impossible to tell what exactly will happen next on the hard right edge. But this is where genuine skill comes into play...it's not what happens, its what you do about it that makes all the difference.