Reference Article: Who is a Trader?
Trading is a search problem; buyers search for sellers and sellers search for buyers. Buyers seek sellers willing to sell at low prices, and sellers seek buyers willing to buy at high prices. Traders must also find other traders who are willing to trade the quantities or sizes they desire.
The following axioms may appear as common sense, but have deeper implications in trading system design:
1. Markets exist to facilitate trading. It provides opportunity to someone at all instants.
People say it’s a bad or good market to trade depending upon volatility, phase etc. However, it provides trading opportunities to some at all instants and that’s precisely the reason for it’s existence. It’s better to improve one’s window (trading system) rather than blaming something external like price behavior.
2. Trading takes most properties of a zero sum game. Some traders will always be manipulative to others.
Bulls are manipulative (in legal sense only) to bears and vice versa. Similarly types of traders exist in pairs and their interests conflict and hence they may try to be manipulative: News Traders and Pseudo Informed Traders, Value Traders and Technical Traders, Short-term Traders and Investors and so on.
3. They dynamic interaction between buyers and sellers, or supply and demand, is expressed through prices. Thus prices are a tool of discovering the value.
The bidding activity, determines whether or not divergences from value can be sustained. On one day, sellers are discouraged by prices below value, and buyers are discouraged by prices above value. When both sides have essentially established a “value area,” any movement away from value will serve to shut off the flow of auction activity until price returns to equilibrium. This is commonly known as reversion to the mean.
4. Prices also change to reflect new information arriving in the market.
The prices reflect information. When new information arrives the market: eg. corporate announcement, seasonal effects, change in valuation of competitors etc.
5. The goal of a trader is to be spontaneous with the market.
Professional traders do not try to predict the market. Their goal is to remain spontaneous with the trend (and auction process) and adjust trading accordingly.
6. The feedback loop process among traders indicates the spontaneous direction of market. Positive feedback occurs when higher prices attract more buyers, and lower prices attract more sellers; negative feedback occurs when higher prices attract more sellers and lower prices attract more buyers.
This also indicates when to follow the trend and when to revert-to-mean.
7. Future prices cannot be predicted owing to the dynamic extraneous information entering in the market. Probabilities in the market are never absolute unlike in a game of cards.
Trying to define the price behavior in exact mathematics is not feasible and not recommended.
10. Extreme events or once-in-a-generation-outliers may occur every couple of years.
Refer to Taleb’s Black Swan for explanation. Price movements which theoretically have a chance of occurring once in a billion years happen in the market place over and over.
{ 11 comments… read them below or add one }
A little heavy, but excellent stuff!
This is really great. You must have very extensive trading experience to write such axioms. I did not see anything like this anywhere else on internet.
this requires a lot of thinking
Great site and writing.
very nice.
thanks, all the points make much sense
Whoa! lots of conceptual stuff.
Really nice… though I think most people will not be able to grasp these basic premise.
It is interesting to understand this theory and space of its appendix in gambling.
That I understand around it – it concerns statistics, is applied to the decision of the nonlinear equations.
Absolutely much the justification to the problem arbitration (representing farm now anybody so plainly resolve nothing a smog) interests:
There is a teleshow – the performer and the leader.
There are three doors. Behind one of them the prize, behind two others is not present.
The number one offers a choice to the gamester that accordingly chooses any of 3 doors (their probabilities are fifty-fifty).
After the realm of possibilities is made, the principal who knows where lies a trophy, opens one of those doors that are not chosen via the player and shows that there the prize is not present. Also suggests the participant to determine a single time finally again already between 2 doors.
Beyond consideration – how to attain to the player? (In a inception it is specified that it is indispensable to supplant a selection, the distinct possibility of a receipts behind a door on which was specified nearby the trouper who is doing not supervise = 66.7 %.
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