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Game Theory in Trading

  • #41
  • Mar 6, 2011 4:21pm Mar 6, 2011 4:21pm
Quoting sisse
...
In simple words, in Poker there is only one game played at one particular time with one particular combination of bets and cards and "behavioral" games in a given hand while in trading you have an unlimited number of games, played by unlimited of players, with different rules, perceptions and objectives. Therefore, the perception of losers or winners has to be in context of what game you are playing even if it is in the same instrument with the same bets visible on the bid/ask at one particular time...

sisse
Nicely put and written

My preference would be to play the same game as the larger players, the market movers, but my strategy has to be completely different to theirs because I simply don't have the same liquidity that they have.
  • #42
  • Mar 6, 2011 8:12pm Mar 6, 2011 8:12pm
Quoting dragan53
hey porkpie,i found something interesting about the zero sum game,
http://www.fxstreet.com/education/tr...ex/2009/02/19/
I'm sorry but this article is total bs. Two traders enter at the same price but in different directions and both win. It is possible but it doesn't prove that fx is not a zero-sum game.
  • #43
  • Mar 6, 2011 8:55pm Mar 6, 2011 8:55pm
Quoting seagreen
I'm sorry but this article is total bs. Two traders enter at the same price but in different directions and both win. It is possible but it doesn't prove that fx is not a zero-sum game.
depends

if u trading ecn,then u could be closing a long,while another trader is buying that long and closing at even higher than ustarted
marketmakers might be different
who really knows what they think
they could close trades in miliseconds,sometimes at lower sometimes higher
  • #44
  • Mar 6, 2011 10:01pm Mar 6, 2011 10:01pm
All price movement is based upon information asymmetry and information flow. If all participants in the market had the same information and no new information found its way to the participants, the prices would never change.

But that is not the case. People's risk appetites change, new people are entering the market, changing the dynamics and information balance, new pieces of information enter the world every minute. In fact the reliance on information asymmetry and flow is so complete that every tick creates new information flow, which leads to information asymmetry, which leads to a change in price, which leads to new information, etc. etc. etc. ad infinitum.

So the question is do have enough of the RIGHT information to be in the market? The key to success is to have information that OTHER PEOPLE DO NOT HAVE THAT MATTERS. Whether this information is fundamental (FED is going to announce X in 10 seconds) or technical (the combination of rising clouds that are pierced) it doesn't matter. You just have to have better information that others.

Game theory may be a way to organize the information of the market, and it may be better that others, but it is just one possibility.
  • #45
  • Mar 7, 2011 4:39am Mar 7, 2011 4:39am
Quoting Porkpie
Great discussion so far which I think fundamentally questions the suitability of viewing the market as a game between the speculator and the remaining market, as it does not take the broader market (non speculatory issues) into consideration, and of course the fact that the smaller player has little impact on the market itself.

[font=Arial]Much of the opposing argument has argued that to have an edge in the market we need to look at history-dependent stratagies based upon behavioural patterns. This contradicts with the notion...
The only games I see now are how far the big money will push the price against the longer term trend to buy or sell at the best possible prices.

I see only three things on my charts now, upwards, sideways or downwards movement.

Upwards bars making higher lows and higher highs are an uptrend, one hl and hh monthly bar can look like four sideways bars on a weekly but it is still in an uptrend on the monthly.

We have to have sideways and downwards movement but why is it a game?

If the Big Big money decides EU was cheap at 1.2 and told their traders to buy at every opportunity til it get to 1.4, to me the only games occuring are the big money selling against themselves to force price down, taking profit call it what you like.

People worry about supply and demand, support and resistance, fair value etc. Find those levels on the monthly and weekly charts, trade everything else like steps up and down between those levels.

We get clear signals when reversals happen, i.e. when to buy and sell from bars and candles on every timeframe.

Up , down or sideways.
  • #46
  • Mar 7, 2011 4:55am Mar 7, 2011 4:55am
Its a game because to push price up there needs to be enough opposing sellers to buy from. Drawing in these sellers by taking price down from the highs to liquidity pools of stacks of buy orders below SR for example traps the sellers. Price can then be pushed up to new levels. It's a game of deception that relies on the vulnerability of the herd. Is it intentional or just the way the market ebs and flows as the herd will always be behind the the market movers.
  • #47
  • Mar 7, 2011 4:58am Mar 7, 2011 4:58am
Quoting Porkpie
Its a game because to push price up there needs to be enough opposing sellers to buy from. Drawing in these sellers by taking price down from the highs to liquidity pools of stacks of buy orders below SR for example traps the sellers. Price can then be pushed up to new levels. It's a game of deception that relies on the vulnerability of the herd.
I don't know, I still think that the majority of banks are just hedging for their clients on the currency markets, or hedging their own exposure to a currency.
Of course there are also some speculating, but in my naive view, I just think most banks are using currency markets for other purposes than generating profits.
  • #48
  • Mar 7, 2011 5:19am Mar 7, 2011 5:19am
Quoting Custos
I don't know, I still think that the majority of banks are just hedging for their clients on the currency markets, or hedging their own exposure to a currency.
Of course there are also some speculating, but in my naive view, I just think most banks are using currency markets for other purposes than generating profits.
darkstar posted something about this
he says that they usually use forwards to exhchange and spot to hedge

http://www.forexfactory.com/showpost...&postcount=496
  • #49
  • Mar 7, 2011 5:26am Mar 7, 2011 5:26am
Quoting Custos
I don't know, I still think that the majority of banks are just hedging for their clients on the currency markets, or hedging their own exposure to a currency.
Of course there are also some speculating, but in my naive view, I just think most banks are using currency markets for other purposes than generating profits.
Agreed. Losing sight of what the market actually is about may lead to misperceptions.

Say a Middle Eastern client calls you in the morning wanting a quote for a few €100M to be booked before NY wakes up. Now you have to figure out how to clear your book of that and other orders while still delivering to the quoted price and making a profit.

What emerges on our screens subsequently may seem like a sinister game with us as adversaries, but it's actually just somebody going about their daily grind without even the slightest attention in our direction.
  • #50
  • Mar 7, 2011 5:29am Mar 7, 2011 5:29am
Quoting Porkpie
Its a game because to push price up there needs to be enough opposing sellers to buy from. Drawing in these sellers by taking price down from the highs to liquidity pools of stacks of buy orders below SR for example traps the sellers. Price can then be pushed up to new levels. It's a game of deception that relies on the vulnerability of the herd. Is it intentional or just the way the market ebs and flows as the herd will always be behind the the market movers.
Yep of course they play games but do we really need to make it more complicated than it really is, I used to and it did my head in.
  • #51
  • Mar 7, 2011 5:32am Mar 7, 2011 5:32am
Quoting medici
Agreed. Losing sight of what the market actually is about may lead to misperceptions.

Say a Middle Eastern client calls you in the morning wanting a quote for a few €100M to be booked before NY wakes up. Now you have to figure out how to clear your book of that and other orders while still delivering to the quoted price and making a profit.

What emerges on our screens subsequently may seem like a sinister game with us as adversaries, but it's actually just somebody going about their daily grind without even the slightest attention in our direction....
I think that was what I was trying to say, keep it real.
  • #52
  • Mar 7, 2011 5:44am Mar 7, 2011 5:44am
Quoting jag1966
Yep of course they play games but do we really need to make it more complicated than it really is, I used to and it did my head in.
But that's just it, it isn't complicated at all as I am sure you'll agree. It's threads like this where theory and real life trading collide as one becomes submerged in academics most of which could be best left at the debating table (but makes staring at charts all day a little bit more interesting). If you meant making it complicated with regards a set of trading criteria/method/style, I agree. It doesn't have to be but looking at different perspectives is not a bad thing imo.
  • #53
  • Mar 7, 2011 5:46am Mar 7, 2011 5:46am
Quoting jag1966
I think that was what I was trying to say, keep it real.
Exactly. And if one keeps it real and simple, then the "games" being played can actually be in ones favour, much like the barracuda following the shark around for scraps after the feasts benefits from what could be perceived as a deadly enemy.
  • #54
  • Mar 7, 2011 5:48am Mar 7, 2011 5:48am
Quoting Porkpie
It's threads like this where theory and real life trading collide as one becomes submerged in academics most of which could be best left at the debating table (but makes staring at charts all day a little bit more interesting).
That's what it's all about, isn't it - keeping one from going bonkers staring at the screens
  • #55
  • Mar 7, 2011 5:49am Mar 7, 2011 5:49am
Quoting medici
Agreed. Losing sight of what the market actually is about may lead to misperceptions.

Say a Middle Eastern client calls you in the morning wanting a quote for a few €100M to be booked before NY wakes up. Now you have to figure out how to clear your book of that and other orders while still delivering to the quoted price and making a profit.

What emerges on our screens subsequently may seem like a sinister game with us as adversaries, but it's actually just somebody going about their daily grind without even the slightest attention in our...
i think that when they need liqidity they hunt for stops
adn thats where we come in
our stops and many others
that could be the reason for our paranoia
  • #56
  • Mar 7, 2011 5:50am Mar 7, 2011 5:50am
Quoting Porkpie
But that's just it, it isn't complicated at all as I am sure you'll agree. It's threads like this where theory and real life trading collide as one becomes submerged in academics most of which could be best left at the debating table (but makes staring at charts all day a little bit more interesting). If you meant making it complicated with regards a set of trading criteria/method/style, I agree. It doesn't have to be but looking at different perspectives is not a bad thing imo.
Cool, no arguments here. Damn right staring at charts all day can be boring but it is a puzzle and I am still a long way from cracking it or my own psyche to my satisfaction, getting there though
  • #57
  • Mar 7, 2011 6:02am Mar 7, 2011 6:02am
Quoting medici
Exactly. And if one keeps it real and simple, then the "games" being played can actually be in ones favour, much like the barracuda following the shark around for scraps after the feasts benefits from what could be perceived as a deadly enemy.
Haha yes, I think the turning point for me was when you see the games being played, start to understand them a little and then learn to love them.

You, Islander and Dave Vantage really opened my eyes to that, my Eureka moment, thanks .
  • #58
  • Mar 7, 2011 7:15am Mar 7, 2011 7:15am
Quoting Custos
I don't know, I still think that the majority of banks are just hedging for their clients on the currency markets, or hedging their own exposure to a currency.
Of course there are also some speculating, but in my naive view, I just think most banks are using currency markets for other purposes than generating profits.
If banks were the bogeymen many claim them to be, their profits would be far higher. The fact is that not many of the large entities are risk-hungry (i.e. intentionally seek it), perhaps there isn't enough skill to go around at those levels, or there's a lack of foresight to employ it. The aggressive entities are far more likely to be the small to medium-sized participants. All we need to know is that a food chain can't support many apex predators, so we know that most of the large participants can't be predators (in terms of trading).
  • #59
  • Mar 7, 2011 7:35am Mar 7, 2011 7:35am
Banks are the elephants, and we’re the fleas. All we can hope for is to get a ride on their backs, regardless of what their motives are. They’ll do what they need to do. Our biggest Nemesis is in the mirror.

Oh damn it, have you noticed that mirrors are not the same quality as they used to be years ago? Or do I need to see optometrist?
  • #60
  • Mar 7, 2011 8:15am Mar 7, 2011 8:15am
Quoting Mr J
If banks were the bogeymen many claim them to be, their profits would be far higher. The fact is that not many of the large entities are risk-hungry (i.e. intentionally seek it), perhaps there isn't enough skill to go around at those levels, or there's a lack of foresight to employ it. The aggressive entities are far more likely to be the small to medium-sized participants. All we need to know is that a food chain can't support many apex predators, so we know that most of the large participants can't be predators (in terms of trading).
That's the conclusion I have come to believe. There are only so many BIG banks, each have their own specialists, GBP, USD, JPY etc. Dare I say collusion to some extent.

And yes I agree it will most likely be the smaller more aggressive players that create the volatile movements.

I don't care really, it isn't scary any more.
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