A jump to the beginning - chaos and market forces

Agree entirely on the theory underpinning price setting. Unfortunately most retail traders do not have access to information regarding market depth/order flow (or market potential). For the trader (as opposed to the market maker) price movement is the only proxy available that can provide indications of where liquidity lies. The constraint's being that which defines the bounds of liquidity (availability of buyers and sellers at a defined price). I assume you can use HFT as a blind tool to continually probe where liquidity lies but that is outside my direct experience. I prefer to use large sample sizes over an extended timeframe to plot where bias currently lies, but again this is a rough tool.

PS... I better be careful here as it appears you are getting your large sample sizes over a far shorter timeframe that is more relevant to current price which would be a better confirmation tool of immediate price action. I am assuming that the duration between trades carries with it important information such as available liquidity on which HFT sampling could be used to great effect. Furthermore important information such as whether the trade was buyer initiated or seller initiated probably could be deduced from HFT sampling.

Even when I was trading stocks and had access to market depth available through central exchanges, the art of forecasting future price movement by determining where liquidity was most likely to move was a nebulous one and a moving feast as off-market and market transactions would continuously interrupt the logic being applied even with access to depth. I had to give up and look for more statistical methods to gauge likely future direction.

Hi C.
You have the ability to synthesize your thinking very well, making these concepts very easy to understand while in reality they are not; this is a very precious ability.

Yes, everything begins in our mind and the true secret is self awareness.
Zen teachers do not want to control or teach for they well know that self awareness cannot be taught because when it comes to human mind the first bareer we face with is ego: the more you try to fight ego the more ego grows because you are feeding it.
The only one who can win your ego is you and again, it is not a matter of fighting and winning-losing because this is all food for ego; it is a matter of self awareness, which in other words I would say it is a matter of reminding that we have a mind that is our consciousness or our Inner Self.
As soon as we become aware of our Inner Self our ego will get instantly resized and it won’t be able to affect us anymore.
The first step to this state is to understand that we can know only through the memory of our experience, we constantly compare what is happening in the present moment with our background of past experiences and emotions and upon this process we then make our decisions and actions.
Since our childhood our brain gets informations from what we constantly experience through our senses; each experience is associated with an emotion and is cataloged in our memory archieve and the sum total of our experience creates a path that is a real brain program like as a computer program.
Through this constant process, depending on what we experience, we create our beliefs, our biases, our convinctions, our way of thinking and here it comes the biggest misunderstanding of us Westerners: we identify ourselves in what we think, we have been taught since our childhood that “cogito ergo sum”: we merge ourselves with our thoughts and the consequence is that our biases, beliefs and past experiences become our limits of which we are not aware because we’ve been conditioned to believe we are them.
So the second step is to realize that we are not our thoughts and pay attention: we are what we think but we are not our thoughts.
We are what we think because we realize what we think but we human beeings are beyond our thoughts, so we can change our thoughts; what does this mean? It means that we can be aware of all our biases and beliefs and negative experiences which are preventing us from doing what we want to do, from being who we want to be and from reaching our goals: it is just up to us, it is just our choise.
Here it comes what is known as cognitive dissonance which is particularly experienced by traders: many traders, although they already advanced in their learning process, they might already have a good system with a good set of rules, they still lose because even if they know what they should do rationally they do the opposite: they lack of discipline, they get greed or scared, they constantly think “what if?......it must be like that…..market has to turn on my side……I’m not wrong….this is an exception….etc”.
This happens because they are not in tune with what they know it should be with what they really think and believe, with what their Inner Self is; and again, this is food for ego.
Most of the people which are facing with these problems have the tendency to manifest a strong resistance to self awareness, they most always oppose a strong resistance, even though they are aware of their problems; why they self sabotage this way?
Because self awareness means taking the responsibility of yourself: recognizing you are self sabotaging, recognizing that you made the reality you are facing with, it requires that you admit this is your responsibility……your ego won’t ever let you do this until you do not understand that you are not your ego, you are beyond your thoughts and your ego.

Now, at this point the recurrent question is always the same: wow!…very nice….but what does all this long topic have to do with trading? Well, it should be self explanatory, but I will answer with a Statement I like very much:
“The mind that created the problem cannot be the same mind that will solve it.”
A. Einstein

Beeing coherent with my way of thinking, in my opinion price it self means nothing, price waves themselfs mean nothing, indicators themselfs mean nothing, price patterns themselfs mean nothing: market is a self generating system made by price, money flow and human behavior, that are interconnected and affecting with one another following a scheme.
In order to understand what market is and what is doing in the moment we wanto to trade it, we need to think to it as a wholeness: what really does matter is the relationship between the elements and the scheme which they are governed by.

Your post nails it S. What actually started me thinking about 'thought' itself was in attempting to fathom what stimulates truly original thought such as that required to make those huge leaps we occasionally see in science such as the leap from Newton's 'clockwork universe' to Einstein's 'relational universe' and to Wheeler's 'participatory universe'. It was in this search that I was side-tracked into the world of David Bohm where his viewpoint majestically unified these alternate viewpoints into a cohesive 'unfragmented' whole through his work dealing with the Implicate and Explicate Order.

I was then dumb-founded with Bohm's intensive research into the mind through his involvement with Krishnamurti which culiminated in his views of 'Thought as a System'. Your post effectively sums up the impact of those cognitive biases on producing incoherent thought which can be so damaging and counter-intuitive in nature and affects all parts of our lives and in particular our poor decision making.

To train the mind to become aware of incoherent thought is a magnificent skill that appears to be 'commonplace in eastern culture' and hence my strong interest in attempting to understand how to translate these viewpoints into a 'Western perspective'. That way, it will assist me in becoming aware of and navigating around those biases that reveal themselves by their 'incoherence'.

In Western tongue, we refer to this as critical thinking which requires us to step outside our noisy minds and manifested behaviours and identify whether our thoughts are coherent or incoherent. I find that like any skill, practice makes perfect and recognise I have a long way to go but critical to this skill in identifying coherent or incoherent thought is knowledge. With knowledge comes the inevitable 'the more I know the less I know' as it is a bottomless pit which is extremely helpful in reducing 'ego' and as a consequence I am finding that I am getting better and better at developing this skill of improving self-awareness and becoming more open minded. As opposed to finding there is 'one answer' this process is actually revealing an infinite array of alternate interpretations which is now also being found in science when attempting to progress towards unification and simpification. I think this is telling us something very profound.

PS I loved your Einstein Quote

This is the question that im asking myself,and yourselfs.

if the next tick has adjusted and priced in all the reacion and informations at that moment it must be true.and yet when i view it ,it becomes irelevent ,history.

how can i determine at what price it is actually trading at, at that viewed moment ?

certainly not at the price im offered,unless im trying to buy or sell on the wrong side...........

This is a good question....how do you determine which side is right or wrong?
Most of times market is doing the opposite of what the mass of traders think it should do: did you ever ask yourself why?

I can answer your first question..how do you determine which side is right or wrong? ;

from the moment my order has been taken i have a good understanding initially as to how good my entry is via the bid and ask there after.the way it widens ,in my favour or traps me in .

the second point you raise is the stickler.the provided tools and teachings prodomently work on the premise of a fair game,all the papers written also use the fair game principle.unfortunatly a fair game is not the game we are playing.but that very fact that its unfair is for a few an advantage.it takes the randomness slightly out or certainly enough to advantage ,but only if you are able to determine the cheats

how does a chinese pot bellied 4 foot tall swimmer win the gold medal,no disrespect to chinese swimmers just an example ,unfortunatly life is full of cheats,some go unoticed some are just ignored .im not a cynic just aware of human habit.and just to clarify ,for the best part most things are fairly fair but if we are aware of this human defect or not to win by any means we can also take advantage .

concidering there are lots of posts regarding human traits ect ,one needs to also look at humans negative traits.

hey FXEZ,

this was an excellent and very easy to understand explanation of what i was trying to say, well done

I was always curios how market makers can agree in a few seconds to show relatively same price during some sudden move (meaning news event or some unexpected event). How can a price on all Market Makers move almost exactly the same (surely very different) but they find a place whereas the spike ends..and as you are saying, with very little flow and volume? Are they interconnected throu EBS, REUTERs so prices are the same? etc?

And, with low flow (what is flow? flow is traded stuff, real volume or this is just price moving without traded notionals?) price moves strong, but tell me, what happens at +70 that price stops on all platforms? why there is no 90 pippers move?
Are there some orders played and finally some volume traded?

And once again, how they can agree on price so quickly?
Or actually they dont?! I have a mutlybank platform with +10 banks feeding price, and while news events we have occurences (2s tops) that some MM lag with "fair-right" price..many times equilibrium is found in a few seconds, also on a weight of spread enlargement. whats your take?

Nature does in fact hold the key to a lot of amazing and incredible advances for humanity, in fact most of what surrounds us is a byproduct of observing nature itself. But taking a observation and migrating it to something practical for trading isnt that easy - at least for me.

For example this threads main topic of randomness/chaos:

Ocurrances in our day to day are without a doubt uncertain - like the bird crap on my shoulder (i suppose you could say that was my black swan haha).

"If past history was all there was to the game, the richest people would be librarians." ~ Warren Buffet

In an environment where randomness and chaos are king, how do you consistently capture non-deterministic moves?

Take boxing as an example, its dynamic, strategic and not predestined (any boxer could win, all else being equal).

A boxer must 'follow' certain rules of engagement, only fight within a defined framework (this being the ring, even though its a square haha) and a win will occur on pts or knockout.

Boxers are both defensive and offensive at the same time, they know when to jab, when to block, when to swing/punch, when to step forward and when to step backwards. And under no circumstances will they take a break - they have to fight until the bell rings.

If to stand a chance of winning, he must adjust to his opponent, he must ebb and flow with his opponent, he cannot be rigid and he cannot expect to win a fight (of many battles) with one swoop knockouts on a consistent basis. He is going to get hit, he cannot take a break, he must continue until 'the end of the game' (all else being equal).

"It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change." ~ Charles Darwin

How realistic and rational is a wannabe boxer tried to build his career on the premise of one punch knockouts?
What kind of consistency is expected? Ebbing and flowing, defending and attacking is whats needed.

So why, if we are uncertain of the next outcome, place one 'all in' trade into the market?
Would it not make sense - being we are trying to capture uncertain moves - that we ebb and flow our entries/exits within a predefined framework?

Would this increase the likelihood of capturing a non-deterministic move, or, would it diminish it?

Just some more thoughts of mine (for whatever its worth..).

anyone else trying to understand this method???

Method?
New account and new ban, bye

I agree with you.
Follow certain rules but at the same time being dynamic. It seems impossible but it's possible. It's the trader that makes the difference.

A Case for Systematic Trading

The following opinion is designed to stimulate thought about the potential benefits that systematic trading can bring when compared to discretionary trading styles.

Discretionary traders offer an opinion that suggests that the personality of a trader actually defines a preferred trading style. There is possibly a good reason for this and I would like to explore this avenue with respect to 'information theory'. Namely the information extracted from a system by a discretionary trader that is then used to develop a particular trading style that responds to that accumulated knowledge. My argument is that the solution is curve fitted to a narrow subset of market conditions that is not fully representative of the complete range of possible market outcomes. It is not saying that this is incorrect, but rather incomplete. This argument does not suggest that systematic trading is a total panacea but that there are ways through systematic trading using statistics to make market knolwdge more complete. For example with chaos theory applied to a complex market, a mere flap of a butterfly wing can, through market dependancies, translate ultimately into a major chaotic event and no method is safe from potential catastrophic events.

As we all probably agree, the ability to make sense of a complex system and attempt to predict a future outcome is dependent on available information that is hopefully representative of the complete state of the system and can then be used as a predictive measure provided that the current state evolves in accordance with an extrapolation of that representative information into the future. The principle is actually a scientific principle which Newton sought to describe when he interpreted this universe as a 'clockwork' universe. The explicit assumption with this philosophy is that if we understand the behaviour of all the collective elements contained in a system including their position and velocity, then theoretically we can then determine the outcome at a future time with perfect certainty. Hence his masterpiece called the 'Philosophi naturalis principia mathematica' was developed which sought to completely describe the mechanics of this universe.

Now the problem that Newton faced, and is the same problem being faced by a discretionary trader is that the initial assumption that 'what happened here on earth' can be extrapolated to the entire universe was actually 'imperfect'. This is because Netwon used a restricted sample set in his observations, namely the conditions associated with a resticted domain here on this earth. He then extended his principles to be representative of the entire universe. Unfortunately his domain of enquiry (here on earth) was not reprentative of the total system and his elegant theory was overturned by Einstein's relativity which was applicable to a far wider domain and quantum theory that extended into the microscopic domain. Both these extended theories of mechanics 'smashed our preconceived notions' of mechanics itself whereby the entire system and it's contents played out a dynamic interplay. It was found that even a description of a system by it's contents was an inappropriate way to describe the total system and that which was assumed to be constant and 'real' by Newton such as 'space and time' ultimately proved to be illusions dynamically evolved in tandem with the contents.

Anyway....back to discretionary trading. What a discretionary trader does is to use their judgement and personal interpretation to plan for a future action using a data set 'or knowledge' base that in accordance with their understanding, fits a particular market condition and hence has predictive ability.....however if their accumulated knowledge is incomplete and not truly representative of the total information made available by the system, then they are likely to fall into the same trap as Newton and find that over time as conditions change that 'they are not even wrong'....just hopelessly outclassed by market complexity.

There is no doubt that 'perfect information' about the market would enable us to trade it with precision, however to assume that a portion of that information is sufficient to describe a future event is a limited way of seeing things. Each of us has a knowledge base about this market which defines how we trade it. This knowledge base unfortunately is incomplete and probably will always be so. But the knowledge base we have defines our thoughts and how we decide to interact with this market....so it really helps to become aware of this fact and accept our limitations.

So are they other ways at looking at this riddle. This is where systematic trading comes in provided we use statistical tools in their formulation. The aim of a statistical tool is to unemotionally describe market behaviour in a standard way that all practitioners will agree on. For instance if I place a standard deviation channel over a price series from the lowest low to the highest high using a standard deviation width of say 2.0, then I, and anyone else that uses these variables will define the exact same trend. This overcomes what many find in trend following in that everyone defines a trend differently. The reason for this discrepancy is actually fundamentally attributed to an individual's knowledge base.

So armed with this knowledge of how statistics can be used to describe market behaviour in which everyone will agree, the aim of statistcal methods is to ensure that the sample size in which the statistics is being used to interrogate is of sufficient size to be 'representative of the entire sample population'.

Once you have this common agreement enabled by statistical measures, this represents an excellent proxy that goes a long way to more accurately describe the total sum of collective market behaviour....that perfect information....... that everyone would probably agree would be useful for predictive purposes.

Now using statistics as your 'market information' you are therefore better equipped to determine a technique that can be applied by all that has a better than even chance of capturing the necessary edge in trading. This comes with the added benefits that strict rules can be applied which removes the need for second guessing your discretionary activities on the fly.

Obviously the statistical measures used need to ensure that as many possible market conditions are built into the system itself hence the rules defined need to be as simple and non-constraining as possible to allow the market to 'breathe'. This is a complete opposite position to the discretionary trader who specialise in placing precise entries and exits in accordance with market conditions that attempt to squeeze out as much performance as possible. The nimble trader who fights around the 'goliath' and uses speed and precision to make their sting. To realistically adopt this technique however needs 'almost perfect information' about where the next blow is going to be landed. I feel that 'nearly all discretionary traders' fall into this trap of self-confidence that their knowledge base and hence interpretation on how to handle this market makes them a superior fighter yet the reality is that their knolwdege base is confined to a particular narrow set of possible market conditions..

Systematic traders are 'punch drunk' victims that simply use methods to stay in the market as long as possible so ultimately they can catch a market event that is of sufficient non-random significance to pay for all those hits and then some.

.....anyway...food for thought from a punch drunk victim of systematic trading.

I've always wondered how the mind of the masses work. All people put together is like one complex mind by its own, which is also part of a bigger more complex organ - the earth, sun, solar system and so on. Take a look at this chart taken from wikipedia overlaid with the Dow. You can see some correlation between daily sunspots, cosmic rays and the economy. can be just something i want to see/ coincidence but still interesting to see.

The simple explanation is that all MMs, banks or others use the same liquidity provider (Deutche Bank is good example).

Very true. Trading and quantum physics have a lot in common.

Often we play flipping a coin in this forum. Let's play pool for once!

Let's say we know perfectly the initial position of the blue ball and its direction with a little error in the angle. Each time the ball bounces on an edge of the table the angle stays the same (Snell-Descartes https://en.wikipedia.org/wiki/Snell's_law). So does the error. The error in estimating the position of the ball is linearly growing with the distance it travelled.

When the ball bumps into another ball the same physics law applies but we need taking the tangent to the ball at the impact point. Because the tangent is not the same the error is now more or less doubled. The error in estimating the position of the ball is exponentially growing with the distance it travelled. Even if the error is not so big it is now sufficient so that we can't know if the next bump will make the blue ball go on the left or on the right of the yellow ball!



What is the relation with trading? The yellow ball is a support/resistance level. Will it hold or break?

a discretionary trader can have an edge, an automatic system can have an edge, you have it only in the beginning though. both can focus too much on being right instead of planning and adapting for being wrong. predetermined probabilities can give you confidence but not certainty, you never know in advance what the market will do after you entered your position, but you can exit at any time (most of the time) so it's not quite like roulette, you can exit when you see the ball slowing down and heading for the other color, and even move your bet over.

Nice Pip

I see what you are getting at and I can see your point in that compounding uncertainty makes prediction 'almost' impossible but using the sum of least squares across this uncertainty, you could possible reduce this uncertainty to determine an overall directional bias and then take this using Snells Law as an educated guess for an angle of incidence to determine a possible outcome at support/resistance by inserting these variables as proxy measures into the equation. Don't know if this has real application or not? I struggle to apply any physical laws to this market as human behaviour seems to defy laws of physics. It doesn't stop me wondering about these things though.

Good points. The name of the game certainly is risk management. It keeps you alive long enough so that if an edge is to be found with the law of large numbers, you might just be around to participate in it. :-)