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Dow

Well….I am still long the Dow, boring that it is.

The interesting thing about markets at or around new highs is the emotional problems they seem to bring. Traders struggle with the notion of buying something that is higher than it has been in recent times simply because we have inbuilt cultural notions about what we believe something is worth. these ideas may be valid in our day to day life. If we wander into the bakery and a loaf of bread is $4.00 today and then it is suddenly $6.50 tomorrow we have a  sense that we are being ripped off. In the context of buying bread this is a valid judgement, in the case of trading it is rubbish. Whilst preparing my notes for an upcoming AIA conference I came across some notes from an old AIA conference. In a particular presentation a presenter stated that he couldn’t buy XYZ stock because he thought it was overpriced and that his market price was around $4.00. The only problem was the market disagreed with him and had priced it an order of magnitude higher.This is the problem with having a narrative that is juxtaposed to what the markets narrative is.

If we accept that the current market price is the sum total of all narratives then by definition only the markets narrative is correct. Markets are essentially voting machines that vote on what story they think is correct. You may huff and puff all you want but if your story doesn’t agree with the market then you are going nowhere fast.

With regards to what I see with the current price action on the Dow.

The long term trend is still intact and volatility is still dropping – which is always comforting.

Dow Big Picture

 

However, in the short term it appears as if pricers are consolidating, which really doesn’t mean much. Price will either move ahead and I can pyramid or it will fall in which I will exit.

Dow close up

 

Motivation Monday

If you do not know who Richard Feynman is do yourself a favour and buy a copy of the book Genius.

richard-feynman

Pick Your Own Fight

Dan_Inosanto-150px-OPTLast year I had the pleasure of training with Dan Inosanto. For those who dont know the name he was a friend and colleague of Bruce Lee’s. We spent an afternoon listening to his wisdom and getting everything i could from someone who was 77 and still in wonderful condition. During one of the breaks he told a story of when he was in the army. He was sitting with a group of others in the mess hall and all were proficient in some form of martial art be it judo, karate, boxing or Guro Dan’s speciality the Filipino art and as nature would have it the conversation turned to who and what art was the best. with each testosterone fuelled individual trumpeting their cause. During the conversation a voice popped up and boldly declared that he was the best and challenged anyone who was game enough to jump in the nearby pool and test their skill. Young men being not too bright all jumped at the challenge and each one was successively almost drowned. Our champions chosen art was water polo. The moral of the story is to chose your own fight and fight the way that best suits you.

The reason this popped into my head was something I came across on the Mentor Program forum where our traders are encouraged to build a trading system that suits them. However, every year someone wants to know how I trade and was tools I use as if they are somehow magical in nature. The issue here is one of individuality – everyone follows the same trading journey, yet, your trading approach is unique and that has to be accepted. Every trader has to find their own way, they have to find the tactics that suit them, the markets that suit them and they have allow all of this to resonate with their psychology. If it doesn’t then it simply doesn’t work in the long  term. This is why all these people who get sucked into magic FX and options trading courses end up getting pumped by the market. The approach they are given doesn’t work, let alone it being suited to the way they see the trading universe.

Being yourself in your approach to trading is very hard but it has been my observation that this is the only way that works in the long term.

Its Friday

Time to continue the World Cup theme –

Some back-of-the-envelope maths regarding Luis Suarez: according to Wikipedia, he has played in 363 club league, cup and friendly matches since breaking through into the Nacional senior team in the 2005/06 season. He’s also played 78 times for the Uruguay national team.

He has bitten three opposition players in the time it took him to play those 441 senior matches – PSV’s Otman Bakkal in November 2010, Chelsea’s Branislav Ivanović in April 2013, and now Italy’s Giorgio Chiellini in the World Cup game on 24 June. This raises a crucial question: how much risk is a football player taking if Luis Suarez is on the opposition team? You’ve got to know the risks when you get involved in a contact sport, after all.

Let’s crunch some numbers. Suarez’s bite rate of three in 441 means we can expect him to take a bite out of someone every 147 matches, but if we assume that there are 14 players at risk of being bitten (that’s 11 starting players and assuming three substitutes come on) that means Suarez has bitten three players out of the 6,160 who have lined up against him in his professional career.

We can therefore conclude that Luis Suarez has roughly a one in 2,000 chance of biting any individual opposition player. For comparison, the following things are less likely than being bitten by Luis Suarez:

  • Bitten by a shark while swimming in the ocean (one in 3.7 million)

  • Struck by lightning once across an 80 year lifespan (one in 10,000)

  • Dying from a hornet, wasp or bee attack (one in 75,852)

  • Being killed by a firearm in the United States (one in 6,509)

  • Living on a coastline and experiencing a tsunami (one in 50,000)

  • Hit by an asteroid (one in 700,000)

More here – New Statesman

And Luis’ favourite nom nom spots…..

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Flash Boys and Investors

Lengthy but interesting.

I have thus far resisted writing anything about Michael Lewis’s book “Flash Boys”, in part because I typically don’t want to waste time on timely issues (instead focusing on topics that are of long-term interest), although it has been a real exercise in self-constraint because there have been few books published in my lifetime that have been as troubling to me (Piketty’s recent “Capital in the Twenty-First Century” is another recent example of flawed economic thinking).
I heard well before “Flash Boys” was published that Lewis was working on a book about high-frequency trading (HFT), and I was very excited; I loved all his other books. Then, a month or so before it became available, I saw something that made my jaw drop: the book was about IEX. This surprised me not because IEX is bad, but it is tiny and insignificant. There were many other exciting things to discuss on the topic of HFT: why would Lewis focus on IEX?

A few general observations about the book:
• It is not an objective account of reality. Lewis began writing the book having already decided in his mind that the markets are rigged. There is very little evidence that he made an effort to research for the book, short of talking to the IEX people.
• The book itself and subsequent promotion has been an exercise in sensationalism. When Lewis, Brad Katsuyama, and Bill O’Brien (President of BATS) squared off on CNBC, O’Brien started the conversation by declaring “shame on both of you for falsely accusing literally thousands of people and possibly scaring millions of investors in an effort to promote a business model.” There is an immense amount of truth in this sentiment. I am sure that both Lewis and Katsuyama believe what they’re saying to be true and they are looking to improve the markets, but there is no doubt that using the “rigged” word and emphasizing how the little guy is getting hurt has been unconscionable.
• For the most part, the “news” around Flash Boys is that Michael Lewis wrote a book. In other words, he has written an engaging story, although in this case, he has not uncovered anything that has not already been discussed at length by financial journalists such as Scott Patterson.
• One of my favorite parts of the book, which really highlights how little the author and the IEX protagonists understand market structure, was towards the end when IEX is reviewing the first trades that were executed in their dark pool. They were surprised to see very tiny orders coming through, which they concluded might be part of a conspiracy to make them look bad by competitors. This hypothesis, of course, completely ignores the fact that algorithmic trading uses small trade units in order to reduce market impact following Almgren and Chriss “Optimal Execution of Portfolio Transactions” and all common sense which dictates that you want to hide your orders.

More here – statalgo

Behavioural economics and public policy

So popular is the field that behavioural economics is now often misapplied as a catch-all term to refer to almost anything that’s cool in popular social science, from the storycraft of Malcolm Gladwell, author ofThe Tipping Point (2000), to the empirical investigations of Steven Levitt, co-author of Freakonomics (2005).

Yet, as with any success story, the backlash has begun. Critics argue that the field is overhyped, trivial, unreliable, a smokescreen for bad policy, an intellectual dead-end – or possibly all of the above. Is behavioural economics doomed to reflect the limitations of its intellectual parents, psychology and economics? Or can it build on their strengths and offer a powerful set of tools for policy makers and academics alike?

A recent experiment designed by BIT highlights both the opportunity and the limitations of the new discipline. The trial was designed to encourage people to sign up for the Organ Donor Register. It was huge; more than a million people using the Driver and Vehicle Licensing Agency website were shown a webpage inviting them to become an organ donor. One of eight different messages was displayed at random. One was minimalist, another spoke of the number of people who die while awaiting donations, yet another appealed to the idea of reciprocity – if you needed an organ, wouldn’t you want someone to donate an organ to you?

BIT devoted particular attention to an idea called “social proof”, made famous 30 years ago by psychologist Robert Cialdini’s book Influence. While one might be tempted to say, “Too few people are donating their organs, we desperately need your help to change that”, the theory of social proof says that’s precisely the wrong thing to do. Instead, the persuasive message will suggest: “Every day, thousands of people sign up to be donors, please join them.” Social proof describes our tendency to run with the herd; why else are books marketed as “bestsellers”?

More here – Financial Times

The Patterns of World Trade

As  expected we ship most of our dirt to China – pity that China seems to be stuffed.

Circos_table_big_grey

 

The original article can be found here – Euromonitor International

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