Archives of “January 11, 2019” day

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12 Things -Your Must Learn From Paul Tudor Jones About Investing and Trading

  
  Education

1. “Certain people have a greater proclivity for [macro trading] because they don’t have the need to feel intellectually superior to the crowd. It’s a personality thing. But a lot of it is environmental. Many of the successful macro guys today, they’re all kind of in my age range. They came from that period of crazy volatility, of the late ’70s and early ’80s, when the amount of fundamental information available on assets was so limited and the volatility so extreme that one had to be a technician. It’s very hard to find a pure fundamentalist who’s also a very successful macro trader because it is so hard to have a hit rate north of 50 percent. The exceptions are in trading the very front end of interest rate curves or in specializing in just a few commodities or assets.”

There are many ways to make a profit by trading and investing. For example, venture capitalists buy mispriced optionality and traders buy mispriced assets based on factors like momentum. Comparing value investing with what Paul Tudor Jones does for a living is interesting.  What could be more anti-Ben Graham and value investing than a statement like:  “We learned just to go with the chart. Why work when Mr. Market can do it for you?”

“While I spend a significant amount of my time on analytics and collecting fundamental information, at the end of the day, I am a slave to the tape and proud of it.”

Set out below are some statements by Paul Tudor Jones that reveal a bit about his trading style:

“When I think of long/short business, to me there’s 5 ways to make money: 2 of those are you either play mean reversion, which is what a lot of long/short strategies do, or you can play momentum/trend, and that’s typically what I do.  We’ve seen cheap companies get cheaper many, many times.  If something’s going down, I want to be short it, and if something’s going up, I want to be long it.  The sweet spot is when you find something with a compelling valuation that is also just beginning to move up.  That’s every investor’s dream.” 

“I love trading macro. If trading is like chess, then macro is like three-dimensional chess. It is just hard to find a great macro trader. When trading macro, you never have a complete information set or information edge the way analysts can have when trading individual securities. It’s a hell of a lot easier to get an information edge on one stock than it is on the S&P 500. When it comes to trading macro, you cannot rely solely on fundamentals; you have to be a tape reader, which is something of a lost art form. The inability to read a tape and spot trends is also why so many in the relative-value space who rely solely on fundamentals have been annihilated in the past decade. Markets have consistently experienced “100-year events” every five years. “ (more…)

Thermodynamics and the Market

  
  Education
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Does Prigogine’s principle have any predictive market implications?

Well if you move from thermodynamics to information theory entropy, and consider the information content of market prices, then there are two clear analogies:

1. There should be local, transient edges (Prigogine, market prices self-organizing to minimize the rate of information loss).

2. Those edges are decaying (Second Principle, “Changing cycles”).

It doesn’t get easier, you just get better. Or do you?

  
Analysis, Education
  Tags

It doesn’t get easier you just get better. That’s a phrase often used in professional sport but when it comes to trading the harder you try, the more hours you watch the charts doesn’t necessarily mean you will get better at trading. With trading, it’s about understanding how to replicate an edge again and again with good risk management.

As time goes on you are either going to get better or worse at applying your edge. It’s black or white you’ll either be making money or losing money and if you are losing money it will be because you are continually switching edges and not applying sold risk to reward on your trades. Making money is a simple process of replicating an edge but it never gets easier and you will never be able to pick the winners, it’s a game of probabilities that requires you to win more than you lose and replicate it again and again.

Why can’t everyone do it? It’s because the outcome on each edge is random and you don’t know which trades (your edge) will be the winning ones and which ones will be the losing ones. That’s why trading is emotional for people because they feel like they’ve tried hard, worked hard on “getting the system right” and when it presents on the screen they expect certainty. Certainty does not exist, probability is what exists and unless you can learn to deal with random probability and let go of certainty you won’t likely get better as a trader. Apply a simple edge, ensure it has solid risk to reward and focus on replicating the edge over 50 trades. You will then have something that you can measure the success over a series of trades and look to see if you can improve the edge and money management.

The Most Stimulating Video About Markets

  
Education, Video

One found this Ted Talk on the Constructal Principalthe most stimulating video about markets I’ve seen in the last years.

Configuration – Evolution – Performance

Humans and animals instinctively nest before giving birth while price intuitively reverts to the mean or fair value time regulates gestation before each moves away– driven and sustained by an evolving flow structure that moves price and people more effectively and is fueled by monetary and human stimulus.

Money solves all of your problems.

  
  Education
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What that phrase means is that who ever you are that day will show up in your trading.  This of course comes in varying degrees.

In many professions your emotional state may not effect your earnings or employment.  In trading, a “bad” day can  create a cascading effect. You lost when you should have made money.  You created a bad habit.  Losing doesn’t trigger the right response, etc.

A trader views the market through themselves.  Now, most of the time it is little things that can be easily passed over.  Human beings are always going to have to deal with things they rather would not have to.  Every person has a bad day.

Money solves all of your problems, till it doesn’t.  The difficult part about trading is the problems start and the money (win or loss) CAN come at different times.  Think about this concept another way, a headline comes out and the market reacts to it (or it is reasonable to think it is a catalyst).  Well it turns out the headline is old and everyone already knew about it.  The story/money and what it bears can often come at the “wrong” or different times.  You are rewarded or punished just not always easy to connect the actions in real time.

Money does not necessarily mean your actions are correct.  Yes over time it evens out but some run out of money, patience, emotional currency before it corrects.  They weren’t honest about who they were that day.  It is prudent to always look a gift horse in the mouth.

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