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Thursday, February 6, 2014

The Map is Not the Territory

Following is from Wiki http://en.wikipedia.org/wiki/Map%E2%80%93territory_relation:
Alfred Korzybski remarked that "the map is not the territory", encapsulating his view that an abstraction derived from something, or a reaction to it, is not the thing itself. Korzybski held that many people do confuse maps with territories, that is, confuse models of reality with reality itself. ...  individual people in fact do not in general have access to absolute knowledge of reality, but in fact only have access to a set of beliefs they have built up over time, about reality.
This is a very eloquent depiction of the reason why I stopped forecasting index trends.
Forecasting of market trends is a bad approach any way you slice it. It makes one to have an opinion, a bias, that has to be expressed  in terms of long or short position. Every next bar brings new information, supporting prediction or not, until some time in a future trader can look back and realize whether his forecast was right or wrong originally. I've been working this way for years, and this is the best explanation why my index trades have never been a steady source of profits. Quite the opposite.

This tuition, paid to "S&P500 Futures University", was not wasted (hopefully) and resulted in System11 - a simple and robust approach to short term index trading. On the other extreme end is System1 - a long term stock/bond index system, that never had a losing year, but also sidestepped most of 2013. System1 was designed in a way to avoid major bear market (and it did), but relies heavily on my own opinion and vague concept of "Enough", which needs to be discarded. I am in a process of modifying System1 rules. It will take awhile, as long term system testing takes a long time (no shit).

Financial speculation is a process of making an aggressive monetary bet, based on incomplete information, for uncertain period of time. The Technical Analysis of price chart can't tell the future. It could tell  where we have been, where we are now, and what may happen next (based on interpretation of conditional probability). Never 100%, not even close. 50/50 is the best I can wish for, yet it still requires forecasting, albeit to a lesser degree. A "SET-UP" is what investment community came up with, to fool themselves into thinking that they don't have a bias. A certain quantifiable set of conditions, that lead to recognizable outcome most of the time. Isn't this an 'opinion' again? What is it based upon? Squiggly-wiggly lines on price/time plot of some financial scam?
Give me a fucking break...

 "The financial markets generally are unpredictable. So that one has to have different scenarios. The idea that you can actually predict what's going to happen contradicts my way of looking at the market." [Soros]

Shopping list:

UPDATE 2/14/2014
As soon as finished taking stops on many common stocks, I saw many new set-ups. With broad rally accommodating, I am now 70%+ invested and want more on some kind of reaction.
1800SPX has to hold for few days. then we will see...

As i was writing this musing, I realized that there is a philosophical problem with what I do, and got stuck. So I published it at Molecool's site, hoping that some replies will get me 'unstuck'. Below are some excerpts of  discussion we had here: http://evilspeculator.com/?p=40387#disqus_thread

Guys - in a vast majority of cases 'market analysis' is a completely misunderstood concept. Instead of attempting to predict market direction your approach should be the identification of high probability opportunities. Moments when the odds are heavily in our favor - a.k.a. inflection points.

I learned it from you (and other people here) - not to engage in predictions. And yes, inflection points represent opportunity- "A certain quantifiable set of conditions, that lead to recognizable outcome most of the time"...
I guess my question is: why do they exist?

Very good question - and I think the answer lies in basic human behavior. In essence price moves due to human activity. We are all wired in a similar fashion and thus regard price action similarly - an alien race may regard markets completely different. What really is the meaning of 'support' or 'resistance'? We point at price region to which a majority of participants attach meaning or are historically known to have meaning. As analysts/traders we seek to find inflection points that many traders regard as meaningful and then attempt to exploit market configurations near these levels. Which explains why predictions are useless - today's market dynamics are so complex that you cannot know for sure where the tape will go. But it doesn't really matter - as long as you know what you will do either way. The tape often gives us many many signs which most traders continue to ignore at their own peril. I see it all the time and it's a mental affliction that will never be eradicated. As a matter of fact it is necessary for the few to profit. The market is a zero sum equation - for me to bank a lot of coin many others have to lose - it's that simple.

Of course you are right, and this is exactly how i am learning to trade, because it works. I also believe its fractal, and observable on multiple time frames.
Still, we are only exploiting a short term irregularity, that will extinct over time. Why else 'the edge' goes away? For example, most late 19th - early 20th century charts of leading stocks are a picture perfect examples of Elliott Wave. Present ones are not so much anymore
Another problem I can not reconcile is this: if most of the volume are machines (for whatever reason), if most of what mutual funds, insurance comp, banks etc do is just administer inflows/outflows and asset allocation, if biggest players are sovereigns (that don't even care about P/L), if...if...if... than why is individual traders psychology and age-old concepts (like support/resistance) still matter?

Mate - don't over-think it. Just figure out what works for you and keep focusing on that. If you don't believe in support and resistance then don't trade that way - figure out your own systems/beliefs and then define your edge.

I ones heard someone comparing market to a puzzle.
A trader works on solving the puzzle, and every time he finds the piece that fits - he receives a prize token with a small monetary value. But I think there is a twist to this story.
You see, when trader goes to sleep... Santa Clause comes and rearranges portion of the puzzle, takes some pieces away and throws in some new ones. His origin is a secret, his reasons are unknown, his logic is moot.
I don't complain. I love the process of solving the puzzle and enjoy them prize tokens. I'm just a little leery of bearded motherfucker... that's all...;-)

You keep over thinking this mate. You still believe there is some holy grail answer that will suddenly give you that big epiphany. Embrace the chaos - embrace nothingness - just look for opportunities and that's it.
Trading isn't at all like solving a puzzle - it's like hunting. You don't care about which way the herd will run. You simply wait for an opportunity to tear into one of the laggards.

As usual you are right (no sarcasm), and I largely share your practical and even-headed views of world and humanity. Have to admit - I was on a quest (lol) to find answers to some important, but vague questions. A very frustrating experience until I realized that I was asking wrong questions.
I've been reading what you wrote and thinking...

I don't like chaos.
I don't want to be in it, don't enjoy it.
I've been suffering from it for a longest time, but now I am free (almost)

For a while now, I've been looking for balance. 
Searching for great-even-pleasant-unassuming balance.
Yet to no avail. Until I realized, that I will never find it, because it doesn't exist. 

I have to create it.
I actually already tried, without realizing it.
Now I will try some more - maybe it will work even better.

I can't explain it... Not yet...

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