This blog stems from a vision.
My vision on a parallel planet, unknown, fascinating, Delphic for the most, the essence of cruel capitalism, speculation and opportunism. A Russian roulette that – statistics on hand – takes 95% of prisoners and 5% of jailers, from hundreds of years, following a continuous pattern that floats in no space and no time.
My platform is a window open on this world. Everyday I stare outside. And my vision appears.
“D’you spend your spare time playing trading, huh?”.
No, no, I do not play.
“So what do you?”.
I breed from uncertainty. I live of uncertainty. I live for the uncertain. The unknown. The chance. Filling my internal space with this creative uncertainty. I take decisions based on not knowing what is going to happen in the next few secs. I belong to a parallel universe that spins, regrets, denies our western frame of mind: the illusion of control.
So, according to trading randomly, I can not keep myself to showing this picture to you, dear surfer:
What’s that? It’s a chart. A chart that, at first glance, shows the behavior of a financial asset price, over time.
As the EUR/USD daily chart here under:
So? Where you want to go Umbolox? Drawing some technical analysis? Spotting cycles? Price action? We do add some MACDs, RSIs or stochastics? Are we going to buy lows and sell highs? Where is the EUR/USD price going at the right side of that chart? Will the support resist?
No, we do nothing.
Yeah, you know why?
The first chart is build by a coin toss. You add 1 when it comes tails, and subtract 1 when it comes heads. The pattern is totally random. It’s random-like. But at the first glance, it is very close to the movement of price of a financial assets.
So, let me slaughter one or two sacred cows of financial trading.
In this model – that roots mostly in the works of two giants: Benoit Mandelbrot and Nassim Taleb – there are not buyers, sellers, institutions, intraday traders, hedge funds or psychological S/Rs. This model ignores moving averages, indicators, candles, everything. This model provides the pure price of a financial asset that moves around according to infinite variables, making it irrational to illustrate their causality. Putting myself in the hands of fate to explain its movements. And here, we have the difference between the loser and the winner, the player and the pro, the entries and the exits, the lottery-ticketed gambler and the poker player.
Well I am not a denier. I do not deny that institutions move the prices, that S/R based either on open interests or psychology do exist, that a moving average can smooth the price line and reduce some noise. I do only tell you that one and thousand information we find on our colored platforms, papers, TVs, are totally useless. Huge trading volume at that price is a worthless information. Both under a Gaussian approach and psychological. Each single rational cause to explain the effects we see on prices can be burned out in seconds by the market. It’s the beauty of the unknown and the illusion of control. Whoever plays with causes and effects loses their time with useless information. Whoever plays with their money on the market believes that the beast of the unknown can be ruled by information. And the more information they put in their model, the more synthesis is required to obtain the illusion of control. Cathedrals, magnificent architectures built on the sand, syllogism-proof chains of causes and effects to explain a synthesis of lagging indicators.
The measurement of market oscillations under the “classical” Gaussian model stemmed into the CAPM, the APT (modern portfolio theories), until the Black-Scholes-Merton model. During the latest crises we assisted an intrinsic weakness in conveying the movements of prices under a normal distribution. The variation to the bell was timidly provided by the GARCH and volatility skews and surfaces is, according to my beliefs, a schizophrenic financial try. This said, fractal geometry is the only tool we have to understand the chaos. And Benoit Mandelbrot is the demiurge.
Moreover, there is another topic that pushes me toward a delightful random approach to sustain my method. Whoever plays with charts won’t never admit that 40% of European transactions are HFT. And, in the US, this percentage reaches peaks of 80%.
Let us enjoy half a second of Johnson & Johnson HFT at Nyse.
Now…. in either case you watched it till the end or you stopped after a minute… how do we ever think to beat the machines? How the hell can we ever think that a mysterious force of nature is hidden in the momentum of the charts? How can we ever taste the arcane in the financial markets, by following assumptions, divinations, Fibonacci’s gold rules, Elliott counts, Gann’s magic squares? How can we ever think to use automated trading systems, analyze the “trading volumes”, fit the price in a canned model, deceiving ourselves that our valuations are rational?
Do you see the muscles of the speed-of-light-servers of Goldman & co? Their power of calculus is thousands greater than Google’s. This is a business that handles sudden spikes at 2.30 CET on every underlying instrument of the planet: stocks, indexes, currencies, commodities, all moving rapidly together because of macroeconomic data or the speech of Mario Draghi. They manage volumes of thousands of billions a day, they move trades at the same pace and direction at the stock exchanges of all over the world, high correlated trades in order to avoid arbitrage. “No free lunches”, they say. Still, isn’t it fool the one who thinks that something different exists rather than a magnificent IT system whose purpose is what I said in the first paragraph?
Well, i don’t give a hell of conspiracy. I am not interested in conspires. I am just telling you that every rational explanation to a market that moves randomly (not “by chance”, not by “a coin toss”, but random like) is a gambler’s fallacy. It means to be fooled by randomness. The unknown is not delighted by rationality. We can’t adopt causality – by definition – to explain, rule, manage, justify, control the random, or at least random like. Couple it with the powerful HFT software you watched in that video and you have the gambler’s fallacy.
No choices are left but undress our rational clothes, wash out our will to control, shatter “the more you do, the more you get” dogma, and dress antifragile.
Let us be lulled by the wonderful random waves of the market.