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Robert Pisani wrote:
Robert,
Thanks for a very good post. But, you missed a major counter point
to your arguement of every trader being a human sponge. The market
has a psychological safety valve to this. What is that? I am glad you
asked. If I could right now post the proof for the "Holy Grail" trading
system which would virtually guaranteed to make everyone trading one S&P
contract $1 mil. in the next six months, 90% would either discard or
ignore it. These people are closed minded and are not willing to
research every avenue to become successful, which is what it takes. They
are not willing to pay the price for success. They want someone to do it
for them, then they want a free ride and will find a way to screw up
that.
These people somehow don't feel that they deserve to be successful or
are not willing to do what it takes to become successful. These folks
we can call Primo Losers. <g> Of the remaining 10%, half would listen
but soon loose interest because it requires doing ten minutes of
homework each day and then managing the buy/sell orders. We can call
these
folks Inspired Losers. They think they would like to be successful and
even entertain the thought of doing what it takes, but then they chicken
out. Of the 5 out of 100 left, 3 would try it, ask a few questions, and
find a way to screw up the system so they would lose money and quit in
disgust. I call these people Moths. They like to fly near the light but
it also scares them so they fly away if they get too close. Their
subconscience sabotage's their noble intentions by not allowing them to
either listen, execute instructions, or have the discipline to
persistently pursue their goal. Out of 100 people, that leaves 2. 1 of
these two will do everything required, make money, and then after a
short while, decide it doesn't fit their style. Call these folks
Acrophobiacs
because the are afraid of the heights of success. That leaves 1 out
of 100 who can investigate a successful system, ask necessary follow up
questions, and pursure a successful plan in a disciplined and persisent
manner in order to achieve success. Call this person a Winner.
The above is based on real life experiences. I have often been a
speaker at trading conferences. I have had over 100 people in a room
at a time. Usually most of these folks choose to hear me vs. going
to another lecture, so they are there by choice. I have often laid out
future trades, which market, the exact date, etc. Seldom do I ever hear
from anyone as to whether these trades where right or wrong. I have
video tapes of my lectures where I laid out many very successful trades
in advance. Very few ever contact me after the seminar. In a rational
world, one would think that if you found the goose who could lay the
golden egg for you, you would want to keep in touch with that goose. But
that is not the case. Typically only a few do this. I have outlined the
typical profile of what happens above. This is the market's safety
valve. Most people will not do what it takes to be successful. In fact,
I beleive that 90% of people are walking around in a trance totally
unaware of most of what is going around them. They sleep walk their way
thru life. All they know is how to get to their job, how to get home,
and what's on TV. This is why I don't worry about offering to teach my
market techniques to
the public. I know that out of 100, only 10 will have the discipline
to finish the course. Of those 10, less than 5 will follow thru to
go to the next step of applying this knowlegdge and do further study.
Therefore, I get paid 100 times over to actually only have a a few learn
and use my approch. The market info biz is just like the pits where
95% subsidize, support, and benefit the remaining 5%. Its very sporting
and generous of those folks to do this, don't you think?
I have also found that the more open and freely I give out
information, the less likely people are to listen. People don't value
what they get for free. This is why it is a service to a student of
the markets to pay for what they get. Because I posted this for free,
I don't expect anyone to remember it for more than 5 seconds...well
there
may be one out of a hundred. <G>
Exceptionally,
Norman
P.S. To the one out of one hundred, I will be a speaker at the 10th
Annual Astro-Economic Conference, Oct. 18-19, 1997, Chicago, IL. There
will be 20 expert speakers on Astro-trading related topics. If you
think you may be interested in this conference, please e-mail me
and ask for AEC information. Please indicate if you want to receive
information via e-mail or a brochure via snail mail. Please include your
names, address, and telephone number. Thanks.
> I have rewritten this piece that I wrote a couple of years ago, and added a
> few thoughts to it, and it seems time to re post it, especially as newcomers
> will not have seen it.
>
> TRADE SECRETS
>
> No one in the market is knowingly giving away money. Just as in an
> ordinary poker game, in this zero-sum business it's your job to take my
> money and mine to take yours. "Us against the market" theory died in the
> 60's, if it ever had a life at all. And if you imagine that you can pay
> someone $3000 and acquire a business that nets you $1000 a day, you are just
> being silly. This is an information game and information is the coin of
> this realm. If you have some valuable information that might help me, I'll
> trade you for some information of similar value -- like it or not, that is
> the exchange mechanism in this marketplace of ideas.
>
> As a contrived but apposite example, suppose you have developed an
> extremely high probability recurring S&P buy condition which leads almost
> always to a quick $3 increase in the S&P, and you let the world know about
> it. When thousands of bids to buy in size suddenly hit the S&P pit, do you
> really think any of them are going to get filled anywhere near the current
> price? Even if the market had enough depth to absorb them all, what floor
> trader would choose to sell? In fact, what happens when such knowledge
> becomes widespread is very similar to what happens in a takeover situation:
> the market estimates the proximity of its current state to the condition
> which would cause the price increase, and price then rises with p, the
> probability of reaching that condition -- the jump in price becomes a
> gradual rise, and the profit declines more or less proportionately with 1-p.
> The opportunity simply disappears. I remember a New Yorker cartoon, in
> which two fishermen were sitting in their little commercial fishing trawler,
> and one said, "If you give a man a fish, you feed him for a day, but to
> teach him to fish is just plain stupid."
>
> The S&P and several other markets that I trade are steadily degrading,
> which is to say becoming more efficient. I have made measurements that
> demonstrate this clearly to me. I understand from Linda Raschke that Perry
> Kaufman has also noticed a similar effect more generally in measurements he
> has made in a variety of markets. The markets always evolve; how quickly
> they change is a function of the information disseminated and their depth.
>
> Market opportunities ultimately and inevitably disappear, evaporating
> naturally through the very process by which traders exploit them. Even
> non-traders have witnessed this phenomenon vividly in the California gold
> rush market of the 1840's and 1850's: after the easy surface gold was taken
> out, only the well-financed could profitably search for gold. Today you
> need a high tech operation that would boggle your mind -- and your bank
> account too, however large -- to make it mining gold in California, and the
> return per unit investment is minuscule compared to the return experienced
> by the original miners. That is what happens to a market after it, as they
> say, "matures".
>
> An inefficiency in a thin market is not of much interest to traders,
> because modest exploitation will remove the inefficiency. Of real interest
> are only those inefficiencies in deep markets -- deep inefficiencies, so to
> speak. This is the reason the largest hedge funds trade currencies. How
> deep are the inefficiencies in the various markets? That is a good
> question. Certainly the inefficiencies in shorter term markets are not as
> deep as in the longer term markets -- the gold in shorter term markets is
> closer to the surface and will be extracted more quickly, and short-term
> trading opportunities must disappear first. And certainly the derivative
> markets are deeper than their volume alone would suggest, because
> value-discovering activity in them is absorbed also by the volume of their
> underlyings, a lot of which is quite naive and slow to act and react. But
> the easy availability of analysis platforms on personal computers, together
> with the efficient dissemination of information thru the various media,
> makes it now easier than ever to learn relationships that were previously
> known only to the few, and you can be certain that in 10 years, and perhaps
> in even as little as 5 years, you will no longer be able to accomplish with
> your wits what you can accomplish today. A good illustration is the now
> highly-evolved options markets. At the beginning of these markets in the
> 1970's, you could bootstrap yourself up with your own ingenuity and
> regularly find delta-neutral/low-gamma hedge positions that not only covered
> commissions but also gave you a handsome return, whereas today the potential
> returns from market-neutral hedging have diminished to the point where, to
> profit reasonably from a deep understanding of options, you have to go to
> work for a firm with a floor operation or a firm like Salomon Brothers. And
> even for such firms the profit is no longer nearly as reasonable as it was
> twenty years ago.
>
> If you possess extraordinary information, I would counsel you not to give
> it away, but to trade it for other extraordinary information that you happen
> to need, or if you don't want to trade it then at least to get paid
> extraordinarily for it, preferably by using it in the market yourself. And
> if you really have to give it away, by all means don't give it to a group of
> anonymous strangers on a list -- give it to someone in your family. Or to a
> friend. Or me (:}). You may naively imagine that your generosity will be
> returned if you simply put your information out there for the group to see.
> But that will not happen. There are in fact lurkers on every list who never
> contribute anything, but merely take what is valuable for their own use.
> Put a truly valuable piece of market information on a public list and I
> guarantee that you will not only not ever hear from them again, you won't
> even hear from them in the first place -- they won't as much as thank you,
> they will simply disappear with your information and use it and never look
> back, and you'll never know. You'll just notice one day that the market no
> longer offers the same opportunity it once did.
>
> And then there are the academics. Academics, of course, get paid not for
> taking trading risks but for writing papers. Little information is safe
> with people whose career ambition it is to publish the next Black Scholes
> equation. In case you didn't know, the Black Scholes model had been derived
> and was employed by a number of practitioners for several years before it
> was published. It's publication contributed immensely to the disappearance
> of both deterministic and probabilistic delta-neutral arbitrage
> opportunities in the options market. It should be noted that this process
> took almost ten years. Were such a tool to be revealed today with today's
> communications efficiencies, the process would be vastly accelerated and
> those opportunities would disappear much more quickly.
>
> It goes further. The first step in doing anything extraordinary is
> to believe it is possible. Before Roger Bannister ran the mile in three
> minutes and fifty nine seconds, it was thought that the four-minute barrier
> was insurmountable, a sort of theoretical human physical constant, and that
> intrinsic limitations in the structure of the human body made it impossible
> for humans ever to run a mile in less than four minutes. And in all of
> history no one did it -- until Bannister. However as soon as Bannister
> broke that barrier, his own 3-minute and 59-second record was broken in
> quick succession in a matter of weeks by many others: the four-minute
> barrier was not in the runners' bodies, but rather in their minds.
> Similarly, Jack Schwager's Market Wizard interviews demonstrated to many
> people that consistently successful trading was possible. Although
> Schwager's subjects dealt with earlier and easier -- which is to say, less
> competitive and more inefficient -- markets, and although certain of the
> more extreme performances could no longer be replicated, the mere fact that
> such performances had been achieved led many to develop market skills who
> previously had accepted the prevailing academic view that the markets were
> efficient and consistently successful trading was not possible. Schwager's
> interviews contributed in their own small way to the growing efficiency of
> the markets and the disappearance of trading opportunities. Thus, in view
> of the four-minute mile syndrome, not only is it unwise to disclose trading
> technologies, but it behooves the extremely successful trader not even to
> publicize his or her results, as such publication will only increase the
> competition and cause those results to degrade in the future.
>
> How is information disseminated? I doubt that someone like George Soros
> himself lurks on Internet mailing lists, but probably some of Soros'
> employees do, and certain some smaller CTA's read them, so you definitely
> have sizeable money looking on there. Exchange floor traders of course are
> well-represented on many Internet mailing lists and many read everything
> they can, books, articles, courses, etc., about the markets -- and the
> floors are very social places where any information becomes common knowledge
> immediately once it enters. And of course there are academics busily
> reading market materials and trying to figure out how to use them to their
> benefit, the university job market being what it is. It is safe to assume
> that any valuable information published or posted for public view will be
> absorbed rapidly into the marketplace, perhaps even by large CTA's, which is
> to say very quickly even in cases of information that relates to longer term
> trading. These institutions employ people to develop good trading ideas and
> don't have to give their employees anything but a salary and a job and some
> incentive pay. And for that, the employees read everything.
>
> Enough said. I have to assume that, for those out there able to develop
> original insights into market behavior, this is all self-evident. This is
> not meant to discourage the exchange of ideas -- even in a cut-throat poker
> game, players develop alliances -- and it is surely not meant to discourage
> the free exchange of technical or hardware or operational information. I've
> certainly gained immeasurably from all of those, and I've always gladly
> learned something from traders more experienced than I, and I hope to
> continue to do so in the future. And it may even make sense on occasion
> to publish some important market insight for the feedback it generates.
> Just be prudent about it.
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