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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."
>
>
Delta neutral and other arb situations will degenerate until the
smallest amount of profit margin acceptable is left and by definition
only the largest players because they can do the volume to make the
small margins worthwhile (much like a Wal Mart or other large 'outlet'
in the retail game).
However, I must disagree with you when it comes to directional trading
for several reasons.
1. The purchaser of a system or the learner of the methodology will
rarely use it exactly as the teacher or the other students. Each one
will change it slightly for better or worse. People are also not likely
to completely change methods easily because they tend to personalize
them. Look at the ruffled feathers on this list whenever a method is
criticized or another trumpetted as the greatest. No method is 100%
winners and therefore each enters periods of drawdowns that test the
users faith in the method. Most have not done enough work developing
and testing a method to have this faith that it will rebound; therefore,
they have nothing to fall back on when they are looking into the
proverbial abyss. This leads the departure of a system or style at its
very low point. Undercapitalization will force the same response (can't
stay with the system without any money).
2. Most of Wall Street, the investing public, and commodity commercials
look at fundamentals as the REAL way to analyze and at technicals as
some sort of vodoo. Since fundamental analysis is subjective and could
not possibly be copied or repeated verbatim by the masses, only a
mechanical technical system could result in the masses placing all the
same trades at once. I am not at all saying that fundamental analysis
is not effective. I am only saying that due to its subjectivity it can
not be replicated time and time again like a black box mechanical
system. If Norm presented his astro 'Holy Grail', Citibank would not
use it because it deals with astrology. Saloman Brothers will not put
its propietary bond portfolio under an Elliott Wave theorist even if
that trader had documented success. Degrees, grades, and ivy league
impress these people. The brokerage industry is also not as interested
in what works as they are in what sells. They need to sell their
product, wheather it is a new trader, bond inventory or stock idea, to
the retail and institutional community. This community has its mind
made up about the cause/effect relationship driving market movement.
They generally want to buy a story and therefore that is what they are
going to get. They are not interested in a moving average crossover
system with a filter and a successful real time trading history.
3. The majority of traders are not losers because of their methodology.
They are losers because of their mental/emotional make up. They may have
a losing system, but I argue that they use this losing system because of
their psychological make up. They would not be using a losing system if
they had put in the time to adequately back test it under precise
scientific conditions. They would not trade using subjective methods
unless they had been trained sufficiently. It is greed and laziness
that force over trading, undercapitalization (I want it now), using
unproven methods etc. Rules are broken and good methods are quit on
because the work that it takes to build faith has not been done. Your
success as a trader is not determined during your 16 for 16 winning
streak. It is determined when you have lost 8 straight and the market
is opening through your stop close to limit again. It is making
decisions that are consistant and within your methodology/philosophy at
these times that will decide if you will be long term successful. The
trade that works perfectly is easy. The trade that held so much promise
that ate up your open profit and opened limit against you the next day
is the trade that the pro handles correctly, notes any possible errors
made and LETS GO. The amatuer breaks the rules, hopes it comes back,
bemoans luck and fills and OTHERS and lets it stay with him/her for the
next two months. This emotional discipline and mental control can not be
packaged and sold. That is why the markets provide and will provide
profit opportunities. The markets are the same as they have always
been, ever changing. It takes the same thing to extract money that it
always has: a method that provides an edge greater than random plus the
costs of trading (commissions, fees and slippage), money management
parameters to avoid ruin and the mental/emotional fortitude to apply
these principles consistantly time and time again year after year.
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