The Rise and Fall of Trend Following

You may have noticed that  modern markets behave in choppy and downright strange ways.  Market price rarely moves from point A to point B without several false starts and weird twists along the way.  This is true on a wide range of time scales – look at a daily chart of the S&P 500 or a minute by minute chart of oil prices, and you’ll see the same phenomenon. Continue reading

Reading Candlestick and OHLC Charts

Traders frequently use a form of charting known as candlestick charting to display price information about a security.  Candlestick charting was originally invented in the mid 19th century by Japanese rice traders, and has subsequently been adopted in modified form by most traders the world over.  A candlestick chart has time on the X axis, divided up into periods.  The conventional Japanese candlestick chart used a 1-day period, but any period of time works reasonably well.  In general the period should be long enough so that multiple trades execute.  Here is a candlestick chart of the S&P index future (symbol ES) with a 1-minute time period: Continue reading

New to Trading? Start Here

Are you considering taking up trading either as a source of extra income or as a career? For the right kind of person, I think it’s a very good decision. If you’re smart, disciplined, mathematically & technically inclined, and willing to put in the time and effort required then trading (really, speculating) has the potential to pay better than any other career on earth. Better than being a lawyer or doctor. Better than being a professional athlete or rock star. For the very top traders, better even than being a CEO of a major corporation. It’s perfectly rational to want a slice of that action – I do.  Even if you don’t have that kind of ambition, there are good reasons to become a trader – extra income, a better return on savings than investing can provide, freedom from a 9-5 job, and a realistic path to move your family into the upper class come to mind.  Having enough money to help others through charity can be very motivating.  There’s also the appeal of a true meritocracy – while lucky fools can profit as speculators in the short run, in the long run the capable and skilled prevail and the fools find themselves out of the market.

The very fact that you’re on this site means some part of that sales pitch probably resonates with you, and that’s good. Continue reading

Auction Markets and Adding/Removing Liquidity

Last post I talked about speculation, market making, and the similarities between them and running a retail store like a grocery.  Now I want to get away from that metaphor and talk about the details of how orders are entered and executed in a market – the ways in which a financial market is nothing at all like your grocery store.  This is a bit technical, so put on your nerd glasses and let’s get down to it. Continue reading

Speculation and Investment

If you believe the mainstream media and the politicians they quote, the bulk of financial crisis are caused by “speculators”.  Speculation has come to mean, by some sort of press fiat, “trading we don’t like”.  This is unfortunate, because speculation has an older and more meaningful definition distinct from any implication of financial crisis.  This older idea is important because it describes what profitable traders do and how they make their money.  If you want to make substantial profits through trading, you will be speculating and thus you probably ought to know something about the subject. Continue reading

The Trader Mindset

Traders don’t look at the world the same way “normal” people do.  This applies both to the world at large, and more specifically to the world of finance.  For the purpose of this post, I’m only interested in that more narrow subject – how traders view the world of finance.  The easiest way to understand this is to look at a couple of pictures. Continue reading

A Room of Sages and Fools – Deciding Who Decides

Here’s an interesting little brain teaser that has applications to trading, economics, politics and business.

Problem Framework:

There is a decision to be made.  For simplicity, assume there are two choices and one choice is correct and one is wrong.  Assume the labeling of the choices is arbitrary and thus neither is a priori more likely to be correct.  Assume the benefit of a correct decision is the same in magnitude and opposite in sign from the cost of an incorrect decision.

You have a room of N would-be decision makers. Continue reading