People and markets give away clues to their true self in small but significant ways. Markets, which are a summation of people’s thoughts, words and actions, show when there is a good chance a strong trend is likely to persist, or fail.
Therefore, market action is simply a manifestation of the aggregate action of how humans behave in their day to day life, with price action showing its true intentions via small but significant ways.
Chung Fu – Inner Truth
Discretionary versus Systematic Trading
All traders are systematic whether their methods are automated or not, for without a system there is no method to generate a repeatable return.
All traders are discretionary. It depends where that discretion is employed. Discretionary traders use their discretion to directly place, amend or cancel orders. Automated traders focus their discretion as they develop the method.
- Every transaction is a trade.
- Natural human tendencies are unprofitable.
- Every profit is someone else’s opportunity cost.
- Humans are not rational, but they are strategic.
- Natural systems exhibit extreme kurtosis, variance at all levels.
- The price of an asset is not as important as its relative movement.
- As human consciousness evolves, so do markets (i.e. limited stationarity).
- Money naturally flows from the hands of the many to the hands of the few.
- Markets exhibit significant scale invariance, although certain moments vary.
- Markets do not tend to fair value. They oscillate around it in quantum moves.
- It does not matter that an event has not happened before because the way people react to it has.
- Supply and demand are not the primary drivers of market price, perception of supply and demand is.
- Managing change from one moment to the next is more important than managing any individual moment.
- Markets as an expression of group consciousness tend to order and symmetry.
- Because humans have a tendency to see patterns in chaos, even if market news were random, price moves based on human interpretation of data will not be random. This is now termed ‘Patternicity’; Michael Shermer, 2008 .
- Group consciousness (a market) has less introspection than individual consciousness (Freud). Electronic executed markets exhibit less introspection than human executed markets.
- Markets tend towards maximum perversion: Markets work to ensure most of the people lose most of the money most of the time.