And Now What?
While algo trades should not be dismissed, because they do after all account for something like 70% of daily trading activity, they should be used with caution.
We live in the information age, meaning that we have vast access to information. If we want to be able to track markets we need to be willing to put in the legwork required to do so. Following news and events, understanding behaviors, and using an abundance of open sources and platforms that are readily available is a good start. Wanting to auto-pilot such a complex industry, during the most complicated of times, is pure delusion.
The past has value, and the future will always be unknown, but ignoring the present simply because the systems we have grown to rely on have no way of understanding it, is quite like being in a world where the living have to fight the dead in order to survive.
If we surrender to the algo craze we will end up in a financial sphere filled with slow-walking zombie predictions.
Where Algos Fail
The problem with algo trading is that it tries to predict what will happen based on what has happened. It assumes that history will repeat itself so knowing all there is to know about the past will most certainly help us predict the future. But what about the present? How can algos be treated as a full-proof source when they cannot apply any qualitative analysis on our current state. Take the inflation scenarios for instance. Based on historical data and rule-based analysis, economists confidently said that printing new money would cause inflation. That's true, based on historical data alone, the printing of new money, should cause inflationary pressures. Yet here we are, 7 years post quantitative easing and inflation is nowhere in sight. The reasons why inflation did not spike are plenty, all of which are entirely new to us. There is nowhere in history that we can look, or algos can find, where a similar event occurred. This means that we are in uncharted waters, a new, and at times, scary frontier that cannot be predicted simply by looking at what our ancestors did. We are in the process of making history, not repeating it. That's where algos completely fail, and that's precisely what can transform them from a useful tool into a dangerous one. Taking algo predictions at face value, without applying any solid research and analysis of your own, is a high-risk game.
Machine learning, optimization, big-data analytics, robo-investing, and of course algorithmic trading, are all words that pretty much sum up the bright future of finance. Yet how confident are we that all these systems - systems that base their knowledge strictly on quantifying the past - are accurate in predicting the future? We live in a world of unprecedented events, a world of "firsts," (disinflation, zero interests rates, flash crash, to name a few), how then, can algos, assess things they cannot understand because they never existed? Under such light algorithmic trading at times feels as if we are trying to conjure the spirit of Pancho Villa so he can explain the impact of SnapChat. What you end up with is a series of poorly correlated events, yielding a string of ghost predictions haunted by the walking dead.
Man vs. Machine
We have learned to depend on technology for pretty much everything. We rely on smart calculations for all our decision-making, what to eat, what to watch, where to travel, what to wear and where to buy it from. Truth is that technology has optimized many aspects of our lives and our business. It has simplified many things and has made others possible. This has granted technology a golden status, making computer-generated predictions almost indisputable. The saying, "computers don't make mistakes, people do," has elevated algo trading into a science of accuracy, being regarded as the highest and most credible authority. When you are told that a prediction was made after processing giant amounts of data and running complicated calculations, you are prone to think that the outcome is correct and trustworthy. For why doubt this super tool that can "outsmart" any human? However, algo trading has a fundamental flaw, and that can be summed up in one glorious term, GIGO.
Pride & Prejudice.
While many classify this work as a love story, it certainly goes beyond the sphere of romance. The closing act of the story has Bingley reuniting with Jane and Elizabeth finally accepting Darcy’s proposal. Despite the expected “happy-ending,” Pride and Prejudice is truly a marvelous story of people crippled by their own blindness. Following Darcy’s trepidations and Elizabeth’s painfully slow realizations, their story stands as a cautionary tale of first impressions, how misleading and harmful they can actually be. This is especially clear when one considers the alternative, for had these two characters not been able to overcome their pride and prejudice, they would have most certainly missed each other completely. Had Darcy persisted in his pride he would have forever dismissed all Elizabeth was, and had Elizabeth not challenged her prejudice she would have forever condemned Darcy to something he was clearly not. "And your defect is a propensity to hate everybody." "And yours," he replied, with a smile, "is willfully to misunderstand them". Austen does a brilliant job in painting an environment that allows both pride and prejudice to exist, only to stress the necessity of overcoming both these aspects. Due to her ability to craft a flawless story filled with conflict, obstacles, and resolutions, Austen’s Pride and Prejudice is absolutely worthy of its high praise as it holds within it two of the most beloved literary characters and one of the most celebrated love stories of all times and beyond.
It’s Superb! (said in a perfectly posh British accent)
The Existence Of Superb, was a layered work that touched upon so many issues and used a number of devices to convey them. the idea of Playing with magical or mystical Elements such as secondary and tertiary meanings within each writing was a way to critique an Industry where the roles and norms are so confining it dooms and Destines its Members To comply with them or suffer because of them. so ends the brief yet Wondrous Life of superb.
Are you referring to leverage or gearing? I am not sure how you interpret the facts but regardless of your conclusion here, the fact still remains that mega financial institutions like MS & GS are currently in a disadvantage compared to mid-sized financial institutions like this one.
Case in point: as I was reading Adam Parker’s note today basically claiming that their clients’ would be better off doing the opposite of what they recommended, I couldn’t help but think how right I was more than a year ago on this board. From my post “A Self-Defeating Strategy”: The problem with market timing however, lies in this: take for example these new apps that allow us to choose the fastest route to our destination through the live traffic feed. As more and more people start using these devices that predict the fastest route, eventually half way to your destination you’ll realize that the prediction was wrong and it would have actually been wiser to take the opposite of the suggested route.” And followed later with this: “The larger a financial institution is or the more subscribers the newsletter has, the more likely it is their market timed based analysis will fail (the GPS analogy).
The mid-sized financial institutions are in a clear advantage here.
The more “followers” you have the more likely it is for your recommendations to get “crowded.” This reality might not fit, neatly, in their illusion of truth or their version of “Wonderland” but the more they publicize their attempts to justify their failure in “Wonderland Markets” the more exposed to total failure they get.”
With that being said and while I almost always stress the importance of not fixating on our own past views because they can in fact mislead you to false and wrong conclusions today. The question of how plausible it is that mid-sized firms are outsmarting the large ones has now found its answer.
Ahhh...it might appear as if a drunk person writes these posts but if you read it more closely you'll find patterns forming within each update, all my messages have a structured "rhythm"...take for instance the capitalized words....count the words between each one of them...a pattern emerges which reveals the forecasters price level by end of March...if you still think this is a work of a drunk....then stop taking those little blue pills when you're home alone...and repeat the exercise!
Market is like a playground swing. the playground swing Accelerates on its way down, decelerates on its way Up, while Losing Bit speed to friction. the motion will eventually settle Down to a regular back and forth pattern, with Swing coming Up Again to same height. odd as it seems, the Motion often turn erratic, first high, then lower, never Settling down Steady State and then never exactly repeating a pattern of Swings that came before. the erratic behavior comes from…Surprise!...systematic Bears’ incremental push upward…
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Although the mean reversion factor was spot on. The level or target price wasn't. 1992 was the year end target for the S&P 500 and unless something spectacular occurs on the last couple of trading days, the number was a little understated...as was the price for this stock. Convinced it would push up a little lower than 20 bucks at 19 dollars and 92 cents...the price target was overstated...maybe not this year...this year has generally been a difficult year for accurate predictions...but there is an explanation for that...
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It was a Monday, approaching noon, S&P 500 was dropping fast when it suddenly reverses course right at the 1992ish level and ends up for the day...
Someone likened this year's market price action to a roller coaster, I've said it again, back in July, to me, this is a "playground swing" market.