Should one trust the judgment of the 'experienced'? Experience counts for a lot as long as positions behave normally but in a non-standard game it can lead to stereotyped responses. This probably has market applications in times when everyone is looking for a rock to cling onto.

Here's a question: does a stats based approach to markets equate to an experienced one? If so, how can one avoid being stereotypical?

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005

Scott Barrie comments:

Not quite the answer you are looking for but experience vs. youth reminds me of two things… besides approaching middle age I am not young, but still not old enough to be experienced. Back in early 90s when I worked on the CBOE, I heard stories about the founding days. The CBOE was a dumping ground for the "Men Who Don't Fit In" (aka the rabble) or the young, seeking opportunity, or both. Those quick to adapt to the environment, were doing arbitrage trades (boxes) left and right and making a pretty penny –with very minimal risk to boot. It was those who adapted to the difference in trading options vs futures(equities) quickly who scored big and quick. As I heard the stories told, they were STUCK there, away from polite society — like many would consider the CBOT polite society. My point is the young, the pioneers, made good money, and pretty easy money as I heard it told (of course, things are always better in the past, so the story is probably just that).

The second market based example comes from the SEOS crowd. The small players ruled for a few years, making fortunes on a shoe string — as legend would have it. The pickings were easy, as the rules changed and those who spotted the change and were able to implement its nuances made lots of money, at least for a while. Many were young, or off the beaten path (rabble) hence they became known as "bandits" for stealing the tick or two that was the "god given right" of the specialists and market-makers (exchange members). In both cases, I have only been able to meet people who heard the stories of these developments years ahead of me. Those who survived and prospered, gained experience and have lost their youth. Those who didn't only managed to lose their youth. 

George Parkanyi replies:

It depends. You also have to assess the motives. General, broad experience can come in handy when things change greatly or rapidly. There are more potential avenues and adaptations open to someone who has seen how things turn out in many different situations. However, say someone is experienced, but they are willing to live within their existing paradigm come what may (e.g. someone owns a house in a hurricane zone, knows the risks, but is willing to accept those risks - even of death - because they CHOOSE not to change their lifestyle). You may have a very experienced captain that suddenly finds himself in overwhelming circumstances, but ultimately chooses to go down with the ship - that may not be your choice. Depending on your own motives, you may want to follow the example of someone who may not be that experienced, but is determined as hell to survive.

In the current situation as a trader, your first question should be — are the financial markets themselves going to survive? If you think not, then maybe selling everything now and buying some guns and a 5-year supply of Spam is the way to go. If you CARE not (like me), then keep trading and if it goes it goes. Your screen trading experience won't count for much in a Mad Max world, and then your choice is to accept its over and just take what comes.

After you've decided that you'll keep trading, then markets typically do one of three things, go up, meander sideways, or go down. If you're really smart and have lots of experience at reading the signs, you may be able to deduce which environment you are in and likely to stay in for a while. Trade accordingly. If you have no idea, then you may want to build an approach for each scenario, risk manage each, and hope the correct one delivers you more profits than the loss management of the other ones costs. I still think experience will be decidedly helpful to the person who was creative and flexible on the first place, regardless of age. Successful traders tend to be students of human nature — and I would think have a better understanding of how people are likely to react in different situations and environments, and use that to advantage.

As to the stats question, it would depend on what you are measuring. You would still have to assess relevance to current circumstances on a case-by-case basis for each metric you are using. And to avoid being stereotypical, you might want to turn basic assumptions and sacred cows upside down and see what falls out, and just keep asking lots and lots of questions and thinking them through. Also broaden the scope of scenarios you could imagine — it would be kind of like thinking many moves ahead in chess.

It would actually be very interesting to have a brainstorming session on the case for each type of potential market — up, down, sideways or even total collapse.

Nigel Davies adds:

I have a concept I use in my chess teaching which is something I've called 'gardening moves'. This is when you try to find a move which is useful in 'all possible worlds'. These tend to come when one has falsified most of the one dimensional possibilities.

Is the decision to trade a good one in all possible worlds? Probably not. Are there investments that would be good in all possible worlds? Probably not. But there are certainly those which can be OK in most possible worlds.

Go down with the ship? Not flamin' likely! I take the view that any creature worth it's salt has a duty to adapt and survive as well as it can and ensure that its progeny do the same. In my book there's no glory in defeat.

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005


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