Aug

15

 It's always good to learn and a vacation is a good time to learn more things. Here are 10 things I learned from my recent vacation in Maine.

1. The refutation of a hypothesis often causes more violent movement than a confirmation. The rejection of the idea that the market needed an extension of the debt limit in order not to fall, caused the great decline.

2. The three greatest declines in recent history came when a clash between the welfare state and the enterprise economy was resolved in the formers favor. The debt extension without teeth, the Tarp in October 2008, and the Baker intervention to get the mark up over the October 19, 1987 weekend are recent examples.

3. The declines in the summer are often more violent than in other months except for October because the interventionists take more time to get their houses in order as they are vacationing in the Hamptons or Riviera, and can get frightened more easily.

4. Negative sequences of 2 or more through big round numbers become avalanches and trigger all sorts of panic selling. A break of a pivot of long standing duration like 1250 can inordinately create a cascade.

5. The ability to not get overextended is the key to success in markets or business. It is pitiable to see all those forced out by margins, or total fear at the bottom because of too little capital.

6. The round number of 1000 is an attractor and the decline was not over until the market breached the 1100 level and fell to the 1000's on Sunday, Aug 14.

7. The book Fur, Fortune and Empire by Eric Dolin is very good reading to show how commerce causes the establishment of countries, the forces of war, and friendship and alliance between trading parties. The founding and survival of America by the Pilgrims and the French and Indian wars as well as many others were caused and fomented in the main by the waxing and waning profitability of the beaver trade and its elusiveness and ingenuity and rarity when hunted into extinction.

8. Big moves around 1 GMT are reversed to an inordinate extent.

9. The declines in the US markets are inordinately preceded and signaled by related declines in the European markets, — the ratio of Germany equities to us fell from 6 to 5.5 before declining below 5. And oil fell below 100, and fixed income had a tremendous rise all before.

10. A ride up US 1 from New Hampshire to Maine is one of the most interesting that a person can take, and there are 100's of attractions that a person can stop at with a family that will enhance a vacation. Particularly attractive to me on a recent trip were the Desert of Maine, the Monkey See Monkey Do, L.L Bean, The Music Box, Owl's Head and Farnsworth museums, and the golf course at the Samoset, who showed the colonists where to find furs, and where Jimmy the starter at 92, who started caddying there in 1932, should be a National Icon.

11. The moves in Europe seem to know that a person can't stay up 48 or 72 hours straight and often do exactly what you thought they'd do the previous day when you are too tired or dissipated to take a position. 

12. When taking out small moves from the market works, it will lead to disaster as big moves against dwarf out the profits from the previous and charts and stops and key trading points must be adjusted accordingly. 


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7 Comments so far

  1. Arthur on August 16, 2011 12:24 am

    I liked them all, but this one really hits the spot:
    “The ability to not get overextended is the key to success in markets or business. It is pitiable to see all those forced out by margins, or total fear at the bottom because of too little capital.”
    And no matter how many times one reads it, it doesn’t stick until experienced over and over and over and over….again (at least in my case).

  2. Andre Wallin on August 16, 2011 7:55 am

    -there needs to be a new word for how ‘gravity’ affects price. gravity of market participants and how rise/run has predictive value for short term gains.
    -rejection by the opposite sex is more powerful than getting out of and over a losing trading. one should seek to master both.

  3. Martha Stuart on August 16, 2011 1:04 pm

    I think more women should get into trading and politics. We would have less wars and more successful traders. It seems to me that some backgrounds that would be good to recruit from would be female athletes, comedians and musicians.

  4. MattyV on August 16, 2011 1:46 pm

    Mr. Neiderhoffer, love your posts. What I would love even more is a Google+ share link, so that I can more easily dish them out to my friends and colleagues

  5. Ed on August 16, 2011 9:56 pm

    Did you happen to stop in and get some salt water taffy at the Goldenrod. There is much to be learned about money making and profits by watching the taffy machine operate in the storefront window.

  6. vic on August 17, 2011 7:33 pm

    ed. one loves that machine. 100 years old? a true money maker. like the vig. vic

  7. douglas roberts dimick on August 21, 2011 6:18 pm

    // V, could you publish this version. The prior submission had typos… Thanks. Glad you enjoyed Maine. I miss it… dr //

    Horsemanship of Market Systematics

    Have reflected these weeks upon the chair’s theory of fixation, it appears that development and maintenance of signals to direct price action becomes synonymous with schooling a horse to recognize when to walk, trot, canter, gallop, even back up. For instance, V notes…

    “Thus the market is fixated on such things in the us that affected things in Greece and other countries so whenever the Greek type scenario comes up the market drops a quick 1%. That is indisputable.”

    Sure, as when a rider uses riding aids (e.g., foot, leg, hand) to cause the mount to step backward. For instance, one may gently lower both hands evenly with a slight reining back and a soft voice yet audibly commanding “Back” perhaps repetitively with each subsequent step backward.

    There are multidimensional aspects of this analogy when more than one pair of actors are involved. There is riding in an equitation ring or on the race track or polo field; so too with electronic market exchanges, whereby quantitative analysis appears at levels of inter- and intra-action to be compounded by complexity of how such collective energies are relative (or may be correlated).

    General relativity then becomes an approximation of the complex physical reality of electronic market exchange systems. We may categorize such corresponding data sets as equating to the Quantitative Relativity of program trading and portfolio management systematics. The architecture for mathematical accounting of such (kinetic) energy may also be labeled as market exchange systematics.

    Note that “the Newtonian approximation” indicates that kinetic energy is proportional to the square of velocity. However, although some theorize that physical laws to include the Theory of Relativity exist because of symmetry, physical laws do not require perfect symmetry. This distinction is important when designing program trading and portfolio management systematics architecture.

    The 1% fallback of the market on announcement of a Greek-type scenario is a good example. Such an event, whereby the market characteristically (or seemingly mathematically) reacts, is actually an “approximate symmetry” of an actually more complete physical reality.

    Now consider our commanding the horse to move backward. Does our command control the size of the horse stepping back or does an approximate combination of elements determine size to include confirmation of the animal, cumulative effects of training, and the environment?

    Obviously, albeit independence of statistical analysis, objective and subjective findings (or assumptions) are made that so govern either interpretation or application of the physical laws relevant to the event – the 1% drop in the market or a horse taking one step back.

    Rules-based Architecture

    For purposes of quantify electronic market exchange systematics, we are heretofore presented with making another distinction for us to continue the analysis of Quantitative Relativity. Does the horse require the rider’s command to step back?

    Likewise, for instance, does the Chair’s Greek-like scenario observation need to be a news event for the market to drop 1% relative to that specific case (i.e., current assessment of ultimate resolution of Greece’s debt crisis)?

    To understand how rule-based analysis answers these two questions, so that we may codify (or design) similar applications for measuring and correlating price action, first consider how we distinguish special and general principles of relativity operating in a given physical reality. In a state of uniform motion, a system of coordinates may be applied to quantify a given (physical) event occurring within said state.

    Two examples: a horse takes one step back; an electronic exchange securities market drops 1%.

    The special principle of relativity has us define the exact co-ordinates being used to measure the motion occurring in each example. A dressage ring operates by a co-ordinate system distinct from that of a polo field. Cannot the same be said when distinguishing between equities and foreign exchange markets or between futures and options markets?

    If so, we are then directed to the mechanics of the nature of the thing moving. For the horse, its confirmation of the hindquarters is apparent; commanded to do so or otherwise, a step backward begins with a lateral movement of one side, whereby compensation of weight affects front as well as rear quarters displacement ratios (or displacement distributions). Obviously, whether the horse has a rider on its back is as significant a factor as whether coordination by one or more central banks exists in the trading of a given foreign exchange pairing.

    Yet since when Victor fathered quantitative impressions to govern market speculation, more than 30 years of following that path – formulating statistical input for mathematical correlations to determine physical consiliences found in the nature of price action – causes one (at least it did for me) to question how rules-based applications are so constructed by those operating within the markets. Is there a general principle of relativity operating in any given price action of electronic exchange markets of financial instruments?

    To answer that question, we ask what may be considered an inverse of the question itself. Is there a co-ordinate system that defines states if not the impact points by which we can assign the exact meaning of the natural laws of physical motion as they may so operate within markets?

    We have the x/y axis for measuring price and time. Thus, when considering Dr. Niederhoffer’s “1% drop” observation, we can see how general relativity may be used to prove that fallacy.

    Why? Because exact symmetry is not required; cause and effect demonstrates proximity to time and mass of a market’s price action. To wit: an announcement was made concerning veracity of a given Greek-type event, and the market then dropped 1%, which was attributed by market analysts as being the result of said (negative) news.

    That correlation is an example of general relativity operating within the market. But what of the mechanics involved here, whereby the physical laws of relative motion are applied to then speculate (i.e., trade or invest) based on quantitative functions and indicators?

    The x/y axis of a given chart, as we have ascribed hereinabove as exhibiting the general principles of relativity, would be not then Euclidean as a space-time continuum. In other words, we see the market as we do the horse: there is one step straight back. The lateral movement of its left or right hind-quarter is not recognized. It is also important to note here that symmetry is not required to make this finding of that physical reality – both market and horse make one step back.

    Quantitative Relativity of the markets, as in the case of a 1% drop in the market, indicates that a similar symmetry operates though perhaps unrecognized. This phenomenon is like our horse example; there is no independent (straight-line) trajectory but for the relativity of motion within a system of co-ordinates as rigidly aligned to any given motion – be it in the ring or on the polo field or track.

    Yet within the body of reference is a parabola. There may be found a path-curve, whereby time-values equate to magnitudes (or resulting measurements).

    In effect, “time is robbed of its independence.”

    In fact, the observation of that cause-effect event (i.e., “whenever the Greek type scenario comes up the market drops a quick 1%”) is “indisputable” if one applies the general principles of relativity, but it is only in that (indisputable) state given a nonsymmetrical application of rules-based indications. NOTE: this point is not to pick a philosophical fight or a contra strategy for correlating speculation (ballyhoo or otherwise)…

    My observation is that Quantitative Relativity allows us to correlate the geodesics of the special principle of relativity found within price action. It is as my Uncle Phil would say…

    At Fryeburg Fair, which he presided over as president of the association for years, and when wanting to just “enjoy folks enjoying the fair,” Phil Andrews could be found over at the horse pulling ring. Once, while sitting there with him, watching the teams of horses competing, I observed that “horses are like money and politics.” He gave me that look of “here we go, he is thinking, again.”

    Point being… you can stand in front or behind of a horse and still get knocked over unless you stand far enough to one side or another to be clear of the lateral movement(s).

    Having been both run over and kick from behind, I know two things. First, if a horse bolts forward with you standing in front, inevitably the horse veering or you rolling or both are gonna result with a lateral movement, left or right or both. Second, if a horse kicks out with you standing behind, there is as much a tendency for that hoof to move upward and to the left or right as it is for you to move backward while leaning away to the left or right – depending on a host of factors.

    After such an event, you may conclude either “that damn horse tried to run me over” or “that fooled thing tried to kick me.” Alternatively, one may end up confirming “I just got trampled” or “see” (pointing to bruised and swelling area of impact).

    The former (potential motion) could be an appreciation of special relativity, whereas the latter (kinetic motion) suggests the limitations of general relativity. For program trading and portfolio management systematics architecture, Quantitative Relativity may correlate one’s positioning a la distinguishing between parabolic states when a herd starts to bolt or kick.

    dr

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