Trading

Less wrong

Ultimately, we are victims of over-simplified abstract theories based on fundamentally wrong premises and “theoretical” naive assumptions.

Just like Freudian “psychology”, being a canonical system based on abstract bullshit, gave way to modern neuroscience and endocrinology, abstract economic theories have to be dropped in favor of “actual”, recurring behavioral patterns.

Evolutionary psychology and behavioral endocrinology are out there to explain the markets.

The smartest guys already exploited these biological and social principles to create and maintain clever meme-based pump-and-dump themes, and to manipulate a niche meme-coins (shitcoins) by pushing misleading, sophisticated false narratives which look “very smart” and “logical”.

The recent case of FTX and SBF was a perfect illustration of how retail “investors” were systematically meme’d and bullshitted and then dumped upon. They used insider information about the internal state (open position statistics) of the FTX exchange to craft trades and outsourced media manipulation campains, not unlike political parties do.

This is how to make money relying on a moderns science - induce hormonal spikes in amateur “traders” using internet memes and simple chart manipulations (by placing lots of “pump” orders) and frontrun these irrational degens and dump on them.

Many such cases.

Non-bullshit social sciences

There are observale and measurable (but not by poll-taking and extrapolation) pattenrs within complex social phenomena, like religious sects, “copycating” of fashion trends, consumerism behaviors and following some political nonsense on social networks.

The “Irrational Exuberance” book was the one which popularized the idea of discarding all the oversimplified models based on pure “rationality” and other abstract conceots.

I myself am sort-of an expert in socially-constructed religious practices, who lived in different parts of Asia immerced in the common folk cultures, trying to learn and understand (and found out nothing but social dynamics – no miracles of any kind).

So, the “plan of an attack” includes using measuring methodologies from social sciences and proper, grounded in reality explanations.

The major memes

The most well-known, less wrong “major memes” implicitly confirm the social nature of the markets:

• time in the market beats timing the market (the law)
• buy when there is a blood on the streets (over-reaction, oversold)

What the memes captured is that all the major price actions “big movements” are caused by cascading caused and fueled by nothing but social dynamics. Over-emotional FOMOing in and panic selling are followed by “regressions to the mean”, and this is the most reliable observed pattern.

The most challenging aspect is to correctly identify the current phase (tide) and this, it seems, require a human expert judgment. The matematical approach based on measurements is reducible to moves above one standard deviation (Bollinger Bands) and acceleration and change of momentum (MACD) and other derivatives.

And this, of course, is not enough to beat the market, especially when everyone else and their mom are doing something similar.

Sects and cults

Just as a there is a very sophisticated, elaborate “reasoning” behind every single wiggle on a very detailed and complex tantric religious paining (which is ultimately have no connection to actual reality, except being a traditional artifact) there are “reasoning” behind every single shitcoin, which includes seemingly “logical” memes alike “tokenomics” and what not.

The crucial principle of any sect or a cult to be sustainable is to have a narrative too abstract to be actually studied or disproved, so people will keep talking and arguing about it. It has to have an overwhelming amount of seemingly relevant and even “consistent” minute details and long chains “deductive” reasoning from false, too abstract premises.

Yeah, the world central banks would use some unqualified amateur open-source low quality PHP or Javascript crap, just wait two more weeks.

Bullshit, bullshit everywhere

There are lots of difficulties with trading the markets and shitcoins, but the ultimate one is the amount of bullshit and utter nonsense poured at you. One would be lectured in every single book, with that self-assertive mood of a final authority (like Alan V. Oppenheim about signal processing), but almost everything turns out to be bullshit.

They talk about the paramount importance of the backtesting, while the past performance (historic data) has no influence in principle upon future events.

Yes, 2 or 3 candle patterns has been identified and even “studied” (cataloged) long ago, and they are indeed recurrent and frequent, and even the fractal-like notion (they emerge at every timeframe) is valid, but these patterns are just a noise, unless happened (emerged) at the edges of a range or at major support and resistance levels (which all have a social causality).

So, backtesting will only give one the sense of a false confidence and will seemingly validate one’s naive over-simplified assumptions.

There is a lot more bullshit. Application of some probability techniques in the incompatible (with all the theoretic assumptions) contexts. Signal processing methods without a fixed “alphabeet” and the corresponding letter frequencies, and so on. All this is just bullshit by over-confident, self-assertive narcissistic Chuds.

So, lets state some facts about the markets.

Superimposing a grossly oversimplified views (models)

The “methodology” for “navigating” the vastly complex world by superimposing some grossly-oversimplified but seemingly “logical” and “consistent” views and using them as a “guiding map” works well since the beginning of time in all organized religions and other kinds of socially constructed “systems”.

It is, indeed, a universal pattern, which includes the notion of a proper abstraction, when once your abstract concept “matches” adequately some complex aspect reality, and is a non-leaking back box abstraction, it “will work” as a grossly inaccurate in the details but more or less “correct” map (which is not a territory).

This approach works wonders in vastly complex social contexts of traditionalist societies.

The problem is that superimposing a bullshit (a map which is just wrong) will ultimately always lead to a disaster.

This explains why most of the traders are being washed out by the markets - they superimpose and then make trading decisions based on a grossly oversimplified, disconnected from the actual reality bullshit, including the most sophisticated models based on advanced mathematics.

The irony, however, is that only the simplest and the most consistent (with all the seemingly irrelevant details being necessarily abstracted away) will work in the long run, just as religious systems do.

Every particular market is a Social phenomena

The prices are moving as a cumulative result of willingness to take certain actions by market participants, either human or bots (automated trading systems).

The actions can be sorted out into 3 categories - to buy, to sell and to stay aside.

The actual price movements are caused by placing individual Orders above or below the market (the current bid and ask prices).

This is done by placing Market Orders, which traditionally are being filled with the worst possible price, so Market Orders literally move the market by setting new bids or asks at the maximum possible distance from the spot.

It is eagerness to buy by bulls or to sell by bears (or just quick orders by “insiders” with some information advantage) is what causes all the candles on the charts.

Smart people place Limit Orders above or below the spot, but once (if) they are filled, they set the new bids or asks.

Again, ultimately, it is just willingness to buy or sell (or to do nothing), and the causes of that is psychological, or, in the case of a disciplined algorithmic trading, by the current “views” or “internal states”, influenced and shaped by the current social “environment”, which includes the actual events, the news about them, and lots and lots of written and spoken bullshit.

The stronglest forces that move the markets, however, are mass hysterias – greedy or even euphoric FOMOing in and fearful and fast panic selloffs.

The most fundamental question

The most fundamental question one have to ask when analyzing the market is:

Where the money will come from?

Who exactly are the “bigger fools”, the “bag holders” the “target”, and where the money they will spend are coming from (a government helicopter)?

What exactly motivates them – greed and memes, but which ones? What are their idiotic expectations – the “line” will go up indefinitely? The “moon mission” just took off?

When one sees the correct causality one suddenly is able to observe the actual “flows” of money to and from particular sectors of economy. This is the best possible non-bullshit short-term market analysis – to observe the what is actually going on.

Models

Only the simplest models work consistently in the long run in the proper context of an “Irrational Exuberance”, which is what the markets are.

The “Regression to the mean” recurrent pattern (at all time-frames, the infamous “fractal”) is what made the most money for smart semi-automated traders.

The subtleties of correctly identifying the current “supports” and “resistances” (which are actually in the minds of other people right now) and the proper edges of a current range are still almost intractable problems.

This is where the principle of having a grossly oversimplified but non-contradictory view superimposed on vastly complex actual dynamics will work. The simplest linear approximations on moving averages will be good-enough. This is what all the chart guys do.

The key is to have the same views and the crowd currently have and to position oneself accordingly.

The facts about the markets

Ultimately, the purpose of any “exchange” (or any other “service”) is to maximize their own profits by all means available, and given a totally unregulated market – to fuck you up in every possible way.

This is the crucial part of any business-plan – to develop techniques (and to implement the corresponding algorithms) to confuse and overwhelm the users (in order to maximize the number of small but costly errors) and to manipulate and front-run the users in order to drain their accounts efficiently , and to sell and take advantage of every single piece of data and statistic they collect.

The smartest guys organize (even cooperate) and maintain a long running pump-and-dump schemes (like the fucking Chainlink scam) where they orchestrate artificial “pumps” (together with a fake bullshit narrative) to boost the morale of degenerate cult followers, and so the newfags could FOMO in, and then, inevitably, to dump on them, while having their own short positions already open, of course.

These are the simplest but illustrative facts about the markets.

All the purist’s oversimplified theories are wrong

The meme that “all the available information is reflected in the prices” is just academic bullshit. Yes, it could be seen like that in a retrosect, while looking back and analyze the “now well-known” actual causes of the events, but at the right edge (right at the spot) nothing is known and “priced in”.

The spot prices are driven by the current sentiments, emerging chart patterns and currently employed algorithms, and then rationalized after the fact to be consistent with the popular abstract theories.

Institutions (market-makers) and organizations (exchanges) against retail

Unregulated, Heavily manipulated, exploitative and full of scams

FTX and SBF

A major trader (a fund) had an unlimited, real-time access to all the trader’s positions on an exchange, which is an ultimate advantage, so it issued trades to manipulate the market (at least within that exchange) to maximize the amount of liquidations (of leveraged positions) and trading fees.

Noting MIT-style uber-intelligent at all (SBF isn’t even that stereotypical MIT-nerd quant and programmer type).

The matkets are never the same

Nowadays all the “exchanges” sell “real-time feeds” to the “partners” so they can front-run and manipulate retail and each other. The techiques has been developed long ago with the rise of HFT of the stock market.

This means that most of the naive assumptions about the markets and naive academic models are inadequate and just wrong.

So, what is real?

This is a minus-sum game. Every single market participant, individual or institutional, is here to take your money from you by all the means available to them.

Deception, manipulation, FUD, fraud and scams are what constitute the markets. This is why the smartest people are trying to use only the “hard data”, ignoring everything social (which won’t work in principle).

If, however, one could properly capture and digitalize the toxic social aspects of the market (the sentiment assessment), which is exactly what all the exchanges do… now you see.

short selling

You must be able to do naked shot selling (sell short without actually owning an asset), which means riding a receding wave or a tide too.

Short selling, in general, provides liquidity and increase number of open positions. It is the most fundamental and the most required feature.

leveraged futures

Leverage is another crucial factor. It is better to bet other people’s money at the cost of potentially being liquidated (to spare them from any loses).

Under the hood there is a well-defined lending (borrowing) schemes, which rewards the lenders with a “funding rate” taken from you, among other fees.

Again, an exchange will liquidate you to ensure profits and “safety” of the “liquidity providers” and for maximizing its own profits.

If, however, you have a semi-automated system which sets and maintain stop-loses, your risk-management rules will save your ass most of the time. Sudden liquidations happen time and again, and there is nothing you can do.

fees and slippage

There is nothing on can do about fees (just try to find the minimal ones), but slippage is directly related to the liquidity (number of open positions, market makers and other factors that shape the order-book).

maximum liquidity

One should trade on the most liquid platform to avoid being hit by a slippage.

Binance was the most liquid platform, and everyone could actually see the difference of trading the most liquid versus illiquid markets.

working stop loses

Some exchanges (notoriously, FTX) do not actually execute your accepted (properly filled) stop-loss Orders to limit their potential loses when the market runs. They had some bullshit about “safety” in their TOS.

isolated margins

Having an “isolated margins” (per “pair”) is absolutely necessary, so a sudden liquidation of one of your positions would not wipe out all your open positions in a cascade.

I lost a whole bunch of printing shorts on major shitcoins by being liquidated by a sudden move on a crappy just-for-fun position. They make the advanced settings and related terminology convoluted and confusing on purpose.

the “Hedge mode”

You absolutely need to have positions in the opposite directions of the same ticker, ideally in different modes (say futures or options).

Binance

Actually, the software vendor who have developed the Binance platform deserves all the respect. They provide all the advanced features necessary for sophisticated semi-automated trading.

the “triggers”

The most important aspect of trading is to rely on “the triggers” - the special kind of Orders, which are automatically executed once some well-defined pre-condition has been meet.

Trailing stop-loses is the canoniacal example of such advanced features and of a “trigger”.