Quant analytics: Impossible probabilities when Human becomes illogical

(Last Updated On: October 6, 2011)

Quant analytics: Impossible probabilities when Human becomes illogical

When human behaviour becomes illogical and there is no useful probability from price action and all what you have learned about the odds go out of the window, leaving you with risk management to limit the severity of such situations.

The number one generator of probabilities in price action is human, human is illogical sometimes and most importantly in chaotic times, while mathematics is all about logic, ruining my dreams of higher return with lower risk.

But fear no more, if you quantify human psychology you can turn your fears into profits.

Human lack of logic can also be quantified, but only from humans:

Observing a sample of 1000+ traders that mimic the traders that you want to take money from, there are trading patterns that translate directly into price action, this behaviour can be quantified from their trading patterns, then factored into your opportunity/risk trading algo in order to be on the opposite side of their trades, same thing can be done by observing basic and poorly constructed trend following systems being sold out there in order to be on the other side of people using such systems.

In trading, human psychology is number one cause for price movement, yet no one talks about quantifying it into trading.

The Answer:

Market Maker / Trading Syste


have you ever seen any research about market as a multi-node system with positive feedback which is carried over by information (and its dependency on information cleanliness)?


—-I just tried looking up multi-node systems but not much out there, can you explain briefly?



It’s not a term, rather my description. I mean a network similar to neural
one, where each node is able to affect others with objective and subjective
information. Objective information is price, volume, open interest, etc.,
and subjective — news, rumours, guesses, etc. Some of the nodes have more
impact onto objective parameters — like MM or bug guys like mutual funds
for example, while others has zero impact or may impact it only en mass —
like herds of traders at forex bucketshops. Also a node with zero affect on
price can have huge impact on subjective parameters — like GS’s statements
about future prices for oil and gold. A system with positive feedback is
described here — http://en.wikipedia.org/wiki/Positive_feedback
<http://en.wikipedia.org/wiki/Positive_feedback> . So, if you look at this
system you will immediately see why “flash crashes” occur for example



NOTE I now post my TRADING ALERTS into my personal FACEBOOK ACCOUNT and TWITTER. Don't worry as I don't post stupid cat videos or what I eat!

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