Quant analytics: Time is a third party measure that we invented, watchout for when it is lying to you!
We invented time by using a stable system (clock) to measure the relationships between two or more less stable systems for synchronisation purpose.
Charts use time to scale price:
Time is used to measure the relationship between price at deferent points in time in order to sense probability, yet this simplification of price movement into linear intervals (minute, hour, day) ignores price action that happens in between.
Hidden probabilities, the solution:
Because time is linear in that sense, there may be hidden volatility within smaller time intervals; therefore it is a good idea to measure the uniformity of relationships between the inner intervals to discover if time missed something.
Indicators use time:
Indicators are derivative of time, therefore prone to the same problem of linearity of time intervals, may lead to a butterfly effect between what you see and what you don’t.
The problem is a bit more general imho. Regardless of the parameter we use to quantize price data we are to use it equi-valued, that is equi-time (standard bars), equidistant (point-and-figure, renko, range bars, etc.), or equivolume. The only sequence which is free from such a fixation is raw time and sales. However before diving into metaphysical matters like hidden volatility it’s useful in my opinion to check if there are enough people who really look into the same magic mirror, and even better if those people really affected price. I think this connects it with your post on psychology.
from your experience in trading, do you think we can quantify human behavior into trading systems?
I had this experience in market makers setup that offer over the counter forex and cfds to individuals that want to trade on margins up to 200:1, they take almost the entire side of clients trades, so they only profit when clients lose and lose when clients profit, the amazing thing is they have been in the business for years profiting without making major trading decisions of their own, they only hedge against large client trades which is as rare as 3 to 5 times a year, other times they take entire trading of their clients.
If you look at client trades from the market maker point of view, the patterns of client trade do form are very similar to trend following systems, like pyramiding positions to average winners (clients average losers), cutting losses short (clients take profits short), market maker equity volatility is directly correlated to the number of clients being traded (diversification in both time scale and assets).
The whole thing happens naturally without any intervention, no traders involved, trading the same price like everyone else in the world/
I have spoken to many of them and they know the concept, but they have no technical analysis experience, they don’t realise that what they have is in fact a trading system built only on psychology patterns of their inexperienced clients! I find that amazing.
Ever had experienced or learned detail about this type of market maker?
I really like your point of view. In fact, 90% of time any market
maker profits from spread, however 10% of the time it profits from the huge
disproportion of clients positions, and this brings the best profits to the
MM/broker. Have you ever seen the Oanda’s open positions historical charts?
It’s not in the most easily readable form, but if you consider it
thoroughly, I think you will come to an evident conclusion where retail
traders enter and where they exit. So, it’s not that difficult to exploit
Client net positions and price move is almost opposite, especially on accumulation:
Those forex market makers do not care about the spread or swaps, almost all the time they take the other side more than 90% of client trades.
They even lowered the spreads to a fixed 2 pips and canceled swaps on Islamic accounts (religion as marketing), they even give back to their brokers around 1 pip rebate per lot traded through clients they bring, also they give back to broker around 10% liquidation fee in case client liquidate their account when they lose their money.
So if you think of it, when the broker gets them a client, they are actually losing 1 to 3 pips on each lot the client trades! They know this very well, their main source of income is liquidation, and if you are a professional trader by any reason they will hedge against all your positions or not accept your application in the first place, sometimes this happens but a lot have learned that reputation matters so they choose to hedge.
They know this works from experience, the owners have no mathematical background or quantiative analysis, they just roughly estimate risk and hedge against client extra large positions only.
Am I mistaking cause and effect? if clients are a sample of the world all over, do you think their positions are an indicator of price direction against them, or they react opposite to price direction because of the losing trader psychology like averaging their losers and cutting profits short?
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