The largest trading edges are found where? It's all in the scale of time
|When do you have edge?
- When you take uncrowded trades (opposite to the crowd).
- That exploit price inefficiencies.
Okay, but aren't markets efficient? Yes and No. The majority determines fair price. But sometimes price trades at a discount or premium to its fair price due to events such as:
- A change in the fundamentals (e.g. interest rate increase)
- An absence of traders due to a regional holiday (e.g. Chinese New Year)
- Illiquidity due to traders waiting for the release of critical data (e.g. CPI)
When something is expensive or cheap relative to its fair value, it doesn't remain so long. Because traders quickly act on inefficiencies to make a profit. But here's the deal: the biggest inefficiencies occur in the shortest periods. Or another way to say this is your largest edge trades happen in the smallest time windows.
Look at the "Market Wizards" (Famously reported in books of the same name). The best traders are wrong half the time. So how are these traders so successful? It's in their nuance of time and monetary risk relative to relative to trades that are working. The following will break it down for you:
How much 'heat'?
Heat refers to your position trading at a worse price than your entry.
The diagram has two axis time and heat. The "taller" the box, the greater heat a trade takes. The "wider" the box, the longer the trade takes heat.
Do you like taking heat on trades? No, of course not. Well then: if unfair prices only last for a moment, trading unfair prices means you won't take heat for more than a moment. And if you enter at an unfair price, you know the market will act immediately, and the price won't continue getting less and less fair.
To illustrate using recent trades, the yellow boxes show you how much heat the trade took for how long the trade took heat.
Example 1
Example 2
Ask yourself: What would it do for you if you took as little heat for as little time when you trade?
- Would your losses no longer exceed your gains?
- Would you trade consistently?
- Would you feel confident?
- Would you feel a greater sense of well-being knowing you've moved on from trading that's painful?
When trading as a business (for cash flow), can you see how short-term price inefficiencies offer you a tremendous edge? The payoff versus the risk is outstanding because the risk is miniature.
Here's the good news: Half the time you're wrong. It could be your timing or a miscalculation. But the market is quick to act on genuine inefficiencies. So if that's not what's occurring, then you know you've made an error. And there's no need to experience more than a paper cut loss.
Okay, sounds great; what's the catch? There is no catch. Competency is transferrable. The right quality and quantity of guidance have you replicating this. And it takes far less time than spending years and years under your own steam.
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