Advantage
A long time ago, I was a fierce adept of technical analysis. I built levels, drew trend lines and shouted something unintelligible about the double bottom.
After I getting acquainted with a huge amount of financial literature, I changed my mind. I changed the technical analysis to... no, not fundamental. I changed it to my own vision of what was happening.
Value investing, momentum, quality, real estate, passive investments and other methods proven over the years are really effective, but not everyone has enough time to feel this effectiveness. Most people want to get a tangible increase in capital during the first year. Take a look at the S&P500 chart. July 1998 and October 2011. Two dates, same price. You bought an asset and after 13 years the price has not changed. And taking into account inflation, your money has generally depreciated.
For people who consider investments not as a matter of life, but as a good bonus to retirement, catch the greatest financial advice - invest your funds in an index fund and buy up on drawdowns. You'll overtake 90% of hedge funds in 20-30 years (after 13, as we found out, it does not always work).
Next for those who tirelessly fight with market demons:
My attitude to financial markets sounds like this - something in between a casino and sports betting.
Anyone who says something like "the market is regulated, money is being steadily earned on it, what an ass casino, Apple shares will grow, that's what I, my neighbor and Bloomberg analysts said" will make me smile. Markets are an inefficient thing. If they took into account all the indicators and put them in the price, then it would be impossible to earn money on them. No one knows what will happen to Apple shares tomorrow - in a month - in a year. Maybe Tim Cook will die, or the company will unexpectedly release an incredible electric car for its innovations. We can only speculate.
There are one-time large winnings in casinos, and this happens all the time in the markets. However, at a distance of several years, when making active speculations, you are unlikely to overtake the market, and are more likely to simply lose money.
The casino almost always has an advantage over you. And this advantage lies in mathematics. The more bets you make, the more you feel the influence of mathematics on your deposit.
Bet on black with a payout 1:1 (50%), but in fact you get a 48.65% chance of winning. With the markets in the same way, only to chances unknown to you (no one knows where the price will go), do not forget to add a couple of dollars of commission for the broker.
But not everything is so bad. The most attentive noticed the word "almost" a few sentences earlier. And indeed, in some moments we may have a slight advantage over the casino. The clearest example is blackjack.
In the last century, there were whole syndicates that traveled around the world playing blackjack. From Vegas to Sydney, from London to Cape Town, these people were looking for an opportunity to show their mathematical abilities in the best casinos in the world. They were hunting for the advantages and inefficiencies that gambling houses offered them. The players counted the cards by making small bets, and when, according to their calculations, the right card had to come— they increased the bet volume tenfold and took a solid win.
Why was it impossible to sit and take out large sums from one casino in a conditional Atlantic City? The casino does not like when it loses its advantage over the players, so it either understates the maximum bet, or simply throws out a profitable player from the institution.
By the way, the situation with the markets is diametrically opposite. Wall Street loves it when someone finds inefficiency and makes a fortune out of it. Everyone starts writing about "the greatest trader of our generation." The trader, in turn, writes a book about being the greatest trader of our generation, simultaneously talking about his method and inefficiency ceases to exist. Other players of the exchange casino will no longer be able to make money on it.
Another comparison is sports betting.
What's going on here? Bookmakers are very similar to their colleagues in the gambling business. They also have an advantage over the players. Only they do it not by buying matches and rigging the results (although this happens), but with the help of the same mathematics.
Two of the greatest tennis players of our time are playing in the finals of a major tournament: Nadal and Federer. Both are in perfect shape, go undefeated, and the result of their personal confrontation is 10-10. The probability of winning one of them is 50%. In the coefficients, this should be expressed as 2. You bet $100 — you get $100. Everything is fair.
But in fact, we always meet something like this:
The coefficient for Nadal's victory is 1.90
The coefficient for Federer's victory is 1.90
With a bet of $100, we get only $90 profit, instead of the mathematically correct $100. This is where the bookmaker has us. This $10 of the profit we have not received becomes his earnings.
If 10 players bet a hundred dollars on Nadal's victory, and the other 10 on Federer, then if the first one wins, the bookmaker will pay the second $900 net profit, and pocket the remaining hundred for himself. I will not paint completely, the main thing is that you understand the essence.
The situation with bookmakers is almost the same as with financial markets and casinos. When making a large number of bets, your account will gradually decrease, because mathematically the bookmaker has an advantage over you. You will lose more than you earn.
And again we come across the word "almost". Of course, there are no blackjack players here, but there is another interesting opportunity.
Value Betting - almost like Value Investing. The essence is extremely simple: the bookmaker cannot correctly assess the chances of all sporting events, so sometimes you can turn the mathematical advantage in your favor.
Let's assume that we are betting on tennis again, but not on a major tournament, but on some championship of the your local region. Two tennis players are playing (let's call them Smith and Brown). They also play on equal terms and have not lost a single match. Everyone's chances of winning remain unchanged - 50%. However, the bookmaker, for some reason, decided that the probability of Smith's victory is higher than Brown's, so he provided the following coefficients to the players:
The coefficient for Smith's victory is 1.70 (we risk 100, we get 70 net profit)
Brown's winning coefficient is 2.20 (we risk 100, we get 120 net profit)
Are you savvy? With a probability of 50%, we will get a $20 advantage over the bookmaker if we bet on Brown. And the more such bets we make, the greater our earnings will be at a distance.
The bookmaker is not far from the casino and does not like when players have a mathematical advantage over him. Therefore, like a casino, it cuts the maximum bets. If earlier you could bet $1000, now the size of your maximum bet is only $10 and it is not very profitable for you to continue betting, earning $2.
How does all this relate to the markets?
In simple words - don't sit down to play roulette, go show your skill at Blackjack. Don't bet on big events where you don't have an advantage, but focus on undervalued events.
S&P500 stocks have been studied by everyone inside and out. Analysts make their forecasts daily, raising or lowering the rating of companies. Large investment funds spend billions of dollars on software, offices, salaries and cocaine, just to have an advantage over the rest. And then you show up and say, "Tesla is overrated! On the chart, the candle hit the line that I drew, simultaneously forming a bearish doji model! The price doesn't lie!". The price doesn't give a shit at all.
But what about Mid-Cap and Small-Cap companies? Do you think the grail has been found? No, there is exactly the same meat grinder, but in smaller volumes. Here you have an advantage, because Clearfield shares (
CLFD) are watched less closely than Amazon shares (
AMZN). It looks like a value investment, but do not rush to draw conclusions ahead of time.
It is not enough just to evaluate the company's P/E, its management and prospects. You need a reason to enter the deal. You should always know a little more than the others. Steve Eisman knew a little more, Greg Lippman knew a little more, Michael Bury knew a little more. The biggest earnings in the stock market occurred when someone knew a little more than others. And who could turn this "a little more" into an advantage over the entire market. It is important not to forget that everyone receives information, but only a few can interpret it correctly.
What can be an advantage?
The first thing that comes to mind is insider information. If you ask me who succeeds most in the markets, then I will answer that it is insiders and your Telegram guru. Poor traders and long-term investors are left with only pitiful crumbs from the bread that these two shared.
But only a narrow group of people have access to insider information, so we immediately dismiss this option. Although here's an option with guruing looks pretty good. Our advantage is that we do not trade on the market, but sell the dream of trading on the market. Huge profits with small risks.
Before I start listing the real benefits, I want you to remember one thing:
We don't fight with investment funds. No matter how crazy dolphin you are— you can't beat the sharks. We need to have an advantage over traders like ourselves. This is our battlefield. If a person does not use the information obtained from the option dark pools, does not spend N hours analyzing this or that company, does not work on his trade and has not particularly succeeded in correctly understanding what is really happening — we will take his money away. Or rather, what's left of investment funds and robots that have already fucked him.
Our first real advantage is mathematics.
Surprise, motherfucker!
Take options, for example. All brokers have implemented the expected return function. Before each transaction, the broker will write to you what is the probability that your forecast will be correct and how much you can lose in this case.
So, if you can earn $150 with a probability of 80%, while risking $300 - this is a great deal. Remember Value Betting.
Mathematics is also applicable to linear trading. The most well—known rule is to observe the risk/reward ratio.
Here we are already ahead of traders who do not control the risks.
The second real advantage is private data.
A banal subscription to ChadderFlow or KingFisher will give you more information than all the technical analysis tools. Here you need to learn how to correctly interpret the received data and benefit from them. As the holder of this subscription, I can confidently say that there is really a lot of use in this data.
You can say that several thousand other people besides me have this information. I agree. But what about the millions who trade on the magic numbers of an Italian who lived in the 13th century? We also have an advantage here.
The third real advantage is your brain.
Wow! How's that? Know what you are trading.
Many people overlook important details of the assets they encounter on a daily basis. If you are trading crypto, you should understand what value LINK represents for the future. If you hold Verizon shares, it would be great to know when they pay dividends and what their profitability is. If you are a fan of the five hundredth leverage and trade Forex, you should know how the value of the euro will be affected by an increase or decrease in the ECB rate.
Even if you are trading on technical analysis and are now grumbling with saliva from this article — the more you know, the better for you. You can say as much as you like that everything is already included in the price and there is no need to read the news.
The fourth real advantage is an understanding of psychology.
And I'm not talking about your psychology. Of course, it's great if you don't fall into the death throes after fixing a loss, but trade on as if nothing had happened. But an important factor will be the ability to understand the psychology of the crowd.
Judge for yourself. Who makes billions on the market? Banks, funds, other reptilians. Who do you think they make their billions on? On retail traders and investors. For those who knew a little less than they did.
Funds will not take money from each other. The guys from Goldman Sachs understand that the dudes from JP Morgan, just like themselves, spend billions of dollars to find an advantage. Although even here there are cases when one bank warmed up another with some kind of credit default swaps. And I think I named one of these banks above, oops.
Okay, moving on, how do banks show huge profits? Do you think that they are sitting and waiting for the price to approach the level to enter the reversal? No, they're waiting for you to do it. The most proven way to earn money for them is to take money from the weak. From you. Eh, okay, from us.
Read the "Game Theory" and you will understand why trading on those models that have been in the public domain for years, on the shelves of bookstores, on websites, forums and folds is a so-so idea.
Therefore, when I go to TradingView and watch how local analysts analyze charts using hand-drawn lines, look for divergences and patterns, I am both happy and sad. I think you'll understand why.
The fifth real advantage
Here I will collect the remaining factors that will somehow affect your success. At the head of everything is a simple phrase: to be in the right place at the right time. I really regret that I could not make money on the dotcom bubble, because I was 4 years old. When the real estate market collapsed, I turned 10. But in 2020, I was already in place. My best year.
Do not forget about having the right environment. If you show your friends every day with a smart look what a beautiful line you have drawn through 3 vertices, and then discuss a brilliant reversal deal when the price approaches this line - well, heh.
Your environment should push you forward. Like a poker player looking for tables with weak players, you should look for opportunities where many miss them. When you work in a team, you understand what is happening in the market and how you can benefit from it — your time will come and the results will justify themselves.
Be able to admit mistakes. When I first started trading, for a long time I refused to believe that the intersection of the 20th and 5th moving averages would not bring me money. I was wrong. I didn't believe that Tesla would grow to 800 bucks per share. I was wrong. Every mistake made me realize that the market doesn't care what you believe or what you think.
Last but not least, remember that this is a game. When money becomes a goal, the goal loses its meaning. You will have an advantage over a trader who has accumulated money in debt in order to rise through trading.
Result
The exchange is a casino that historically fucks most of the people who come to it. You can follow what everyone knows, or look for advantages in places that others simply do not reach.
The one who has the advantage will not share it. Learn to show profitability more than the market — provide yourself for the rest of your life. And a little more knowledge than others will help you in this. A small advantage. Understanding one tiny inefficiency. Very small.
Thank you for your time! I would like to apologize for possible mistakes. English is not my native language. I'm learning to speak it the same way I'm learning to trade every day. Cheers.
After I getting acquainted with a huge amount of financial literature, I changed my mind. I changed the technical analysis to... no, not fundamental. I changed it to my own vision of what was happening.
Value investing, momentum, quality, real estate, passive investments and other methods proven over the years are really effective, but not everyone has enough time to feel this effectiveness. Most people want to get a tangible increase in capital during the first year. Take a look at the S&P500 chart. July 1998 and October 2011. Two dates, same price. You bought an asset and after 13 years the price has not changed. And taking into account inflation, your money has generally depreciated.
For people who consider investments not as a matter of life, but as a good bonus to retirement, catch the greatest financial advice - invest your funds in an index fund and buy up on drawdowns. You'll overtake 90% of hedge funds in 20-30 years (after 13, as we found out, it does not always work).
Next for those who tirelessly fight with market demons:
My attitude to financial markets sounds like this - something in between a casino and sports betting.
Anyone who says something like "the market is regulated, money is being steadily earned on it, what an ass casino, Apple shares will grow, that's what I, my neighbor and Bloomberg analysts said" will make me smile. Markets are an inefficient thing. If they took into account all the indicators and put them in the price, then it would be impossible to earn money on them. No one knows what will happen to Apple shares tomorrow - in a month - in a year. Maybe Tim Cook will die, or the company will unexpectedly release an incredible electric car for its innovations. We can only speculate.
There are one-time large winnings in casinos, and this happens all the time in the markets. However, at a distance of several years, when making active speculations, you are unlikely to overtake the market, and are more likely to simply lose money.
The casino almost always has an advantage over you. And this advantage lies in mathematics. The more bets you make, the more you feel the influence of mathematics on your deposit.
Bet on black with a payout 1:1 (50%), but in fact you get a 48.65% chance of winning. With the markets in the same way, only to chances unknown to you (no one knows where the price will go), do not forget to add a couple of dollars of commission for the broker.
But not everything is so bad. The most attentive noticed the word "almost" a few sentences earlier. And indeed, in some moments we may have a slight advantage over the casino. The clearest example is blackjack.
In the last century, there were whole syndicates that traveled around the world playing blackjack. From Vegas to Sydney, from London to Cape Town, these people were looking for an opportunity to show their mathematical abilities in the best casinos in the world. They were hunting for the advantages and inefficiencies that gambling houses offered them. The players counted the cards by making small bets, and when, according to their calculations, the right card had to come— they increased the bet volume tenfold and took a solid win.
Why was it impossible to sit and take out large sums from one casino in a conditional Atlantic City? The casino does not like when it loses its advantage over the players, so it either understates the maximum bet, or simply throws out a profitable player from the institution.
By the way, the situation with the markets is diametrically opposite. Wall Street loves it when someone finds inefficiency and makes a fortune out of it. Everyone starts writing about "the greatest trader of our generation." The trader, in turn, writes a book about being the greatest trader of our generation, simultaneously talking about his method and inefficiency ceases to exist. Other players of the exchange casino will no longer be able to make money on it.
Another comparison is sports betting.
What's going on here? Bookmakers are very similar to their colleagues in the gambling business. They also have an advantage over the players. Only they do it not by buying matches and rigging the results (although this happens), but with the help of the same mathematics.
Two of the greatest tennis players of our time are playing in the finals of a major tournament: Nadal and Federer. Both are in perfect shape, go undefeated, and the result of their personal confrontation is 10-10. The probability of winning one of them is 50%. In the coefficients, this should be expressed as 2. You bet $100 — you get $100. Everything is fair.
But in fact, we always meet something like this:
The coefficient for Nadal's victory is 1.90
The coefficient for Federer's victory is 1.90
With a bet of $100, we get only $90 profit, instead of the mathematically correct $100. This is where the bookmaker has us. This $10 of the profit we have not received becomes his earnings.
If 10 players bet a hundred dollars on Nadal's victory, and the other 10 on Federer, then if the first one wins, the bookmaker will pay the second $900 net profit, and pocket the remaining hundred for himself. I will not paint completely, the main thing is that you understand the essence.
The situation with bookmakers is almost the same as with financial markets and casinos. When making a large number of bets, your account will gradually decrease, because mathematically the bookmaker has an advantage over you. You will lose more than you earn.
And again we come across the word "almost". Of course, there are no blackjack players here, but there is another interesting opportunity.
Value Betting - almost like Value Investing. The essence is extremely simple: the bookmaker cannot correctly assess the chances of all sporting events, so sometimes you can turn the mathematical advantage in your favor.
Let's assume that we are betting on tennis again, but not on a major tournament, but on some championship of the your local region. Two tennis players are playing (let's call them Smith and Brown). They also play on equal terms and have not lost a single match. Everyone's chances of winning remain unchanged - 50%. However, the bookmaker, for some reason, decided that the probability of Smith's victory is higher than Brown's, so he provided the following coefficients to the players:
The coefficient for Smith's victory is 1.70 (we risk 100, we get 70 net profit)
Brown's winning coefficient is 2.20 (we risk 100, we get 120 net profit)
Are you savvy? With a probability of 50%, we will get a $20 advantage over the bookmaker if we bet on Brown. And the more such bets we make, the greater our earnings will be at a distance.
The bookmaker is not far from the casino and does not like when players have a mathematical advantage over him. Therefore, like a casino, it cuts the maximum bets. If earlier you could bet $1000, now the size of your maximum bet is only $10 and it is not very profitable for you to continue betting, earning $2.
How does all this relate to the markets?
In simple words - don't sit down to play roulette, go show your skill at Blackjack. Don't bet on big events where you don't have an advantage, but focus on undervalued events.
S&P500 stocks have been studied by everyone inside and out. Analysts make their forecasts daily, raising or lowering the rating of companies. Large investment funds spend billions of dollars on software, offices, salaries and cocaine, just to have an advantage over the rest. And then you show up and say, "Tesla is overrated! On the chart, the candle hit the line that I drew, simultaneously forming a bearish doji model! The price doesn't lie!". The price doesn't give a shit at all.
But what about Mid-Cap and Small-Cap companies? Do you think the grail has been found? No, there is exactly the same meat grinder, but in smaller volumes. Here you have an advantage, because Clearfield shares (
CLFD) are watched less closely than Amazon shares (AMZN). It looks like a value investment, but do not rush to draw conclusions ahead of time.It is not enough just to evaluate the company's P/E, its management and prospects. You need a reason to enter the deal. You should always know a little more than the others. Steve Eisman knew a little more, Greg Lippman knew a little more, Michael Bury knew a little more. The biggest earnings in the stock market occurred when someone knew a little more than others. And who could turn this "a little more" into an advantage over the entire market. It is important not to forget that everyone receives information, but only a few can interpret it correctly.
What can be an advantage?
The first thing that comes to mind is insider information. If you ask me who succeeds most in the markets, then I will answer that it is insiders and your Telegram guru. Poor traders and long-term investors are left with only pitiful crumbs from the bread that these two shared.
But only a narrow group of people have access to insider information, so we immediately dismiss this option. Although here's an option with guruing looks pretty good. Our advantage is that we do not trade on the market, but sell the dream of trading on the market. Huge profits with small risks.
Before I start listing the real benefits, I want you to remember one thing:
We don't fight with investment funds. No matter how crazy dolphin you are— you can't beat the sharks. We need to have an advantage over traders like ourselves. This is our battlefield. If a person does not use the information obtained from the option dark pools, does not spend N hours analyzing this or that company, does not work on his trade and has not particularly succeeded in correctly understanding what is really happening — we will take his money away. Or rather, what's left of investment funds and robots that have already fucked him.
Our first real advantage is mathematics.
Surprise, motherfucker!
Take options, for example. All brokers have implemented the expected return function. Before each transaction, the broker will write to you what is the probability that your forecast will be correct and how much you can lose in this case.
So, if you can earn $150 with a probability of 80%, while risking $300 - this is a great deal. Remember Value Betting.
Mathematics is also applicable to linear trading. The most well—known rule is to observe the risk/reward ratio.
Here we are already ahead of traders who do not control the risks.
The second real advantage is private data.
A banal subscription to ChadderFlow or KingFisher will give you more information than all the technical analysis tools. Here you need to learn how to correctly interpret the received data and benefit from them. As the holder of this subscription, I can confidently say that there is really a lot of use in this data.
You can say that several thousand other people besides me have this information. I agree. But what about the millions who trade on the magic numbers of an Italian who lived in the 13th century? We also have an advantage here.
The third real advantage is your brain.
Wow! How's that? Know what you are trading.
Many people overlook important details of the assets they encounter on a daily basis. If you are trading crypto, you should understand what value LINK represents for the future. If you hold Verizon shares, it would be great to know when they pay dividends and what their profitability is. If you are a fan of the five hundredth leverage and trade Forex, you should know how the value of the euro will be affected by an increase or decrease in the ECB rate.
Even if you are trading on technical analysis and are now grumbling with saliva from this article — the more you know, the better for you. You can say as much as you like that everything is already included in the price and there is no need to read the news.
The fourth real advantage is an understanding of psychology.
And I'm not talking about your psychology. Of course, it's great if you don't fall into the death throes after fixing a loss, but trade on as if nothing had happened. But an important factor will be the ability to understand the psychology of the crowd.
Judge for yourself. Who makes billions on the market? Banks, funds, other reptilians. Who do you think they make their billions on? On retail traders and investors. For those who knew a little less than they did.
Funds will not take money from each other. The guys from Goldman Sachs understand that the dudes from JP Morgan, just like themselves, spend billions of dollars to find an advantage. Although even here there are cases when one bank warmed up another with some kind of credit default swaps. And I think I named one of these banks above, oops.
Okay, moving on, how do banks show huge profits? Do you think that they are sitting and waiting for the price to approach the level to enter the reversal? No, they're waiting for you to do it. The most proven way to earn money for them is to take money from the weak. From you. Eh, okay, from us.
Read the "Game Theory" and you will understand why trading on those models that have been in the public domain for years, on the shelves of bookstores, on websites, forums and folds is a so-so idea.
Therefore, when I go to TradingView and watch how local analysts analyze charts using hand-drawn lines, look for divergences and patterns, I am both happy and sad. I think you'll understand why.
The fifth real advantage
Here I will collect the remaining factors that will somehow affect your success. At the head of everything is a simple phrase: to be in the right place at the right time. I really regret that I could not make money on the dotcom bubble, because I was 4 years old. When the real estate market collapsed, I turned 10. But in 2020, I was already in place. My best year.
Do not forget about having the right environment. If you show your friends every day with a smart look what a beautiful line you have drawn through 3 vertices, and then discuss a brilliant reversal deal when the price approaches this line - well, heh.
Your environment should push you forward. Like a poker player looking for tables with weak players, you should look for opportunities where many miss them. When you work in a team, you understand what is happening in the market and how you can benefit from it — your time will come and the results will justify themselves.
Be able to admit mistakes. When I first started trading, for a long time I refused to believe that the intersection of the 20th and 5th moving averages would not bring me money. I was wrong. I didn't believe that Tesla would grow to 800 bucks per share. I was wrong. Every mistake made me realize that the market doesn't care what you believe or what you think.
Last but not least, remember that this is a game. When money becomes a goal, the goal loses its meaning. You will have an advantage over a trader who has accumulated money in debt in order to rise through trading.
Result
The exchange is a casino that historically fucks most of the people who come to it. You can follow what everyone knows, or look for advantages in places that others simply do not reach.
The one who has the advantage will not share it. Learn to show profitability more than the market — provide yourself for the rest of your life. And a little more knowledge than others will help you in this. A small advantage. Understanding one tiny inefficiency. Very small.
Thank you for your time! I would like to apologize for possible mistakes. English is not my native language. I'm learning to speak it the same way I'm learning to trade every day. Cheers.
면책사항
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