Do you see a incomprehensible, complex market when you sit down to trade? Or is it a simple song… music to your ears?
Many traders have strong views about whether the markets are incredibly complex or just a simple extension of the market participants (and this is usually reflected in how traders try to extract profits from the market).
If the market is too complex, how can we ever compete with the string theory physicists working for the banks and hedge funds?
And if the market is simple, what can we do to make sure our system doesn’t become too complex?
The answers are waiting for you in this podcast (ok, that was a joke… maybe not the definitive answers, but this episode will definitely get your brain working on the problem).
Also, you’ll hear what Darren believes is “pure madness” in the market and why Walter worries about traders who want to “be right.”
Download (Duration: 14:14 / 16.2 MB)
In this episode:
00:55 – The market is insanely complex
01:27 – Simplicity is the answer
02:50 – The market is made up of people
06:03 – A matter of perspective
07:07 – Perspective is important
08:10 – Understand everything
09:21 – Trying to predict
11:22 – The big short
12:29 – Perpetual Bull or Bear
The market is a collection of humans, with ordinary emotions. [Click To Tweet].
You can learn to read the markets and trade profitably. [Click To Tweet].
A very complex strategy won’t necessarily give you an edge. [Click To Tweet].
Walter: To me, I don’t see why people feel like the market necessarily has to be complex. Now I think it’s not because, it isn’t complex and there are a lot of decisions that go into moving the price.
Announcer: Two traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast.
Walter: Welcome back to the Two Traders Podcast. I’ve got Darren on the line. How are you today Darren?
Darren: I’m really good Walter.
Walter: So we’re going to talk about this idea of the markets and how complex they are. I’d love to get your thoughts on these. We often hear things like “Oh, the market is so complex, people can’t understand the markets, they move randomly, can’t make money in the market, it’s zero in some game”. All these things like that, what are some of your thoughts on that?
Darren: I think it’s insanely complex that’s probably why trading is so difficult. We’re trying a certain control of the market and we try and find patterns to trade profitably. When they don’t work then we add complexity to them. Because the market is so complex, we think if we have a very complex strategy that’s somehow is going to give us an edge. Whereas, simplicity is the answer. I’d like to think of it as random and that, causes a lot of grief for people. I don’t see simple patterns that we like to trade as ever having a sustained edge. I think the root profit is not going to come from those who are purely on their own.
Walter: Right. Let me ask you this, what do you think about people then in terms of behaviour? I’ll give you an example, I like to go to this restaurant because my kid, he likes to have a mexican food. So, we go into this restaurant and walking to this restaurant you have to see a clown doing a stripshow on top of one of the tables. That’s just not what people do in a restaurant. We don’t have dancing clowns taking off their clothes on top of the table. They are sort of like in accepted range of behaviours and I haven’t seen much. I mean, I suppose, one day, someone could come in with a knife and try to get over the restaurant and another time maybe someone come in and dump off a tub full of jello. I mean crazy things can happen but they don’t. You know what I mean? They don’t happen.
I know you’re probably know where I’m getting at, but the idea here is, the market is made up of people. Why is it that it’s so complex that we can’t see something going on in the markets? Because after all, the people are the ones who are participating in the market. Now maybe a computer program that the people created, it’s still is by extension, the people. So are people just as random and behave in the same random patterns that you see in the markets? That’s my question.
Darren: That was a particularly great evening for me, I can see where you’re driving now. Yes, obviously, markets are people but there’s so many people in the market with different objectives and goals. From their entries and exits to the market, who do you take notice of? Do you take notice of the retail traders? Or do you take notice of the institutional trader that’s buying currency for Mercedes or where they want to buy an X amount of dollars and X average price over X period of time. All of those different people in the market are going to make it appear more random.
I am not explaining myself particularly well here, but you’re right that the market behaves in a human way. I think if you zoom in and look at a chart of a price chart, it can look very complex and if you zoom right out you can see it’s essentially just going up and down. Can you learn to read that and trade that profitably? Yeah, I’m sure you can.
Walter: Okay. But here is another thing, what you’ve basically boiled it down, you said “look I’m going to make money when the market goes, I don’t care, I just want to go”. Right?
Walter: True, right?
Darren: Yes, That’s what I do.
Walter: You’re right. There’s a lot of things going on in the market. There’s information that’s constantly being released and that’s affecting the trader’s decisions who participate. The institutions and the big volume, the little volume, all these stuff is happening in the algos or firing off left, right and center and that’s true. But in essence, what you’ve done is, you’ve basically said “look, the market either goes or you see they’re excited and it goes or it’s quiet and sort of rest. When it’s resting, I’m going to lose money and when it goes, I’m going to make money”. In theory, I should make more money on balance because when it goes, I’ll capture a bigger chunk of that move then the losses that I take when it doesn’t really go anywhere are just kinda sits there right? is that fair to say?
Darren: That’s exactly I spot on.
Walter: Yeah. This to me, I don’t see why people feel like the market necessarily has to be complex. Now it’s not because it isn’t complex and there are a lot of decisions that go into moving the price. I guess it’s just a matter of perspective because you’ve taken this perspective which is, you’ve really boiled it down to either the market is going or the market is resting. I want to get in when it’s going and I never know when it’s gonna be going. It could be just resting now and in that case I have a loser. It could also be going now and it looks like it’s going and it does go and then now I’ve got a big fat winner.
So I guess my question would be, is it that people are too hung up on the details of the market in trying to predict that or see that or put that in a box that makes it difficult? And why they throw their hands up and say “this is so much complex for me”. Whereas, if you take the thirty-five thousand feet view and take that step back and look at it like you have, you’re basically saying “look, it’s either gonna go or not gonna go and I wanna be in when it goes”.
Darren: You’re right. I’ll start of in saying the market is insanely complex and at the same time I treat it with a view that being very simple. You’re right, perspective is important but I think people do come with that complex idea that they can somehow, from the informations on the screen realistically and accurately predict what is going to happen next. They might be right but they might be wrong by one pip. Maybe, prices been falling, falling hard and then you get a pin bar or a significant level of support and resistance. They’re gonna go long at the break of the pin bar and they get taken into the trade and price just tips down, takes at less stop and goes. That’s what I mean by insanely complex. Even if you’re kind of lead and feel in the market and you’ve got pretty good assumption about what’s going to happen next, mind you, a little bit of complexity in there, can mess it all up for you.
Walter: Sure. Yeah, absolutely. It’s interesting because when you think about it, as we first come into it as a trader, we feel like we have to understand everything. Once we crack the code so to speak then we’re all off to the races and the profits will start piling up. It’s anything like, the longer you stay with something and learn about something, you talk to the professors of chemistry and they’ll tell you all these things that we don’t know about chemistry or astronomy, whatever the discipline, it’s the same thing. When trading, you’re walking into thinking “well, I just need to figure this out” and then in the end you say “well, maybe I don’t have to figure it out, maybe i just need to come up with some sort of, really simple blunt instrument that will work and maybe it’s not that critical”.
Back in the days when I started trying to build a neural-network which is basically like almost artificial intelligence that’s supposed to spit out what the moving average of the dollar-yen is going to be three days from now. That was this huge thing that I had to learn. All this stuff – how do you build it and what kind of data do you feed it. We had to feed data into it everyday and it was a real nightmare. I look back then and I think it wasn’t really wasted time.
Trying to understand what was going on, trying to predict what was going on because in the end, I understand that you don’t have to do that. You don’t have to predict what the market is going to do to make money. I know you would probably agree on our desire to really understand and predicting control are kinda gets in the way doesn’t it?
Darren: Yeah, definitely. I’m always amazed that the people want to be able to explain and give reasons for every single move in the market. It’s going to go here, it’s going to close that gap and it’s going to return to here and buying is up to here. It’s just like, how can you even think that’s a viable way of making money. I don’t know in saying, anybody can do that but to me, to my mind, that’s madness.
Walter: Yeah, absolutely I can see why. I mean in a way you can argue, Darren that those people that you just described they’re more interested in being right than in making money in a way.
Darren: Yeah. Probably they’re not aware of that as well. They’re not aware that’s what they’re doing. They probably come from a background where that’s what they’re expected to do maybe in their job or or from their parents. I’m guessing that’s the kind of environment that they have been exposed to for a long time so that is their approach. I think also, a lot of people get drawn into that because if it’s two people and one of them is basically gambling and is telling you “Okay, you need to take your risks, you need to control your risk and when you make this profit, you need to take if off the table.” Then the next person says, “I can read the market, I know exactly what is going to do”. Which person are you going to listen to?
Walter: Yeah, exactly.
Darren: You’re not going to listen to me are you?
Walter: You’re the one that you know we need to feel like you’re in control. I have to ask you – have you seen the movie The Big Short?
Darren: No, it’s on my list. I was going to watch it this evening actually but I fell asleep.
Walter: Alright. I watched it last night. I think a lot of it was bubbling up for me. Like this idea, you’ve heard the phrase something like, “the market to remain wrong longer than you can remain solvent” or something like that. I can’t remember exactly what it is but it reminds me of that.
Maybe when you see the movie you’ll see, like this idea that you can be spot on about where the market is going to go but you can lose a lot of money between the time that you actually put money… put the risk capital up and say “ok I think this is where the market is gonna go” and then when it actually go, it’s there. You know what I mean?
That gap between when you place your bet and put your risk capital up for the market to take or decide when to do it. Then when the market actually goes to where you think it’s going to go, that gap there can just drain you and bleed you. Even though you’re in theory, you’re right. It’s just how long will it take to get there, that sort of thing. If you’re a perpetual bull or perpetual bear, the good news is you’re going to be right eventually. The question is, are you going to have enough money when you are eventually right. You know what I mean?
Darren: Yeah. I went down a few avenues of just being a bull or a bear as well and that can be made to work. For me again, you have that second guessing “should I be able to trade now, actually shouldn’t be a bad thing”. Before you even know it, you’re running around in your head not knowing what you’re a bull or a bear.
Eventually I got to the point where I just don’t have any bias at all, just kept up and start trading. If price runs my way, excellent, I’ve got some profit. Now, I need to make some decision on what to do with that profit. That is eventually once worked for me because I can deal with the complexity of it. I thought, I could for a long time and I had some success with it but I find the tough times very hard to deal with because I wasn’t questioning the market then I was questioning my decisions about the entries I took. Making it less complex how I trade has worked out well for me.
Walter: Yup, right. Makes perfect sense. Well Darren, thanks a lot for another great session, really appreciate it and we’ll see you next time.
Darren: Ok Walter. See you soon.