Expected Value (EV) & Bayesian Analysis In Trading

Expected Value (EV) & Bayesian Analysis In Trading

An alternative title for a trader is “professional uncertainty manager.”

Trading is a business of possibilities, not certainties. Despite our best efforts to predict financial markets, we’ll inevitably be wrong time and time again. Many of our bets will lose purely due to bad luck or unforeseen circumstances. It doesn’t matter if they were objectively good bets.

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Guerilla Speculation

Guerilla Speculation

The following is an excerpt from our weekly Market Brief. If you’re interested in learning more about Market Briefs and the Macro Ops Hub, click here.

 

“If you wait by the river long enough, the bodies of your enemies will float by.”

“He will win who knows when to fight and when not to fight.”

“If a battle cannot be won do not fight it.” ~ Sun Tzu

The Art of War by Sun Tzu dates from 6th century B.C and is the oldest known manual on military strategy.

I first read it in my early teens and was captivated by the weight of the wisdom packed into such a short book. It’s not just a treatise on war but a deeper philosophical look at the underpinnings of how nature works, and more importantly, how we should operate within it.

It’s one of the few books that I revisit every few years and still manage to come away with new insights each time.

Sun Tzu birthed the concept of guerilla warfare. Guerilla warfare enables a small force to defeat a significantly larger and more well equipped one. It accomplishes this through extreme patience, knowledge of thyself and thy enemy, and a superior strategy that shapes the rules of the game to one’s advantage.

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Plan Your Trades And Trade Your Plan

Plan Your Trades And Trade Your Plan

The following is part 3 of our 3-part psychology series. You can read part 1 here and part 2 here.

Clearly our biology and the biases that come with it are hazardous to our financial health.

But how exactly do we solve this problem?

The trick is to plan your trades and trade your plan.

The first step to successful trading is creating a solid strategy that accounts for every possible market scenario. High volatility, low volatility, black swans, it doesn’t matter. Everything should be planned for. Nothing should be a surprise.

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Goals, Expectations, & Inner Alignment In Trading

Goals Expectations Inner Alignment In Trading

Why Do You Trade?

It’s important to understand the true drivers behind why you trade the markets. The answer is different for everyone. We all have different circumstances, wants, wishes, and desires.

Find yours.

Below are common reasons people get involved:

  • Entertainment
  • Gambling
  • Staying Informed About Economic and Political Developments
  • Intellectual Pursuit/Curiosity
  • Side Income
  • Primary Income
  • Advising Friends and Family
  • Professionally Managing A Fund

Your reasons influence how you attack markets. For example, people managing their own wealth might prioritize account growth over shallow drawdowns. Whereas the individual looking to run money professionally will need to focus on risk control. And then you’ll have the gamblers who will undboudtedely gravitate towards penny stocks and out-of-the-money options.

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Avoiding Cognitive Biases In Trading

Avoiding Cognitive Biases In Trading

The following is part 2 of our 3-part psychology series. To read part 1, click here.

On top of rampant emotions and a dire need to “fit in”, our biological evolution also had another side-effect. It made us lazy.

Back in the day we were faced with an endless cycle of feast and famine. We’d have short periods of feeding followed by long periods of minimal sustenance living. So naturally we evolved to conserve our energy as much as possible.

If given two options we’re conditioned to choose the one that involves the least amount of effort. This applies not only to physical activities, but to mental functions as well. After all, the brain does account for up to 20% of the body’s total energy usage (more than any other organ). We’ll always go for the quick and easy solution over the tough one that requires more thinking. This is true even if the easy option ends up being wrong…  

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Achieve Market Mastery Through Fallibilism And Perspectivism

Achieve Market Mastery Through Fallibilism And Perspectivism

Macro Ops is dedicated to one thing: mastering the markets.

But the path towards mastery isn’t linear. It’s a messy one that requires constant iteration, observation, backtracking, and improvement. Ray Dalio has a good visual for it:

Achieve Market Mastery Through Fallibilism And Perspectivism

The loops in the path are the necessary pain points that come with the journey. In order to push through them, you must continually self-examine to see where you can improve. An unwillingness to do so will stunt your growth and lead to plateaus.

Our team at Macro Ops employs two key mental models to keep ourselves growing rapidly: fallibilism and perspectivism.

Fallibilism states that humans can’t fully prove their beliefs and are therefore prone to mistakes. If you’re fallible then you know you’ll be wrong a lot. The philosophy requires that you’re open to new evidence that may alter or contradict your previously held beliefs. At no point should you be 100% confident in an absolute “truth.”

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Why Our Evolutionary Biology Works Against Us In Markets

Why Our Evolutionary Biology Works Against Us In Markets

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“I think investment psychology is by far the most important element, followed by risk control, with the least important consideration being the question of where you buy and sell.”

~Tom Basso, Market Wizard

A strong psychological foundation is the key to successful investing. The human mind is a powerful, complex tool that quickly turns into a double-edged sword to those untrained in its control.

It’s like driving a Formula-1 race car. A skilled driver can push his racer to its limits, extracting every last bit of performance. A novice driver on the other hand is better off in a mini-van. Put him behind the wheel of an F-1 and he’ll end up crashing straight into a wall.

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The Fallacy of Market Prediction

The Fallacy of Market Prediction

Spoon boy: Do not try and bend the spoon. That’s impossible. Instead… only try to realize the truth.

Neo: What truth?

Spoon boy: There is no spoon.

Neo: There is no spoon?

Spoon boy: Then you’ll see, that it is not the spoon that bends, it is only yourself.

~ The Matrix

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Intuition In Trading And Investing: Can You Trust It?

Intuition In Trading And Investing

Do you ever get that feeling that a certain trade will be huge? That you should size up on it and go for the jugular? You can’t exactly describe why this trade is the “one”, but you can definitely feel it.

This feeling is what we call intuition.

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