Tuesday, January 26, 2010

Why Intraday Trading is So Difficult

Imagine the market affected by two relatively independent vectors. One vector describes directionality: the "trendiness" of the market. The other vector describes volatility: the degree to which markets vary around a central price.

The first vector describes the degree to which market participants are reassessing value in the auction marketplace.

The second vector is closely connected to volume and reflects who is currently active in the marketplace.

Both vectors are distributed in a non-stationary way through the trading day. That is, measures of trendiness and volatility exhibit different means and standard deviations through the day.

Early identification of when the vectors shift their means and standard deviations is important in recognizing the beginning and ending of trading ranges and market trends.

Many trading problems occur because traders trade the vectors as if they are stationary: they automatically assume that past levels of direction and volatility will be accurate estimates of future direction and volatility.

In other words, markets change their behavior faster than people can change their minds.

And that is why intraday trading is so difficult.

.

6 comments:

D TradeIdeas said...

Almost like a haiku in its brevity and essence.

I'd add that markets change their behavior faster than people's egos allow them to change their minds.

Ego often acts as an unnecessary filter - '3rd wheel' on a date.

Markus said...

Sorry, but I don't get it. Do you think it is easier to assess vola and direction on a longer time frame? And if, yes, why what's the difference?

Cheers,
Markus

rdv said...

"they automatically assume that past levels of direction and volatility will be accurate estimates of future direction and volatility."

That's, as you know better than I ever would or could, a psychological bias. What do you do about that; how could one, who isn't aware of this, avoid this?

Thanks again for another superb - saweeeet - post. :-) Glad to note you're having fun.

Roberto

Radek Dobias, H.B.Sc., M.W.S., B.Ed. said...

The geek in me loves your analogy!

fchris said...

"they automatically assume that past levels of direction and volatility will be accurate estimates of future direction and volatility."

I don't think too many people think this. But regardless, we ALL have to make estimates of future direction and volatility if we are to be succesful... its not just 'they'...

Soberba Insônia said...

Couldn´t agree more. So here a I leave an interesting quote from a trader.

http://img199.imageshack.us/img199/4960/mesv.jpg

... and a mantra that helped me a lot in my early days, when I used to overanalyze everything and didn´t realize the simplicity of the combat:

do the work ► think ► then don´t think