Saturday, March 21, 2009

Sharpen Your Knives

First I'd like to welcome you to the blog and tell you a little bit about why I've decided to do it. Last weekend I had a long conversation with my friend, who is a graduate of physics at WPI, about chaos and the stock market. My experience in trading came before I had gained enough exposure to the rigorous mathematical concepts necessary to fully flesh out the peculiarities I had noticed. To make a long story short, at the end of several hours, we had assembled all of the right pieces of the puzzle so that my friend, who has a degree in physics, is now thoroughly convinced that there is in fact a level of determinism to the stock market. If you've never tried to prove something to a physics graduate, take my word for it that you can't do with smoke and mirrors.

In the end we concluded that there are a lot of important concepts that can be easily drawn from the model we developed, convincing me that I should go ahead and develop a book to explain the whole model, its limits, and how to apply it to best capitalize on the determinism that does exist, which is brings me to explaining the title. Looking at the market like a cow we'd like to convert to steak, but because of the chaotic aspects that shroud a lot of its behavior in impenetrable mystery, there are only certain cuts of its meat that can be reliably carved. Conventional wisdom says that the easiest profit opportunities are the least rewarding. Take it with a grain of salt for now, but I aim to explain in due course that the most profitable and reliable trades are in fact the easiest to identify and capitalize on.

Still, the cow we're after is highly erratic whenever these opportunities don't exist, so prudence is still necessary to avoid the more mystical cuts of the cow that, while potentially quite rewarding, cannot be rigorously described like the deterministic parts, giving us no real indication as to our likelihood of profit. In short, there are carvable cuts and uncarvable cuts of this chaotic cow. Traders, being profit driven, will inevitably attempt to carve up every piece of the cow, which often leads them into the mystical regions of the meat where determinism breaks down into randomness. Through this blog, I aim to hone the concepts and their delivery down so that the eventual book can both stand up to academic scrutiny and be accessible enough so that even retail investors can utilize the principles to identify the meat that is there for the taking without getting confused by the noise of a hungry stock market.

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