

The Competitors’ Edge in a Negative Sum Game

Take a step back and look at the battlefield.  Is what you have any better than anyone else’s?  The answer is “probably not” (vs anyone who matters).  In fact, from the previous post, you should realize that what you have is close to the bottom of the barrel when compared to what your bigger competitors have.  The competitors have three main advantages:

  1. They have an informational advantage.  On pretty much any given topic related to trading, you are going to be one of the least informed people in the market.  Period.  You don’t have access to the thoughts of key people, you see no flow, you don’t get all the research, you don’t get first hand accounts of how things are in situ, etc.  The big boys have access to everything, and faster!  What you do get is probably written by some of the larger players (who have already digested it hours/days ago), or something that the larger players paid extra to get earlier (minutes/hours ago), or timely market information already analyzed by the larger players’ algos (seconds/minutes ago).  And there’s probably a lot of things you don’t get to see.
  2. They have a resource advantage.  On pretty much every resource available to traders, you basically have nothing the big boys don’t already have, and they have more.  How nice would it be to have staff to do a bunch of analysis?  Or the resources to build your own systems?  Or the ability to model and backtest whatever you wanted?
  3. They have a cost advantage.  The big guys pay a fraction of what you do… on everything.  Think Walmart.

Your Edge in a Negative Sum Game

What is your edge in the negative sum game?  [cue Jeopardy music]  Just to help you refine your list, here are some things that your edge is NOT:

  • Anything you read in a book, or anything published.  I’m pretty sure the big guys know how to read.  And if you need to rely on something in print, you’re probably 5 years behind.  I’m not saying books aren’t helpful for building a foundation – but you need to build on it and think outside the box.
  • Almost all technical signals.  Why?  How hard do you think it is to pick up a copy of Murphy (a technical analysis handbook) and backtest the snot out of every market?  In every time interval.  Maybe even do combinations.  Not very difficult.  And do you know what happens when something looks like it works, and has a following?  The bigger guys try to figure out if they can run through a  key level and get everyone to stop out.  Wouldn’t you do the same, in a negative sum game?  Think about the game!  Empirically, I have never seen technical analysis be anywhere close to consistently successful.  Even technical signals I find useful to look at in conjunction with other things, I do not think could be successful by itself.
  • Anything that can be duplicated by an algo.  From a game-theory perspective, an algo can do the trade much faster than you can.  They have a lower cost structure, and anything they find profitable, they will do.  Where would your “edge” be in this?  Anything and everything you can think of… because there are algos that just look for basically every relationship and pattern that has a reasonable track record.  There are algos that can beat humans at chess.  Is what you are trying to do so complicated it can’t be easily replicated and executed better?

I could go on, but I just wanted to give you a flavor for how you should be thinking as you are doing your self-inventory.  Everything you do and how approach trading should be within the context of the negative sum game.  You have a bunch of disadvantages and probably not a lot of advantages.  But that doesn’t mean you can’t win – you just need to maximize what you can control and minimize the things that are beyond your control.