That's the problem I have been talking about though its often the same whatever size the player as they also want to maximise their profit and bets are fairly scalable.

I dont really think its about irrationality. In any active market its impossible to avoid prices departing from value. There is a transactional force pushing prices apart that is fighting the same value force pulling them together.

If for example apple and rimm were genuinely and permanently of fixed relative value them the maelstrom of trading activity would still push prices about and change relative prices even though relative value is fixed. The wind dies down and gravity dominates.

sure, there will never be perfect efficiency until market can effectively execute a binary impulse to new information

since I don't pair trade, I always wondered if a new mean recalculation was more efficient (day to day for a daytrader for ex.) with a time based exit - reduced profit, but reduced variance

It gets into a semantic argument but this is the efficident market in action as opposed to anything behavioral. Selling/buying stuff imparts a downwards/upwards force on prices, once the sale/purchase has gone through the force goes.

Fast MAs are very useful though there's no reason not to use multiple MAs and have a new mean recalculation every day as well if you like.

Daytrading is just a mistake, there is clearly no good trading reason to restrict yourself to day trading anymore than there is a good poker reason to only play live poker.

Hmmm. You are getting close. What we really want to know is what what forces causes them to diverge.

What causes comex gold and spot gold to be attracted is pretty easy.

What could cause them to spiral away from each other is the more difficult bit.

I dont know anything much about gold but like everything else they will diverge from their no-arbitrage values due to liquidity*.

Its a classic arbitrage so you had better be damned expert and be able to do it faster/cheaper than everybody else. If others weren't doing it much it would be very easy money.

*I used words a bit differently to their usual incorrect usage so just to clarify: I mean that the buy/sell pressure for anything imparts an upwards/downwards pressure on the price. The less liquid the more the price will shift. If there was 100% liquidity then even if everyone who cared about gold wanted spot and none of them wanted futures the prices would remain at the no-arbitrage values which is just a function of finance costs, ownership costs and any benefits of ownership

It is yellow and shiney and dense and back in the 80's it was popular amongst young men to wear large amounts of it around the neck.

Not sure what else you would think would be important to know.

I prefer to break things down because I find the lingo a bit silly. Liquidity is just a measure of how easy it is to buy and sell. In other words, if you want to buy, how easy it is to find a seller, and if you want to sell, how easy it is to find a buyer.

Obviously, if you want to deal in illiquid assets, you can take advantage of (or be taken advantage of) people who are in a hurry to sell or buy. Prices can go beyond nice clean curves and get boulder-ish granular if you want to deal in very illiquid things like early Rembrandt paintings. Of course, you have to have sufficient free capital to survive long and steep divergences, and you really have to hope that you aren't an early pioneer into a semi-permanent trend.

Mistaking a new trend for a divergence is a bad thing.

However, in general, if lots of people want/need to sell and fewer want to buy, prices drop. If lots of people want to buy and fewer want/need to sell, then prices rise. LDO, right?

You are (when things work perfectly, and you are on the right side of things), just waiting for a rush to the exit as your opportunity to enter. The only problem with this is if you actually are running into a building that is in the process of burning to the ground.

In other words, liquidity is not a thing that describes a market. It is a thing that both describes a market and what side of a trade you are on. Real estate was very liquid in certain markets in the US if you were a buyer recently. It was very illiquid if you were a seller. (I was on both sides of this over the last 4 years. Got a house at a very silly price and sold it at a very silly price.)

Or you can be patient and take advantage of opportunities as they arise. There are arbitrage-ish opportunities that arise often enough. Of course, if your well-thought out causation thing goes awry due to new variables suddenly becoming causal, you get to live in a cardboard box.

Everything is 100% liquid if you are willing to take any price to buy and sell. The problem is that you need to be willing/able to wait to buy and sell at opportune moments.

Things get easily out of line in a 100% liquid market if you consider future discounted value and/or whether price changes are part of a new trend or just an ephemeral thingamagig.

Today, water-well drilling companies in the US are making money hand over fist. Long-term trend or ephemeral divergence is the question. (this can be applied to any current opportunity).

I meant I knew nothing about trading gold, how to minimise transaction costs etc.

This is one definition but its the wrong one to use here.

The other definition of liquidity (which although I made it up coincides with an established one) is (from investopedia):

add that to the no-arbitrage valuation and you have a nice clean easy and complete framework for understanding divergences and convergences of price and value.

Its simple, clean and rather sweet.


No you dont - well you do because you're martingailing but us kellying people are fine. There is always the risk of a political catastrophe but that's true for everything.

You will never know when the causation failed, if you did your math right the probability of a failure will be far lower then the probability of divergence simply giving you a better price...

obviously the if part is the most crucial, leverage and the inability to asses your competitiveness in an objective way will get you a margin call fairly quickly....

Causation never fails without you knowing. Think about the gold example. You're buying spot gold now and selling spot gold in the future with costs along the way. For the causation to fail it requires a change in the law or a revolution or draconian government interference, you cant possibly not know about it unless you're trying very hard not to know, but it doesn't matter as there's nothing you can do about it. There's no claim that sort of risk is being eliminated but it cant be eliminated whatever you do.

What I think you mean is the real concern that the existence of causation doesn't mean divergence cannot grow more than we would like. This is a simple fact, liquidity is a real factor so large transaction pressure can overwhelm the arbitrage values and there is never a point at which the divergence cannot grow significantly more. This is why people say trite stuff about irrational prices but its not about rationality its about liquidity causing prices to depart from values.

The really hard part in practice is closing really good bets, it hurts and the temptation to double down is immense (and very dangerous because most of the time it works).

hardly true, if the first and double down bet are viewed as an independent bets they shouldn't be a problem. Analyze their EV independent and see if they work

more often the double down continues indefinitely until a forced liquidation occurs, or the whole size of the bets vs the bankroll are way beyond optimum...

They're far better than independent. The double down has a much higher ev than the previous bets. The dark side calls.

I think you have in mind that you can double down a few times before you have to kelly, that's fine but eventually you have to kelly and that's when you're bankroll has been significantly reduced.

If I bet on a divergnce of 100 (ignore the units) I'm not going to close my bets because it goes to 200 or 300, I expect that to happen frequently and have sized my original bet to allow for it. I may even add bets*. This is all well within expectations and bankroll. However get to a rare 500 and I need to be concerned even though 500 is massively profitable. I'll be crying in my cardboard box when the doubledown on 500 would have made me a fortune if it hadn't gone to 750 along the way and busted me.

* an interesting issue is whether to wait for a high ev opportunity and stick all the bets on in one go or stick some bets on a lower +ev opportunity and be able to add bets later.

everything you said was my point, wp sir

This requires you to measure the historical volatility of the spread and probably adapt the strategy in intervals or on major fund information.... (something like measure 1SD, 2SD hit counts and see the frequency of your possible entries)

Oh, you'd want to just muck about in futures contracts if you wanted to trade it while minimizing costs.

Owning it is a bit easier than pork bellies, but still has some carrying costs.

Right now, etfs seem pretty popular and are pretty reasonably priced and seem to track spot gold pretty darn well.

And the reason why the prices move upon you making a sizeable buy or sell is the lack of people willing to be on the other side of the trade.

Nothing more than that.

The "no-arbitrage valuation" is, I'm completely sure, the tricky part. That leads many to want to not bother with it and do a long-short strategy. I presume that is what leds you to it.

Except for the messy part of determining what the value is.

Nah, I am quite sure that I have less risk than nearly any other approach. This would not be true if I had a short time horizon or if I were not in the process of accumulating (i.e. adding significantly to my bankroll by other sources). My approach is to basically to keep x number of dollars in the game, with x changing exponentially as time passes. When I am above expectations, I bank it to put in the game to replace losses when I run below expectation.

The Kelly approach gets far too risky if you run good for a bit.

***

No reason for a +ev poker player to not go to the main event even if he is down to his last $10,005 (or $10,000 if he gets free breakfast at his hotel) if he has a big paycheck on its way. The idea that you are playing as if you don't know that you will have an increased bankroll in the near future seems silly to me. I am too lazy to go back and find the post you made that made me say this. It was something about your current bankroll and you selling a property.

Wat?!?

I assume you mean something along the lines of "oh, crap! I'm poor now <insert sad face here>" sort of "knowing." These things rarely announce themselves in time for you long-short people to get out of the way.

Causal relationships break down with regularity.

That is, in a nutshell, the problem with any long-short strategy. You are hoping that the apparent arbitrage opportunity isn't just other (smarter) people hedging their bets against a breakdown of the current relationships between things.

Tanstaafl.

The eaisest way is to run simulations of different betting strategies and find the sweet spot.Turns out the sweet spot is pretty large.

Its an interesting problem because it looks like the sweet spot varies with time and situation.