Thursday, October 16, 2014

Trading on error - there is value

These days, there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates the illusion that there is an explanation for everything and that the primary task is simply to find that explanation.
- Paul Tudor Jones, July 2008
Good quote from a successful trader. Sometimes we just do not know what is causing a price move. Our fundamental models can only explain a small portion of the variation in price, so other means have to be used to profit from price changes. Sometimes market prices move before information is announced. Sometimes prices move because the reason is not available in public information. Sometimes is based on changes in expectations and sentiment which are hard to measure. Other times it is liquidity or flow dynamics. We just have to accept that uncertainty is real and a part of all markets and we have to have models that accept this inherent unknown about price dynamics. What we often call error from a regression is just the unknown and what cannot be explain about the complex dynamics of markets.

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