Thursday, 22 February 2018

Behavioural gamma and fractal attractions - I blame the Russians.

I am fast wondering if someone has perfected the ultimate 'hunt and destroy’ algo trading weapon. The development of programs that can sniff out other’s stop levels and micturate all over them before running off maniacally laughing with their positions has been around for years, but the precision with which market moves have sliced and diced the flesh from many a portfolio this month has me wondering if the Russians have developed the killer algo of all killers.

I don’t really wonder if it’s the Russians, I more expect someone else to wonder if it's the Russians because if anything that involves a computer and cannot be easily explained, or rather can be easily explained by ‘yeah ok, I was dumb not to see that coming’ but we don’t want to say that - it's blamed on the Russians. I use it all the time now. My wife popped out of the room during ‘Call the Midwife’ on Sunday night and when she returned the TV was tuned to ‘Dragons Den’. I told her it must have been the Russians as I didn't know where the remote was. She couldn’t find it either to turn the channel back, thus proving my point. We also found that the Russians had turned the thermostat down in our house from 24C to 20C, which I can cope with but the Russians, as my dear wife pointed out, have also cut the power to all the wires and chargers by my bed, emptied the fridge of high-fat foods and hidden my favourite clothes. Damn cunning, these Ruskies.

Markets have turned ‘difficult trading’ into a form of waterboarding. I don’t need to talk you through the details of various asset swings over the last few weeks but if you have a position and your stop loss is in the range zero to infinity,  there is a good chance you have been stopped out. Unless you are an investor, in which case you have waved your hand in a marginally dismissive way whilst tilting your head slightly back to peer down your nose and languidly intone, “No my dear chap, I'm an investor, not a speculator, my investments are to provide me with long-term returns”. Which actually translates to - “ I haven’t got a clue what is going on with the markets as I had a chap come round to the house who sold me this marvellous long-term investment fund, no I don't know what the fees are actually, that I don’t have to look at as he assures me that it will pay me handsomely when I retire. Mr Woodford’s something or other”.

I was taken out today. Out of gold longs, stock shorts, and lunch. Only one was pleasurable.  Mourning the loss of my gold position, I bought a new one as I applied my trading maxim - 'the best time to enter a position is just after you have been stopped out of it’. Sad, but unfortunately true recently.

If you had your screens off for the last 36hrs you could well ask "what Fed minutes?"

This sort of thing hurts when you are suffering from  'fractal attraction’ and  'behavioural gamma'. When you don’t know what is going on you have some choices.

1- Carry on, pretending you do know what is going on - you may get lucky
2- Walk away - Clever, clever, clever.
3- Get angry that you don't know what is going on and make it a mission to know what is going on in an ever more dangerous search down the old mine of broken dreams - Danger danger danger Will Robinson.

Or perhaps Lassie - “What's that Lassie? You saw Polemic trying to dissect every price move down to a 3minute chart looking for patterns in order to look for breakouts that would define the next big move? And you think he needs rescuing? Nah.. he’ll already be dead"

The 'fractal attraction' is the drilling in on tighter and tighter time frame charts in the search for a pattern. Each zoom showing pretty much the same pattern, or lack of one, as the previous. Fractal-like. The 'behavioural gamma' is the chasing of any move that looks as though it is setting the next direction, as you really don't want to miss out, only for you to be caught out on a reversal and have to chase it the other way. Behavioural gamma increases dramatically when there isn’t a fitting narrative. It isn’t options gamma, as it is linked to behaviour not a mathemantically derived hedging demand, but I suppose you could imply a link between behavioural gamma and options gamma stemming from the same source of uncertainty.

One could even go so far as to cogitate if one drives the other or that the total sum of behavioural and options gamma is constant. But my mind is wandering too far.

I guess the point of this ramble is to say. Don't get sucked in. When you don't know what’s going on, walk away, as curiosity may well be terminal feline flu.

Just blame the Russians.


Anonymous said...

No retest of the low, or your risk adj. part 2, before a new All Time High or reaching the previous high. The double dip expectation has become a consensus, and people are positioning for that, how can it happen?

Polemic said...

indeed. I've just widened my band of 'wait and see'. But in the longer term, I stick to my risk repricing theory making the cost of carry higher.

Anonymous said...

Maybe the reason you keep getting stopped out is that you have no trading strategy/edge, and are just semi-randomly entering trades based on your misguided view of market action. Algos love people like you.

Polemic said...

maybe.. maybe lots of things.

Al said...

It's not worth lachrymating over spilt lactate.

Polemic said...

As a friend of mine said to his wife after she'd chucked a bottle of milk at him.

BlackRaven said...

just the high vol innit

Al said...

I note the Russkis are getting the blame for the 'Beast from the East'. They never get the credit for warm Summers though.