Sunday, 14 June 2015

The market loves to punish hubris

19:28 Posted by The Thalesians (@thalesians) No comments

History is one of those things which seems pervasive, an influence on the present and the future. Rather than being some sort of static list of events from the past, it is anything but static. History gets reinterpreted over time. Forgotten events become clearer in our collective memories as anniversaries loom and historians find new evidence from the past. Every city has its own history, its own story of how it came to be. Take York for example, which I just visited (see York Minster above), it is built upon the roads which one day Romans paved with their bare hands. All road were literally built to find Rome. Today, it stands at the intersection of many different ages.

In the same way, during our own careers, we each build our own history, our own experiences, which help us to map the present and the future. Whatever experiences we might have, they will always be unique, although they will bear some similarities to others. Our experience will also be heavily of influenced by the history of price action during our careers. Looking at a plot of EUR/USD and the various highs and lows, often brings back memories for me, of what type of strategies I was working on at the time.

In financial markets, the phrase of "this time is different" rarely rings true. Yes, markets change in some ways, but events seem to reoccur. People inevitability end up borrowing too much, fuelling a risk rally which inevitably ends. That process has forever been repeated and will never end! The relative inexperience of traders could be one cause. Equally, another cause could be that experienced traders might misinterpret the current market in terms of historic events which are subtly different.

As has often been remarked, many traders working today have never been in a market when the Fed has hiked (I'm sure I've seen a fantastic plot going round on Twitter illustrating this, but I've not been able to find it). How will they react when this happens? This is far from a criticism of younger traders. They bring a different perspective on the market. I personally know a number of excellent younger traders, even some who are barely into their twenties (@JeremyWS being one, who you should follow if you're on Twitter). At the same time, experience need not mean a trader is necessarily always better. It is the quality of experience which counts.

So which would be best for banks, younger traders or experienced traders? Neither one, nor the other, but a mix of both. Younger traders can be helped by experienced traders, to get to grips with what seem to be new situations in markets. Equally, experienced traders can see a different perspective, when working with people who are seeing market events in a new light.

Old and young can teach one another, when it comes to markets, whether it's in trading or in other areas, like quant strategies or risk management and so on. The biggest mistake happens when either of these groups think they know it all, when it comes to markets and they do not need the other group. No one knows it all and it is when they think do, that is when they can lose the most. The market loves to punish hubris.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Frankfurt and Prague - join our group for more details here (Thalesians calendar below)

17 Jun - London - Man-AHL & Saeed Amen - Using Python to build trading strategies
18 Jun - New York - Dr. Tim Leung - Exchange-Traded Funds and Related Trading Strategies - IAQF-Thalesians
26 Jun - Budapest - Bruce Packard & Panel - Emerging Alternative Finance
22 Jul - London - TBA


Post a Comment