Thursday, April 28, 2011

29. 5 alternative ethical attitudes for the same practice: 1) Trading, 2) Volatility Risk Management,3) Volatility Insurance, 4) Fluctuations Tax, 5) Renewable Forms of Capitalization or as if printing currency as the Central Banks do.


There are 3 contexts of laws required in trading . The appropriate LAWS OF THINKING for trading, the appropriate LAWS OF FEELINGS for trading , and the appropriate LAWS OF ACTIONS for trading. 

The Successful trading is based according to these three laws on
1) POWER OF COLLECTIVE  SCIENTIFIC THINKING: A GREAT AND SIMPLE SCIENTIFIC PERCEPTION OF THE FUNCTION OF THE ECONOMY THROUGH SOME GLOBAL STATISTICAL LAW. E.g. The law of Universal attraction in economy: that big money attracts more big money in the capital markets, and this by the balance of demand and supply makes securities indexes of the companies , that are indeed the big money, to have mainly stable ascending trend, whenever one can observe such one. Valid statistical deductions can be obtained with simple statistical hypotheses tests about the existence or not of a trend, with sample size half the period of a dominating cycle). (STABLE GREAT SCIENTIFIC THOUGHT-FORM  OR BELIEF FACTOR IN TRADING. )

2) POWER OF COLLECTIVE PSYCHOLOGY: A LINK WITH THE POSITIVE COLLECTIVE PSYCHOLOGY.(E.g. that the growth of security indexes also represent the optimism of the growth and success of real business of the involved companies. And we bet or trade only on the ascension of the index, whenever  an ascending trend is observable). (STABLE GREAT POSITIVE COLLECTIVE   EMOTIONAL OR PSYCHOLOGICAL FACTOR IN TRADING. )


3) POWER OF INDIVIDUALS SIMPLE , CONSISTENT AND EASY TO CONDUCT PRACTICE. (e.g. a trading system with about 80% success  rate that utilizes essentially only one indicator in 3 time frames, simple risk management rules of stop loss, take profit, trailing and escalation, and time spent not more than 20 minutes per day. In this way there are not many opportunities of human errors in the conduction of the trading practice. Failed trades are attributed to the randomness and are not to blame the trader). (STABLE SIMPLE AND EASY PRACTICAL  FACTOR IN TRADING)

We may make the metaphor that successful trading is the ability to have successful resonance with the  activities of top minority of those who determine the markets.

In trading there are 3 components in the feelings that must be dealt with. 1) The feeling of MONEY itself, 2) The feeling of the UTILITY of the money 3) The feeling of the RISK of the money each time. What is called usually money management in trading is essentially RISK MANAGEMENT. 



VALID STATISTICS AND PREDICTABILITY
We must make here some remarks about the robust application of statistical predictions in the capital markets.

1) The theory that the efficient markets and in particular that they follow a pure random walk is easy to refute with better statistical experiments and hypotheses tests. The random walk would fit to a market where the sizes of the economic organizations are uniformly random. But the reality is that they follow a Pareto or power distribution, therefore this is inherited in the distribution of the volumes of transactions and also in the emerging trends or drifts. 

2) The statistical models of time series  are more robust , when they apply to the entity MARKET as a whole and are better as  non-parametric , and not when they apply to single stocks and are linear or parametric. The reasons is that  a time series as a stochastic process , requires data of a sample of paths, and for a single stock is available only a single path. While for all the market the path of each stock or security is considered one path from the sample of all paths of all the stocks. 

3) The less ambitious the statistical application the more valid the result. E.g. applying a statistical hypothesis test, or analysis of variance   to test if there is an up or a down trend (drift) or none, is a more valid statistical deduction , than applying a linear model of a time series and requiring prediction of the next step price. 

4) Multivariate statistics, like factor analysis, discriminant analysis , logistic regression,  cluster analysis , goal programming etc are possible to utilize for a more detailed theory of predictability and of portfolio analysis, and sector analysis of the market and not only H. Markowitz theory. 

5) In applying of the above applications of statistics, the researcher must have at first a very good "feeling" of the data, and should verify rather with statistics the result rather than discover it. 

6) The "Pareto rule of complexity-results" also holds here. In other words with less than 20% of the complexity of the calculations is derived more than 80% of the deduction. The rest of the 20% requires more than 80% more complexity in the calculations.


Probably the best "why?", of manual trading is the joy and satisfaction in playing,  among the situations of higher or lower uncertainty of what will happen in the global economy and markets, so as to  plan and conduct a strategy that lets you know on occasions what will happen with acceptable low uncertainty.




According to your attitude and goals about trading there is different terminology and moral appreciation .

1) If trading is done for the sole purpose of making a profit, by buying and selling a currency it is simply called trading. It is the least ethically accepted in society, in general, Much hostility is relevant to the perception that you do not deliver a tangible product, to receive money but rather currencies and, in addition the trader may alternate his role as buyer or seller.
2) The second approach is that of an investor (e.g. of securities of an enterprise) that is practising trading to reduce the volatility of his equity because of the market's price fluctuations. This can be called volatility risk management.
3) The 3rd approach is that of an financial organization, e.g. of a bank, that is holding operational and investment position on currencies, and wants to insure its assets from the large volatility at the time of a crisis. Because in a good trading the larger the volatility the higher the profit, it’s a perfect vehicle of insurance capitalisation. It may be called volatility insurance. Here the financial organization is considering itself more as providing indirectly liquidity services in the market rather than a trade services.
4) the 4th approach is that where the overall landscape is the global market, and the trader has fixed goals of utilising his surplus capitalization for benevolent social purposes. This has the characteristic of higher social responsibility, and essentially serving mainly the society. In such an approach the trading can be called fluctuations tax. As in taxes, there is an inflow of funds, that are not instantly at the transaction related to a provided service, but the really significant service, is provided afterwards in society with the appropriate utilization of the accumulated funds. This latter task (re-distributing the funds) may be by far more difficult that the trading itself.
5) Taxes are a significant percentage of the profits of an enterprise or of Gross National Product. But when they are almost null percentages of global economic activities (like the traders profits in the Interbank Market) then we compare them to the renewable forms of energy (solar, wind, field etc) and we may call it Renewable Forms of Capitalization. In other words as accumulation of dividends from the interbank business.  Or we may compare them to issuing or printing money from a Central Bank. Except here the Central Bank is the trader himself. So trading is also a renewable form of capitalization, as what applies is a win-win situation rather than a win-lose situation as seemingly is in a transaction as far as money is concerned.



It must be noted nevertheless that in spite the difference in the attitudes, goals and impact in societies, the inflow trading practice might be identical.


From all the above 5 alternative concepts, I prefer that of tax. I explain why: The concept of  trading is rather distant to the commercial activities, and has lost its basic meaning. The concept of risk management and insurance is of validity only to institutional investors that have other forms of more traditional investments too. And the concept of "printing your own money" is for the moment the privilege of the central banks, maybe in the far future a more wide ability.

Finally the concept of renewable capitalization is excellent, but it does not involve the idea of using this capital for a common good. Therefore The concept of (fluctuations) taxation seems to me the best, as it shows that the result of the successful trading is only the start, and it ends with benevolent use of the surplus wealth for social good. Of course you may argue that only the public sector has the privilege for taxation. Well you may conceive the profit of private enterprises as a kind of taxation to the society, especially when the retained profits are utilized to grow the offer of good and services to the society. Thus even the private sector has the ability and right for "taxation" and so also the trader of forex and in general of the  capital markets. With this "taxation" by trading, the quality and safety of the economic systems is increasing.


Probably the best "why?", of manual trading is the joy and satisfaction in playing,  among the situations of higher or lower uncertainty of what will happen in the global economy and markets, so as to  plan and conduct a strategy that lets you know on occasions what will happen with acceptable low uncertainty.