Why did the fish not dry?

Lessons I learnt figuring out the why.

People familiar with the Telugu poem know what myriad factors led to the fish not getting dried (spoiler: an ant bit a poor child). With thousands of trading hours behind them, commodity traders always wonder why the prices moved in a particular direction.

There have been lot of trading models, factoring analyses that have been developed, AI models now being introduced for the holy grail of future price discovery. While information age has led to lower and thinner arbitrages, it also gave us overactive imagination and tools that support knee jerk reactions.

Commodity trade is already very gamified. Innovation rarely comes from inhouse strategies. Nash equilibrium is not possible. Agile impactful strategy calls are being taken much faster and at a scale we have not seen before. At this speed, reactions are often extreme and have severe consequences — only some are seen immediately.

With massive volumes being paper traded 100x over physical volumes, commodity exchanges are seen more as a mechanisms to cash out a view or keep running algorithms that keep scraping the bottom of the barrel. So as a trader, how does one understand the why and how of the market?

1. Focus on supply and demand: together — While fundamentals make more sense and easier to conclude, a combination lead to more questions and lets you conclude less.
2. Ghosts of Tradings Past — The more we have data, we can observe that prices and markets are cyclical and/or repetitive in nature. Look for past similar trading activities and your actions will have more weight behind them. This ability to remember the past is the experience everyone seeks.
3. Read — If there is a singular advice on the why, that should be to read. Read anything and everything with an open mind. Distinguish tangential and mainstream views, weigh them accordingly but do not discount a view because it does not conform.
4. The last 5% — Don’t strive for getting all pieces of information to get the view. Neither there one complete picture nor a perfect view. Diminishing returns apply here as well. Leave the last bit if the effort required is disproportionate to the return on that piece of info. Sometimes over analysis is paralysis of action.

As a trader, some of the tools that help me daily to keep track of why are:

1. Notes — Copious notes can help if you are the type who can review them once in a while. Writing down views and prioritising factors can help evaluate the view again and again while it comes true.
2. Focus on execution — A view or a trade is only half as good as its execution. Dotting the i’s is very important, double check on stop losses, expiry dates and some micro detail record review your trading is a healthy habit every Thursday evening.
3. Price Discovery is the King — In non-terminal traded products, it is always good to follow market leaders who are usually the market makers. If margins look great, they are too good. Develop relationships quickly with competition to help discover price.
4. Twitter is not your friend — Social media is a distraction. Markets certainly move on social media cues. But they rarely create trends. They move offline trends to social media. If you have set your charts on ticks, it is a sure shot route to increase your systolic. Identify kep pattern/trend and stick to it till it makes sense.

“The road forks and wanders wherever you are. It is not a single way, but many: a web of choices” — Colin Thubron, Shadow of the Silk Road

Right choices happen only if you keep asking — Why?

Photo by Dewang Gupta on Unsplash