Study Notes:
The Goal
A simple answer: we trade and invest to make money in the market.
But is there more?
Function of Financial Markets
One of the main functions of markets is price discovery.
- People (and institutions) participate in markets for many reasons:
- Producers and consumers sell and buy commodities
- Simply to buy and sell needed commodities
- To hedge
- To offset different risks
- For speculative reasons
Be Careful
Don’t assume everyone is seeing markets as you are!
What is an Edge?
Making money in a market requires having an edge.
An edge is a higher probability of one thing happening than another.
Expected Value
E() = win (prob) * win (avgsize) – loss (prob) * loss (avg size)
What does this tell us?
Consider impact of:
- Percentage of winning trades
- Average size of winning trades and losing trades
Where do we get the values to input?
- And how reliable are those values?
Where Do People Look for an Edge?
- Fundamental Analysis
- Technical Analysis
- Macro
- Relative Value Trading
- Specialized expertise in an area
- Anticipating news/changes
- Arbitrage
- Etc…
What Is Technical Analysis?
Looking for an edge based on patterns in prices
Traditional TA:
- Is primarily a visual discipline.
- Includes an element of subjectivity.
But there are other forms of TA to consider…
TA is a discipline that covers a wide range of techniques
- Classical charting
- Price action
- More quantitative-driven approaches
Summary
People participate in markets for many reasons.
The expected value of your system is the bottom line.
There are many approaches to finding an edge in the market.
Technical analysis covers a wide range of techniques, perspectives, and philosophies.
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