Thursday, May 26, 2005

On money mangement style

Over at Taylor Tree Michael Taylor just wrote a post relevant to anyone who is studying the market for ways to improve their trading. His argument is centered around the idea that bloggers who talk about trading techniques are speeding along the extinction of their trusted tricks of the trade to arbitragers. He also draws interesting parallels to the history of martial arts, where certain fighting styles had edges over each other at times. The pursuit of an edge eventually led Bruce Lee to completely abandon all the known styles in favor of "the style of no styles" (I saw the special on the history channel).

I think there is probably an edge for people who are studious and disciplined enough to take advantage of the weaknesses in various prevalent trading techniques. However, like in fighting, rookies will be killed. At the end of his write-up, Michael Taylor admits that his own path in trading is leading him down the road of "the style of no styles". My friend Jarod is also very much in this camp. He feels that he can outperform any system for opening and closing trades by reading the tape on his own. He might be right, I don't know.

I have a very different opinion on the subject of trading style. The way I see it, the most successful money managers are always increasing their influence on the market as a side-effect of their success, and the less effective are always decreasing their influence on the market. The consistently successful money managers will have more money to employ with their techniques. Knowledge of this emergent effect is one of the biggest edges I can think of. My style is just to be one step behind this group of influential money managers because I think this is their style as well. Since their style is to be just one step behind each other, this is really the only limit on their size and influence, but they coudn't be so big any other way, hence the limit. These money managers are constantly probing for opportunity, and when any of them get a bite, it is almost simultaneously exposed to the entire group, who will then take as much action as can be profitably taken.

Another way to look at what I'm trying to say is that if you are consistently trading in tandem with the market, then you are trading alongside the most successful money managers, and by extension, that makes you one too.

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