SK Biswal Chief Engineer at ONGC. Interested in Stock option trading ,Technical Analysis of Stocks & Commodities

Winning Zero Sum Game

15 min read

“Fish see the bait, but not the hook; men see the profit, but not the peril.“ -Chinese proverb

Trades as wager at Poker Table

Both poker and trading are amazingly similar in that you are either playing in to someone’s edge or vice versa.Indices of market or price action are secondary to  alignment of motives and behavior of other traders Vis a Vis your trade .   Looking the market as poker game then the players are as following. Both poker and most financial markets are zero sum games where money flows from those who do not know how the game works to those who do.Break out traders ,momentum traders, swing traders , position traders ,novice traders are links of food chain in market not necessarily in that order and they feed on each other not on Market Indices which are just outcome of that process.You either feed on others or others feed on you.That is harsh reality of market for you or market psychology.

“Poker is a game of people – it’s not the hand I hold; it’s the people I play with.” -Amarillo Slim.

The average poker player has a higher net profit with pocket jacks than  pocket aces or kings. Why would this be true? For the same reason unmarked mountain roads in Europe often have fewer driver fatalities than similar US roads with lots of signage and guard rails. The extra risk of pocket jacks makes people “wake up.”Tracking and out thinking others can only tilt the balance in your favor.

Thinking Out BOX(Trading as Playing singles matches)

 

Stock market  is not like any other business we are accustomed  to  where the returns are governed by the supply and demand of   secular consumers in the market and you have to simply trade an the basis of anticipation of future demand and supply.In  fact it is much more than that and  this assumption is absolutely invalid for day trading or swing trading or speculative  trades in  general.Clearly a speculative position  is linked to an opposite trading position and it is just a call Vs a call. So it is a transaction or deal between two parties primarily and  Market and its indices are mere references for the deal and market’s  supposed presence is only illusion and  designed to give a false sense of fairness .Market is virtual world with minimal impact very often.Well it is like buying  insurance  from insurance company or buying an apartment from  a builder where  so called  insurance or property market which may exist, fail to make any impact on the outcome of personal deal between  builder and client.Market is sometimes myth and  mind conditioning or feel of traders.Never forget your trade is  ultimately nothing but a transaction with an anonymous someone in reality.

The final outcome of this trades is not exactly dependent on supply and demand forces of market  as you would like to believe but result of potential face off between you  and your  redoubtable opponent like wealthy and influential group of traders . Yes you betting against a face less casino called Smart money who owns the table you are playing  in.It does easily turns into just a cat-mouse game called Bull –Bear Gaming when you  falsely wait for fairness and efficiency of market to deliver.Like  any other transaction,  Trading  does boil down to mind game called  ZERO SUM GAME.Mind game is always turns into completely psychological assault to shape your sweet  behavior like cat does to mouse.Proper treatment in the form of punishments like volatility or large drawdowns or more subtle Pump and dump techniques  and putting  heavy pressure on your margins can easily tame you quickly  as you run out of money and you don’t fight long enough. Zero sum games  played against flawed human competitors favoring courage, discipline, creativity, deep analytical ability, and risk control which your formidable predator possess.

marketaction-bullbearpoker

Market is virtual reality and can be treated as so .Imagine when you are searching a hotel room  in a city or buying property or taking rented car ,do you ever think of their respective market?Its one to one transaction and zero or minus sum game. Stock market in fact is some times  exactly so for most of us.My point is to understand trading as one to one conflict sometimes against a mean, powerful bully not as random and apolitical occupation like fishing in sea. 

CAT & MOUSE GAME AND  THEN CRUSHING

Prediction and Certainty in the Race ?

Traders waste a lot of time on stupid or useless predictions. What do you think stock ABC is going to do? Where do you think the S&P NIFTY  is going to go? What’s going to happen after RBI GUV makes his speech ? Will stocks be higher or lower by Diwali ? Most of this is a straight-up WASTE OF TIME. If a line of inquiry has no direct or indirect bearing on your P&L (profit and loss)  .To reiterate: Traders waste a lot of time, energy and effort on stuff that has NO BEARING on their P&L at the end of the day / month / quarter.

Traders are ridiculously enamored with the quest for certainty — the impossible safety blanket of “knowing” what is going to happen. Are you certain the scenario you just laid out will come to pass? How do you KNOW that it’s going to be correct? Can you kindly confirm 100% confidence, so I can completely absolve myself of personal responsibility for the risk I am taking? In a race between you and your opponent only certainty is one of you going to lose in final game.Learn how not to lose .

You don’t need a crystal ball to do well as a trader. You can ignore the endless deluge of pointless shit most traders pay attention to.You don’t need certainty — ever. Probability alone can keep you in clover.The habits and training of the professional poker player are instructive here. Consider the following. The skilled poker player never has full certainty. because he never gets to see his opponent’s hole cards.What’s more, the skilled poker player never has advance knowledge of what cards are coming on the turn or river — he only has the valuable ability to estimate probabilities… and game various scenarios based on situational context.And yet this same player, so “handicapped” by a lack of certainty and lack of information, can extract sizable and consistent profits from his opponents, over and over, with clockwork regularity over time…

How is this possible?

Win Mileage By Tracking Behavior Like In a Sport

By a quirk of biology, if a shark is flipped on its back, i.e. rotated upside down, it goes into a trance-like state and cannot move or defend itself. The shark can literally drown in this state, for lack of oxygenated water passing through its gills. (If a shark stops swimming forward, it dies.The whale’s tactics include forcing the Great White up toward the surface of the water, then using its tail like a giant spatula to flip or roll the shark onto its back. Once that happens — dinner time!.Like whales,market and trading is domain of Apex predators of variety of its own.

We can thus further define “apex predator” not as the operator with the biggest capitalization or the greatest skill , but rather as the cartel with the most potent combination of capitalization and skill, for max compounding effect and they operate  at the top  end of food chain.

Why would a zero sum game — in which whatever profit you extract comes from your fellow participants, with sharks and whales  on top — be easy?To be a successful trader, you must not be part of the herd. You can run with the herd, certainly — that is the name of the game in the midst of trending markets — but you must always be watching, testing, mentally setting yourself apart.

Money is always a stimulant like some kind of  drug and capable of inducing wide range of behavior in humans enmasse ,both positive and  Negative.Wide range of behaviors such as Optimism .greed , thrill ,euphoria ,complacency ,fear ,panic or despondency  are induced with Money .Past experiences with money shape our belief system which enforces considerable  force on our mind and we are hostage to those beliefs.Fear of missing out profit or fear of loss compels us to enter at support and close trades at resistance respectively .So we are caught in inescapable cycle of fixed behaviors, a certainty and  constitute an edge for mercenary or  a weapon  to win trades quickly. Certainty of behavior scores over  uncertainty of future supply and demand and hence an edge.Money triggers predictable emotions and emotional patterns  repeats and which are easily targeted by smart money.

When you are focused on price and price action  ,it tend to control your psychology and behavior. Looking differently Candlesticks,chart patterns, break outs ,volume and so on are stimuli..As long as you are focused on price and patterns ,other participants in market and their psychology neither exist nor matter to you  and you simply behave  in response to price action .And price action is cumulative outcome  parallel behavior of large number of  traders like you and you become part of herd .Herd reaction  is always predictable and highly certain and turns into edge for mercenaries..So as you react to stimulus of price action ,you tend to play into edge of your opponent.On the other hand ,if you focus on majority behavior and set your trade in sync with collective  behavior  you can tap into consequent price action coupling your trade to Smart money.There are divergences between  behavior and future price  and future behavior is more predictable.Key questions to ponder are not Should I buy? Or Should I sell? Or Should I take profits? Or Should I take a loss? But who is buying? Or who is selling? or who is taking profit ? or who is taking losses?and if there are psychological stimuli or trigger and then knowing opponent and their actions in advance ,winning strategy to zero sum game can be successful and certain..Price action you see is part of  history and becomes stimulus for future behavior which decides future price.Past can not replace future and there are going to be divergences..Psychology is key to understanding and anticipating future and current price action is just stimulus  not the future.Tracking Herd behavior creates an imagery of an opponent in mind who you have to defeat and passion of completion replaces idle expectation in your mind just like in a sport.

Election result is difficult to predict looking at historical trend but becomes more apparent if  current public pulse or e.xpected behavior in response to stimulus is looked at.Knowing  cycle of behavior pattern constitutes a powerful edge with higher probability and gives good road map.Outcome of an election does depend on which party you vote but which party majority votes. Election process is a contest ,hence a sport.

Emotional Cycle  And Herd Behavior

The psychology behind trading stocks are the forces that moves the stock market. A stock chart is nothing more than a picture of human emotions. Painted on the canvas are the emotions of greed, fear, hope, and euphoria. As a disciplined trader, you capitalize on the psychological demons that plague other traders.

Cycle-of-Market-Emotions-EngV1

The Market cycle as shown charts  emotions experienced by traders  and subsequent expected mass behavior.Only correctly predicting future behavior of  majority of traders  can give an idea about next move of market.Analysis  and flow of traders’ psychology  runs parallel to course of uptrend and down trend.Amazingly the cycle of Traders’ emotions  and therefore their actions  are going to repeat  mechanically time and again and are safely predictable and  emerges as an EDGE when properly engaged with trade . Novice trader on the other hand  is focused on price action or predicting future levels and unable to decide whether to buy or sell. In fact Smart money opens and closes gates for you depending on contingencies of their trade.Opening and closing gates to market and corresponding  stimulus on display for the herd  is match fixed to complement designs of ZERO SUM GAME.Gate keepers are FIIs and DIIs and they control the schedule as per the above chart.Price action does not gives clues as to future schedule but nature of stimulus gives clue as to schedule of opening and closing of entry and exit gates to market.Market is designed to defeat speculators.

Whether it is day trade or swing trade or stock trade ,Zero sum game is played  mostly against  novice traders with psychological weapons and the stimulus called money.Gaming trades or chasing stop losses with coercion  tactics like volatility or gaps, rigging,HFT  or other deceptive methods are killing 90% of traders.Going by trend world over , future of capital market under huge question mark as market can not sustain without deep food chain.

Leadership of Smart Money

Smart money gives leadership in market and creates public opinion and does not follow opinion.and can not be expected to follow and support those species of traders such as breakout, momentum or swing or novice traders.They tend to contest themselves and eliminate competition and rivals.They can succeed by garnering  and winning support other tribes of market as they build up momentum in zero sum game.They want public support to win and can not allow others to win at their cost.So betting on smart money is always like betting on good horses..Emotional chart reveals clues as to  their  opening and closing market gates to market by smart money..But this is not enough.Follow smart money= which means FII and DII flow  but not price action which is merely stimulus for herd behavior.If you follow public behavior ,you are only financing trades or playing into edges of smart money when  even they are not financing theirs.Public behavior last as long as objectives of smart money need public cooperation and  lasts till nobody knows when.Once that objective is reached ,different kind of stimuli would be in place and public behavior going to be completely different.Present herd behavior lasts as long as Smart money wishes it  to.Follow smart money not price action only .Don’t be at the wrong end of the stick.

To be a successful trader, you must not be part of the herd. You can run with the herd, certainly — that is the name of the game in the midst of trending markets — but you must always be watching, testing, mentally setting yourself apart

Gaming with Positive Expectation Like PROs in Sports.

Following technique also gives an edge in zero sum game against opponent.  If you took this particular action 1,000 times over, would it be profitable on a cumulative basis? If yes, it is +EV (has positive expected value.

Like Mercenaries at the poker table, Successful traders and poker player truly don’t care about trying to gain certainty as to opponent hole cards or what is coming on the next street. They only seek to develop consistently accurate situational assessments, so as to make positive expectation decisions that bear out over a long series of repeated trials.Like  Mercenaries trading in markets with  own capital, you should  similarly truly should  care about what the future holds… except in respect to gaming potential scenarios and making positive expectation decisions in your trading and investing portfolios (with proper overlays of risk control.)

Example of Potential Scenario in Gaming as in a Sport

In markets, a “premium hand” is like a highly attractive value play (based on bottom-up fundamental merits).Whereas a premium “situation” takes all the big-picture factors into context — sentiment, price action, false trend drivers, and so on.The best opportunities are where everything aligns — when the hand and the situation come together. But an awareness of situational context creates opportunity — sometimes BIG and EXCELLENT opportunity — for “speculative” hands too.Using experience, patience and observation to constantly observe and game scenarios, watching and waiting, until all the stars align and an incredible high-probability opportunity lines up, allowing you to absolutely CRUSH IT…

Money,Sickness and Defeat 

Sports has many similarities with trading in terms psychology.Both have dreams at its core and Win and defeat  common factors.Money causes sickness we hardly realize and to some it may sound weird and fantastic ,but nonetheless it is true.Any form of reward and losses and their expectation do cause sickness to all in that our body and mind are held hostage.Even promise or prospect makes us tense or stressed.Focussing on price action,patterns,candle sticks ,volume or indicators tantamount focusing on Money.It becomes like catching flu when exposed to inclement weather .As a patient you don’t treat your sickness but you  go to a good doctor and take medicine.A trader is in the profession of predicting future price and Risk and reward tend to make him sickness of indecisiveness or “do nots”..

When you are sick with certain disease  say Malaria you undergo its symptoms such as high fever, Vomiting,  headache and so on before you fully recover.Money and its different Avatar play similar roles in inducing a kind of sickness.During sickness you can not pay attention or involve immediately surrounding activities for your safety from risks. And least of all try to WIN.Your defeat is given.WHY?In money induced sickness one’s body and mind tend to undergo a sequence of emotional states and you enjoy no freedom from those and you tend to act as per these mental states not react to risk or reward of market.Your perception of risk of market tend to be shaped by your state of mind and need felt by at the moment not objective reality obtaining in market or potential fuure.Our thinking is shaped by our need and our decisions are shaped by our conviction and fear.Your conviction and fear are based on the past or present information you have.There is no dichotomy in objective reality of market but dichotomy exists in traders mind.Objective reality of market is shaped by majority behavior at present or future.This entails possible conflict of your held  perception and objective reality of market  causes your failure.To eliminate this  possible divergence and pitfall ,you stop relying your flawed perception and base your decision on objective majority behavior in market both present and expected in future.We have to win and we can not afford to fail,And we need safety.Our mind can not give us safety and it only makes us loose not win as it is captive or hostage to our past or expectation which is illusion or delusions.WINNING with objective and with reference to collective or majority minds which is reality.Sadly Its our mind which causes defeat, our failures and under achievement

Hormones such as adrenaline ,dopamine and cortisol not only control our behavior but they control our state of body and mind .They control our internal environment and tend to distort our perception of external realities such as market. Sick mind and body is vulnerable and subjective and prone to defeat .Study of behavior of sports man and their psychology can give valuable clues to any trader to understand the reality of market.

Mind the Bloody Competition in the Market as you do in Sports

Brace yourself to play Muhammad Alli ?

When you enter the stock market, you are going into a competitive field in which your evaluations and opinions will be matched against some of the sharpest and toughest minds in the business. You are in a highly specialized industry in which there are many different sectors, all of which are under intense study by men whose economic survival depends upon their best judgment.

In any competition you are looser if you fail to win.We all mind not having a good grade in exams or not getting a promotion or a raise as it hurts our self esteem and finances and  therefore winning matters to you in  any competition and you mind it seriously and this you should realize  from beginning.But this we mostly tend to ignore and underestimate our opponents. As mentioned already .for the same reason unmarked mountain roads in Europe often have fewer driver fatalities than similar US roads with lots of signage and guard rails. The extra risk  makes people “wake up.” Be creative in risk finding and keep vigil to survive.So mind other players and your opponents and  remember you have to score over others before others scores over you.To win over others  you must know what others can not possibly know.If you are sure others can not find their ways in and out of the market as quickly as you can do ,you enjoy a formidable edge.You are fastest and quickest and can outrace competitors.Remember to win your IQ .knowledge  and efficiency  and  that of your opponent matters.This is exactly like a reality show in which participants are asked to locate a house in Large city and who does it at the earliest is winner and others are loser.Only smartest can win not everyone.This is market for you – a game of competition not passive expectation and waiting for secular and faceless supply and demand.That is for dummies.Market is in fact a continual IQ test of participants like one faces for entry into highly skilled jobs.It matters to you and it matters to know your opponent.Either you undercut with your edge or get ready to be undercut.Dont play into other’s Edge

Winning Sports with Emotional Edges

Opponents’ psychology and knowledge of skills when becomes repetitive and predictable ,it turns into an edge for professional sports man. Playing into those those weakness is about winning.poker

Psychological Edges for PRO

The UPSIDE

1.GREED 2.OPTIMISM  3. THRILL.4.EUPHORA

THE FLIP SIDE

DISBELIEF OR COMPLACENCY 2 .HOPE 3. FEAR 4..PANIC  5.DESPONDENCY                                                                 

DESCRIPTION

GREED– is trying to make money quickly.Ways to be greedy in trading are

a.Trading sizes too large . b.Having unrealistic expectation

THRILL– is also form of greed. Thrill in us comes  out of potential rewards on display . Extreme wants is emotion produced in novice investor in response to the hefty reward  and causes thrill

FEAR  Has two faces 1. Fear of losses  2.Fear of missing out.Following are our common experiences in decision making out of fear.

Fear of losses compels traders to close profitable trades prematurely,meaning they miss out on profitable trades.And the fear of missing out compels traders to abandon their trading strategy so they assume they don’t miss out a major move.So fear leads to over trading and mistimed entry and exits.Typical examples are

Excitement! Euphoria! Yeah, I’m making money! “I had better sell to lock in these profits since I have had several losing trades in a row.” The trader then ends up selling too soon!

Or They get excited and buy at the worst possible time. Then the stock reverses. Fear creeps in and then the stock goes lower… and lower… and lower. Finally the pain becomes too much to bear so they sell taking a huge loss!

Hope

Hope may be the most dangerous of all human emotions when it comes to trading. Hope is what keeps a trader in a losing trade after it has hit the stop. Greed and hope are what often prevent a trader from taking profits on a winning trade. When a stock is going up, traders will often remain in the trade in the “hope” of recouping past losses. Every swing trader hopes that a losing trade will somehow become a winning trade, Rest assured, when your thinking slips into hope mode, the market will punish you by taking your money

Regret

When technical traders allow regret to rule their thinking, they tend to “chase trades” in the hopes of still being able to make money on the position by entering it well above the trigger price. The problem with this thinking is that the reward/risk of the trade no longer meets the parameters of good trade management. For instance, by entering a trade 1 point higher than the trigger, the potential reward may be 1 point, but the potential loss may also be 1 point. This sets the reward/risk ratio at 1 to 1. Recall that we prefer trades to have at least a 2 to 1 reward/risk ratio. However, if the trade had been entered at the appropriate trigger price, the reward/risk ratio would have been 2 to 1. Successful and profitable online traders learn to discipline their mind to eliminate regretful  thinking.

Conclusion with Pirates and their Game

Your bias tend to put you on trance combined with all kinds of stimuli that price action presents from time to time.Once you bite the bait,Pirates can easily defeat you in zero sum game. Mercenaries  wait at empty casino tables and with your wager  in market you tend to play into their hands.Pips are in fact Chips.In zero sum game ,for pirates to win you have to lose.In order to defeat you , you are forced to  run out your money and then you are toast.And if you know the pirates motive in advance ,you can easily fail them.Remember to win you have to defeat your opponent and to defeat you should know his motive.

Our common tendency is that we endlessly seek appointment with Mr Profit just like we tend to do with doctor.We hope and wait for doctor to come when receptionist not committing anything or immediately leave hospital after doctors arrival or we go to hospital when doctor is about leave.This is exactly the way we seek appointment with Mr Profit .This is just an analogy for understanding our behavior.

The biggest problem that gamblers have is their emotions that cause them to always lose in the long term by placing bets based on feelings instead of the odds. The winning traders trade based on probabilities being in their favor and pick their trades carefully based on the best chances of success.. The losses of the gamblers is where the majority of the profits come from to the winning traders in the markets who have an edge.

So can you win now ?

SK Biswal Chief Engineer at ONGC. Interested in Stock option trading ,Technical Analysis of Stocks & Commodities

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