Saturday, March 08, 2014

Finding an Edge in Changing Markets

Many traders talk about having an "edge" in markets.  Few actually measure and identify the sources of that edge.

Let's say that roads never changed:  there were never detours, road closings, new roads, etc.  In such a situation, one would never need a GPS to get to work.  One's memory and experience would be the source of edge:  the driver could follow the same course and always arrive at the destination successfully.

Now let's say roads changed routinely:  the roads that were best to get to work one week might not be open or available the following week.  In such a rapidly changing environment, one would lean heavily on an updated GPS.  Without the guidance of the machine, it would be hit or miss as to whether one's past course would lead to the destination successfully in the future.

Now imagine a driving educator who tells you that all you need to get to work is a chart of the roads, called a map.  You're very excited, because this will tell you how to get to work each day.  But the map never changes when roads open and close, so the best the map can do is aid your detours.  But even the detours suggested by the map might be closed...

Fortunately, there's a driving coach who tells you that your problem is that you lacked the discipline to follow your map and shows you several exercises to be a better map follower.  The coach even shows you higher resolution maps to guide your commute.

But the maps never change and the roads do.

Much of my work these days consists of building better GPS systems for markets:  systems that tell you when markets are changing, how they are changing, what drives the changed markets.. 

The GPS doesn't replace the driver; it informs the driver.  The more roads change, the more important the GPS becomes.

Meanwhile, drivers keep working on their map reading...keep running into detours...keep seeking out those coaches when frustration boils over...

Further Reading:  How to Identify an Edge in Markets