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The market does not run on chance or luck.
Like the battlefield, it runs on probabilities and odds.

David Dreman


Asset classes:


Trade styles:

Key differences:

Investors - giving money without sole intention of making money in nearest future. Supporting business, values it brings.


Think about options as a way of renting assets for a set period without significant cost associated with a purchase.

With options, potential loses and profits are not symmetrical. Loses are limited and profits are unlimited.

Market mechanics

What truly moves the price is AGGRESSION.
If the price goes up, then the buyers are more aggressive (they use market orders).

Traders become aggressive because of fear of either missing out or losing.

Even if a trade entry had a resoning logic, after the entry, trader often sucumb to the emotions of fear and regret and end up selling winners and hanging onto losers.

More risky assets are sold and the money is moved into safer assets (market rotation).
It is not because the safer assets have room to advance, but because they are likely to hold their value better in an economic downturn.

Randomness and efficiency

There is a theory that claims that market moves are a random walk and the future price can not be predicted.
Although we can not predict price precisely, there are patterns in the market that occurs with probability high enough to use them in trading.

Markets are efficient, unless we know if the market is trending or ranging.
If the market is trending - we can benefit from it by following the trend; if ranging - buy lower and sell higher.

What traders are looking at

Traders are looking at price

Once price increases - they experince fear of missing out and buying in (jumping into the train).
Once price of an asset drops - they experience fear of losing.
Once price is close to a significant price level (1$ for example), there is more excitement than if price gets to 0.95$. Also, support/resistance, ath, atl, and moving averages work in a similar way.
If price is not volotile enough and do not produces opportunities in the chosen timeframe - traders move money to more promising instruments.

Traders are looking at PnL

Once a trade PnL moves to negative - traders try to exit the trade at break-even or a small loss.
If they didn't exit at a small loss/profit and moved to a large loss - they try to keep assets (don't sell at loss).
Once price rallies again and get's close to break-even - they exit.

Traders are looking at volumes (loocking at top assets = top volume assets)

The more volume - the more traders are looking at the asset, and so more are ready to jump in/out.

Retail traders

The more visible setup (more clear, more time since formed), the more participants to expect.

Study candlestick patterns, price action.

Retail traders are scared of large volume clusters in order book, by projecting their own trading volume they miscalculate the amount of effort required to break through a limit order wall (and often the wall is a fake one).

Put stop loss orders right after support where they are easily hunted by larger players (stops are not given enough space to breath).

Emotional, averaging down, taking losses personally and fighting back an asset, jumping in on a signal/news without proper analysis and plan.

Large volume traders

They are institutions, whales, coordinated groups of traders, insiders.

A large amount of an asset under management causes trouble for them because they can not buy or sell at a specific price and fast.
Large limit order in order book will show their intent and they don't want this.
A large market order would move price significantly and the final price will be much worse than initial.

They need time and other traders willing to sell at lower prices.

Sideways market is a great place for them for buying in.
Low volatility and relatively small volumes make many retail traders move money to other assets, selling to the large traders who are accumulating.

The large traders are monitoring supply in the range, once there is no more retail traders are willing to sell - the price can be pushed lower looking for more selling (testing).

Large drops in market price scare off participants invested in the trading instrument, causing them to sell their holdings and exacerbate the drop.

Large traders may block large price advances by adding large fake sell limit orders. So they can make sure the price will not start a rally until they will have enough asset accumulated.

Once the asset has low liquidity and the large player accumulated enough of it, they can create an initialiation activity, that can be picked up by the retail traders. There can be a positive news to give a reason for the price increase.

Large market rallies generate investor confidence, causing more participants to buy more, recursively causing larger rallies.

Then the large trader sells the accumulated asset to the retail traders.

Large traders like liquidity:

Institutional activity signs:

Wall street

Selling scalable products (10% annually is considered a very good result) to wealthy clients. Charging fee for looking after their money.

Bots impact

Algorithmic trading now accounts for over 80% of the equity trading volume (2019).

Bot classification:

Bots are like startups: obviously some succeed; also obviously, most don't.

Jacob Eliosoff

Some bots are designed to get profit from market inefficiency (not enough liquidity to process orders efficiently, not enough time for incoming liquidity to keep up).
Algorithmic market making is an example - a strategy that smooths out large orders on a single exchange (provides liquidity at a worse price).
Market making - get inside the bid-ask spread and buy low, sell high.
Another market making strategy implemented by many bots is grid trading.

Arbitrage (one exchange or cross-exchange) also just reduces inefficiencies (balances prices between markets).
Arbitrage - take advantage of things trading at different prices on different exchanges or through different derivatives.

They are basically not impacting price much, they are waiting for others to move price, jump in and make a profit.

The flashcrash bot is one of our best bots.
A flashcrash is when prices on an exchange change very rapidly, and the bot exploits this by buying up cheap coins and selling when the price returns to normal levels.
This bot can do between 5 and 15 percent a day, on average. Exchanges love this bot, too: It makes their order books more liquid.

Stephan de Haas

Other bots could trade based on TA indicators, news, etc. They are just adding to the retail traders crowd.

Regime change

Regime shift is caused by market structure or macroeconomic changes.

Regimes are periods of mean-revertion and trending behaviors, high and low volatility. Each regime requires different strategies or or strategy parameters.
Another regime is no clear regime, when price is random walking.
Regimes can be different for different time horizons.

Markets spend more time in mean-reversion regime than in trending.

Bull Bear Sideways Volatile
Trend up Trend down Range bound No boundaries
Slow Fast Very slow Very fast
Buy the deep Sell the rallies Buy support Lock in profits
Long positions Short positions Cycle positions Quick trades
Easiest Difficult Simple Lower time frame
Trend traders like Short sellers like Swing traders like Day traders like
Accumulation Distribution Ranges Emotional uncertainty


A technician is someone who cuts right to the chase and studies actual prices and behavior instead of puzzling over the causes of prices and behavior like everyone else.

John Brown


Phases (Charles Dow):

Smart money taking profits and selling to an increasingly eager public.

Price action

When only price (candles) is taken into consideration.

The charts don't lie.

Charts really are the "footprint of money". What some talking head on a financial news network might say becomes immaterial when you can look at a chart and see what the "money" is saying.

Charting and Technical Analysis by Fred McAllen

Charts allow to see:

Support/resistance: price has memory. This is because humans (who make up the market) are susceptible to "anchoring bias".

Support/resistance can be:

The more times price touches support/resistance, the weaker it becomes.

There is no such thing as a quadruple bottom/top.


Volume reveals whether the price action is valid or false.

Wyckoff laws:

Market weakness early signs:

Trend change signs:

Volume Price Analysis concepts:

Buying climax - when the market has moved sharply lower in a price waterfall and bearish trend, supported by masses of volume. Wholesalers are buying and retail traders are panic selling.

Selling climax - at the top of a bull trend, where we see sustained high volumes.
Wholesalers are selling to retail traders and investors.

Why markets move sideways:

Divergence between volume and price: the volume of trading stops expanding and starts to shrink as the averages move to their final highs. Normally at the beginning of a move, the volume of trading continually grows. But then, at a certain point, the market makes new highs but the volume contracts.

Volume profile:

Order book, large volume at price:


Fibonacci retracement is a tool used to predict the pull-back of price after a period of growth based on a set of predetermined percentages: 23.6, 38.2, 50, 61.8, 78.6.

Fibonacci extension is a tool used to find targets for growth after a pull-back. Commonly used 161.8, 200.

Combine fibonacci with trendlines and moving averages.


Some indicators:

VWAP - Large institutional buyers and mutual funds use the VWAP ratio to help move into or out of stocks with as small of a market impact as possible. Therefore, when possible, institutions will try to buy below the VWAP, or sell above it. This way their actions push the price back toward the average, instead of away from it.

Consistent profitability


Edge in the market

Trading is about probabilities, never certainties.

An entry should not be based on an opinion, prediction, or emotions; it should be based on a statistical edge.

Strategies can be found:

What truly makes a strategy proprietary and its secrets worth protecting are the tricks and variations that you have come up with, not the plain-vanilla version.

Quantitative Trading by Ernest P. Chan

The goal is to have a strategy with high Sharpe ratio (low drowdown), so we can use higher leverage in order to achieve maximum long term growth.

Strategy characteristics:

Risk management

The most important rule of trading is to play great defense, not great offense.

Paul Tudor Jones

Attention to profit is a sign of immature, attention to losses - sign or experience.

Parts of risk management:

Backtest and papertrade new strategies first

Backtest. Test new ideas with paper trading first.

Historical success is a necessary but not a sufficient condition for concluding that a method has predictive power and, therefore, is likely to be profitable in the future.

Evidence-Based Technical Analysis by David Aronson

Transaction costs should be taken into account.
Transaction costs:

The appropriate benchmark of a long-only strategy is the return of a buy-and-hold position - the information ratio rather than the Sharpe ratio.

Cut loses short and maximize gains

Money is not made on entries; profits are only generated on the exit of a trade.

Exit strategies:

Have to try to maximize profits when right and minimize losses when wrong.

The primary tool of cutting loses short is stop loss, and the primary tool for maximizing gains is trailing stop.

After a trade is entered, the risk/reward ratio is always shifting, and a trader must act based on how the trade plays out.

Booking partial gains as the asset is becoming profitable and raising stops to ensure profits do not become losses.

Taking action to prevent a small loss from becoming a big loss should be considered a victory.

Stop price can be calculated based on volatility (Average True Range can be used as a volatility indicator).
Give some breath for stop price.

Stop should be applied if price is in momentum, otherwise - it could reverse fast.
Stop is beneficial in momentum regime and harmful in mean-revertion.

Lower RR and higher win rate is more favorable than higher RR and lower win rate (if risk and reward are many times larger than commission) because easier to handle emotionally.

It would be much more advantageous if we could proactively avoid those periods of time when the strategy is likely to incure loss.

Position sizing

Keep 1-5% of account exposed to risk (use stop orders) per trade.
Can be increased to 10% for small accounts.

Improperly sized positions affect the ability to be disciplined:

Leverage can be used to maximize strategy output. Should be chosen to withstand strategy maximum drawdown.


After a losing trade - take a break to reduce emotional decision-making.

Bots should have fuses to stop when:

Bots should be handling errors (closing positions, sending alerts, etc.).



Following a consistent set of actions leads to consistent results.


Behavioral finance studies irrational financial decision-making.

If smart people would be able to be consistently profitable in trading, we would have many rich people.

Loss aversion is the observation that human beings experience losses asymmetrically more severely than equivalent gains.
Each next win gives less sattisfaction. Each loss adds to pain of previous loses.
Negative emotions have a stronger impact than positive ones.
According to one study, the pain of losing $100 still outweighs the happiness of gaining $240.
Causes some traders to exit their profitable position too soon because pain from possibly losing some of the current profits outweights the pleasure from gaining higher profits.

There is a rational part in loss aversion, losses can lead to capital wiped out, even if size of wins is higher than of losses and chances for each outcome is 50/50 because any capital is limited.

Endowment effect causes traders to hold on to a losing position for too long. Demand much more to give up the asset than they would pay to aquire it.

Status quo bias causes traders to hold on to a losing position for too long. A preference for the current state of affairs.

Representativeness bias - put too much weight on ecent experience and underweight long-term average.

It is difficult to accept own mistakes and change.

Trading becomes easy once a trader learns to ignore her own personal opinions, stops trying to be right, stops focusing on making money, and instead focuses on the process of trading.

The Tao of Trading by Simon Ree

Trading requires large time investments in experiments.

Repetition can be boring or tedious - which is why so few people ever master anything.

Hal Elrod

Boredom associated with slow progress.

Focus on enjoying (and getting good at) the process, without having any specific objectives in mind, the outcomes will be all-the-more rewarding.

Do not set expectations on a trade, it will ruin the trade (robs ability to appreaciate current reality).

You can lose your opinion, or you can lose your money.

Adam Grimes

To grow: objectivity, impartiality, discipline, focus.

This is not a trader's job:

Automated trading

A lot of us are in the business of quantitative trading because it is exiting, intellectually stimulating, financially rewarding, or perhaps it is the only thing we are good at doing.

Quantitative Trading by Ernest P. Chan

MBAs once scoffed at the thought of relying on a scientific and systematic approach to investing, confident they could hire coders if they were ever needed. Today, coders say the same about MBAs, if they think about them at all.

The Man Who Solved the Market by Gregory Zuckerman

Client algorithmic trading infrastructure:

Statistically significant signals (Medallion):

Machine learning

Machine learning struggles to predict future price moves.
It can be used for adjusting strategies based on market conditions (predicting our strategy performance).


Recent data can be not enough for testing, older data can be absolete.


Profitable trading does not have a secret recipe for success. There are as many different ways to be profitable as there are traders who know how to utilise the good trading systems out there.

The Quiet Trader by Atanas Matov


Statistical arbitrage:

Market making:




OB based:

Volume clusters:

Pair trading:


Buy when there's blood in the streets,
even if the blood is your own.

Barron Rothschild



Difference between trading and other small businesses: no marketing if you manage only your own money, otherwise your perfomance is the best marketing.

High Sharpe ration is much easier to achieve with smaller account.


Gambling - when odds are unknown and wishing for luck.

Sharpe Ratio - consistency of returns. Helps investors to understand the return of an investment compared to its risk.
When < 1 - not suitable for a stand-alone strategy. Profitable almost every month - > 2, profitable almost every day - > 3.

Black swan (fat tail) events - unexpected events (black swan was discovered in Australia in XVII century).

Alpha is the ability to predict the future (additional return over a naive forecast).

Alpha decay - decreasing of strategy performance. Happens when many are trading the same strategy. Alpha shows how much the strategy outperforms the market on a risk-adjusted basis.

Data snooping bias - when strategy has many parameters and oveoptimized to perform on historical dataset and may perform purely on new data.

Look ahead bias - using data that should not be available at the moment in backtest.

Strategy capacity - how much a strategy can absorb without negative impacting its returns.

High frequency trading - automated trading where trades are closed in the same day.

Kelly formula - a formula that determines the optimal leverage and capital allocation while balancing returns versus risks.

DoM - Depth of Market.








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