Trade Outside the Box

"If you put a forecast way above everyone else and the number comes in low, you look stupid. If you submit a forecast just a bit higher than everyone else, then no matter how strong the number is, you look smart!" "Herding around the mean is rational if you want to avoid looking stupid or getting fired, but as a market professional you need to be aware that the data is not clustered the way the forecasts imply."

"One of the best tells in markets is a market that fails to react to good or bad news." "More often than not, a market that doesn’t respond to clearly good or bad news is going to trend in the opposite direction for the next 24 to 48 hours."

"In poker, the dream scenario is you run into a player on tilt. They are easy to read, they play loose, and they repeatedly put their chips in with the second or third-best hand."

"All other things equal, you should think that Jo only has 40% (0.20/0.50) of the confidence in her fair value as you do in yours."

"The money is made by those who can get outside themselves to combine second-order thinking with ultrarational behavior to forecast and exploit the emotional, irrational, and sometimes predictable behavior of the market hivemind."

"If adverse selection dominated, nobody would ever trade because everyone would be afraid that everyone else has better information than they do." "If you know what you are doing, you will be adversely selecting others much more often than you are adversely selected yourself."

"There is a meme that says: If you improve by 1% per day, you will be 37.78 times better after one year. It’s a nice thought, but it’s wrong."

"Keynes asks us to imagine a newspaper which holds a contest where readers are rewarded for choosing which contestant will be chosen by the most other readers." "The task is not to choose the most beautiful woman, but instead to choose the woman others will think is most beautiful."

"When a market enters a tight trading range after a significant move and volatility begins to contract sharply, it tells you that the order imbalance in the market has been rectified, and a more stable short- term equilibrium has been found."

"The simple definition of an ergodic system is one where the expected value of an activity performed by a group is the same for an individual carrying out the same activity over time." "Nobody would choose to play this game 100 times in a row because the expected outcome is almost certain death."

"Mental capital is an important, underappreciated and finite resource." "This sort of trade could be mathematically positive EV but be so mentally taxing that even when it works, it has cost you more than you earned."

"Younger children, or those without a fully developed Theory of Mind, will say that James will say: “pencils,” because they are unable to separate their own knowledge from someone else’s perspective." "Adults in financial markets often operate like the children in the Smarties Test. They think that everyone sees the world the way they do."

"We saw opposite market reactions to identical policy announcements because the market viewed the U.S. and U.K. starting points as fragile, and Germany’s initial conditions as robust."

"Ask yourself regularly: Am I trading for fun, or to make money?" "If you find yourself putting on the “correct” position size and then 15 minutes later doubling it because you’re bored… You’re trading for excitement, not to make money."

"Narrative contagion is the process whereby a story shared by one person or organization prompts others to share their own stories, spreading narrative themes organically through a community." "Markets are social systems, not machines that take in fundamental information and spit out logical prices."

"“Brady, I want you to stop worrying about what all the other players on our team are doing. All you do is worry about what the starter is doing, what the second guy is doing, what everyone else is doing. You don’t worry about what you’re doing.”"

"There is a market aphorism that says: Early is the same thing as wrong." "You underperform as you wait for your dream trade to come true and eventually get fired three weeks before it finally works. Then again, it’s important to remember that late is the same thing as wrong."

"Principle 14: Avoid risk of ruin first. Maximize returns second. If you blow up, there will be no returns."

"I don’t shy away from hard topics, but if the answer to the following three questions is yes, I put the topic in the too hard pile. 1. Not particularly interesting. 2. Not critical to developing an edge in my business. 3. Complex and time consuming to learn."

"I would write a big piece about Australian Terms of Trade and the employment situation in Australia and so on... And then go long AUDUSD with a stop loss 1% away." "When trading (and investing), your time horizon must match your analysis."

"The more profitable my strategy, the more likely someone else will discover it. Keep stacking new ideas on top of old ones. When the old ones stop working, the new ones will pay the bills."

"“Your reputation is like a teacup. Once it’s broken, it’s almost impossible to put back together.”" "All your actions accumulate in the long run. Be nice to the person who sweeps the floors in your office."