Stock Market Trading Rules: Collected Wisdom From 80 International Stock Market Experts
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One of the many strengths of the rules that were written for and included in the original publication was their timeless quality - these gems of investing and trading wisdom apply to a range of markets across a spread of time periods and are not confined to one market or one set of circumstances. And so it is that the decision was made to republish the original rules in a more condensed form and in a new format. In this eBook you will find just that; 80 sets of trading rules from expert international traders.
As with the original publication, these rules provide condensed knowledge from experts about what they consider to the key determinants of trading success. This means that some aspects of physical systems like the weather more than a few days from now as well as social systems the behavior of a group of human beings over a long period are fundamentally unpredictable. A strong network effect is a good example of preferential attachment; a market with 10x more buyers and sellers than the next largest market will tend to have a preferential attachment dynamic.
Higher-level behavior tends to emerge from the interaction of lower-order components. The result is frequently not linear — not a matter of simple addition — but rather non-linear, or exponential. An important resulting property of emergent behavior is that it cannot be predicted from simply studying the component parts. We find that in most systems there are irreducible quantitative properties, such as complexity, minimums, time, and length. Below the irreducible level, the desired result simply does not occur. One cannot get several women pregnant to reduce the amount of time needed to have one child, and one cannot reduce a successfully built automobile to a single part.
These results are, to a defined point, irreducible. Tragedy of the Commons. A concept introduced by the economist and ecologist Garrett Hardin, the Tragedy of the Commons states that in a system where a common resource is shared, with no individual responsible for the wellbeing of the resource, it will tend to be depleted over time. The Tragedy is reducible to incentives: Unless people collaborate, each individual derives more personal benefit than the cost that he or she incurs, and therefore depletes the resource for fear of missing out.
We see a similar result in human systems, as with bad behavior driving out good behavior in a crumbling moral system, or bad practices driving out good practices in a crumbling economic system. Algorithms are best known for their use in modern computing, but are a feature of biological life as well. For example, human DNA contains an algorithm for building a human being. Popularized by Nassim Taleb, the sliding scale of fragility, robustness, and antifragility refers to the responsiveness of a system to incremental negative variability.
A robust system or object tends to be neutral to the additional negativity variability, and of course, an antifragile system benefits: If there were a cup that got stronger when dropped from 6 feet than when dropped from 1 foot, it would be termed antifragile. A critical model of the engineering profession is that of backup systems.
A good engineer never assumes the perfect reliability of the components of the system. He or she builds in redundancy to protect the integrity of the total system. Without the application of this robustness principle, tangible and intangible systems tend to fail over time. Margin of Safety. Similarly, engineers have also developed the habit of adding a margin for error into all calculations.
In an unknown world, driving a 9,pound bus over a bridge built to hold precisely 9, pounds is rarely seen as intelligent. Thus, on the whole, few modern bridges ever fail. In practical life outside of physical engineering, we can often profitably give ourselves margins as robust as the bridge system. A system becomes critical when it is about to jump discretely from one phase to another. The marginal utility of the last unit before the phase change is wildly higher than any unit before it.
A frequently cited example is water turning from a liquid to a vapor when heated to a specific temperature. A network tends to become more valuable as nodes are added to the network: this is known as the network effect. An easy example is contrasting the development of the electricity system and the telephone system. Only with additional telephones does the phone network gain value.
This network effect is widespread in the modern world and creates immense value for organizations and customers alike. In many systems, improvement is at best, or at times only, a result of removing bad elements rather than of adding good elements. This is a credo built into the modern medical profession: First, do no harm.
Similarly, if one has a group of children behaving badly, removal of the instigator is often much more effective than any form of punishment meted out to the whole group. The Lindy Effect refers to the life expectancy of a non-perishable object or idea being related to its current lifespan. Although a human being who is 90 and lives to 95 does not add 5 years to his or her life expectancy, non-perishables lengthen their life expectancy as they continually survive. The renormalization group technique allows us to think about physical and social systems at different scales.
An idea from physics, and a complicated one at that, the application of a renormalization group to social systems allows us to understand why a small number of stubborn individuals can have a disproportionate impact if those around them follow suit on increasingly large scales. A system is spring-loaded if it is coiled in a certain direction, positive or negative. Positively spring-loading systems and relationships is important in a fundamentally unpredictable world to help protect us against negative events.
The reverse can be very destructive. Complex Adaptive Systems. A complex adaptive system, as distinguished from a complex system in general, is one that can understand itself and change based on that understanding.
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Complex adaptive systems are social systems. The difference is best illustrated by thinking about weather prediction contrasted to stock market prediction. Complex adaptive systems are thus fundamentally not predictable. The laws of thermodynamics describe energy in a closed system. The laws cannot be escaped and underlie the physical world. They describe a world in which useful energy is constantly being lost, and energy cannot be created or destroyed. Applying their lessons to the social world can be a profitable enterprise.
If I push on a wall, physics tells me that the wall pushes back with equivalent force. In a biological system, if one individual acts on another, the action will tend to be reciprocated in kind. And of course, human beings act with intense reciprocity demonstrated as well. Velocity is not equivalent to speed; the two are sometimes confused.
Velocity is speed plus vector: how fast something gets somewhere. An object that moves two steps forward and then two steps back has moved at a certain speed but shows no velocity. The addition of the vector, that critical distinction, is what we should consider in practical life. Relativity has been used in several contexts in the world of physics, but the important aspect to study is the idea that an observer cannot truly understand a system of which he himself is a part. For example, a man inside an airplane does not feel like he is experiencing movement, but an outside observer can see that movement is occurring.
This form of relativity tends to affect social systems in a similar way. Activation Energy. Two combustible elements alone are not enough. The reaction may slow or stop without the addition of catalysts. Social systems, of course, take on many similar traits, and we can view catalysts in a similar light.
Most of the engineering marvels of the world have been accomplished with applied leverage. Understanding where we can apply this model to the human world can be a source of great success. An object in motion with a certain vector wants to continue moving in that direction unless acted upon.
This is a fundamental physical principle of motion; however, individuals, systems, and organizations display the same effect.
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When we combine various elements, we create new substances. If it is more viscous there is more resistance. We have to deal with gravity and inertia, although viscosity is always present. But for small particles, gravity and inertia become a non-issue compared to viscosity. We thus learn that when we change the scale we change what forces are relevant. All creatures respond to incentives to keep themselves alive. This is the basic insight of biology. Constant incentives will tend to cause a biological entity to have constant behavior, to an extent.
Humans are included and are particularly great examples of the incentive-driven nature of biology; however, humans are complicated in that their incentives can be hidden or intangible. The rule of life is to repeat what works and has been rewarded. Competition tends to describe most biological systems, but cooperation at various levels is just as important a dynamic.
In fact, the cooperation of a bacterium and a simple cell probably created the first complex cell and all of the life we see around us. Without cooperation, no group survives, and the cooperation of groups gives rise to even more complex versions of organization. Cooperation and competition tend to coexist at multiple levels. Thus the dilemma.
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This model shows up in economic life, in war, and in many other areas of practical human life. In a physical world governed by thermodynamics and competition for limited energy and resources, any biological organism that was wasteful with energy would be at a severe disadvantage for survival. Thus, we see in most instances that behavior is governed by a tendency to minimize energy usage when at all possible.
Species tend to adapt to their surroundings in order to survive, given the combination of their genetics and their environment — an always-unavoidable combination. But of course, conditions change. The evolution-by-natural-selection model leads to something of an arms race among species competing for limited resources. When one species evolves an advantageous adaptation, a competing species must respond in kind or fail as a species. Standing pat can mean falling behind.
A fundamental building block of diverse biological life is high-fidelity replication. The fundamental unit of replication seems to be the DNA molecule, which provides a blueprint for the offspring to be built from physical building blocks. There are a variety of replication methods, but most can be lumped into sexual and asexual. Most complex biological organisms have an innate feel for how they should organize. While not all of them end up in hierarchical structures, many do, especially in the animal kingdom. Human beings like to think they are outside of this, but they feel the hierarchical instinct as strongly as any other organism.
This includes the Stanford Prison Experiment and Milgram Experiments, which demonstrated what humans learned practically many years before: the human bias towards being influenced by authority. In a dominance hierarchy such as ours, we tend to look to the leader for guidance on behavior, especially in situations of stress or uncertainty.
Thus, authority figures have a responsibility to act well, whether they like it or not. All organisms feel pleasure and pain from simple chemical processes in their bodies which respond predictably to the outside world. Reward-seeking is an effective survival-promoting technique on average. However, those same pleasure receptors can be co-opted to cause destructive behavior, as with drug abuse. Introduced by the biologist Steven Jay Gould, an exaptation refers to a trait developed for one purpose that is later used for another purpose. This is one way to explain the development of complex biological features like an eyeball; in a more primitive form, it may have been used for something else.
Once it was there, and once it developed further, 3D sight became possible. An ecosystem describes any group of organisms coexisting with the natural world. Most ecosystems show diverse forms of life taking on different approaches to survival, with such pressures leading to varying behavior. Social systems can be seen in the same light as the physical ecosystems and many of the same conclusions can be made.
Most organisms find a niche: a method of competing and behaving for survival. Usually, a species will select a niche for which it is best adapted.
The danger arises when multiple species begin competing for the same niche, which can cause an extinction — there can be only so many species doing the same thing before limited resources give out. The primatologist Robin Dunbar observed through study that the number of individuals a primate can get to know and trust closely is related to the size of its neocortex. Extrapolating from his study of primates, Dunbar theorized that the Dunbar number for a human being is somewhere in the — range, which is supported by certain studies of human behavior and social networks.
Fundamentally, the modern world operates on trust. A trusting system is one that tends to work most efficiently; the rewards of trust are extremely high. This causes us to distort our thinking when it is in our own interest to do so. A wonderful example is a salesman truly believing that his product will improve the lives of its users. Ivan Pavlov very effectively demonstrated that animals can respond not just to direct incentives but also to associated objects; remember the famous dogs salivating at the ring of a bell.
Human beings are much the same and can feel positive and negative emotion towards intangible objects, with the emotion coming from past associations rather than direct effects. The tendency towards envy is strong enough to drive otherwise irrational behavior, but is as old as humanity itself.
Any system ignorant of envy effects will tend to self-immolate over time. Based on past association, stereotyping, ideology, genetic influence, or direct experience, humans have a tendency to distort their thinking in favor of people or things that they like and against people or things they dislike.
This tendency leads to overrating the things we like and underrating or broadly categorizing things we dislike, often missing crucial nuances in the process. Denying reality can be a coping mechanism, a survival mechanism, or a purposeful tactic. Availability Heuristic. One of the most useful findings of modern psychology is what Daniel Kahneman calls the Availability Bias or Heuristic: We tend to most easily recall what is salient, important, frequent, and recent.
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The brain has its own energy-saving and inertial tendencies that we have little control over — the availability heuristic is likely one of them. Having a truly comprehensive memory would be debilitating. Some sub-examples of the availability heuristic include the Anchoring and Sunk Cost Tendencies. The three major psychological findings that fall under Representativeness, also defined by Kahneman and his partner Tversky, are:. Failure to Account for Base Rates. In response to questions from Caixin, WeChat Pay and Alipay said they have actively participated in the discussions on unified barcode-based payments and will be prepared for connectivity based on the state standards.
In July the company said it would suspend payment transactions made through intermediaries for risk control reasons while those made directly through its system would not be affected. WeChat Pay has relied on partnerships with smaller rivals and banks to access offline merchants. WeChat Pay denied it is forcing merchants to directly link with its services, although it said it has suspended services with some merchants that were deemed risky. But now, WeChat requires partners to submit all detailed documents about merchants for a second review and signs service contracts directly with merchants, a payment company source said.
By setting up direct links with offline merchants, Tencent will be able to control more merchant resources and gain a competitive edge against Alibaba, analysts said. As the central bank weighs promoting a unified QR code payment standard, payment companies will compete harder to win merchants, according to a payment service provider source.
That forced the State Council to order the formation of UnionPay to push forward connectivity of bankcard payments, a move that eventually created the bankcard payment market landscape consisting of card issuers, clearinghouses, intermediary institutions and merchants. Analysts said a similar pattern should apply in the mobile payment industry in which Net Union plays the role of clearinghouse.
But as Alipay and WeChat Pay push forward direct links with merchants, the stability of the system is undermined, they said. Get exposure for your startup at RISE Meet 5 of the best startups selected to represent China at the largest technology event in Asia. Caixin App Newsletter. Photo: VCG.