Yo, traders.

This is the last post and I’ll shut up.

Read my disclaimer in the pre-processing/filter/frequency domain post if you’re interested.

My intent is to help shorten your learning curve and maybe save you some money, but without clouding your view or perception of the ideas, of the seeds I’m planting because the concepts, these processes I’m talking about are MUCH BIGGER than me or how I’m applying. After all, most of these ideas I’m writing about in this forum are not my own or original and I’m relying heavily on others like John Ehlers.

But my hope is these few posts spark some ideas and maybe get you thinking about the market in new and different ways. In ways that I think might be beneficial for you, but it's up to you to determine that.

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The Good Doctor Brett Steenbarger might suggest to you that, if you want to consistently make money as a short-term trader, you’re going to need an edge. You might even need more than one.

What’s an edge and where do you find it?

I think of an edge as a statistically significant advantage that I have over other market participants that lasts for a while.
This edge can come from so many sources.

Steenbarger has helped to clarify my thinking about the markets so much and with this concept of edge, he offers a simple way of thinking about where edge comes from:

New information

Old information applied in new ways

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I go to great lengths, and spend ridiculous amounts of time, trying to discover edges from both.

A simple example of new information that I can think of over the last few years might be something like buy/sell signals from Social Media. You know, like how many Tweets a stock gets, or whatever… I’ve seen a few services pop up that offer this type of data, but never personally looked into it. There’s probably some edge in these data.

Or, how about the number of cars in parking lots of Target stores, all across the country? Do you think that might be useful information if you owned 1,000,000 shares of TGT? This is, sort of, a new type of data. I mean…I don’t get that kind of data through my IQ Feed. Do you?

One way I find new information is by creating my own. I explained one simple way to do this in another post on this forum. But I would encourage you to open your mind to the possibilities here because they are endless.

I’ll give you an example. I created my own version of a widely disseminated piece of market-generated data.

I was inspired by reading a bunch of posts by a guy on the Elite Trader forums. And, then, I kept coming back to a principle John Ehlers likes to write about.

Two COMPLETELY un-related thoughts. Merely ideas. Different men. Coming from two entirely different contexts – I mashed up these two ideas and, VOILA, I have new information and an edge.

Again, lots of different ways to come about New information as a source of edge. And, generally, two principles guide me here in the discovery process:

The more creative, abstract, and open-minded, the better. Don’t be afraid to explore seemingly stupid, crazy, weird ideas, but you need to do so within some sort of organization and logic and with some base principles. It’s a delicate balance, but try to remember what it was like being a child, playing in a sand box.

You must also let go of fear, go out in the wilderness, and carve your own path.

There was a time when I wore a heart rate monitor while trading. I was nervous because I didn’t understand. This lead to fear and bad behavior and losses.

Today, I don’t wear a heart monitor and I trade what I think are 2 of the most difficult markets in the world in the NQ and HSI. And I am not afraid.

Understanding makes the fear go away.

After all, this is no place for feelings.

It’s this idea of being vulnerable, naked, and afraid, right? You need some courage to look where others do not and see what others cannot.

I try to do this by making every aspect of my trading my own, completely unique to me, and not caring at all about what other traders are looking at, doing, or thinking. Obviously, I’ll steal their good ideas. But, I don’t really care for their view of the NQ, for instance, while I’m trading it.

Along the way, I just naturally make observations, run across strange, unusual, and unfamiliar behavior in markets, indicators, and above all, get real curious. And I stumble across new information all the time. Some of it turns out to be garbage and some of this has led to my greatest insights and breakthroughs.

I draw a lot of inspiration from Kevin Kelly (nothing to do with trading) in this area and how to find purpose and meaning in one’s life and work. But, above all, Mr. Kelly gave me the courage and taught me how to make it my own.

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But what about old information applied in new ways? How can you find an edge there?

In my mind, any raw market data, like a last price of a stock or futures contract, or a TICK indicator, or even an output unique to Investor RT, like a Volume Breakdown – I think about all these in the same way as being “off the shelf.” And, to me, that makes it “old” information because other traders can see it and apply it. Just like I can. And, you know, more traders makes it all more competitive and more difficult.

As a general principle, I think it’s a bad idea to use anything “off the shelf” that another trader could be using, but there are certainly exceptions to this statement. I can think of quite a few in this platform.

But, what do you do, if everybody else is looking at a 20-day Simple Moving Average on a 5-minute SPX chart?

Like before, you make it your own. Change the old, transform it into something new. Like a hipster recycling a kombucha soda can into a bicycle.

But this doesn’t have to be complex at all. Let’s stick with the Volume Breakdown that Investor RT spits out. What if you speed up that data a little bit, maybe by one or two bars, so that it’s a little faster than the next trader’s? Or look at its relationship with some other piece of data? Or, what if you find a really unique setting, among ALL the variables, in just that one indicator?

THAT is taking old information and applying it in a simple, but new way, to maybe find an edge.

There are SOOO many different ways to “speed up” your data inputs, for example, and among these many ways, there are opportunities to tweak, customize, and personalize. Tons of ways using tools already built into this platform. I mean…I don’t know if the possibilities are literally infinite; but, if not, it’s close. And that should excite you and that’s the part about going out, into the wilderness, and finding your own way.

Or here’s another way to take old information and apply in a new way.

The NQ tracks 100 stocks, known as the NASDAQ-100 (NDX). Is there a faster way to track that index? Is there a smoother way? Does the NQ drive the NDX or is it vice versa? Or maybe some of both? How do you know which and when? Which stocks really matter? Could I build a faster NDX, one that consists of maybe, I don’t know, 5 or 10 ginormous-cap stocks like, say, AAPL, AMZN, GOOG, MSFT, INTC? Could I experiment with the weightings in this custom NDX index? Or should they be similar to the NDX weightings? Or, could it be simpler? Is there value in creating a synthetic NDX out of XLK, XLY, and IBB? Why those ETFs? Could I use this creation to predict the NQ?

The possibilities are endless.

Most ideas will turn out to be dead ends.

But one could be your holy grail.

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There’s a third process that I use to find edge and it’s an almost stubborn, insatiable curiosity about how markets work and the principles and dynamics that govern their behavior. Stubborn in the sense that I won’t rest until I have the answers to the questions I’m asking.

And, I will tell you this: EVERY time I absolutely focus my attention, energy, and efforts on UNDERSTANDING how markets work, I generally make a breakthrough and find an edge.

LIke the time I found TONS of edges in Asian markets, after I moved to Australia for a while, and spent days, and weeks, and months, learning everything I could about those markets.

It all started with looking at a chart of the Shanghai Composite and wondering, “What the hell makes that market look so much different than any equity market I have ever seen?” I had to find out…

Before moving to Australia, I had traded the Hang Seng and Japanese equities maybe 5 or 6 years earlier and did a decent amount of trading currencies in the region. So, I had some experience in Asian markets. But, being in the time zone really helped me expand to other Asian markets, and this is when I went to work trading China.

Markets over in Asia are a little different than in the U.S. because they close during the middle of the day for a lunch break. Cash hours are generally shorter than in the U.S.. Stop and think about this for a minute and the implications. And try not to think about yourself, have some empathy, and think not as an individual trader, but as if you were a manager of a $2 billion equity fund. What would it be like to get your trading done in a shorter window of time than, say, a fund manager in the U.S. markets? What impact would this have on the market? And there’s humility in this exercise because my order, your order – that’s the noise in the market. But this fund manager’s orders?

Among the Asian markets, China is the most peculiar because day trading Chinese stocks is illegal.

So….Short cash session + no day trading = Hmmm…? Sounds kind of funky.

All this makes the Chinese markets really easy to predict on an intraday basis.

The edge comes from figuring out which of the many China markets to trade because, as it turns out, there are lots of versions of “Chinese stocks.” The edge comes from obtaining the real time data in the first place. And a super-duper edge comes from pre-processing and filtering this real-time data. And the edge comes from figuring out a way to, you know, get around the law and day trade China, which in itself is maybe part of the reason there’s an edge in the first place. And then you must deal with the currency risk, and conversions, and latency, and so on.

Not easy, but it’s doable.

Here’s one way I exploited all these edges in China and an example of how inefficient the market is.

I found an ETF on the Hong Kong stock exchange that was thinly traded, but had a small enough bid/ask spread to be economically feasible to use as a day trading instrument. It was typically 1, but no more than 2 ticks wide. I figured out how the market makers adjusted their bids and offers in this ETF. It was based off one obscure index and in its raw, un-filtered form, it’s pretty easy to predict almost every day. It gets hard when trading grinds to halt in China, which is rare, but can happen. That's when the high transaction costs cause this strategy to do little better than break-even. And it had to be a long-only strategy, so I would lift the entire offer once the index started to rise. I’d buy more when they replenished the offer, but usually the market makers would move the ask up a tick after I entered. After I got the position on, I’d let it rise, and then hit the bid when the index stopped going up. I defined up and down with a moving average of a couple bars and I was happy to pay the bid/ask spread and I’m guessing the market makers were pretty happy with my volume.

And I made money almost every day. This was as close to a risk-less trade as I have ever found.

All this was happening years ago during the last Chinese flare-up and it was a really interesting stretch in their futures market because, at one point, the CSI 300 futures were more active than the S&Ps. Then the Chinese government killed that market, although it’s come back recently. But they killed this trade I discovered, too.

But, at this very moment you’re reading this, many, many exploitable edges remain in China.

Many, many ETFs with similar dynamics.

Many even slower moving stocks, pushed around by the ETFs, and futures.

Here’s a thought: Chad made a video about creating a custom TICK indicator. I can’t seem to find a TICK for the CSI 300. Or the Hang Seng.

But, why stop there?

Why not make a TICK on another, less-visible index in China that just happens to have an ETF that trades in – I don’t know – Japan. That would be some new data, right? That maybe no other trader in the world has? Might there be an advantage in being the only trader on earth to have a piece of data, a one-of-a-kind insight into a market?

Or create your own custom, better version of an index that has futures attached to it and trade the futures.

Or buy the stocks and hedge with derivatives, running a book of rolling swing trades. So many possibilities for stat arbitrage!

Or use China as an input to trade Hong Kong, where you can day trade.

And on, and on, and on…

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Simple concepts, but can be difficult and time-consuming to UNDERSTAND, and to get it all correct. But, surprisingly, the tech behind most is pretty easy to implement with IRT. You can do some pretty high level statistics, functions, and calculations, with the click of a mouse.

And how do you know when you’ve truly found an edge? How do you know if it’s real?

It works. You make money applying it. Until it doesn’t. Then you find another one.

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Again, all this is just my opinion and you shouldn’t believe any of it, and sure as hell NOT risk any of your money, on anything that I’ve said.

I lost so much money listening to, and believing in, the wrong voices.

What you might do instead is go find out for yourself.