Friday, August 11, 2017

The rules of the game haven't changed

I started getting involved in trading back in 2003, and didn't get into trend following until 2006. As a result, I missed the huge trends (both up and down) from the bubble around the millennium.

While thinking idly back to those times, which are now getting on for 20 years ago (yikes!), I began pondering about how things have changed in the intervening period.

Back then, Facebook and Twitter didn't exist. The bubble sprang from something new to the masses called the internet. Mobile phones were nowhere near as common as they are today.

How on earth did we survive?

And that got me thinking, from a trading and historical viewpoint.

These days we have up to the second market quotes on your PC, tablet or even your mobile. We have sophisticated charting packages which come with a Pandora's box full of indicators. Even Joe Public can create fully automated trading strategies and back-test them to their heart's content relatively easily and cheaply.

Go back in time, and none of these tools were available. Before the advent of electronic trading, people stood at trading posts at the exchanges, or in the pits, executing orders which may have come in via person, telephone or telegram (what's one of them?).

Nicolas Darvas was successful simply by following the information his broker provided via telegram. When he did move 'closer to the action' he lost a big chunk of the profits previously made.

Jesse Livermore did not use charts - instead, he had his own custom analysis pads printed where he jotted down the 'pivotal' price movements that were the backbone of his own method.

Livermore himself talked about a successful speculator based out west in the mountains, who simply observed and acted on price from newspapers that were three days out of date.

And to take this a stage further, think of the 'top down' traders who these days look to trade only in the direction that the general market is moving. 

The Dow Jones Industrial Average was first published in 1896. The S&P Composite index (now the S&P 500) came into being in 1923, and was only expanded to 500 stocks in 1957. Yet stocks have been traded on an exchange since the signing of the Buttonwood Agreement in 1792. 

How on earth did the successful speculators of the 19th century cope without reference to a market average, let alone any charts or indicators?

Progress is often automatically seen as good - for the better for everyone.

But while thinking about this, a question formed in my mind:

Has all this additional information and all the bells and whistles we now have at our disposal made traders of today any more profitable or successful than our predecessors of 10, 20, 50 or even 100 years ago?

At the end of the day, stocks, commodities or other instruments still move in exactly the same way as they did back in the 1800's - price can only go up, down or sideways. 

And, as far as I am aware, it is still the case that your profit or loss is solely determined by the direction price moves after you have entered a position.

So the rules of the game haven't changed. But the market participants, together with the tools and gizmo's that are available, have all added to the noise.


  1. Beautiful article. Really got me thinking...

  2. Good read. I suppose Darvas and Livermores' success was founded on price action (breakouts) and cutting losers which still holds true today regardless of all the technical indicators we now have.

  3. Buy pullbacks in an uptrend, sell rallies in a downtrend, no trading in sideways mkt. cut your losses and let your profit run, be disciplined. This is the recipe to success in any market. I go back to look at charts traded by Livermore, I could have traded them the same way I am trading now and still made money.

    1. If those are your rules then yes, absolutely. I only ever buy new highs or short new lows, but the principle of keeping whatever rules you follow as simple and focused as possible on price without all the fancy extras still applies.