Defeating the Discombobulating Dialectic: Or, Just Trade the Damn Thing! Part II.
The practitioner of tomorrow has already dissolved artificial boundaries.
Read Part I Here:
At the AXIA trading desks.
Tuesday 19th November 2024,
London, England.
“Then Spoos put in a new high. Maybe fading geopolitical risk isn’t the worst idea in the world,” said this trader. “But I’m not so confident in fading nuclear war just yet.” Fading nuclear war? Win-win all round! You retire or get retired. Ah! Good old perverse incentives—the Fed Put was so last decade…
And now I’m speaking with another young buck at his desk on AXIA’s London floor, who netted shy of six-figures on yesterday’s events; another perspective on Tuesday 19 November. Pan left, and you spot the usual assortment of a dozen monitors, containing X feeds, news terminals; yet the rest of the screens are absolutely pasted with price ladders—everywhere! And unlike the Cypriot’s comparatively sleek machine, these ladders are all different shapes, sizes, and colours. Damn, why didn’t I think of doing this too…
Yes! This late twenty-year-old is your classic news trader—who survived his initial years on strict discipline of trading nothing else. But pan further left across his screens and spot the unusual market profile charts. Unusual for a ‘news trader,’ that is, or what they typically assume that to be. So this is an obvious symptom of more profound, deeper change within this trader—and a marker of where he is going next, and perhaps our profession too.
So, early European morning, Tuesday 19: then came the fade. Half-clips all round—short Bunds, long S&P— get a feel for the market on lower risk. This was the modus operandi, our young trader said, of most of the floor on the update of Russia’s Nuclear Doctrine.
But then!— (‘Ukraine Made Their First ATAMCS Strike Inside Russia’) This is it!—real risk-off flows! Short S&P two clips; short Euro a clip; long Yen a clip; long Gold two clips. Yet: focus on the S&P, it's ripe to go.
But the ol’ Spoo, is stuck— C’mon! It has to go! Dax is straight-lining, Bund is ripping—C’mon Spoos! It has to! The collective lamentations of the traders start to build—wake up man!—then more swearing and shouting. Just go! If this DAX turns, and I’m holding this Spoo; I’m screwed… the minutes feel like hours, but the S&P holds and holds. Our trader glances left to the S&P’s profile. Look there’s this inside day… and we failed up there, and rolled over down here… this is going to play out! It will come down here! Clear targets, clear idea: conviction holds.
The S&P finally releases, and our trader is still in, backed by conviction and good prices. Smash the lows! Scale some out; okay—reset and get back in… But this will be a fight. The S&P absorbs some selling and bounces higher again, but our trader presses on—he sells more clips, but S&P bounces again. Shit! I’m back at my average price now, how’s this happened? But the S&P rewards those who survive the shakeout. C’mon! Suddenly it releases, pushing our trader several handles on-side. He’s held on, earning him a strong hand to add to his trade without adversely affecting his average price too much.
Later the moves abate, the Bund rolls off the highs, Yen and Gold too. S&P bounces. It’s done.
Then comes one of the most important questions of all:
“What’s the next trade?”
“In my mind, that was some form of walk back from Russia, or Ukraine or the U.S.—on the idea that the ATACMS missile strike situation wasn’t going to escalate,” our trader said. “At the same time, DAX was off 300 ticks, Bund up around eighty ticks, Spoos—down fifty to sixty handles. So immediately my mind goes: the next big thing is this denial trade. I need to be ready and waiting for it. So I made sure to be on top of the DAX; the European equities were much more responsive, and I can make much more on the way back up. Then came Lavrov’s ‘Russia’s Position Is That Nuclear War Won’t Happen.’”
How did you deal with the volatility in-between closing out your main S&P short, and what later turned out to be Lavrov’s walk-back comment, or ‘denial’?
“I was flat. I would rather not get involved in the post-flow. [After Ukraine's ATACMS missile strike headline.] Because once you do—you get caught; distracted. Many people get caught on both comments: trading too late on the morning's Nuclear Doctrine comment, and then caught the wrong way around on the Ukraine missile strike comment. Then the same happened for the Lavrov comment. People try to trade other things—too late on the missile strike—but then they get caught again on Lavrov’s denial. Or at least they miss the initial leg.”
When the denial hit, you were in familiar territory— the ‘smash and grab’ scenarios you've first developed over the years. Walk us through your next moves.
“I lifted the DAX, EuroStoxx, Spoos and shorted Bund; knowing it has to retrace a big part of the move. You would expect to do it for the large part of the day, but I don’t have the patience for that. I’m already moving onto the next trade again in my head. Because this is the storyboard of the trade in my head.”
What do you mean by ‘storyboard’?
“You had the escalation: the nuclear doctrine update, then ‘confirmation’ of it with Ukraine’s missile strike. So you now have two branches of possibilities. It will either escalate further or de-escalate. We’ve gone down the de-escalation path on Tuesday 19. So where are we going to go from here? Will Ukraine walk this back further? Or will you have some kind of U.S. comment: no more missiles? Or you get what happened today [Wednesday 20th]—Ukraine has fired more missiles. Okay, markets have come off again. Therefore, what is Russia going to do next? And so on. Then you plan ahead.”
Give us more detail on how you executed the Lavrov walk-back.
“It was about fighting a very sticky market that wouldn’t release higher. But you knew that it had to go higher. It had no reason not to go there. You’ve seen the risk-off flow already on these comments. DAX bid fifteen to twenty ticks and just sat there. EuroStoxx popped six ticks or so and offered back down in a straight line. But then Bund was taking out the lows. It made no sense! Stoxx has to go! The denial was so quick, I was looking for products that haven’t moved so much. And Stoxx had more in it. It had no business being down here. DAX should go a lot further, Bunds had just done forty ticks. So why is Stoxx still there? I kept buying Stoxx fairly big. But it flushed back, I had to scale out little bits, and trying to manage a core position. To then later buy more and more as it traded higher… and I eventually scale out most of it as the move petered out.”
What was your real-time assessment during this denial or walk-back flow?
“I think of what I have on—is it enough? Either: ‘Ok that will do,’ and you manage it. Or, I had a large position on DAX on the pulse up, but I took it off quick. Because denials are like this—an instant thing. It goes, teleports higher off the screen, and can stay there for a long time. The DAX upside was capped for something like fifteen-twenty minutes! And then it put in a new high and released higher. For a binary trade like this, I would rather not be in a position that long, when its this volatile and I have positions on four markets; because something can flip! Some crazy risk-off thing could happen again—then I’ve got to flip everything. I’m fast; but not that fast.”
This ‘smash and grab’ was different from the morning's Spoo short, though?
“Yes, the bulk of the denial move was done quick, and that is what I wanted to capture with most of my size. And that is different when you have to fight, like on the Spoo move to the downside, on the initial ‘Ukraine fires ATACMS missiles’ comment. Maybe it takes time for the markets to figure tout; only then the real risk flow kicks in, as people sell—all sorts of reasons. But the flow and release was gradual. These are two very different trading styles.”
Looking back, we now know that was the second of three significant comments that Tuesday, with the final one being Iran's standalone statement. How did you navigate the afternoon?
“It was managing yourself at that point. After the morning's events in such short succession, you feel you’ve had so much adrenaline course through your body in to act on all this. I find I feel heavy, and I was telling myself not to tilt trade. I thought I should have done better, I still feel like I underperformed. Nevertheless, I didn’t want to give back half a day’s P&L. The day is still very good. But would you want to be up another 50% or more? Of course you would! But because of sitting out, I wasn’t caught in other markets when you had the Iran headline, [‘Iran agrees to stop producing near bomb-grade uranium.’] This itself added 30% P&L to my day.”
How did you trade this Iran comment?
“It was a great opportunity because no one expected it, so you could get as much size off as you wanted in there. I saw the comment drop, and I instantly hit Brent futures, and instantly flashed onside fifty ticks, then took some off. However, you also saw Crude Oil couldn’t bid at all on any geopolitical risk all morning. It was weak all day, so Oil was ready to roll over. Then it's just back to managing yourself once more, after yet another shot of adrenaline. I had to be disciplined—shorting an Oil pull-back would just exhaust me and take my focus away from better opportunities. And even though I wished I'd made more P&L, randomly punting around when nothing's happening would be pointless.”
The Anomalous Becomes The Centre
The above interview speaks for itself. But note, readers, our young buck's use of the market profile to review the S&P that morning, as it reveals a ‘framework bonus.’ That is, to have the ability to understand when to hold the trade and add more size—a consequence of conviction. In other words, to possess a framework that can also aid in market selection when there are many to choose from, and guide where to best commit risk.
And that comes from understanding where the 'path of least resistance' is, as often says one of AXIA's premier market profile traders. Yes! agrees our young buck, and the Bund downside on the Lavrov denial comment was a good example. “That was actually the original plan: I'm going to sell the Bund on the denial. I will get away loads of size, and I thought it was weak after a large squeeze high. You could feel the path of least resistance was down; it wanted to die—you could see it. It couldn't hold itself up while other markets were trading the risk-off flow. But best laid plans don't always happen—right?”
Indeed, and while his DAX and EuroStoxx trades paid out—the real juice was in the Bund. And that is where he can improve next. It is the same idea—trading the risk-on, following Lavrov’s denial—but expressed optimally, in the best possible market, realised through ostensibly a ‘technical’ market approach—but really: an overt framework to do so. Because at this stage, our trader says, simply adding more size to push his performance reaches the point of diminishing returns. You can’t be in everything! So then the trader must identify the most sensitive and ripe markets to optimise: attention, risk, commitment. Packaged as that elusive entanglement of brains and brawn known as conviction.
Hence: the framework bonus. Consider the alternative, to those who eschew any ‘technical’ bias: “We’ve all sold a hawkish central banker on a massive [technical] level,” our trader said. “And the market barely trades through it, then bounces and rips higher. Well!—something didn’t add up.” In this case, the bonus is the ability to filter traders through different means, rather than simply reading and acting blindly on the comment or headline. And this returns us to a crucial part of a trader’s edge: variance. That is, filtering out the ocean of high variance—defined, for our purposes, as a large range of trade outcomes. Or, if the trader cannot filter, can they counteract high variance through other means?
Especially! when we trade a fuzzy edge case like Tuesday 19th. Consider what we emailed our subscribers last week:
This series, and really the Asymmetrist as a whole, isn't here for the usual, but the unusual—that's where the best learning takes place, where expectations shatter. If anything, numerous scientific breakthroughs came from that one annoying anomaly, the exception you just can't ignore. So it went for Darwin, Curie and Einstein… Why is Tuesday 19th interesting? We have a rare observable instance of the market's self-fulfilling prophecy. That Gordian knot of what the market really is, and by extension, what is the 'legitimate' market approach… [But] spoiler: asking that question already sets you up to fail.
As we said in Part I: “News flow causing order flow, or is it order flow causing news flow?” In other words, these are situations where the market seemingly reacts to the insignificant or is unmoved by what we deem as critical news. Will it go or not? To a ‘technical trader’ these are lone volatility injections that trigger trades. Market selection, sizing, and management are handled by their overt framework. Yet, this is inaccessible to a pure news-event-fundamental-macro (assign your box) trader, whose market selection, sizing, and management is left to the devil in the details: the headline—and this little devil is the most wily and unreliable of all.
This ‘separation’ is becoming ever more blurred, neither camp can afford to “wait it out” for something to fall into their wheelhouse. The markets are, of course, perfectly imperfect. So why waste time thinking dogmatically and joining sides in that never-ending discombobulating dialectic of arguing or thinking in terms of ‘technical’ and ‘fundamental’ trading? The Gordian knot of the market becomes evermore entangled as it evolves and develops organically, like a rainforest, for the markets to warp, twist and change in a non-linear way—to be a ‘complex’ domain.
These ‘edge cases’—Tuesday 19—are perhaps not so anomalous, in various market cycles or some environments they can quickly become the norm. And who knows how much time the market will spend in this environment? Can you survive it? Maybe you’ve not traded long enough to imagine any other environment! But reconsider it: these edge cases also show the way forward, of how you can develop next or where the practitioner of tomorrow is going.
In other words, the practitioner of tomorrow has already defeated the discombobulating dialectic; this rough Gordian knot, by taking a cue from Alexander the Great—pull out your sword and slice the damn thing in half! That is, don’t argue—just trade—and use every means at your disposal to dissolve framework, technicals, market profile, fundamentals, charts, news, levels, flow, stats, indicators, patterns, macroeconomics into just one thing: trading. An act of never-ending synthesis.
Acknowledgements, Permissions & Disclaimer
Grateful acknowledgment to AXIA for granting access to one of their traders.
This article features the image “Alexander cutting the Gordian knot” by André Castaigne (1898–1899). Modified from the original. Public domain. Retrieved from Wikimedia Commons: Link to file.
Disclaimer: Do Not Do Stupid Financial Decisions. This Is Not A Game.
