Game Theory and Predictive Reasoning

[UrmaBlume 10]

As both a poker player and a trader - game theory and predictive reasoning plays a big part in what I do.

 

In the clip bleow a very smart man provides insight into basic game theory and predictive reasoning - insights that, for those that can handle it, provide a glimpse into a new dimension in trade decision support information processing.

 

 

http://digg.com/d1o9iD

[jonbig04 10]

interesting...........

[thrunner 10]

Mr. de Mesquita suggests that the stock market is unpredictable, in his analysis, while the decision making process in Iran can be predicted to 90% certainty, regarding the building of the bomb.

 

Why do you think this is the case? Are there just too many players in the market and too little information on what position they hold that makes it insoluble? Does this suggests that one should isolate a sector of the market and try to analyze and influence the players in just one sector of the market? Which is apparently what the investment banks and hedge funds tried to do with the oil market and now with the gold market.

 

If this is indeed the case, shouldn't one be in sector specific markets rather than the index futures, for example?

[UrmaBlume 10]

If this is indeed the case, shouldn't one be in sector specific markets rather than the index futures, for example?

 

We believe that each instrument is a market unto itself and from there we try and discover the interests and activity of the major participants.

 

In the case of the stock index instruments we believe that the commercial speculator is the force that drives price and we make efforts to track his trade via such indicators as Trade Intensity, Buy/Sell Volume Harmonic, Net New Commercial Trade and others, most of which have been disscussed in previous posts to this board.

 

cheers

[zdo 20]

Mr. de Mesquita suggests that the stock market is unpredictable, in his analysis, while the decision making process in Iran can be predicted to 90% certainty, regarding the building of the bomb.

 

Why do you think this is the case? Are there just too many players in the market and too little information on what position they hold that makes it insoluble? Does this suggests that one should isolate a sector of the market and try to analyze and influence the players in just one sector of the market? Which is apparently what the investment banks and hedge funds tried to do with the oil market and now with the gold market.

 

If this is indeed the case, shouldn't one be in sector specific markets rather than the index futures, for example?

 

My limited perspective - His is a specialized model of game theory that requires good representations of 1) who has a stake, 2) what they say they want 3) how focused / how big a deal it is to them 4) how much clout they have if decide to act…

For exchange traded markets, in both macro/broad index and micro/sector/ individual instruments, 1) is unknown and is also too transient 2) ‘they’ always say they want the same thing, they “want it to go up” - not differentiable info 3) their focus is immeasurable (and, like 2), malleable and transient) 4) the ‘clout’ is also transient (and also prefers to keep position information secret). That’s essentially why he doesn’t (publicly) apply his model to the stock markets… Also, his model is applied to situations which ‘resolve’ at least in terms of current circumstances and conflicts. Markets never ‘resolve’… so applying other game theory models would be more appropriate and he knows it...

[BlowFish 10]

Doesn't game theory need a discrete (finite) number of players, moves and outcomes? Aren't continuous games much harder (if possible at all ) to model?

 

Having said that I have no formal knowledge of game theory though have been an avid gamer for a long time.

[AgeKay 10]

In the case of the stock index instruments we believe that the commercial speculator is the force that drives price and we make efforts to track his trade via such indicators as Trade Intensity, Buy/Sell Volume Harmonic, Net New Commercial Trade and others, most of which have been disscussed in previous posts to this board.

cheers

 

You mention commercial traders/speculators a lot, but what exactly is a commercial trader?

[become 10]

Thanks for posting that - very interesting in the light of recent developments in Iran. Those TED talks are wonderful - and great listening when the market is moving slowly.

 

Also (and more generally), I've only just started exploring this site seriously, and came across your various threads over the weekend - thanks for those as well, they contain a lot of very suggestive material.

 

I've been trading for some time with volume bars, a velocity histogram, and cumulative delta, and have been searching for ways to measure and exploit more precisely what I've been observing. Having the computer beep when large lots are hitting the bid and the ask can alert one to all sorts of interesting activity, but quantifying it is something else. You've indicated some interesting directions...

[BlowFish 10]

You mention commercial traders/speculators a lot, but what exactly is a commercial trader?

 

I presume that it is the following

 

"Commercial and Non-commercial Traders. When an individual reportable trader is identified to the Commission, the trader is classified either as "commercial" or "non-commercial." All of a trader's reported futures positions in a commodity are classified as commercial if the trader uses futures contracts in that particular commodity for hedging as defined in CFTC Regulation 1.3(z), 17 CFR 1.3(z)"

 

From the Commodity Futures Trading Commission (CFTC) website.

[UrmaBlume 10]

I presume that it is the following

"Commercial and Non-commercial Traders. When an individual reportable trader is identified to the Commission, the trader is classified either as "commercial" or "non-commercial." All of a trader's reported futures positions in a commodity are classified as commercial if the trader uses futures contracts in that particular commodity for hedging as defined in CFTC Regulation 1.3(z), 17 CFR 1.3(z)"From the Commodity Futures Trading Commission (CFTC) website.

 

BlowFish,

 

The CFTC criteria have nothing to do with the way we classify commercial trade.

 

We don't designate trade as commercial by who is doing the trading but rather by certain characteristics of the trade.

 

Most of our work is about the timely designation of local points of price inflection which we call Trade Points. We call our little group TradePointTechnologies.com

 

There are certain measureable dynamics present at most of these local turning points. One that I have demonstrated here is our measure of the Intensity of Trade which is one of 4 primary measures that we use to designate a certain price as a TradePoint.

 

The concepts and indicators I have shown here are not our final layer of processing but merely the inputs to that final layer/level of processing/technology.

 

cheers

 

UrmaBlume

[AgeKay 10]

So you're basically call those guys commercials traders that are responsible for these local points of price infliction or what you call Trade Points. Or one could say you call those commercial traders that cause local highs or lows?

[BlowFish 10]

Ahh OK personally I try and use terms that have been adopted in emerging works on market microstructure, Harris in particular (I have not read O'Hara). He deals with who trades how and why. Different types of trader have quite different modus operandi, though of course they all leave 'footprints' across the tape. Might interest you actually if you have not read it already.

[UrmaBlume 10]

Ahh OK personally I try and use terms that have been adopted in emerging works on market microstructure, Harris in particular (I have not read O'Hara). He deals with who trades how and why. Different types of trader have quite different modus operandi, though of course they all leave 'footprints' across the tape. Might interest you actually if you have not read it already.

 

I have Harris and even my students find him a bit pedestrian. Lots of pages to describe "informed speculator," "bluffer," or "dealer" with nothing much we could find as useful from the standpoint of practical application at a level anywhere near what we find effective.

 

I don't mean to talk down to either you or the book but I come from 30 yrs on trading floors, in dealing rooms and among market makers and Harris comes off to me and those I teach as a bit ABC in a whole lot of pages.

 

My next book is "Practical Short Term Trading - Techniques & Technologies" and I hope to do a better job of covering the material and provide more practical, accessible and useable information.

 

cheers

[AgeKay 10]

I have Harris and even my students find him a bit pedestrian. Lots of pages to describe "informed speculator," "bluffer," or "dealer" with nothing much we could find as useful from the standpoint of practical application at a level anywhere near what we find effective.

 

I agree, I had the same criticism when I read his book.

[AgeKay 10]

My next book is "Practical Short Term Trading - Techniques & Technologies" and I hope to do a better job of covering the material and provide more practical, accessible and useable information.

 

Pad, when do you plan to publish this book and is it possible to preorder it? I'd even offer you to proof-read it ;-).

[UrmaBlume 10]

Pad, when do you plan to publish this book and is it possible to preorder it? I'd even offer you to proof-read it ;-).

 

Thanks. While my publisher is always after more cash flow, our primary focus is to grow our little company.

 

Books help to train and to clarify thoughts but no matter how many you sell its not much money when compared to the revenue from 2 more traders or 2 more bots.

 

Thanks for the kind words.

 

cheers

 

Pat

[BlowFish 10]

It is rather 'text book' and text books tend to be dry...you might go as far as saying hard work. I agree is not really that 'practical' a book (well it might be if you are a regulator or design exchanges). I guess if your sole interest is practical applications and strategies it won't hold much for you.

 

I found certain sections (quite a few) pretty interesting I just re-read about liquidity and bilateral search issues again no real practical use to me but who knows one day maybe one day maybe finding liquidity will be an issue interesting none the less. I guess people see things like 'The Glosten-Harris spread estimation model' and their eyes glaze over. I though hmmm maths...Im not very good at that maybe I'll learn something here.

 

I do think his definitions are far more useful than 'smart money' 'big boys' etc. I wonder exactly what you do mean by commercial? Size? Without a common lexicon communication becomes hit and miss at best.

 

I'd be up for proof reading too ;-)

[AgeKay 10]

Books help to train and to clarify thoughts but no matter how many you sell its not much money when compared to the revenue from 2 more traders or 2 more bots.

 

This is true, but unfortunately you have not answered my question with regards when you intend to publish it and if I can preorder it? I am probably one of the few who could translate your information into something practical for myself since I develop my own software...while others will probably read your book and wish their favorite trading platform vendors would implement your information in the future which is obviously unlikely.

[taotree 10]

So, I've seen Harris and O'Hara books mentioned but not in the form of a recommendation. What's the best book for studying market microstructure?

 

I'm also looking for a recommendation for a solid book on game theory. I don't know/care about poker, so would rather have one that's just focused on game theory, but if the best one is about poker, I'm ok with that. I'm not afraid of math, so heavy in math/theory is fine--just looking for the most informative/useful. I've read some about game theory before, but I would like to read through a good solid formal approach.

 

Oh, and I should say: book that I can get right now I also look forward to a certain unpublished book mentioned on this thread, but I'd like to pick one up right away. (Unless that someone needs any help reviewing/editing/proofreading/etc. for which I would gladly volunteer)

 

Thanks!

[UrmaBlume 10]

So, I've seen Harris and O'Hara books mentioned but not in the form of a recommendation. What's the best book for studying market microstructure?

 

I'm also looking for a recommendation for a solid book on game theory. I don't know/care about poker, so would rather have one that's just focused on game theory, but if the best one is about poker, I'm ok with that. I'm not afraid of math, so heavy in math/theory is fine--just looking for the most informative/useful. I've read some about game theory before, but I would like to read through a good solid formal approach.

 

Oh, and I should say: book that I can get right now I also look forward to a certain unpublished book mentioned on this thread, but I'd like to pick one up right away. (Unless that someone needs any help reviewing/editing/proofreading/etc. for which I would gladly volunteer)

 

Thanks!

 

Thank you for the kind words.

 

I haven't read O'Hara but I found Harris to be very pedestrain, usless for the kind of trading we do and that it said very little that is of practical use in over 600 pages.

 

As to Game Theory I would recommend "An Introduction to Game Theory" by Osborne and "Game Theory" by Meyerson.

 

In addition here are a couple of links I found useful:

 

A collection of articles:

Combinatorial Game Theory

 

Some course notes:

Lectures

 

Enjoy

 

cheers