Is Trading a Perfect or Imperfect Information Game?

[tacdog 10]

http://en.wikipedia.org/wiki/Perfect_information

 

Perfect information describes the situation when a player has available the same information to determine all of the possible games (all combinations of legal moves) as would be available at the end of the game.

 

In Game theory a game is described as a game of perfect information if perfect information is available for all moves. Chess is an example of a game with perfect information as each player can see all of the pieces on the board at all times. Other examples of perfect games include tic tac toe, irensei, and go. Games with perfect information represent a small subset of games. Card games where each player's cards are hidden from other players are examples of games of imperfect information.

 

In microeconomics, a state of perfect information is assumed in some models of perfect competition. That is, assuming that all agents are rational and have perfect information, they will choose the best products, and the market will reward those who make the best products with higher sales. Perfect information would practically mean that all consumers know all things, about all products, at all times, and therefore always make the best decision regarding purchase. In competitive markets, unlike game-theoretic models, perfect competition does not require that agents have complete knowledge about the actions of others; all relevant information is reflected in prices.

 

The concept of perfect information has often been criticized by the various schools of heterodox economics.

 

 

Trading is a game we all play in various forms. So do you think trading is a perfect or imperfect information game?

[Tradewinds 12]

. . . . Chess is an example of a game with perfect information as each player can see all of the pieces on the board at all times. . . . . . . . So do you think trading is a perfect or imperfect information game?

 

It is possible to see what moves the market is making. You can use "market internals", volume, and of course we can see the real price with no delay. So in that sense, trading is very close to a perfect information game.

 

However, I think that we also need to talk about the speed at which we get that information. The market moves much faster than a chess game. (Played by humans)

 

We also would need to talk about whether everyone knows how to obtain information, and whether they know it's available.

 

But the question is about whether there is transparency in the market and whether we can see all the moves that the other players are making. I think that for the most part we can.

 

In chess, a perfect information game, we can't read the other person's mind, or know if their strategy or rational is correct or not. A big institutional trader can enter a big order, but that doesn't mean it was a good decision, or that they will ultimately make any money.

[tacdog 10]

I didn't even consider the speed of information, and how much faster the game of trading is played.

 

As a trader we have to play the game at a pace where we are able process all necessary information to make decisions to execute our plan and exploit our edge

[$5DAW 10]

I'm in the imperfect camp on this issue, for a host of reasons. I was watching one of the "news" channels the other day and saw a report on how McDonalds was using satellite imagery to see the increase/decrease of parking lot (drive thru) traffic at different locations/times and thus project sales of "featured items" offered at those locations. Now that is information! I guess if I was the largest consumer of potatoes (and most everything else on the menu) in the world I'd want to know if they were selling or not too.

 

I don't have one of those (satellite), I have a PC with a cable connection. I accept the fact I'll never get the news, I get history. If I want to set up a HFT computer and I'm more than 100 miles from the exchange/co-location server, I cannot compete due to latency, that's the fact. Sure they'll lease me slot or two in their server, if I'm willing to pay up. Speed in the markets is no longer measured in seconds but fractions of a second.

 

When I started trading I called in my orders on a phone, and often waited for a call back to verify my fill. The switch to electronic trading was brutal for me. As the speed of execution increased, I always found myself lagging behind the crowd. Even today, since FIOS is not available on my street, I consider the guy trading against me in the "next neighborhood" to have a speed of execution advantage over me.

 

The notion of market internals has it's own quirks and limitations. Take volume for instance, do you really know what your looking at? Is it tick data or is it a snap shot of a 25 millisecond time span of tick data, or is it the actual number of trades traded at that price? This may seem like splitting hairs but the title of the thread mentioned, "Perfect or Imperfect Information." So if you see 100 contracts traded @ 2236 on that last trade, and I see only a single tick of movement who has the "most perfect" information? Furthermore, if I'm using this volume data to chart a VWAP or build a price histogram study, how perfect or Imperfect are they?

 

My conclusion:

When I realized and accepted the fact that the information I receive is in fact what the "heavy hitters" already know, the best I can do is follow along with them and not attempt to lead the way. For me, this meant expand my time frame, I cannot compete on a sub second level on my PC from my home, period, end of subject. During the "brutal" period of adapting to the new speed of trading I described above I found my niche not in narrowing my time frame but expanding it! By stepping back and letting the fast and furious players do their thing and giving the scalpers room to do their thing, I found a time frame where I could comfortably do my thing. Support and Resistance have always existed in the markets and I assume always will, trading between those two levels on a time horizon that fit my style of trading, my tolerance for risk and my personality proved to be the key for me to remain consistently profitable in the markets. It seemed ironic at first, that in the era of high speed trading my answer was found in slowing down.

Edited March 20, 2011 by $5DAW

[SIUYA 11]

unless you are hitting the market bids and offers, you are always going to be looking at history.

 

I always shake my head when people talk about trying to compete with the institutions and the brokers.....its like an amateur rocket builder trying to compete with NASA. Understand your limitations and work with those.....you might find you make more money rather than worrying what everyone else is doing.

 

There is no such thing as perfect information. Everything is relative.

[Ingot54 13]

I accept the fact I'll never get the news, I get history.

 

My conclusion:

 

When I realized and accepted the fact that the information I receive is in fact what the "heavy hitters" already know, the best I can do is follow along with them and not attempt to lead the way.

 

For me, this meant expand my time frame, I cannot compete on a sub second level on my PC from my home, period, end of subject. During the "brutal" period of adapting to the new speed of trading I described above I found my niche not in narrowing my time frame but expanding it!

 

What a brilliant insight $5DAW.

 

 

By stepping back and letting the fast and furious players do their thing and giving the scalpers room to do their thing, I found a time frame where I could comfortably do my thing. Support and Resistance have always existed in the markets and I assume always will, trading between those two levels on a time horizon that fit my style of trading, my tolerance for risk and my personality proved to be the key for me to remain consistently profitable in the markets. It seemed ironic at first, that in the era of high speed trading my answer was found in slowing down.

 

What a reassuring and timely post this is.

 

In a trading world where we are just bleeding to get the most powerful hardware with the fastest software execution, here is a guy who says: "Whoa there guys! Take 5. Take a breather. You can do this - but don't try to take them on at the tick level. Let them reveal their play, and run with them."

 

I find this kind of attitude and insight precious beyond words.

 

Thanks mate - this is the thought for the week, for me.

Edited March 21, 2011 by Ingot54

[Tradewinds 12]

I've been thinking some more about this question, and it's quite interesting really. In a chess game, or many other games, you have time to contemplate your next move, and other people don't make a game move until you have made your move. If you are making very short term trade, then you have almost no time to contemplate your next move. So even if all the information really was there for you to see, it's not like a chess game where you have time to think. And in a chess game, there is only one other player. In the market, no one waits for a small time retail trader to make their move before everyone else follows. It would be like playing a chess game where multiple people are moving pieces on the side against you, and they don't wait for you to make your move before they make a second move, or a third move. It would be like playing a chess game where you could be put into checkmate without ever having made a move. You could loose pieces, but if you never made a move, then you would never take the opponents pieces.

 

That's kind of an amusing mental picture. Someone asks you if you want to play chess, and then you find out that you are playing chess against 5 other people, and they are all moving pieces against you, all at the same time, and they couldn't care less what you are doing. Picture that in your mind.

Edited March 21, 2011 by Tradewinds

[Qiman 10]

A person's emotional/mental state has a huge impact on what information they are actually able to perceive on all levels, including gthrough one's "gut.". This mental state includes various biases, i.e., the market "should" go down, or the market is "undervalued." When I speak of emotional states I am of course also speaking about FEAR, which is an integral part of the trading arena. In addition, we all have our various awareness skills. Have 10 different traders following the same futures contract, and you have 10 different viewpoints upon the information at hand. And if these 10 people witnessed an accident, they likely would all have slightly different stories to tell as well.

 

When I take individuals out into the wilderness, what they do and do not notice is a source of constant fascination for me. And for most modern individuals, there is so much FEAR about being in deep, rugged wilderness, that their perceptions are greatly limited by these fears. I once had a student fly many thousands of miles to come study, she was in an area which was absolutely teeming with opportunites for life-altering positive experiences, and yet she was so afraid of the possibility of bears being about that I had to backpack her out after only two days! And all these amazing opportunities never came to fruition in her life...

 

The more calm and centered one is in both the wilderness and the "market wilderness," the more likely one is capable of noticing opportunity contained within market information, and taking effective advantage of it!

[zdo 20]

Imperfect.

 

"history" is one way of looking at the incompleteness of data.

For me, it's more accurate to look at it in terms of "representations" we each build of the actual auctions in process. The data itself is always incomplete, the tools we use to build visuals, etc.etc. , our brain balance in constantly rebuilding consistent and accurate perceptual 'maps' - with, as Qiman just discussed, the inevitability of some degree of bias

[Elroch 10]

The random (or caused by unknown factors) component is larger than the known component. Hence, very imperfect information.