On the market, there are two types of profits: Alpha and Beta. Beta is what you get when you diversify and passively hold on to the marketplace. Alpha, on the other hand, requires you to have an advantage, in which there are 3 points: information, analysis and behavior.

To earn Alpha profits, you need to do a considerable amount of work, as it involves separating others from their capital. And someone is definitely trying to do the same for you. Most active traders and investors join the game to make Alpha.

The competition among Alpha players is what makes the most efficient markets.

Occasionally, Mr. The Market will go crazy and mispricing will happen. This opens up profitable opportunities for Alpha players, but these opportunities usually don't last long. Other Alpha players would rush up to take advantage of it as soon as they sniffed it. Once saturated, the market will return to efficiency.

Using this mental pattern of the game, we can infer that high-quality trading is batch, not continuous.


Trying to capture the Alpha continuously would be like amateurs trying to win in the long run, but the truth is that even expert players hardly ever win in the long run with 80%. Lowest starting stakes, no matter how good they are at the post-flop!

In trading, we can't get Alpha EVERY DAY. The market is highly competitive and Mr. Market is rarely erroneous with such high frequency!

As a trader, you need to learn to patiently sit for long periods of time to get great opportunities. In poker, we call this "sitting in Siberia". This is when you have to sit in line for hours waiting for cards with positive expectations, while the rest of the table happily pushes the chip in the middle. Trying to trade in these "Siberian moments" in the market is just a futile endeavor in the long run.


Continuous trading produces even poor performance as exposure to ineffective market states is mixed with exposure to effective market states.

If you go in the right direction of the market in inefficiency, you will make money in the long run. But when you start trading in an efficient market, your expected return will be zero. And you still endure the volatility of every trade. What a waste of time, resources and energy! You have to go through all the jobs with no reward!

That is why it is important to think that trading should be phased, not continuous. Your trading structure is similar to how a sniper does his job on the battlefield - strike in waves and have a strong impact.

The consequence of "intermittent, high-quality trading" is that the rarer the market deviation. There are several reasons for this ...


First of all, a rare event is less fully understood than an event that happens often.

Second, professional quant trader communities often ignore rare events as a source of advantage because quantum techniques often seek statistical significance, i.e. quant traders must watch many historical events to prove that their trading method is justified. If there are not enough occurrences in history, they will consider that approach inadequate.

Professional quantum methods ensure that they will not and cannot act on the highest Alpha opportunities in the market, thus leaving those opportunities to traders who use intuition and experience. Trader's intuition and experience are powerful as it allows traders to identify rare Alpha opportunities, albeit with low historical occurrences.

So, if you are an independent trader who:
  • Believe that trading with high Alpha is intermittent
  • The rarer the "Dislocate" is, the more Alpha there is
Here's what you can do to change your approach for better risk-adjusted returns ...

START OFF BY CLEANING UP YOUR TRADING SETUP


Pick out 50% of your bottom trading opportunities and get rid of them. Then do the rest of the setups and cut 50% again. This will help you stick to the philosophy of rare events (the most optimal settings) and make your trading happen in phases rather than continuously.

THEN CONSIDER TRADING THAT IS MEANINGFUL TO YOU, BUT NOT MANY APPEARANCES IN HISTORY

These trades will always have the most lucrative and least competitive advantage, as other traders will deny that opportunity.

FINALLY, EXPAND YOUR PLAYING FIELD AS MUCH AS POSSIBLE

Because high chances of earning Alpha are so rare, a particular market will only generate a few quality signals per year. That puts a limit on your earning potential. Therefore, the only way to make more money is to increase your space of exploration. That means entering other markets such as money markets, interest rates, grains, meat, cryptocurrencies, energy, metals ...

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