I'll tell you a secret... make the subjective, objective

This is just a brief note as I was having a think about this earlier today...

Yesterday's article had mentioned a paper on hedgefunds going against media (and therefore public and uninformed traders') sentiment.

Have a read of the PDF if you missed it...

  Macro Sentiment and Hedge Fund Returns 1  Macro Sentiment and Hedge Fund Returns (1).pdf 1022 KB     

Sentiment is naturally a massively subjective 'thing'.

It relies on surveys, an understanding of polarising language used in content, tweets and reports and naturally, a context of how this language fits in to a bullish or bearish view.

What is interesting about this, is the extent to which one side has a purely subjective and perhaps emotional view on it, yet the side which is making money is simply taking an objective view that being emotional is wrong, and if you have enough emotional people, such as large media outlets feeding the general public, it's a fairly decent population size to base actionable data off of.

The hedgefund is taking the chaos of the crowd's chimp brain and turning it into an actionable trade idea, without really even doing that much.

I've mentioned this a lot, but new members might need to hear it too.

YOU CAN DO THE SAME THING!

Literally a strategy of mine is to look at IG's asset bull or bear sentiment indicator.

If 65% or more of the book is positioned one way, I look for a reason for the market to move against it.

The most recent example was with our EURGBP trade.

And guess what?

As of writing, the market is still 72% long EURGBP.

This is a surefire short, since it is likely these uninformed traders are caught in a weird view that the UK is doing shite and the Eurozone OK...

When the trade is really that the UK has higher inflation and has just priced in a 50% chance of interest rates hitting 6%...

This is very simple discretionary analysis, where the subjective can be made objective.

Brokers like their clients losing money since they internalise flow, so when you see IG client books this far stretched, go against it because...

You don't want to be with the crowd.

Naturally this isn't always going to work, which brings in another point of making the subjective objective...

Your risk parameters should be rather objective too, especially if your trade ideas are discretionary.

Now this does not mean using a tighter stop - probably the opposite in fact.

But what it does mean is not throwing a stop at a high or a low, like most do.

Make your risk parameters objective by focusing on volatility stops AND time based stops.

Vol stops can be based on Average True Range, or daily expected moves, while time based stops are self explanatory...

If the trade hasnt moved by x time, the cut it, since it is likely your signal has decayed sufficiently enough that it now is not valid.

Just a bit of evening reading for ya.

Do try out the strategy mentioned above - I have left it sufficiently discretionary that you can build your own filters and parameters around the book positioning so that there is no real alpha loss.