Odds and Psychology.

9 de jun.

Based on "Think fast and slow", people have two system thinking. System-1 is autonomous, always working in background (ie unconsciousness), lazy, intuitive, fast, has stereotypes. System-2 is rational, hard problem solving, takes effort and energy, cuts trough the BS, etc (ie consciousness).

Based on another book called "superforcasters" and some dude I forgot his name, best approach for odds is to have simple system; where 100% certain. 93% almost certain. 75% probable. 50% about even (or maybe). 25% probably not. 7% almost certainly not. 0% impossible. All forecast are subjective guesses.

The catch; If you think something is 100% - you would go allin with max lever. (If you dont) your beliefs or opinion go against your actions. If you dont believe it's wise to go allin - then odds are not actually 100%. If you are stressed about 93% spot, then maybe it might not be 93% after all. (1:14).

In key SPX areas, based on business cycle and TNX, logic says one odds (or System-2) and your intuition (or feel) says differently. You are either too bearish or too bullish.

This is a simple representation of concept.

Another key concept is that TIME <----> PROBABILITY are at opposite sides of coin. The closer or far away in time something - more or less risk, ie higher or lower probability.

9 de jun.

Nota

(1) in first box (pandemic crash), odds feel like 7% not 25% because it was very uncertain period with high volatility, and "market always know best, or wisdom of crowd". Intuitively it wouldn't make sense to risk anything, therefor 7%.
Whilst many indicators, thus, macro variables pointed towards high probability (93%). leaving 7% for error.

9 de jun.

Nota

(2) beginning of 2022. Odds felt like 75% not 50-50. because it was a strong trend and there's too much money at sidelines, etc. Your logic said it's 50% but your gut told you it's 75% (meaning - you want to be in stocks, but you might as well take something out; or be fully invested but not really sure...). A lot of longterm investors stayed in the stocks due to dollar cost averaging. When rising TNX before was a good indicator for rising economy, now rallying above 2% damaged stock market.

I still think that was a 50-50 spot ie u never know. Even Tom Lee was bullish for 2022.

9 de jun.

Nota

(3) before the AI rally in 2023. Everything pointed towards bullishness whilst the crowd sentiment (market is always right and EMH) said to be cautious. Meaning - Odds felt like 25% at best. If you had burned yourself during post-pandemics stocks, you wouldnt want to invest, therefor 25% odds. I have 50-50 on graph, to say I wouldnt be sure.; whilst the hunch and logic said it's very high probability. Something similar to what BTC was in 40k price.

It was foolish to bet against AI economy; and there are a lot of longterm funds..;

You wouldnt want to risk a lot, ie it's a 25% spot, risky. Yet there was subjective probability of 93% in practice (leaving 7% for error or chance). When I look at things I convince myself these are 100%-or-0% else you would never really want to risk. Something cant be 93%, it's either a bull or no bull. A 100 or not.

9 de jun.

Nota

for context, where do I get the odds of direction of market? I use intermarket analysis, business cycle and bond market. or stuff like nasdaq or FAANG index strength; as well as market valuation. Odds change as cycle change but we were beginning of a new cycle.

all the longterm investors waited to get inside stocks again, etc. ISM down cycle peaking, etc.; high volume. Small caps or tech leading the way. NVDA or semi cond. leading.; No way it was anything else than "almost certain". "Probable" (75%) would be too bearish.

given the AI momentum, etc.

10 de jun.

Trade ativo

UPDATE.
interesting. Markets more more like a weighing machine. If it's a bull, then odds are like 60-40; where 40% cant just happen -> they have to increment and first beat the market trough 50-50 regime?
subjective odds are a informative tool too.

BTC is in a bull or 60-40 odds. meaning even if skeptical it's almost impossible to have crash or bear. Because it's tough to alter strong (dominant) trends.

10 de jun.

Nota

So something like this.
Markets are a weighing machine, where odds change in one direction or the other. All in the background. Based on factors, etc.
Sometimes market can have a 50-50 regime but all factors point to like 93% odds (and people have like 25% confidence).
I think it explains how markets work in practice. interesting.

10 de jun.

Nota

Renaissance technologies used markov chains. Basically when something moves in one direction, then other directions are "almost" impossible. If you use smart risk management, I think that's a good trading strategy and model.

When SPX has a 60-40 regime, contrary to market belief, u almost cant lose buying the dips or support. (Following cycle, indicators i mean).

10 de jun.

Nota

From "Think fast and slow"; People overestimate probabilities of rare events. Recently BTC was at this dip. Your initial thought would be the deep fall and loss of capital. because why not. But market was still in a 60-40 regime, where it's hard for trends to shift (and not over day).; People give too much emphasis on this risk, as if odds of disaster were 50%. When rare events are like 1%... meaning 1 in 100.

Another cool concept is that future in unknown or it has odds. And odds advance trough the cycle; meaning, you might not see the BTC trend now - but with changing odds - the demand follows.

10 de jun.

Nota

Same example for SPX. After sharp falls, quality assets would always find demand at support level. People feared of rare events (lets say they were rational and risk averse..) but rare events are 1%, ie they overweight risks. There is always risk management, not risking it all.

The chance for big fall is 1%... there was no reason for spx to crash. People would give the chance for this to happen at 50%.. because money was at stake.

10 de jun.

Nota

**pessimist overweighs chance of disaster.
optimist overweighs chance of easy rallies.