Complex system theory

Discussion in 'Strategy Development' started by maxpi, Jun 26, 2012.

  1. maxpi


    If we read up on complex system theory we find that the law of requisite complexity means that a controlling system [in our case the market] would have to be equally or more complex than the controlled system [our strategy].

    This raises some questions and I think that the most important one is of complexity of a market. If one views a market as more complex than it really is, his strategy is likely to have too much complexity in it. If one views a market as less complex than it really is, efforts to keep one's system even simpler than one's view of the market could result in a system that is too simple.

    I've seen posts on ET wherein a system trader had a system that worked for years and then gave it all back and more in a month. That would be an example of underestimating the complexity of a market. I've seen lots of posts saying that systems are all random over enough time. That might be an example of overestimating the complexity of markets... I'm sure that fundamentalists are overestimating the complexity of markets if they are not holding for a long time.

    My new definition of "market" is: the minimum that I need to know about a market in order to trade it. It's like Einstein said: "Make things as simple as possible, but not simpler".

    My new definition of a trading system involves making sure it is complex enough but not a bit moreso.

    Does this resonate with anybody?
  2. First, I think you mean the Law of Requisite Variety (rather than complexity) by Ashby?

    If so, then the law simply requires that the control system can represent all the STATES of the system it is trying to control. It says nothing (that I'm aware of) about complexity.

    Since the "market" is a made of a finite number of trading instruments whose prices are decimal numbers, it's this law is trivially satisfied by any program.

    Finally, your final ultimate 'insight' is recursive.
  3. Brilliant. Many people overcomplicate the market simply because they can't accept how truly simple it is. Of course that simplicity bears no resemblance to the "official" definition of how markets work. Occam's Razor.
  4. What, exactly, is the 'official' definition of how markets work?

  5. Efficient market theory. Market makers exist to make markets for the benefit of retail participants. Random walk theory. Effective government regulation against manipulation and fraud. Every word printed on exchange and brokerage websites. All the shit they want the sheeple to take a dip in. It's all a giant scam. And if you want to win, you have to scam the scamsters.
  6. I think that this is a wrong application of this principle. A trading system need not be an estimator of the market dynamics. This is not what a trading system does. Actually, a trading system should not even try to do this because it will fail almost immediately. A trading system is a model of conditions that allow positive expectation. When it is used it becomes part of the dynamics of the market. In the limiting case that the influence of this model of conditions is so pronounced that it affects the market sufficiently, then the system becomes also a good estimator of the market itself. But this is only in a tautological sense.
  7. I don't think "Market makers exist to make markets for the benefit of retail participants" has anything to do with efficient market theory.

    I don't think random walk "theory" (there's no such theory; there's such an assumption used for modeling so *some* theories) has anything to do with " Effective government regulation against manipulation and fraud"

    Finally, I don't think the the soybean future contract spec on the CME website is a lie.

    I do, however, suspect the application of occam's razor here is that you don't really know what you are talking about.

  8. Surely you don't mean positive expectation? Positive expectation is not a sufficient condition (though necessary) for a 'good' system.

  9. Sorry I went over your head. Keep believing.
  10. I don't think you understand the meaning of terms you are using, sorry to say that, no personal offense intended. Market makers must be net short when there is high retail demand for assets. Where do you see the efficiency? This is the greater inefficiency right in the core of the market concept. At some point in time for market makers to profit they must cause panic so the market collapses and they unwind their short inventory. See 1987, 2000, 2008 crashes, flash crash, etc. Otherwise, there is no point of being a market maker. When markets rally with retail participation, this is inefficiency in itself by definition.
    #10     Jun 26, 2012