1/ The illusion of alpha
Arguably the biggest way I've seen good traders burn out is the never ending search for a unique edge in the market
But what if I told you that 95% of the time, alpha is an illusion. And furthermore, most traders look for it in the wrong places
Arguably the biggest way I've seen good traders burn out is the never ending search for a unique edge in the market
But what if I told you that 95% of the time, alpha is an illusion. And furthermore, most traders look for it in the wrong places
2/ To further define illusionary alpha vs real alpha
real: arbitrage, MEV, mempool bots, exploiting inefficient marketmakers, to name a few
illusionary: order flow, TA, footprint, indicators, etc
95% of traders focus on "illusionary" alpha, so I'll focus this thread on that
real: arbitrage, MEV, mempool bots, exploiting inefficient marketmakers, to name a few
illusionary: order flow, TA, footprint, indicators, etc
95% of traders focus on "illusionary" alpha, so I'll focus this thread on that
3/ Now let me be clear - illusionary alpha is not necessarily useless.
You can be an incredibly successful trader with just TA, order flow, footprint, etc.
But even within that category, most traders spend countless years looking for edge in the wrong places
You can be an incredibly successful trader with just TA, order flow, footprint, etc.
But even within that category, most traders spend countless years looking for edge in the wrong places
4/ In trading, there's 2 orders of thinking:
1st order: How do I interpret the info the market is presenting
2nd: How will others interpret the info the market is presenting
Most traders look for alpha within 1st order, while it's almost always actually found in 2nd order
1st order: How do I interpret the info the market is presenting
2nd: How will others interpret the info the market is presenting
Most traders look for alpha within 1st order, while it's almost always actually found in 2nd order
5/ To further elaborate, traders will spend years perfecting orderflow strats, the right indicator combo, the best TA style, or a mix of the above.
I also fell victim to this.
In other words, I looked for the best way to personally interpret market info, AKA 1st order thinking
I also fell victim to this.
In other words, I looked for the best way to personally interpret market info, AKA 1st order thinking
6/ Again, you can still find reliable / profitable strategies focusing on 1st order trading.
But anecdotally, I see many traders get stagnant with their progression after a few years of consistent profitability
They recognize it, but don't know how to advance
Sound familiar?
But anecdotally, I see many traders get stagnant with their progression after a few years of consistent profitability
They recognize it, but don't know how to advance
Sound familiar?
7/ I myself struggled with this for a few years: being reasonably consistent and profitable, but feeling like my progress hit a brick wall
It wasn't until I finally had the "aha" lightbulb moment of 2nd order thinking that my growth and profitably took major leaps forward
It wasn't until I finally had the "aha" lightbulb moment of 2nd order thinking that my growth and profitably took major leaps forward
8/ So what does this actually mean in practice?
The first (and most important part) is to swallow your pride.
To understand 2nd order thinking, you need to first come to terms that a lot of this shit is a self-fulfilling prophecy, and that you aren't actually a genius
The first (and most important part) is to swallow your pride.
To understand 2nd order thinking, you need to first come to terms that a lot of this shit is a self-fulfilling prophecy, and that you aren't actually a genius
9/ Price doesn't bounce off your trendline because you're good at TA, price bounced because enough players were looking at the same level.
Smart money knows this, which is why they use common traps like stoploss hunts or support and resistance fakeouts to bait retail.
Smart money knows this, which is why they use common traps like stoploss hunts or support and resistance fakeouts to bait retail.
10/ While this all may sound obvious, so many traders spin their wheels for years asking the question: "How do I better interpret what the market is showing"
When the better question to ask is "How do I improve how I think *others* will interpret what the market is showing"
When the better question to ask is "How do I improve how I think *others* will interpret what the market is showing"
11/ So what's this look like in practice?
When I'm evaluating a seed investment for example, I no longer put weight on my own opinion.
It doesn't matter what I think. It matters how the rest of the market will think.
This mental model is what helped break my stagnation
When I'm evaluating a seed investment for example, I no longer put weight on my own opinion.
It doesn't matter what I think. It matters how the rest of the market will think.
This mental model is what helped break my stagnation
12/ Most of my biggest wins in trading came after I started applying this mental model.
It can feel very counter-intuitive to buy things you hate and pass on things you love. It takes time to refine.
But that's why I say it requires a bit of an ego death
It can feel very counter-intuitive to buy things you hate and pass on things you love. It takes time to refine.
But that's why I say it requires a bit of an ego death
13/ This is also why I say most people look for edge in the wrong places.
It's rare to find a TA / orderflow strategy, or an indicator that has *actual* edge (which as a reminder, doesn't mean it's not profitable)
Even if you do discover something, alpha decay sets in quick
It's rare to find a TA / orderflow strategy, or an indicator that has *actual* edge (which as a reminder, doesn't mean it's not profitable)
Even if you do discover something, alpha decay sets in quick
14/ Assuming you aren't part of the gigabrain 5% of traders that are right-curving their way to generational wealth, I think most traders are better off trying to perfect their 2nd order skills and spend a bit less time endlessly searching for the perfect 1st order skills
15/ If there's interest, I'll do a future thread to expand on this more.
For now, I challenge you to try this model and see if it helps you.
Of course the ironic paradox of this all is there's no secret to trading, including this. It might help some, but it won't help everyone
For now, I challenge you to try this model and see if it helps you.
Of course the ironic paradox of this all is there's no secret to trading, including this. It might help some, but it won't help everyone
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