TradersCALM - Is there a Perfect Market? © "Dedicated to trading with good feelings."                                      All services are free.
	"Is there a perfect market to trade?" Simple answers might be:       •   probably the ideal characteristics depend on your trading style,       •   no!       •   but it is practical to get very close. First let us look at one definition of a perfect market to trade - a frictionless pendulum. A pendulum, like one that might power a grandfather clock, especially an imaginary pendulum that does not slow down through friction effects, goes back and forth, back and forth predictably, and forever.     So predictable it was used for marking time. Let us imagine a market that behaves like such a pendulum.     It swings between 90 and 110 and back again to 90 and then to 110 ... Our pendulum market has an average value over time of 100; and it never moves outside 90 and 110, swinging back and forth around 100 with perfect symmetry - yes like a pendulum. A wise trader, noticing the pattern of the market, and having a trend-followers mind-set, might wait for the market to fall to 90, then start rising and so then buy the market, selling to close when it rose to 110 and started falling, and also opening a new selling position at that time. Another, equally wise trader, noticing the pattern of the markets moves, and with a faders mind-set, would buy when the market got to the low 90's and sell and reverse when it got to the high 100's. Both would take almost all the moves out of our pendulum market as profits. (Note a trader with neither a trend-following nor a fading mind-set could take out slightly more profits than our trend-follower or our fader - by noticing the behaviour of our pendulum market, buying as near as possible to 90 and selling as near as possible to 110.     This is just one example of how our perceptions or at least our mind-set can get in the way of making maximal profits.) Now imagine a second pendulum market is available, identical except its range was 80 to 120 and the range is swept in the same time as our first pendulum market. Twice as much profit potential each time period. Now you have an idea of one definition of a perfect market, but does it exist in real life?     Well yes, to quite a high match. The attributes of many - but not all - ratio spreads, of two highly correlated markets, is they behave more like (not exactly like) pendulums than do the individual markets that make up the spread.     The ratio is chosen to give, allowing for contract sizes, a roughly zero net value of the spread so our pendulum like spread has an average value of zero. Compared to an individual market, such spreads behave often more like pendulums as:       •   the spread value tends to oscillate around zero,       •   they tend to have higher persistence levels (they 'trend' more           but for a shorter period),       •   they have smaller range of movements (lower risk of adverse move). There are other additional sources of profit available from spreads, but these are out-with our simple discussion. So our conclusions could be:       •   some ratio spreads behave somewhat like our perfect pendulum market,       •   preconceived opinions get in the way of maximising profits,       •   both trend-followers and faders can gain from trading spreads,       •   ratio spreads can help you to trade with good feelings.		Welcome Self Assessment Links Inner Tendencies What's New Contact Us Calm Secrets Tip of the Week Risk of Ruin