1/ A short thread about priors.

- What are they?
- Why do we need them?
- A few specific priors I hold.
2/ Priors are supposed to be "beliefs you hold before seeing the data".

Taken at face value this is crazy. You've been collecting data since the day you were born.
3/ But what we usually mean by priors (in a non-technical sense) is "what is your default assumption".

You may object "Ah, I don't hold any assumptions until I see the data."

That's dumb. (A) You do actually, and (B) you couldn't function in the world if you didn't.
4/ Especially in trading, if you waited for the data to tell you everything you needed to know, you'd act like a madman:

- You'd study *everything* because you wouldn't know where to focus your efforts.
- You'd never find anything. Once something is obvious in data, it's gone.
5/ So you need priors, informed by years of study and learning and people teaching you, etc.

Of course, don't go off the reservation the other way.

Great decision-making in trading and in life is about holding good prior beliefs, then updating them the right amount w/ new data.
6/ Some (obvious to some) priors I hold about markets:

- Volumes are higher on Fridays.
- Almost all US equity up-drift happens overnight.
- Options MMs don't *try* to pin stocks to strikes.
7/ But crucially, enough evidence could easily change my mind about those priors. How much data? Depends on the prior.

Some more priors I have, this time more general/sociological:
8/ Levels of belief:
A - I really believe this and it would take a lot of data to convince me otherwise.
B - I'm pretty sure this is true, but it wouldn't shock me if I believed differently in 5 years.
C - I kinda think this is true.
A: If you're selling a subscription to something, you're not a trader. Or at least, trading isn't the *real* way you're making money.

A: Technical analysis as practiced on #fintwit is worthless.
C: Crypto isn't a long-term solution to almost anything important.

B: The signal-to-noise problem makes it almost impossible for even the smartest most-well-motivated retail person to make $ trading.
B: Retail interest in trading circa 2020 is like poker interest in 2004: most people will lose their shirts, but those who remain will be *fierce* competitors that will make markets more efficient.
Ok, I told you some of mine.

Tell me yours! Use the A,B,C scale.

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More from @AgustinLebron3

31 Mar
A book review: London And The 17th Century


by @margarettelinc1

When Elizabeth I died, noblemen had to make a huge show of her funeral in order to prep people for the accession of James I (James VI of Scotland).

With modern eyes, it’s cool to see how critical the “show” was to a government’s legitimacy. Government meaning the king, obv.

This wasn’t some unnecessary extravagance. Shutting the city down for a day or two for the funeral procession was a critical part of establishing the legitimacy of the next king.

Oh and by the way, yes James II really was a horrendously bad king.

Read 18 tweets
25 Mar
1/ Musings about variance in trading, in sports, and in life.

A thread.
2/ Why does poker get played for big $ but chess (mostly) doesn’t?

Because of variance.

In chess, if you’re rated 1800 ELO and you’re playing someone rated 2000, you pretty much know exactly your P(win) and P(tie). (It’s 15% and 19%, go check).
3/ There’s no sense in betting for two reasons:

- A wide spread of ability directly creates wide spread in outcome. A 2400 will NEVER lose to an 1800.
- All these probs are pretty much known. $ gets traded when people disagree about probs. No such thing exists in chess.
Read 21 tweets
10 Mar
1/ Quick mini-thread on a useful way to think about risk based on a recent discussion I had.

"If I have an opinion about lithium price, should I trade $LIT?"
2/ Almost definitely not. $LIT is a very weird monster. Many ETFs that target second-tier commodities are equally weird. Why?

Because $LIT includes both producers and consumers.
3/ High Li prices are good for producers, bad for consumers. So what's the effect on $LIT?

It depends on the balance of producers and consumers.
Read 10 tweets
22 Feb
1/ Taking a break from options to talk about a general trading concept.

Intended audience: people who are getting into trading, people have read a bunch of “experts” and came away even more confused, etc.

A thread…
2/ I thought about putting this in the book, but in the end I decided it’s too technical for a general audience. The one sentence claim I make here is:

“Trading is the wrong term for what trading is. Trading is more accurately called positioning.”
3/ What do I mean by this?

Retail traders seem to obsess about “entries” and “exits”. But in my career as a trader, I *never thought about entries and exits. At least, not explicitly.
Read 34 tweets
8 Feb
1/ Welcome to Options 201! You might remember me from such threads as Options 101:

Or What’s The Deal With Having Edge?

2/ I wasn’t sure if I should keep going. We’re getting closer to “how to make money in options,” and I think public sources of such claims are always and invariably scams.

But I’ve decided this is still more “useful information to know” than trading edge, so it should be ok.
3/ Let’s start by talking about time. Time is surprisingly hard to think about. But why do we care?

Well, as we said in Options 101, we want to convert our options prices into vols because of #reasons. And to do so, you need to know t_exp.
Read 62 tweets
30 Jan
More ruminations on what trading can teach us about non-trading things. A thread...
Recently reading @SinclairEuan's excellent "Positional Option Trading", and he reminded me of something I hadn't thought about for a while:

Great trades start with a known risk premium and then add idiosyncratic inefficiencies on top to get more alpha.
The risk premium is a long-term thing. The vol premium or the carry trade aren't going anywhere.

But you can't really build a business on them alone. Too many people know about it, so returns are at best "ok" (i.e. low Sharpe) but with terrible tail behavior under stress.
Read 14 tweets

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