Capitalogix

The Secret To Competing Against Tech Giants

The last time I drove in New York City traffic, I complained that "I didn’t understand why people came here" because it was too crowded.

That reminds me of one of Yogi Berra’s famous quotes. “Nobody goes there anymore because it’s too crowded.”

He said that about a famous restaurant where he used to work.

The same is true in business. Opportunity draws a crowd ... but the best opportunities are often in areas of less competition.

For entrepreneurs, oversaturation can turn products into commodities, reducing profit potential. Conversely, many shy away when a challenge seems insurmountable, creating unexpected opportunities for those willing to take the risk.

As an entrepreneur, I’m drawn to projects others might dismiss as science fiction. These are the challenges that often lead to the most groundbreaking and rewarding outcomes.

Moonshot Projects

Moonshot projects offer a unique advantage. While they may seem daunting, their audacious nature often means less competition and greater potential for transformative impact and extraordinary profits.

A moonshot project is a highly ambitious, transformative endeavor that seeks to solve a significant problem or create a revolutionary innovation. These projects are characterized by:

• Audacious Goals: They aim for breakthroughs that seem nearly impossible to achieve.
• Disruptive Impact: They strive to create solutions that are vastly superior to existing offerings, often by introducing entirely new paradigms.
• High-Risk, High-Reward: These projects embrace the potential for failure in pursuit of groundbreaking results.
• Long-Term Focus: They prioritize long-term impact over short-term gains.
• Technological Advancements: They leverage cutting-edge or even nascent technologies.
• Paradigm Shifts: They challenge conventional wisdom and industry norms.

Moonshot projects are inherently challenging. They demand significant resources, interdisciplinary collaboration, and a willingness to venture into the unknown. This perceived difficulty often deters potential competitors, creating a unique opportunity for those willing to take the risk.

When successful, they push the boundaries of what is possible and redefine the landscape of their respective fields.

In part, that is why a 10X mindset is particularly well-suited for Moonshot projects. By aiming for a tenfold improvement over existing solutions, you’re essentially operating in a space with little to no competition or opposition. This allows you to redefine the rules of the game and establish a sustainable competitive advantage.

Our strategy of creating a unique, sustainable competitive advantage aligns perfectly with the Moonshot approach. By choosing to play a different game (with an asymmetric edge), we’re not just competing; we’re fundamentally changing the playing field.

I’m not interested in going head-to-head with tech giants on their turf. Instead, the goal is to carve out our own niche, focused on using our unique abilities to push boundaries and extend our edge. Being slightly ahead of the competition can be a powerful attractor. It often leads potential competitors to seek collaboration rather than confrontation. They might approach you with ideas, money, or opportunities, aspiring to share in your advanced position and capabilities. This dynamic can create unexpected partnerships and accelerate progress in ways that benefit everyone involved.

When interviewing potential team members, I often share a crucial insight: if you’re seeking a job where you work 9-to-5 solving problems so you can go home feeling satisfied, this might not be the right fit.

We tackle challenges of a different magnitude. Our projects rarely have quick solutions. Instead, we focus on making steady progress towards ambitious goals.

I sometimes joke that our motto should be: “We suck less.” Nevertheless, the underlying truth is more profound. It’s about understanding your ultimate objective and recognizing that each step moves you in the right direction, no matter how small.

This approach aligns with our belief in playing a different game. We don’t just compete; we redefine the rules of engagement, creating our own metrics for success and pushing boundaries in ways that traditional thinking often overlooks. Kind of like this quote:

“I have not failed. I've just found 10,000 ways that won't work.” - Thomas Edison

It doesn’t make sense to challenge a bigger and better-funded competitor in an area where they have an asymmetric advantage. In other words, don’t compete with giants at their own game.

Choose to play a game you expect to win.

Playing a different game is a theme at Capitalogix. We believe that you control the game you’re playing, the rules, how you keep score, and even how you evaluate success. These things inform where to spend time, where to invest money, and even what looks like an opportunity to you. 

Wouldn’t you rather compete in areas where you can create a unique, sustainable competitive advantage? Personally, I want to invest in the things that extend the edges that let us win.

Why? Because ... Mediocrity Is Expensive!

What you lack in size or computer power, you can make up for in creativity, agility, and innovation. 

We sought to create a niche in the investment industry, not through computing power, but through unique approaches to age-old problems. We use AI and data science to enhance decision-making. 

We have an incredibly narrow and consistent focus. Within that area, we are willing to take on problems others avoid and pursue goals that others say are impossible. 

Our niche limits risk and lets us fail faster ... and learn faster. This allows us to take confident action while others are tentative. 

Most big companies - and most of our competitors - are afraid to be wrong. They have to protect their infrastructure, cash cows, and short-term performance metrics. It makes sense (from their perspective) that playing it safe means they’re secure. - but that’s not how it works. 

You can’t challenge the status quo when you are the status quo. 

10x Improvement Is Often Easier To Achieve Than 10%

 

Astro Teller via TED

"In 1962 at Rice University, JFK told the country about a dream he had, a dream to put a person on the moon by the end of the decade.The eponymous moonshot. No one knew if it was possible to do, but he made sure a plan was put in place to do it if it was possible.That's how great dreams are. Great dreams aren't just visions, they're visions coupled to strategies for making them real." - Astro Teller

Incremental change is hard - it’s finding new ways to do the same thing, and you often end up competing in very red oceans - saturated markets where you’re competing on price.

Moonshots sound harder, but you create your own niche, and the constraints of a new idea force creativity and energy. If you’re going after a goal that no one has accomplished before, it’s impossible to be in a red ocean, and it’s easier to mobilize a team around something exciting and new than decreasing some arbitrary metric by 2%. 

 

There are a couple of important lessons to keep in mind when pursuing the unknown.

• Forget what you know - self-reported “experts” are limited by their worldview. If you’re trying to get a different result, you won’t do it by playing by the same rules your predecessors followed. Heuristics are great for making life easier - but they’re very limiting when trying to create something new. 
• Attack the hardest problems first - your biggest problems are your biggest opportunities. If you don’t deal with the big problems now, you’ll never get around to it, and you’ll waste time, energy, and potentially realize you have to pivot much too late.  
• Be comfortable being uncomfortable - Most people find failure taboo, and they’re deathly afraid of it. Tony Robbins talks about our tendency to avoid pain more actively than we pursue pleasure, and it’s true in business. But failure is a part of business. The people I consider most successful got there through incredible pain tolerance and increasingly intense problems that they continued to conquer. 
• Have a short memory for pain - Focus on the gain, not the pain. People often focus on not having enough money, not enough time, or simply not having enough. That scarcity mindset is dangerous and can lead to getting lost in pain and fear. Acknowledging the pain/fear and moving forward from a place of abundance and opportunity helps create opportunities. 

As well, a clear identity is important. You have to understand what you’re pursuing and how you want to attack the problem. At Capitalogix, we’ve gotten very in tune with our goals. 

We invent techniques that identify and adapt to what happens in markets. We apply the lessons learned from past experiences, data science breakthroughs, and hard work to eliminate the fear, greed, and discretionary mistakes that are the downfall of most traders and decision-makers.

Small businesses don’t have a monopoly on these mindsets and these opportunities, but companies like Y Combinator, X(and no, I don't mean the company formerly known as Twitter), or HeroX are few and far between ... Elon Musk is famous for moonshots like Tesla, SpaceX, Starlink, Neuralink, Xai, etc. Google and Microsoft pursue moonshots as well. 

Good news ... the future is big enough for them and you. 

Choose something that lights you up and leverages what you already know and who you already are.

So what’s your moonshot?

Here Are Some Links For Your Weekly Reading - September 15th, 2024

Here are some of the posts that caught my eye recently. Hope you find something interesting.

Lighter Links:

• Nate Silver: If Trump Loses, He Will Have Let Election 'Slip Out of His Grasp' as Underlying Factors Favor Him Despite Harris' Poll Lead. (Benzinga)
• Organisms Created in Laboratory are "Third State" Beyond Life and Death, Scientists Say. (Futurism)
• Breaking Free From the Happiness Trap: A Blueprint for Unconditional Happiness. (Inc)
• What Makes Us Human in the Age of AI? a Psychologist and a Technologist Answer. (TED)
• Oprah Just Had an AI Special With Sam Altman and Bill Gates — Here are the Highlights. (TechCrunch)

 

Trading Links:

• The Case for Huge Fed Rate Cuts up Front (And Maybe Some Hikes Later). (TheOvershoot)
• Is Amazon Angling to Buy TikTok? the Two Companies’ Ties Deepen. (Forbes)
• Trump Plans to Announce the World Liberty Financial Crypto Exchange on Monday. Here's What to Know. (CBS News)
• After Shark Tank, Mark Cuban Just Wants to Break Shit—Especially the Prescription Drug Industry. (Wired)
• What Happened to You? Wasn't the Plan to Create Cool Stuff to Make the World a Better Place? (GuyKawasaki)

The Cities Of The Future

Studying historical changes in human population trends offers valuable insights into the factors that have propelled or hindered human development throughout time.

From ancient civilizations to modern metropolises, population dynamics have influenced everything from economic prosperity to social structures.

 

A Window Into Our Past Gives Us a Glimpse at Our Future.

By studying this critical aspect of human history, we can gain valuable insights into the past, present, and future of societies.

Population growth is a complex and multifaceted phenomenon with far-reaching implications. It offers a fascinating glimpse into the demographic trends that have shaped our world and continue to influence our trajectory.

Historically, human populations grew steadily but relatively slowly ... until something changed that. 

Scientists estimate that humans have existed for over 130,000 years. However, it took until 1804 for us to reach 1 Billion. We doubled that population by 1927 (123 years later) and then doubled it again only 47 years later (which was 1974). 

Looking back, early population growth was driven by the agricultural revolution. Since 1804, the Industrial Revolution, health and safety advances, along with technology, have significantly improved quality of life, spurring the rapid population growth. Here is a quick overview of some of the key factors.

Shaping the Future

It’s hard to predict some things accurately. So, one goal in data science is to figure out what we can “know” in order to “guess” less.

Population growth is a prime example. One of the easiest ways to predict how many 60-year-olds there will be in 40 years is to look at how many 20-year-olds there are today. Obviously, the number won’t be exact, but it’s a pretty good head start.

This principle of using known data to make educated predictions applies to many aspects of future planning, including urban development and resource allocation. By leveraging current demographic information, we can better prepare for the challenges and opportunities that will likely impact the cities of tomorrow.

• Economic Implications: A growing population can expand the workforce, fueling economic growth. However, it can also strain resources, requiring increased investment in infrastructure, education, and healthcare.
• Social and Environmental Pressures: Demographic shifts, such as aging populations or youth bulges, can profoundly affect social structures, healthcare systems, and the environment.

 

Why It Matters

Population growth is more than just a numerical metric. It is a fundamental lens through which we can analyze:

• Historical Development: By understanding past population trends, we can better appreciate the factors that have shaped human civilizations.
• Future Planning: Governments, businesses, and organizations can use population data to make informed decisions about resource allocation, infrastructure development, and social policies.

 

Have World Population Growth Numbers Peaked?

World population growth rates peaked in the late 1960s and have declined sharply in the past four decades, but we’re still on a positive trend. We’re expected to reach 9 billion people by 2050, but a lot of that growth comes from developing countries – they also almost exclusively come from urban areas. 

via Axios (Click for an Interactive Graph)

Urbanization: Megacities

In the 1800’s, about 10% of the population lived in urban areas. Since 2014, over 50% of the world’s population has lived in urban areas – today it’s approximately 55%. That number is growing.

Ironically, as we grow more digitally connected, our world is shrinking, and our populations are concentrating. 

An interesting consequence of this rapid urbanization and population growth in developing countries has been the increased development of Megacities – defined as cities with populations greater than 10 million. Today, there are 33 megacities – more than triple the number in the 1990s. 

This creates a set of interesting opportunities and challenges. 

For example, how will these cities deal with infrastructure – sanitation, transportation, etc?

 

via visualcapitalist

Today, in most high-income countries, about 80% of the population lives in urban areas - contrasting the primarily rural populations of lower-income countries. 

As a result, we see many of these megacities forming in developing countries. As a side note, we’re also seeing countries like China making substantial investments and alliances in these developing areas. This is likely done to profit from the expected growth and also to shift the future balance of power in their favor. Sometimes, it makes sense to focus on the marathon and not just the sprint.

It’s interesting how the world can become more decentralized - and more globalized - amidst a contraction of where people live.

The Average NFL Player ...

When I woke up this morning, I saw that Dak Prescott, the star quarterback for the Dallas Cowboys, signed a new contract, making him the highest-paid player in NFL history. His new four-year, $240 million deal makes him the league’s first $60 million per year player. 

If you are curious, here is a list of the highest-paid NFL players in 2024.

Each of the 32 teams has an active roster of 53 players. That is 1,696 active roster players. Add the practice squad and account for injuries, and in a typical season, you end up with about 2,100 players per season.

Now that the NFL Football season is officially underway, I thought it would be interesting to look at each position’s composite player.

As you might expect, different sports have a different ratio of ethnicities, builds, and features. The same is true for different positions on a football team.  For example, you might expect more Pacific Islanders in Rugby or Asians in Badminton. You expect NBA players to be taller, swimmers to have longer arms, and football players to have more muscle. 

Here is a visualization that shows what happens when you average the top players’ faces in various positions.

  

osmutiar via Reddit

Composites are interesting.

While you may be thinking, “This player must be unstoppable,”... statistically, he’s average.

The “composite” NFL player would be the 848th-best player in the league. He’s not a starter, and he plays on an average team. 

We found the same thing with our trading bots. The ones that made it through most filters weren’t star performers. They were the average bots that did enough not to fail (but failed to make the list as top performers in any of the categories). The survivors were generalists, not specialists.

In reality, you need both.

In an ideal world with no roster limits, you’d want the perfect lineup for each granular situation. You’d want to evaluate players on how they perform under pressure, on different downs, against other players, and with various schemes. 

On a related but slightly different note, I recently read a post called “Why Generalists Own the Future.” It says that, in the age of AI, it’s better to know a little about a lot than a lot about a little. But part of that rationale is that it is easy to find or create digital specialists to do the things people used to do.

That’s what technology lets you do with algorithms. You can have a library of systems that communicate with each other ... and you don’t even have to pay their salary (but you will need data scientists, researchers, machines, data, alternative data, electricity, disaster recovery, and a testing platform).

You won’t find exceptional specialists if your focus is on generalized safety. Generalists are great, but you also have to be able to respond to specific conditions.

How ‘Bout Them Cowboys!

Here Are Some Links For Your Weekly Reading - September 8th, 2024

Here are some of the posts that caught my eye recently. Hope you find something interesting.

Lighter Links:

• The Four Dark Laws of Online Engagement and the Science of Group Psychology. (PowerOfUs)
• Why Six Hours of Sleep is as Bad as None at All. (Pocket)
• Could Weight Loss Drugs Be a Psychiatric Tool? (PsychologyToday)
• Maybe You Will Be Able to Live Past 122. (TechReview)
• Terrifying Simulation Reveals What Would Happen to Your Body If Swallowed by a Whale. (BoredPanda)

 

Trading Links:

• U.S. Debt Crisis: Interest Costs Reach $3 Billion a Day. (Fortune)
• All 👀 on a Key Recession Indicator. (TheSandBox)
• Mapped: The Purchasing Power of $100 in Each U.S. State. (VisualCapitalist)
• Trump Says He's Putting Elon Musk in Charge of Making the Government Super Efficient, Like He Did With Twitter. (Futurism)
• In 2020, Elon Musk Predicted that 100% of Cars Produced by 2040 Would Be Electric and Fully Autonomous. Now He Says '99% Is Probably Right'. (Benzinga)

Some Perspective: "I'm Way Closer To Lebron Than You Are To Me!"

With the NFL starting its regular season this week, I was thinking about the talent and effort it takes to compete as a professional athlete.

Take a second to reflect on the journey required to become a pro. In general, the top players from a youth league became standouts in high school and then were star players in college before eventually making it to a professional team. But here's the kicker ... in any other context, they're elite, but unless they're superstars in the NFL, they're considered average or worse. Think about it. By definition, half of the players are below average. 

Meanwhile, I recently came across an example from the NBA that illustrates this concept in a funny but profound way.

There's a relatively famous quote from NBA journeyman, Brian Scalabrine, who said: 

"I'm way closer to Lebron (James) than you are to me!" - Brian Scalabrine

For context, as a USC Trojans men's basketball player, Scalabrine was the top scorer and a leader in field goals and rebounds. He then played 11 years in the NBA ... but at no point in that time was he a star. He didn't put up great (or even good) stats, he wasn't a household name (though he did pick up the nickname "White Mamba"), and he is nowhere near the caliber of player that Lebron James is. In fact, throughout his career, he averaged just 3.1 points, 2.0 rebounds, and .8 assists a game. But, remember, he was good enough to play at a pro level for 11 years.

As a result, many unprofessional (weekend warrior) athletes thought he was an easy target. One day, Brian was playing a rec league game where he dropped 60 points. He tweeted about it, and a bunch of people started tweeting back to the now 40+ years old former NBA player that they could beat him. There are funny YouTube videos about this.

Brian responded by replying:

"Listen. I may suck for an NBA player. Those guys are pretty good. But I don't suck compared to you. You suck compared to me." - Brian Scalabrine

He then accepted their challenge by asking them to send in videos of their play and committed that he would go 1-on-1 against the best of them.

Scalabrine then went on to play 4 of the best players who responded, with one of them having NCAA D1 experience.

The end result?

He outscored them 44-6 - with two of the players scoring 0 points. 

 

via YouTube

It should be self-explanatory, but it seems to be a concept many people struggle with. Any given pro player has been the best of the best throughout their journey. They're the 1% of the 1%. 

But that is probably true for you too. If you're reading this article, you're likely killing it compared to the average Joe. 

Many of us are in rooms with phenomenal business owners and operators. When you meet people like Peter Diamandis, Ray Dalio, or Richard Branson, it's easy to focus on the distance between you and them.

Recognize that it is still a huge accomplishment to be a Brian Scalabrine rather than a Joe Schmo. 

They don't recognize what you and me do recognize. When you're in the NBA, there's all kinds of tells, right? Like if a guy puts his hand like that, you know what he's gonna do. If a guy does a hesitation, you know what he's gonna do. All that stuff is like in real time in the NBA, you got to be so on top of the reads. It's not speed. You can't look at me and say my brain is slow. My brain is fast. My body might be slow, but I have to read whether a guy's gonna shoot, drive, go to the middle, pass. If you're not reading those things, you're not playing in the NBA. - Brian Scalabrine

A helpful reminder.

Keep it up – and as always ... Onwards!

(Re) Inventing The Wheel

When I think about the invention of the wheel, I think about cavemen (even though I know that cavemen did not invent the wheel).

Lots of significant inventions predated the wheel by thousands of years. For example, woven cloth, rope, baskets, boats, and even the flute were all invented before the wheel.

While simple, the wheel worked well (and still does). Consequently, “reinventing the wheel” is often used derogatorily to depict needless or inefficient efforts.

Nonetheless, there are good reasons to reinvent the wheel. Scientists recently developed an innovative shape-shifting wheel that can adapt its form depending on the terrain, enhancing mobility for vehicles like wheelchairs and robots. This new design addresses the limitations of traditional wheels, allowing for real-time adjustments to navigate uneven surfaces.

But how does that compare to sliced bread (which was also a significant invention)?

Even though the wheel is considered a symbol of innovation, it took over 300 years for it to be used for travel. Upon closer examination, this delay is understandable. In order for a wheel to be used for travel, it needs to have an axle and must be durable and strong enough to bear heavy loads, which requires advanced woodworking and engineering skills.

  

 

All the aforementioned products created before the wheel (except for the flute) were necessary for survival. That’s why they came first.

As new problems arose, so did new solutions.

Necessity is the mother of invention. 

Unpacking that phrase is a good reminder that inventions (and innovation) are often solution-centric. 

Too many entrepreneurs are attracted to an idea because it sounds cool. They get attracted to their ideas and neglect their ideal customers’ needs. You see it often with people slapping “AI” onto their product and pretending it’s more helpful. 

If you want to be disruptive, cool isn’t enough ... your invention has to be functional and fix a problem people have (even if they don’t know they have it.) The more central the complaint is to their daily lives, the better.  

 

Henry Ford famously said: “If I had asked people what they wanted, they would have said faster horses.”

Innovation means thinking about and anticipating wants and future needs.

Your customers may not even need something radically new. Your innovation may be a better application of existing technology or a reframing of best practices. 

Uber didn’t reinvent a new car; they created a new way to get from where you want with existing infrastructure and less friction. Netflix didn’t reinvent the movie; they made it easier for you to watch one. 

As an entrepreneur, the trick is to build for human nature (meaning, give people what they crave or eliminate the constraint they are trying to avoid) rather than the cool new tech you are excited about.  

Human nature doesn’t change much … Meanwhile, the pace of innovation continues to accelerate. 

The challenge is to focus on what people want rather than the distraction of possibility. That gets harder as more things become possible.

Onwards!

Here Are Some Links For Your Weekly Reading - August 31st, 2024

Here are some of the posts that caught my eye recently. Hope you find something interesting.

Lighter Links:

• Will Artificial Intelligence Be Your Child’s Future Boss? (Forbes)
• OpenAI’s New Model, Strawberry, Explained. (Every)
• The Art of Asking Smarter Questions. (HBR)
• Scientists Grew a Mushroom Into this Robot to Act as Its Brain. (Futurism)
• A New AI Tool Creates Hyper-Realistic Photos. Can You Tell the Difference? (CBS News)

 

Trading Links:

• ChatGPT Surpasses 200 Million Weekly Active Users, But Meta's AI is Already Giving It a Run for Its Money. (WindowsCentral)
• Once-In-Lifetime Wall Street Rally Raises Soft-Landing Stakes. (Bloomberg)
• Ray Dalio: Here are 5 Trends Shaping the Global Economy. (WEForum)
• The World’s 50 Most Valuable Companies, Sorted by Industry 💼. (Voronoi)
• Trump Warns Mark Zuckerberg Could ‘Spend the Rest of His Life in Prison.’ (Fortune)

Examining Life Expectancy & Longevity

Life expectancy has been on a steady global rise for longer than I've been alive. 

via worldometers

Meanwhile ... the United States has fallen to 48th on the list of countries with the highest life expectancy.

Hong Kong tops the list with an average life expectancy of 85.63 overall - and 88.26 years for females. 

For comparison, the U.S.'s average life expectancy is only 79.46.

Many factors potentially impact the findings, for example, the average height and weight of a population (with shorter & lighter people tending to live longer), diet, healthcare system, and work/life balance. 

While some of this is out of your control (OK, a lot of it is) - there are definitely things you can do to increase your healthy lifespan. Meanwhile, some people like Bryan Johnson are doing everything they can to live forever. 

Popular Mechanics put together a video series called How to Live Forever, or Die Trying, where they interview scientists and anti-aging gurus to give you insight into pursuing a future without death. 

Unfortunately, recent science has shown that adults in their mid-40s to early 60s begin to experience significant changes in their alcohol, caffeine, and lipid metabolism, an increase in risk of cardiovascular disease, and a noticeable decrease in their skin and muscle health. When you hit your 60s, you also begin to see negative changes in carbohydrate metabolism, immune regulation, kidney function, and a further decline in the previously mentioned factors. 

Here's the good news. Not only is science and technology getting better, but you're always in control. You can make lifestyle changes to increase your longevity, and you can also find supplements, treatments, and protocols that can reverse those factors of aging. Even simple measures like increasing your physical activity or avoiding alcohol before bed can make a massive difference. 

They say a healthy person has thousands of dreams, but an unhealthy person only has one.

That is one of the reasons I spend so much time and energy thinking about staying healthy, fit, and vital.

Focusing on the positive is important ... But to extend your healthy lifespan, you have to start by telling the truth and finding out what you and your body struggle with the most.

A doctor friend gave me some advice. He said it doesn't matter if you are on top of 9 out of 10 things ... it's the 10th that kills you.

Despite our best efforts, Mother Nature remains undefeated.

With that said, here are some of my previous articles on longevity and health: 

• Live Long & Prosper
• How Much Time Do You Have Left?
• Changing Your Definition Of Resolution
• Workouts That Work
• Getting Used To A New Normal (Pt 1, Pt 2, Pt 3)

The goal isn't just to stay alive longer; it's to live life to its fullest for as long as possible.

I recently joined a fantastic mastermind group called DaVinci 50, run by Lisa and Richard Rossi. It brings together a remarkable collection of medical professionals and entrepreneurs focused on the latest research, treatments, and opportunities in health and longevity.

Another great tool I rely on is Advanced Body Scan. Early detection is crucial, but so is tracking the history of your scans to monitor changes over time. In my opinion, the most valuable scan is always the next one.

Additionally, I use a growing list of trackers and biometric devices to measure my heart rate, along with apps and tools for mindfulness, breathwork, and journaling. Together, these practices recognize that mind, body, and spirit combine to define how you live your life.

To end this post, I'll use a farewell phrase I heard often while growing up ... it translates roughly to "go in health, come in health, and be healthy." It's a beautiful way to wish someone well on their journey, emphasizing the importance of health and well-being.

I hope you found something interesting.  Let me know what things and practices work best for you.

Pattern Recognition In Trading

The Market has been volatile recently, with unusually large gains and losses as we enter the homestretch of the election season. Even though many markets are still near their highs, I'm sensing an increase in anxiety and fear in many of my peers. 

While some believe that markets are random, others make money using rule-based trading systems that rely on specific patterns to identify favorable trading conditions.

Traders, at every level, search for a tradable edge. Some find it in fundamental analysis, others in technical analysis or chart-based patterns, while still others rely on an algorithmic or execution-based edge.

So, is there some magic unifying equation that defines the Market? Personally, I doubt it. Even though nothing always works, "something" always works in the markets. The challenge is to identify what that is and to ignore the rest. 

Though many patterns work, from time to time, when a particular pattern works may seem random, and here is why.

Understanding the Markets. 

There is no such thing as a "Market" ... It is a collection of separate traders (each trading based on what they focus on, what they make it mean, and ultimately what they decide to do).

As a result, one of the reasons that markets experience volatility is that different groups buy or sell for different reasons at different times.

Consequently, even if one group trades using a consistent set of rules, a strategy that effectively combats it only works until that group stops trading those rules.

It works the other way too. If a large trader imposes their will, it changes the playing field for smaller traders.

Elephants Leave Tracks. 

Smart traders follow the big money.

Large traders like governments, sovereign wealth funds, or mutual funds can affect markets while they buy or sell.

However, when they're done, some other group's strategy becomes the dominant force.

Experienced traders recognize that it is important to understand "who is in control" ... but not necessarily why they are trading.

That means you don't have to figure out every bit of information or rationale behind a strategy to make money. For example, suppose you were about to walk into a movie theater but were suddenly confronted with hundreds of people running in the other direction screaming. In that case, you don't have to understand precisely why it's happening to respond intelligently.

 
On a superficial level, that's the basis of trend following. It is also an example of pattern recognition.

Most hedge funds now use some form of pattern recognition in their trading systems.

Much of the analysis done to get a trading edge is simply a way to identify "who is in control" and what they are doing ... rather than why they are trading.

Here, we will examine why some traders rely on specific patterns to identify favorable trading conditions.

Some Patterns Are Logical.

Let's look at a common trading pattern called a "Triangle". You can think of the Triangle as a well-contested battle between the bulls and the bears. It is almost like an arm-wrestling match. Inside the pattern, neither side gives up much ground. However, when one side loses conviction, the market surges in the direction the winners push. 

Here is a picture of a Triangle and the pattern's likely price projection.

 

  

Triangles are an example of a logical pattern. It is easy to see and easy to understand. In addition, it is easy for a trader to use a setup like this to define the likely risk and reward of a trade they are considering.

Why Do Patterns Form in Markets Repeatedly? The Answer is Human Nature.

Markets are not always logical. Some would argue that Markets are rarely logical. If they were, intelligent people would get rich by following their instincts ... but that isn't how it works.

On some level, markets represent their participants' collective thoughts and emotions. So, even though conditions change, the collective response to fear and greed remains reasonably similar.

As a result, many patterns show up in market price data.

In General, Here's What Is Happening.

A move up of a certain degree will be met with some people who fear the move won't go higher ... so they decide to sell. Meanwhile, others will believe the move will trigger a whole different group of people to recognize an opportunity ... so they decide to buy.

The same thing happens with a big move down. At first, it triggers fear and selling. But at some point, to a particular group of traders, the move down will look like a discounted buying opportunity.

At its core, price is the primary indicator of investors' willingness to buy or sell. Things like velocity or slope are secondary, and show the intensity of their motivation.

So, many of the patterns that you read in books or magazines (with names like "head and shoulders", or "cup and handle", or "double bottoms") are all just ways of explaining the natural response to certain conditions.

 
  

There is science involved in recognizing a specific pattern ... and art in selecting which pattern to rely on today.

But You Don't Have to Predict Anyone's Action - All It Takes Is An Intelligent Response.

It's the law of large numbers. An insurance company doesn't have to accurately predict when any individual will die; their actuaries have to figure out a reasonable estimate of how many people like that in their risk pool will die during the relevant period ... and price the coverage accordingly. Likewise, in the Market, patterns don't predict what an individual will do; they indicate what the majority will likely do.

So now that you understand patterns, the rest is easy ... right?

Of course, it's not as easy as it sounds because these patterns are being played out across every Market and happen in different time frames as well. That means some people respond to the Market using a much longer time horizon than others. A pattern for them may be noise at a different level of focus.

It may be comforting to see familiar patterns occur whether you're looking at a minute-by-minute chart of the S&P or a weekly chart of gold ... but comfort doesn't make you money. Instead, ask whether what you are looking at is a coincidence or causal. Said another way, does it simply explain what happened, or is it a valid prediction of what will happen?

Since many patterns are playing out across many markets at any given time, a human can't identify, validate, and trade all of them in real-time.

This is where computers and artificial intelligence truly shine. For example, we've developed a pattern mining technology that doesn't rely on traditional technical analysis patterns. Instead, it searches for patterns across various markets and time frames, uncovering edges that humans would never be able to detect on their own.

But even that simply adds more ways to win.

The only thing I can confidently predict is that volatility and noise will increase due to how markets work and the arms race for enhanced technical capabilities and information asymmetry. As volatility and noise continue to rise, what separates smart money from dumb money will likely be the ability to focus on what matters when it matters.

It is hard to do – and even harder to do consistently. But some things are inevitable. While technology may not immediately replace all human traders, it's becoming increasingly evident that those who leverage computers and advanced technology will outperform and eventually replace traders who rely solely on their human capabilities.

We live in interesting times.