The Strategic Analysis of Financial Markets: Framework Volume / Trading System Analytics: Vol 1-2

Volume 1 of "The Strategic Analysis of Financial Markets," Framework, is premised on the belief that markets can be understood only by dropping the assumptions of rationality and efficient markets in their extreme forms, and showing that markets still have an inherent order and inherent logic. But that order results primarily from the "predictable irrationality" of investors, as well as from people's uncoordinated attempts to profit. The market patterns that result do not rely on rationality or efficiency.A framework is developed for understanding financial markets using a combination of psychology, statistics, game and gambling analysis, market history and the author's experience. It expresses analytically how professional investors and traders think about markets as games in which other participants employ inferior, partially predictable strategies. Those strategies' interactions can be toxic and lead to booms, bubbles, busts and crashes, or can be less dramatic, leading to various patterns that are mistakenly called "market inefficiencies" and "stylized facts." A logical case is constructed, starting from two foundations, the psychology of human decision making and the "Fundamental Laws of Gambling." Applying the Fundamental Laws to trading leads to the idea of "gambling rationality" (grationality), replacing the efficient market's concept of "rationality." By classifying things that are likely to have semi-predictable price impacts (price "distorters"), one can identify, explore through data analysis, and create winning trading ideas and systems. A structured way of doing all this is proposed: the six-step "Strategic Analysis of Market Method." Examples are given in this and Volume 2.In a seminar I attended in 1993, Ed Seykota said words to the effect, "Everything is known about trading there are no secrets." Maybe so, but lots of secrets are known only to a few traders. If this Volume and its companion are successful, lots of secrets will soon be known to lots more.Volume 2 of "The Strategic Analysis of Financial Markets" Trading System Analytics, continues the development of Volume 1 by introducing tools and techniques for developing trading systems and by illustrating them on real trading systems. The difference between these two Volumes and the rest of the literature is its rigor. It describes trading as a form of gambling that when properly executed, is quite logical, and is well known to professional gamblers and analytical traders. But even those elites might be surprised at the extent to which quantitative methods have been justified and applied, including a life cycle theory of trading systems.Apart from a few sections that develop background material, Volume 2 creates from scratch a trading system for Eurodollar futures using principles of the Strategic Analysis of Markets Method (SAMM), a principled, step-by-step approach to developing profitable trading systems. It has an entire Chapter on mechanical methods for testing and improvement of trading systems, which transcends the rather unstructured and unsatisfactory "backtesting" literature. It presents a breakout trend following system developed using factor models. It also presents a specific pairs trading system, and discusses its life cycle from an early, highly profitable period to its eventual demise. Recent developments in momentum trading and suggests improvements are also discussed.

This book is required reading for anyone who hopes to understand how modern financial markets and trading really work. For too long, theoretical finance and the efficient markets hypothesis have been at odds with industry practice. At the same time, methods in the industry have been thought to be too heuristic for rigorous study. Drawn from his decades on Wall Street, Steve Moffitt's Strategic Analysis of Financial Markets reconciles these conflicts by presenting a structured approach that is as practically applicable as it is quantitatively rigorous. --Benjamin van Vliet, Stuart School of Business, Illinois Institute of Technology

For hundreds of years, commodities were traded in open outcry markets and traders trusted their gut instincts. But today, electronic trading has revolutionized markets ‐ gut feelings don't suffice to execute trades and analyse markets any longer. Dr. Steven Moffitt's 'Strategic Analysis of Financial Markets' is a must read for the professional trader who is participating in this new paradigm. With a deep understanding of how the human psyche influences markets and is in turn influenced by the markets, Dr. Moffitt illustrates what is required by those who want to become, and then remain successful in the world of commodity and equity trading. --William Hobert, WH Trading, LLC and Member, CME Group Board of Directors