[Part 2] The two types of trading games

Yesterday I spoke at length about the first (and easiest) type of trading game you can play, Risk Premia games. If you missed it do a search for the following subject line: The two types of trading games you can play (part 1 of 3) Now on to the second type of trading game we can play. They are harder, but more profitable, however, they don't last forever.  Plus, other people are fighting over the same bread as you. So they pose an equal number of cons as Risk Premia games, just in a different way. They're called Alpha Games. What is alpha? Alpha is when you figure out a price inefficiency. One example of a price inefficiency is a listing alert brought to us by the NewsQuakes™ indicator from the Markets Pro dashboard. To generate alpha you have to know something the rest of the market doesn't know, that's it's underpriced or overpriced. Maybe the squiggles you drew on your chart lead you to believe the market has gotten price discovery wrong (unlikely but it can happen). Maybe you notice that a price insensitive seller has pushed the price of a coin lower on Gate.io exchange than Binance. You can earn alpha by helping to nudge that price back into proper alignment. And this is how I'd like you to think about it. Trading edge IS service. Ask yourself "what useful thing am I doing for the market that someone's gonna pay me for?" Some examples... 1. A coin is trading at a lower price on one exchange than another because somebody got wrecked.  You can be useful by buying that coin and helping nudge the market back into place. 2. Degens aped into a small cap shitcoin, sending it to the moon. You can short that coin and help it come back to its fair value of 4/5ths of nothing. 3) You have some data on-chain that predicts price. Since on-chain is the "fundamentals" (and yes I'm aware of how suspect it is to use the word fundamentals about crypto) price discovery has diverged from fundamentals so you can be a good person and help the market find balance again. 4) You notice (this was a real one) that FTX had a token called SHIT-PERP (seriously). That token was an index of other tokens, and they "rebalanced" at 00:02 UTC time every day.  With a spreadsheet you can work out how much of each coin FTX will have to go into the market and buy or sell, and get in a minute ahead of them and help nudge the market back to its fair value.  This was literally how Alameda research set fire to $10 Billion Dollars.  That money didn't go into the ether…it went to the smarties on the other side of that trade!  So Alpha is really doing something clever.  Knowing something the market doesn't. One evergreen source of alpha is Price Insensitive traders…rebalancing ETFs or tokenized assets, or traders getting liquidated, or traders who are tax loss harvesting, or end-of-month window dressing. You can see this is hard…but you might not fully appreciate why this is so hard. Let's say there's a bar near your home...  On Sunday morning after a rowdy Saturday night you see a $20 bill on the ground. Woo Hoo! It's obvious what happened...  Some unknowing soul three sheets to the wind reached into his pocket for his phone and dislodged a $20 bill. Breakfast is on him! Now, here's where it gets interesting. You go back next Sunday.  Same deal.  Another $20. This time you brag to your friends about it. And the next Sunday, you arrive and see one of the guys you told walking away, happy as can be. You call out to him "hey, that's mine!" He turns around and laughs.  There was an inefficiency, and now it's closed. No point in you turning up to get it now, it's already gone. If you arrive at 5 A.M., your friend will get there next week at 4 A.M., and so on and so on. Let's look at how this works in trading. Here are some real world results based on a scalping system over 3,000 trades or so. Looks amazing, right? It's pure alpha. So here's the deal.  If enough people start trading this, the edge will decay. How many people?  With one tick of slippage the edge decays from .25 expectancy ($250 per trade on average risking $1,000/trade) to .11 expectancy ($110/trade). With two ticks of slippage it falls away to about breakeven. Now, the currency pair this trade is based on is the deepest, most liquid market in the world, but not all the time.  And even during the NYSE market hours, 30 million on the bid will give slippage. So if the total people trading this system bet more than 30 million, this edge will disappear. Those risk premia games we talked about yesterday are extremely high capacity. It's hard for them to disappear. People have known about them for 100 years and they still work just fine. Alpha is a $20 note dropped outside a crowded bar. Risk premia is a $20 note dropped in the middle of a freeway. Which do you think is gonna be around longest before it's picked up? Keep an eye on your inbox tomorrow for the third message in this series where I explain which trading game (or games) you should play – this is where the rubber really starts to meet the road. See you then, Russell DeCorte Director  Markets Pro © 2023 COINTELEGRAPH MARKETS PRO COINFIDENTIAL. Copyright © 2023 Cointelegraph Markets Pro, All rights reserved. You are receiving this email because you opted in at our website. Our mailing address is: Cointelegraph Markets Pro 21 W 46th St New York, NY 10036-4119 Add us to your address book Want to change how you receive these emails? You can update your preferences or unsubscribe from this list.