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The UFC Comes to Town

This weekend I got to fulfil one of my sporting dreams, watching the UFC live in Sydney with my son. We are both fanatics so it was wonderful to experience the exciting showbiz atmosphere as well as the culture of the fans of the worlds fastest growing spectator sport. Boys will be boys.

As those of you who have been following PsyQuation the last few months will know, we are embarking on a major new allocation program where we will be incubating emerging trading talent. For me the similarities with the UFC are quite profound.

Dana White the UFC President has built their organisation into a billion dollar company by seeking out the best talent and providing these warriors with the opportunity to become famous and wealthy by providing a platform for the best of the best to make it to the top of their weight class.

To make it in the UFC you need to be uniquely talented but you need more than just talent. You need ambition, you need tenacity, you need a tactical approach and you can never succumb to fear. I see all these qualities as necessary to make it in the even more competitive arena of trading.

Traders like fighters who give up after the first sign of trouble will never make it, you need to be able to shake off early setbacks and fight on. A healthy dose of fear is important so that you don’t get overconfident, but fear as in being scared in the ring and the markets is death. If you cannot take risk as a trader because of fear you are doomed to fail as there are no strategies (other than some high frequency) that make money without some risk being accepted by the trader.

Ok I have probably tortured the analogy enough for the pacifists reading this letter so lets learn a little bit about code breaking.

Deciphering Code
For centuries people have been using cryptography to transport secret messages between ruling parties and their envoys in foreign lands. One of the famous methods used is called a cipher which is a secret way of writing a message, or put simply a code.

If you jumble up the alphabet with a secret code you will have more than 400,000,000,000,000,000,000,000,000 possible combinations which would take at the rate of 1 second a trial combination more than 1 billion times the lifetime of the universe to trial and decipher. I am not sure about you but that is a puzzle I would gladly skip.

However 100’s of years ago, an arab scholar by the name of Ismail al-Kindi came up with an ingenious way of solving the problem of the cipher in a substantially shorter time frame than the one I suggested above. Stay with me I have a point, I promise.

al-Kindi came up with a frequency table, he said take an ordinary page of text and count which letters appear the most frequently. In English the most common letter is e followed by t and then a. Working with this frequency table you can then look at the message being sent in code and try and look for the most frequently used letter and start a matching exercise that will help decipher the code.

There are exceptions to this technique. If the message is too short then its possible that the frequency table doesn’t represent the true alphabet, or for instance the message being sent could be describing a very specific circumstance say for instance discussing the ozone and it could include in the message the letter Z many times.

When it comes to deciphering which traders are talented using our PsyQuation Score, this is exactly the challenge we are faced. If the track record is too short we cannot be sure that the data we are analysing is accurately representing the alphabet/skill. Also it is possible that the context of the message may be too focused on a specific circumstance (say trend) to fully reflect the true nature of the frequency table.

The good news is that as cryptographers of trading talent, we have formulae and tools at our disposal that make deciphering the skill in traders track records decipherable. We are working on releasing a new white paper on the PsyQuation Score 2.0 in the next few weeks.

Looking forward to more profitable trading together.

The PsyQuation Team

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