Small Capital Should Focus More on Predicting the Market

In this article, I would like to explain an idea based on my observation and think. The conclusion is that people who do not operate a large amount of capital can use computer-based quantitative analysis to support their stock trading strategy to make profit in the stock market, specially much easier that those people who are operating much larger amount of capital.

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This is an unproved idea which is quite lack of evidence. Since I believe there are not many people reading this article, I would like to share this idea here and probably it does little harm to my own process of making money. Hopefully, one day this may be proved right with evidence.

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According to George Soros’ theory of reflexivity, actions of stock traders are affecting the market where they do trades. Therefore, that particular area of the market is no more static. So the interesting thing is that, if they are using static quantitative models to generate trading instructions, they will always fail at a point when their behaviors are bringing too much impact to the market. In this situation, a static algorithm will not perform well and they need a correct non-static algorithm to secure a certain level of profits.

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We can see that there is a concept called “risk” in the area of stock market. We also know that, in the long run, market grows and stock prices will rise. So the key point determining whether those large capital can win is their ability to “minimize the risk” instead of “predict the game”. So hedge fund appears.

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But, as small capital, their impacts on the market are little. In this situation, the market can be seen as “static”, so a static model can work.

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Overall, the world in your observation is less static when your behavior is larger, and more static when your behavior is smaller equivalently compared to small capital and large capital. Hence, as small capital, you should focus on “predict the game” instead of “minimize the risk”. ?