Way of the turtle

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Way of the Turtle

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Arbitrage is a form of trading that capitalizes on price differ-
ences in the same market or in very similar markets. Often these
markets are traded on different exchanges. For example, an arbi-
trage trader may buy gold on the Comex floor at $550 and sell
five e-mini gold contracts on the CBOT’s globex exchange for
$555 to capture a very short-term price mismatch. 
Watching the Market State
Each of these strategies tends to work better some of the time:
When the price movement of a market behaves in a particular way
or when that market is in a particular state.
As Figure 2-1 illustrates, speculative markets exist in one of four
states:
• Stable and quiet: Prices tend to stay within a relatively
small range with little movement up or down outside that
range.
• Stable and volatile: There are large daily or weekly changes,
but without major changes over a period of months.
• Trending and quiet: There is slow movement or drift in prices
when measured over a period of months but without severe
retracement or price movement in the opposite direction.
• Trending and volatile: There are large changes in price
accompanied by occasional significant shorter-term reversals
of direction.
Trend followers love markets that are trending and quiet. They can
make money without having significant adverse price movement.
Taming the Turtle Mind
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This makes it very easy to keep a trade for a long time because the
market does not give back profits during the trade. Volatile markets
are much more punishing for trend followers. It can be very diffi-
cult to hold onto a trade when profits are vanishing for days or
weeks at a time.
Countertrend traders love markets that are stable and volatile.
These types of markets have relatively large swings but remain in
a fairly narrow range of prices. Swing traders like volatile markets,
whether trending or not. Volatile markets present more opportuni-
ties because swing traders make money on short term price moves.
These types of moves are the characteristic that defines volatile
markets.
Although it’s sometimes easy to tell when a market is in one of
these states, both the degree of trendiness and the volatility vary over
time. This means that many times markets simultaneously display