a quant at a prop firm showed me a 5x5 grid on a napkin
said:
> this is our entire edge. we don't predict price. we predict which box the market is in and where that box historically leads
i didn't understand it for weeks. then it clicked
never looked at a chart the same way since
grid is called a Markov Chain transition matrix. the math is from 1906, it's in every probability textbook on earth
and hedge funds use it because it asks a completely different question than retail traders ever ask
retail: will this go up or down
quant: what state is this market in, and where does this state typically go
every market lives in one of maybe 5-6 states at any given moment
tight range, volatility compression, trending with momentum, post-spike reversal, pre-breakout coil
not random labels - clusters you identify from actual data using volatility, volume, and momentum readings stacked together
once you have the states, you build the matrix:
P(state 2 -> state 4) = 73%
P(state 4 -> state 1) = 61%
P(state 1 -> state 3) = 68%
each cell is a historical probability. now when the market is in state 2, you're not guessing
you're betting on 73% historical completion. you size it with Kelly. you take the trade when the math says to, not when it feels right
i built this on BTC using 2 years of 4-hour data. identified 5 states
one i labeled "volatility compression below 20-day mean for 6+ consecutive candles" transitioned to a directional move above 1.8 ATR in 71% of cases
average reward/risk on those trades: 5.4
that's not prediction. that's reading a probability table the market keeps filling in for you every single day
the part that should bother you: the data to build this is free. the framework is in any quant textbook
python to implement it is maybe 200 lines
what Renaissance Technologies has that you don't isn't secret data or proprietary signals
it's this framework applied to higher-resolution data with more sophisticated state definitions
you're not missing information
you're asking the wrong question every single time you open a chart
Going to show you the exact moment sellers tipped their hand & the spot I jumped in right at the beginning of the liquidation on Thursday. 🔊 ⬆️ #NQ_F#SPY
The market's reaction to the Trump tweet today. A clear example of a market that is worth spending money in. Level to level, the market gave us eight 15 point rotations down to our flatten zone. That’s 8 opportunities to initiate and add to positions. Trading is not about catching every wiggle. Its about maximizing the trades you do catch. This was a great day for many of us in @ThePAXGroup@paxtrader777
Trading rewards time.
Year 1: 100 systems, 100 failures, accounts lost.
Year 2-3-4: Breakeven, failures, mistakes, emotional pain.
Year 5+: $300/day, disciplined and fearless trader.
You can't become a successful trader if you don't love the process.
@LanceBeggs Thanks lance. Good choice, family first, then the time is on, please let us know if you shut down the website, i think the community will keep it up! I'm willing to help. Great post.