Welcome to another article from the Macro Book. In the second instalment of the idea structuring series, I will build on the last article, where we dissected the art of great trade selection. This time, I will explore the idea of dominant trades and how to scan, observe and go after them. This will give you a powerful framework and tool to analyse a range of possible trade ideas and select the ones with the best potential for a given thesis.
For all new subscribers, here is a little reminder of what we are trying to accomplish within the PAMB framework:
As announced a few weeks ago, I will publish a series of articles about PAMB (Paper Alfa Macro Book). This will encompass all relevant elements of a full investment process. We will cover the following important stages.
Idea Structuring (Article 1)
Risk / Sizing
Portfolio Construction
Risk Management
This will be fun and educational, aiming at anyone interested in all the necessary aspects to make this actionable. I will also make it interactive and provide useful tools for those interested.
Finally, we will run a portfolio of trades encompassing any available tradeable, liquid asset class. All subscribers will be able to participate in the idea generation. We can even set up a mini-investment committee to steer the portfolio. It will be, therefore, more strategic than a day-trading vehicle.
What is a dominant trade? Any given idea can, of course, be dissected by its underpinnings and implications. Nearly every idea affects another one. It is how complex systems are built. In Mandelbrot’s excellent book, he dissects the fabric of how we understand financial markets and rebuilds it using a fractal model. He forces a re-evaluation of the foundation of financial theory, pushing for a paradigm shift in risk management and market analysis. Everything is connected in either a weak or strong form, but that’s how, in essence, a relatively small cause can have massive impacts elsewhere. You might have heard the story of a butterfly wing causing a hurricane on the other side of the world.
A dominant trade idea stands out from all others along many different angles. There is a lot to unpack here.
Let’s explore.