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Tackle Today: Trading Polyphony 🎶

July 24, 2018

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Polyphony is a type of musical texture that consists of two or more simultaneous lines of independent melody. The overall sound is shaped by melody, rhythm, and harmony. In Western musical tradition, the term is usually used to refer to music of the late Middle Ages and Renaissance.

Market participants include individual retail investors, institutional investors (pension funds, insurance companies, mutual funds, index funds, ETFs, hedge funds, investor groups, banks etc.), and also publicly traded corporations trading in their own shares.

By paralleling both, one might think that the whole stock market is a polyphonic chant with participants being voices in harmony with one another.

Far from the truth. Markets are not a polyphony but, from that perspective, a cacophony—a mix of discordant sounds, producing dissonance. The market efficiency theory suggests that markets are rational and provide correct pricing. What we know with a little bit of confidence, though, is that when considering a larger time horizon, the price of the stocks tends to follow the underlying company fundamentals. Warren Buffett knows it very well and that is why he extracts polyphony from cacophony, his edge.

This Signal vs. Noise dichotomy is our everyday job as traders. The advantage is that we can profit from both. Day traders and investors can attest to this fact.

The secret lies in finding the edge between order and chaos, polyphony and cacophony, and harmonize it with our personality and trading skills.

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