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Robots run amok?

  #3 (permalink)

North Carolina
Trading Experience: Beginner
Platform: NinjaTrader, Tradestation
Favorite Futures: es
Posts: 644 since Nov 2011


Right, you are partially correct. I mention that I anticipated a multiple standard deviation down day in the month of Feb back in October (see the Bond forum). You are correct that there is more profit opportunity because the HFT liquidity robots have temporarily shut down because the risk and uncertainty was higher. However, I doubt they took big losses. In fact, there was a lot of evidence the HFT were trading very aggressively in the futures. So, they probably made even more. The environment didn't change to favor discretionary traders: although it was better in many ways. It changed from favoring HFT liquidity providers to HFT aggressive traders.

Possible winners:
1. HFT aggressive traders
2. Macro oriented or speculative traders on long volatility
3. Discretionary day traders and scalpers

Possible losers:
1. Systematic lower frequency traders and swing traders. One reported big losses among CTA's.
2. Short volatility traders (betting on statistical odds)
3, Market order retail auto-trading strategies.

A real concern was the market was trading too fast at times for a discretionary trader but it doesn't seem that anyone cares. There is very little retail trade in futures markets. Most of the trade is institutional and HFT. These are the firms that pay the exchange. I do not see anything really changing toward that way. It would be fairly simple to make it more level and easier for humans to trade. But, I don't think that will happen.

But, I think it is a valid question to ask for the independent trader whether or not it is easier to make profits from the markets statistically vs. opportunistically? It sounds like the "discretionary vs systems" debate but it is framed differently.

There are some good arguments that it might be easier to make money from the markets opportunistically. One argument is to assume markets are mostly efficient but not perfectly. If they are efficient, is it more likely that one would be able to find profitable opportunities by data mining and backtesting or is it more likely that one could find profits by scouring for unique and developing opportunities?

While, I shown that futures markets do not have to be negative sum when we allow for arbitrage and when considered on a participant vs. a contract basis, however there is a cost for every trade you make and with leverage and fees, if you make too many random trades in futures markets your account will go to zero fast. I have built profitable systematic strategies and even have a funded strategy account. Systematic trading can work. One of my strategies has performed well for about 4-5 years after released with no updates and with only one brief critical period. So, do I think historical prices and behavior are relevant? It is relevant. But, is it central? Is it core and central? Are 10 year old prices more central then the events and news today? Relevant, sure but central less likely. And, look at why most traders whether they are discretionary or systematic, they are trying to find rules that work consistently.

What I think of as "cutting edge" trading is when traders formulate original ideas and insights that have value and then fully quantitatively develop them and/or use systematic strategies to realize them. Traditional backtesting is formulated as trying to find a set of rules that work consistently in the past. But, a quantitative outlook, if you can come up with good ideas and then find ways to implement them and keep your trading frequency relatively low-- the question is -- is it going to be easier to make a profit that way?

It is difficult to answer. But, if markets are efficient, if trading might be zero sum, and given that markets are non stationary then all those things together suggest trying to trade the markets using a consistent, finite set of rules is less likely to yield superlative success.

But, right you are right that often there is a risk to reward ratio in anything. It is something that must be understood when making any amount of profit that the traders who capture opportunity earlier then later make the best returns. Most institutions cannot realize the "big returns" because they are too speculative. Right, how many institutions would touch Bitcoin when it was new. They needed more data. The HFT traders don't want to take any risk. They have a monopoly on those trades. Systematic traders, they find the historical trades that no one else wanted. What's left for the independent trader? Maybe to take advantage of opportunistic trades.

Now do you have to be able to predict? Yes but if you can find big R opportunities then you don't have to be perfect. The portrait suggest someone who trades on a lower frequency whether it is day trading or swing trading or whatever - we'll just imagine it is lower then they could trade. The trader is seeking out the bigger trades. They aren't looking to scalp a few ticks.

As an aside, I am trying to be more quantitative in my trading and define quantitative setups. Still building systems and still trying to trade the market on fast frequencies-- scalping, etc. I think perhaps some mix might work best for myself.

Last edited by tpredictor; February 12th, 2018 at 08:24 PM.
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