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A Time Traveler and a Trade

  #21 (permalink)

Trading Experience: Intermediate
Platform: Bookmap and Jigsaw DOM
Broker/Data: Stage 5 Trading
Favorite Futures: ZN
lax99's Avatar
Posts: 433 since Jun 2015
Thanks: 623 given, 809 received

tpredictor View Post

This is a "false choice problem". How much action/information are you able to infer from 1 tick? And what certainty can you scratch a trade for only 1 tick of risk? That's what matters. Let's just say, I think discretionary traders in today's markets unlikely to be able to scratch many trades effectively.

Your ability to improve results as action develops is based on the efficiency of the markets and ability to integrate Bayesian probability theory. If every trade is a unique event then you cannot improve your results from knowledge of prior trades. You can only do that if the trades have dependency.

I mean the way this question is posed is would you rather lose $12.50 on a trade or $100? If all things are equal, I will prefer the small loss because the standard deviation of returns will be lower.

I feel like we're speaking two different languages and I'll do my best here to reconcile them (or at least present my understanding of our difference in opinion).

Here's an example from two weeks ago: ZN was selling off pretty hard and I saw the first spot where it paused. Not only did it absorb like five or six thousand contracts on the low, but it lifted 1500 up into the offer and it went bid. I tossed my bid in at the tick lower where the 5-6k had traded. I got filled long and I watched it dance higher by about a tick before going offered again.

I was able to infer a TON of information from the 1 tick difference in price--this is a nice characteristic of thick markets--which I'll describe here. For argument's sake, I'll say I was long at 05. The market had traded like 15,000 at 05 and about 3,000 had lifted into 06. There was a bid of 6000 at 04, which is 1 tick lower than my entry long. The market suddenly ticked against me, so it was 04 bid x 05 offered. The volume wasn't enormous; maybe 1,100 or 1,200 had sold into 04, but the bid of 6,000 had plummeted to 2,000.

All I had to risk was 1 tick to know that I was wrong. I thought I was aligned well with buyers who would drive the market up a couple of ticks. As soon as it ticked lower, all of the bids below me vanished. I hit out for -1 and the market ended up cracking 4 or 5 ticks. There was no need for me to risk any more on that trade because I was dead wrong on the call.

I think part of the reason for our difference in belief is probably because we trade different markets. One tick in ES doesn't mean much. One tick in ZN means a ton.

To the second point: Improving your trading isn't a matter of market efficiency and integrating graduate-level mathematics into the choice to click buy or sell. Improving your trading is all about seeing hundreds of trades (which are each unique, but human behavior follows patterns) and just spending time trading your market.

And finally: Once again, we're talking apples and oranges. I'd rather lose $12.50 on one trade instead of $100. But what about a string of trades? That was the root of my original question...

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