I am a yank (American) by birth but have lived in NZ for 15 years so I am more kiwi now (thank god).
Trading is so ridiculously simple but people make it seem so complex. But you have to learn so much to get to that point where the fog clears. I am sure a lot of traders won't understand a lot of what I have said but that is exactly my point. They are focusing most of their attention on the wrong things. It is about odds and probabilities or as I say "applied statistics", you must accept there is no 100%. The holy grail is you.
I could elaborate a bit more but don't want to hijack my own thread and blow everyone's mind at the same time. I can see you already "get it".
Last edited by ctnz; November 12th, 2012 at 10:49 PM.
I'll like to add my opinion on this that this is untrue with exception of illiquid symbols. To be fair, I think @ctnz was trying to put everything in a single sentence. To begin, I prefer the following definitions of market-making.
(1) Weak and unnecessary condition: Loosely, if you submit a standing limit order at the BBO or improve the current BBO, you are a market maker by definition.
(2) Necessary condition: (This is the more common view than (1) in today's trading.) You are a market maker if your strategies seek only to receive compensation for providing liquidity. In the previous case, your compensation is the difference between the price you would have received if you submitted a market order and the price you received from being taken out by a liquidity taker.
(3) Sufficient condition: A true market maker should satisfy condition (2), and also have zero aggregate price impact. This means that an entity cannot be labeled a market maker if it makes persistent profits from the bid-ask spread. With exception of illiquid symbols, pure market-makers (e.g. GETCO) no longer involve earning the bid-ask spread, but instead must focus on capturing the rebate. Also, there are actually practical impossibilities that prevent one from capturing the bid-ask spread. Studies have shown for liquid symbols that it is actually empirically impossible to earn the whole bid-ask spread on a consistent basis. In practice, say in equity markets, the typical market maker earns about 0.1 cents per share on each trade after costs, which is significantly smaller than the bid-ask spread.
Remark 1: This is even less than what regulators make on a risk-adjusted basis! So I actually disagree with "Rule #15". Thinking like a market-maker, in the literal sense, is a bad idea. In equity markets, regulators take away about 50% of this as profit margin per share, risk-free. In futures markets, the NFA earns a profit margin of about 20-40% of what a market-making HFT makes per side. Risk-free. If you think about this carefully, there is nothing glamorous about being a market-maker. What a market-maker does is only possible with privileged technological access (e.g. ISO orders) and rebates at the highest tier. Trying to replicate this without either is financial suicide. In fact, a market maker's very own aversion towards causing price impact is a source of many market opportunities. I'd advise the opposite - that the retail trader think of what a market maker will not do.
Remark 2: Many people get part (3) wrong. But part (2) is the one that even more people get wrong. Market making is NOT passive trading. Moreover, providing liquidity does NOT mean passive trading. That's why people who get upset for reasons such as "liquidity vanishing when it is most needed" or "a market maker should not be buying into a uptrend or selling into a downtrend" are absolutely misguided. You can buy into an uptrend and still contribute aggregate zero price impact at the end of the day. There are several scenarios where a market-maker has to take aggressive trades.
Remark 3: There is an exception to rules (2) and (3): Several "market-makers" are operators of non-displayed markets, and need not even profit from their activities on the displayed markets. So there is again no need to capture the bid-ask spread, rebates, or even provide liquidity in the displayed markets.
Last edited by artemiso; November 13th, 2012 at 03:43 AM.
Reason: This is probably the worst piece of prose I've ever written. Please forgive the lengthiness.
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The point i was trying to make is a true market maker constantly evaluates both sides (long/short), a trader should do the same. Traders are biased into looking only one way. There is always a short or long but which is the better opportunity. Give it a try you may begin to see things you never saw before.
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A hint: If it looks really bad for a short then maybe there is a long or if it looks really good for a short how does that long you were pondering look now. This ain't rocket science.
A few phrases I trade by:
1. There is always another trade
2. The second mouse gets the cheese
3. If in doubt, don't
4. There is no coulda, woulda, shoulda on a previous trade so move on but can, will, shall on the next trade.
5. If you can do just 1 simple thing better each day after just a week just think where you will be. (Brett Steenbarger quote)
6. It's not what you look at that matters, it's what you see. (I couldn't say it any truer, from Henry David Thoreau)
7. Every trade starts out as a scalp (Tradestalker)
Last edited by ctnz; November 14th, 2012 at 02:51 PM.
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I like your thought process immensely, clarity in a potentially unclear environment.
I have a question about mentors if you will. I have struggled along for a while now (16 months so far) and achieved a state where I can say I am a BE trader slowly grinding my way toward success. There are many areas I need clarity in; thoughts, emotional maturity and the most important that of seeing what is, rather than what I believe, however I am proud to have made it even this far. I have found there are many rabbit holes along the way and I'm not entirely sure why I have climbed out of them to move on. I have been drawn to Wyckoff right from day 1 which has been a lucky break as it is just PA.
I have come across many great speakers and communicators who speak of the market like a known son. However they trade like a long lost crazy aunt. Thus I have a belief that there are ton of people out there with knowledge but not skill in the market. On the flip side (and being a fellow Kiwi thus very much always looking on the bright side) there is knowledge in everyone for the taking.
My question revolves around mentor ship. I do not want to follow someone (as you have point out this limits your capacity) however I want someone that has stood at the top of botanical hill (for example) and knows not the foot steps but the route, who knows the questions to ask not the answers, who knows to look for losing beliefs not create winning attitudes and is provocative in thought and action.
Where does one go to find this..... Or is it through piecing together the thousands of threads of information that you develop your own internal trading mentor and coach?
I do sense some frustration in my writing which is interesting for myself, probably as I have been one at times the wolf in the sheepskin clothing and have given advice from the small hill I stood atop of thinking I was all that and a bag of crisps.
I should clarify that when I read something I can immediately see the skill level in someone's writing. It comes across in the way that they can make the reader see past the idea into the understandings of the market and makes the reader question their own belief structure. You are one such writer.
I'm interested in your thoughts. I'm a bit of a wanderer in my own writing so hopefully you can see the forest for the trees.
Nice being in the centre of NZ for sure- paradise.
"Train yourself to let go of everything you fear to lose."
-Yoda, Star Wars Episode III Revenge of the Sith
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To find a good mentor it is best to find someone who is like you. This is difficult if not impossible because you don't know what kind of trader you are yet. People think they must change who they are to be a trader but the opposite is true. You must be who you are or it will never work. But in being who you are you must find something that fits that person. It is like which shoes fit you. You only know or can compare to all the shoes you have tried before to know what fits.
You give away a bit of your heritage with that reference to "botanical hill". So as a mainlander I can say watch out for the dags and there are many. Trust your gut or you will end up at the meat-works. Don't be what you think you should be but who you are. I probably sound like a broken record but it is so true.
My way of trading is very good for me but would be a big loser for you. Any setup you get you have to make your own. You have to mold it to your personality to work. You can develop it from scratch but you have to learn lot to get there plus you need some good analytical skills. It is like a good cook. Once a person learns to cook one can give them any ingredients and they can make a magnificent meal out of it.
To be a successful trader you don't need to be a rocket scientist, a quant, or have an IQ of 200+. Just find something that fits and it will be as natural to you as breathing. It isn't about being perfect but just good enough. But with all this you still have to master some psychological issues or demons we all have in common. As traders we have technical's coming out our ears but what you really need is something so simple a five year old can do it.
How many times in your life have you completed something difficult only to then see when finished the easy way to do it. Trading is like this as well. If there is a better way I sure don't know it.
I quote Thomas Edison "“I have not failed. I've just found 10,000 ways that won't work.” . “Negative results are just what I want. They’re just as valuable to me as positive results. I can never find the thing that does the job best until I find the ones that don’t.” . Smart man Edison.
Last edited by ctnz; November 16th, 2012 at 08:24 PM.
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