Platform: "I trade, therefore, I AM!"; Theme Song: "Atomic Dog!"
Favorite Futures: EMD, 6J, ZB
Posts: 798 since Oct 2009
Thanks: 216 given,
I have done over 142 cars round trip in one trading day and broke slightly more even than the massive commission holiday it afforded the broker.
there was something horribly wrong with and when the broker somehow notices your pattern and somehow your edge disappears, and you're stuck in disbelief mode, and not accepting that somehow someone reverse engineered your edge and dulled it.
now, was it hard, to trade over 100, yeah!
were they all one side, now, that was cumulative for the day,
were they profitable, no,
did I use trading skills to achieve just above break-even and comms, yes!
would I recommend doing this.
let's face it, at some time one has to grow up and get serious and scale up to their dreams...
whatever that means...
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The interesting thing you can notice in the movie that there are basically 2 rich guys (one who became an alcoholic and the other one who shoots animals and curses) and every one else is broke!
And guess what: the two (ex-)(pit)traders who are rich are not trading anymore!
You can hear an ex-pittrader who is trying to transition to screen trading complaining about algorithmic trading. And this theme just comes back over and over again. Pit traders not being able to transition and mentioning of algo trading.
I think there is a lot of sense in it. In the movie the psychologist says it is only a psychological issue and you might think that the poor old veteran who knows a lot more about markets than 99.9% of the people just cannot use the computer.
Bullsh#t! That's not the point! It is not possible that every PROFESSIONAL is just a technical analphabet.
So why do even the most experienced guys lose money?
Because as pit traders they are used to be the insiders - meaning they had information which rest of the market didn't and they could price in the inefficiency. The nature of information is irrelevant. Think of anything that matters in relation of price being where is should be.
If all the significant information is priced in - and price is where it is supposed to be - than it is an efficient market state and there is NO STATISTICAL EDGE OF ANY KIND to take advantage of.
And apart from the lack of information the ex-pitraders have now the market has become even more efficient with algos than is was before.
These programs can detect orderflow in a way that it is humanly just not possible. They purposely shake everyone out. It got to the point that I can say we are no longer competing against each other as traders. Algos compete against each other (playing hide-and-seek) and hopefully you are not trying to beat them at a game where you have just as much chance as any outsider compared to the pit traders in the old days.
Is it still possible to make money trading as a retail trader whithout having a supercomputer and servers on the CME and a team of cutting edge programmers? Well yes but it is getting more and more difficult as the markets get more and more efficient leaving less and less money for the increasing number or participants.
(Just think of the inefficiencies when options were introduced or currency futures.... there was a ridiculous amount of money to be made because noone understood how the new products worked and the market was VERY inefficient - also you could take advantage of statistical models where new at the time)
I think there are a few ways to survive the algo-chop.
1) For example you can fade the daily extremes (after the daily range was "completed") with a bigger stop. The problem with fading that your RR is not very high and you also can't leverage yourself up, because it is a short, weak move. In a trending market you will have losses trading only this strategy which will drain your profit factor and question if it is beneficial for you to leverage your time with trading.
2) Trade after news. With news you have new information which is not priced in and therefore creates inefficiency, meaning opportunity. All stock traders do this btw.
3) Ride the strong waves when institutions take directional trades for whatever reason. This is when you can beat them, because of their size and lack of speed shifting realy big capital.
I would be very curious to hear your opinion on #3 how you can detect this.
I found orderflow to be somewhat unrealiable, since everyone is splitting their orders and in a choppy market big trades take place on both sides meaning you can't lean on a 1000 lot offer or jump in with a 1000 lot market order.
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One thing I want to make clear is that trading has never been easy whether it was on the floor or the screen. I think people have the perception that when electronic trading came that it wiped out a ton of traders. Change is what gets traders....and change can come in many different forms...nothing lasts forever. There was not this gigantic 'edge' on the floor.
I got in the business in 1987 and the locals who were making big money in the late 80's were not the same guys making the big money in the late 90's. I think the big change in the 90's was the institutional money that came into the market. I worked for a large Wall Street firm and when you get an order to sell 50,000 10 yr. notes in the next 3 hours above a certain price....guess what the locals are going to get run over.
My 1st job in the business, my boss was a guy who would later become Chairman of The CME. After a few years, I took a new job and when I left the firm he asked me what my long term goals in the business were. I said I wanted to trade. He looked me in the eye and said don't ever trade..."the people who have long careers in this business and make (and keep) all the money are not the traders...they are the brokers."
Ironically I never traded on the floor. My trading career began on the screen in 2001 (yield curve) and I had immediate success on the screen and it lasted nearly 10 yrs.....however, beginning in '06 the Hft's made life difficult for me...
The last thing I want to say about electronic trading is that it eliminated thousands of well paying jobs for people that handled orders. I grew up just outside of Chicago and half of my neighborhood was employed at the exchange. Only a small percentage were trades. That is really what the movie FlOORed should be about...they were well paying jobs and they are essentially gone.
Finally, I grew up with the guy that started the HFt firm that was mentioned in Lewis book. He was a floor guy that was struggling as the mkt was just entering electronic trading. He started the HFT in 1999 because he could not make money on the floor and I guess u would say he had vision. Nevertheless, whether it was on the floor or the screen...trading has never been easy...and a good run as a trader has a limited shelf life...as my old Boss said....the people who make money in the business are not the traders...
The Market is Smarter than You Are
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I trade the ym and nq now and I only have been trading them for 2 years. Hence, I don't know what it was like to trade these products prior to Hft's.....
however, I brokered or traded treasuries for almost 25 years and I did see first hand how HFTs affected the treasury mkt. it really began in 2005 and 2006. As I mentioned I was a spread trader and we were easy targets of Hft's because they would continually front run us and they knew (before we did) when we were buying stuff and the knew when we had to sell stuff. If you missed a leg and were unhedged they knew it and good luck getting hedged. Because of the Hft's I primarily traded my strategy in the Asian and European hours....aside from Hft's, the financial crisis of '08/09 eliminated soo many players that the Hft's gained even more control. Of corse QE is another element..
To answer your question, I knew many successful traders and 95% of them never traded on the floor. They were successful screen traders and some of which were 7 figure guys. Of the 100 or 150 guys I knew trading, just a few are left. I don't have an answer as far as what adjustment one has to make. I think Hft's know when the mkt is 'caught'....u cannot trade big and u need to limit the number of trades u make in a day. My point to my earlier posts is that there is always going to be changes in the mkt....it is your job to change. In the 90s it was the institutional money overwhelming locals, today it is Hft's, tomorrow it will be something else. You have to find your niche. Bottom line for traders I knew, they did not have much difficult making the transition to electronic trading (in fact many prospered). However, very few have been able to adapt to the era of Hft's (which also includes the era of QE and the financial crisis)
The Market is Smarter than You Are
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Fortunately I have not traded the mkts in the 'off hours' In a couple of years, but I believe Hft's do not really get involved until Europe opens (Eurex exchange....1 a.m. cT).in fact my last year or so of trading the curve I would trade from 2 to 4 pm CT and then 5 pm till 1 am CT. Brutal hours with a family and very boring but again...got to carve your niche.
back in the day, markets were inefficient and dominated by heavy retail participation. pricing was a value oriented phenomena that actually reflected the laws of supply and demand. technical analysis was more effective back then, because markets were more auto-correlated, and retail participation in the markets contributed to the self-fulfilling prophecy that drives ta. historical price patterns were more reliable, and price reacted in predictable ways after this conditionality was presented. if one could identify these repetitive patterns, then determining path dependency was easy. the markets are now dominated by commercials, commodity funds, indexers, etfs and hfts. the financialization of traded instruments has resulted in more cross asset correlations which have stripped individual assets of their uniqueness, and price discovery and risk transference functions.
over the past decade, institutional management of equity portfolios has increased from 54% to 81% and over the same period, “real institutional trading” has declined from 47% of trading volume to 29%. there are far fewer market participants today than just ten years ago, managing much larger portfolios across more asset classes, and using much less trading. the retail trader has all but disappeared, and traditional traders are predominantly competing against professionals and machines in a relatively illiquid market. this perspective is important to realize, because it underscores how markets have changed. given the near extinction of retail participation, and the almost total dominance of professional and algorithmic trading, it is unlikely that the biases and readily "available" cognitive reference points that are the hallmark of the retail trader, still exert their influence on pricing today.
more than ever, the market is predisposed to preying on unsophisticated traders; and there is no shortage of material for the flexions to practice on to refine their skills. the internet is full of trading forums, venting the opinions of naive wannabe traders who don’t know the difference between a stock and a bond, yet live in the delusional world in which they believe they can better the traders who are rigging the game. at the core of their beliefs is the illusion that they can grind out a living i.e., they can overcome trading friction and be consistent enough to collect a steady paycheck from the market, while taking very little risk and very small profits. they continue to believe in the existence of the exploitable edge that is reproducible on a daily or intra-day basis. and, herein lies the biggest and most stultifying misconception about trading -the belief in the existence of alpha and the denial that the grind is gone.
one of the many advantages of being a local trader on the floor of an exchange was that a trader could earn the bid/offer spread as an incentive for providing liquidity. when a local made a trade he could buy-the-bid and sell-the-offer, which meant he was buying below fair value and selling above fair value. in addition to this edge, traders were able to transact business at a cheaper rate than the public, and had first-hand knowledge of market structure and order flow. this enabled them to trade ahead of large orders and "race" the retail stop orders. a member trader did not have to go far in his quest for alpha.
following decimalization and regulatory initiatives aimed at creating competition between trading venues, the equities market fragmented, and liquidity was dispersed across many lit venues and dark pools. this complexity, combined with exchanges becoming electronic and for-profit, created profit opportunities for technologically sophisticated players. high frequency traders (HFTs) now use ultra-high speed connections with trading venues and sophisticated trading algorithms to exploit inefficiencies created by the new market structure, and to identify patterns in 3rd parties’ trading, so that they can use it to their own advantage in much the same way as the floor trader used his proximal and informational edge to generate alpha.
however, as a short-term, point-and-click, discretionary directional trader, one does not have access to the same process required to generate alpha. for traditional traders, the new market conditions insure that the playing field is tilted against them. retail traders continually find themselves falling behind these new competitors, in large part because the game has changed and because they lack the tools required to compete effectively. nevertheless, as the complexity of trading increases, it is still possible for a trader to separate from the pack and profit. the trader who has the better (more complete) and more timely (current) analysis will enjoy the greatest edge and have the greatest success, because they will have increased the gap between the traders who have adapted to the new environment, and the less informed, less diligent, and less talented ones.
it’s not that alpha doesn’t exist- it just doesn’t exist for the retail trader. what traders earn beyond the risk-free rate is not a true profit but simply factor compensation—the market rate for the risks they take. any positive expectation is the result of accepting that risk: the payment for taking such a position is compensation for risk, not an excess return. so, a trader must assess his approach to trading and decide what steps must be taken to find a proxy for alpha; and it begins with adopting an attitude, that is both realistic and relevant. the best any trader can hope to achieve, under any circumstance, is an incomplete, but probabilistic knowledge of the trading environment. so a trader must realize and accept that the markets are dominated by the rules of chance and randomness, both skill and luck come into play. how traders cope with probabilistic uncertainty and their imperfect view of the market is critical to their success. the essential job of traders then is to reduce uncertainty, not risk.
as a leveraged trader, one makes short-term decisions/trades, but understands what is happening at time frames greater than the one he's currently trading. the decision to trade and its management, flows from an analysis of price action. he is aware traders operate at different time-frames, markets are interconnected, themes abound in markets and that probabilities and departures from value govern trading opportunities. he understands and incorporates relevant informational signals from a wide range of deterministic processes to arrive at a summed probability that acts as deeper context.
he manages the risk through diversification, keeps draw-downs to manageable levels and strikes a balance between profit maximization and loss mitigation by adjusting trade size and stop-loss levels, so that only an extreme event will trigger the stop. he keeps losses in a predetermined range, and prevents getting stopped-out of a potential winner by managing expected value along with p&l, while allowing for a margin of error, so that he may stay-in-the-trade.
he is not concerned about how often he is right about the market, and frequently adds to his winners and turns short-term winning positions into longer ones. yet, never loses sight of the fact there is a downside scenario with an associated probability. the way decisions are evaluated affects the way decisions are made, so one does not allow stress, cognitive load, emotions, and bias, to non-linearly affect the decision process.
smart traders have the capacity to aggregate and synthesize large volumes of information, analyze it, and then derive an edge from it. the primary step in this process is to develop the capability to gather timely information from all the various sources and attach relevance to the information as accurately as possible. then merge both data sets, public information and proprietary tools, to derive insights that are applied in making trading decisions. good traders figure out what game is working and play that game. if they can understand the interactions of the individual factors and their effects on the market as a whole, then they will be able to identify higher order patterns that are the result of these interactions. going beyond the standard correlation/causation question, the trader must ask, does this source of edge make sense? is there a behavioral or structural reason why this source of edge should persist? and he must expect to be surprised and have to make adjustments, and build that into his expectancy.
good traders are always working on themselves, always refining what they do. in an important sense, they don't just use introspection to improve their performance. they work on their performance as a means of extending their personal mastery. the best traders spend significant time generating trade ideas, researching markets, and staying on top of developments worldwide. the ratio of time spent in preparation to time spent actually in trading, is a measure of a trader's professionalism
every trade a trader makes provides an opportunity to learn. gathering information from every trade, as opposed to a select few, helps give the trader a better understanding of how those trades may perform in the future. the more frequent the analysis, the more relevant the findings will be. however, the findings serve a purpose only if they are acted upon. the key is to use information to guide actions whose outcomes are then analyzed and the findings reapplied. this creates a continuous iterative loop that drives towards ever greater efficiency.
if you look at alpha as various types of beta doing different things at different times, then a trader's returns are going to be lumpy and cyclical in nature and performance will revert to the mean. the central message for traders then, is to trade efficiently, and make the most money with the least cost. it's not how often you're right, but how much you're right. if you want to make money, then maximizing geometric returns should be front and center in your thinking.
the market and its past is identical for all observers. yet, the market and the future are understood uniquely by each trader. no matter how crude or refined a method one follows in ascertaining the likelihood of change, it still boils down to surviving against one's own incomplete intellect, a misfired bout of randomness, in controlling the risk, and in executing a set of consistent ideas day in and day out, so that chance can prevail. the opportunity is there for the traditional trader to capture his personal alpha. all he has to do is see the market for what it is, and not what it was, or what it appears to be.
Last edited by tigertrader; October 19th, 2014 at 11:32 AM.
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1) are any of those traders you knew, possibly on futures.io (formerly BMT), or know about it? When I left off the prop equities desk(s) at quite a few different firms, all closed and failed because of both the basket trading being substantially more profitable (baskets, ETF's, changing over to Eminis) and HFT's dominating key stocks, we all scattered and don't keep in touch either.
2) it might be insightful to discuss more about YM and NQ trading, and why those two vehicles are better than the common ES, TF, CL variety. I prefer the EMD over the afore mentioned contracts.