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it's a very difficult question to answer because i'm still adjusting to recent changes in the market
right when i think i have it figured out, things change again
it goes back to what i alluded to in brian's thread - methods need to consider the constantly changing nature of a market's path dependency in terms of variability, duration and signal. a greatly reduced holding period and strategies that take account of variable future paths are now the rule rather than the exception
so, what i attempt to do is determine what game is being played , and play that game - what markets offer the highest probability of making the most money, given the current theme and current drivers of price
to accomplish this, i've gone from trading one instrument at a time to multiple instruments
friday, gold was positively correlated in varying degrees, to zb, dx and 6j, good relative strength to si, and it was negatively correlated in varying degrees to 6e, es, aud/jpy, and the nob
the past couple of days i was short es, long zb, and gc
the reasoning behind the decision was somewhat implicit but also related to volatility and liquidity, and thematic insights
come monday, i'll see how these relationships and the game have changed or remained the same, and adjust accordingly
as bacon would say (robert, not kevin), the grind is taken. as a short-term trader, you get "satisfaction" on a more predictable basis, but you pay a price (risk premium) for the comfort of a higher frequency of gains; that is smaller profits, and higher friction. this kind of trading, was "pit appropriate" because of the advantages afforded the floor trader, i.e., reduced commissions(with a yearly cap), a real edge ( buy/sell-it-on-the-bid/offer), knowledge of the order flow, auditory and visual cues, etc. it was a very un-level playing field that was tilted in favor of the local and was tailored to scalping - high frequency, low expectation. because of these advantages local traders owned the grind.
change venues to the screen, and all the advantages that a pit trader enjoyed on the floor are gone. he immediately becomes an uninformed trader, who gives up the edge, pays higher transaction costs, has to deal with execution slippage, and loses all the visual and auditory feedback he enjoyed in the pit. he goes form making the market, to reacting to the market. in effect, the hfts, have supplanted the local trader/market maker, and inextricably tilted the playing field to their advantage. now they own the grind.
this is question of of market structure, but lets consider price distribution. the majority of trading days are range or mean-reversion days. if we use es as a proxy, only 14% of trading days are trend days. there are big implications here in both psychology and p&l. trends tend to be outliers- low probability trades - frequency is low, expectation is high. the trader now goes from paying a premium, to receiving one. therefore, the big money is in the outliers, because of the way profit opportunities are naturally distributed by the market — not evenly, but in concentrated bursts for limited periods of time.
of course, the best approach would be to integrate your trading styles, using a mean-reversion strategy on range bound markets( while avoiding the chop), and a trend following strategy on trend days. but even in this scenario, probably 80-90% of your profits, will come from 10-20% of your trades, and those are the fat tail trend days.
for all the reasons i mentioned above, it is infinitely more difficult to trade size electronically than in the pit. you have to realize, that a floor trader that would accommodate a large order, usually received a substantial edge, which could be anywhere from a tic to 4or5 tics below-the-bid or above-the-offer, and in addition he usually had large resting orders to lean on.
Just as I thought, trading big size has a lot to do with "sure" (insider) edge or just call something very high probability. Normally you wouldn't want to risk millions several times in a row because it is not appropriate to have a bad beat with this size Or they had staggering bankrolls.....
I think it is still possible to trade size, one just have to wait for the near-perfect psychological points in the market. (As I said I don't believe in probabilities) but I really wonder if it is safe to trade size, since if you have a position with a 1000 lots and a close stop, you are a moving target
I grew up in Oak Park, IL and started wkg at the CBOT (full time) in 1987. I was a futures broker for Dean Witter and JPM in the bond room. It was amazing how large the locals on the floor traded back then.
I left the floor in 2001 and traded the Treasury Yield Curve for a decade. At present I am trading the indices.
We celebrated my Dad's 81st b-day yesterday. We were talking and he said he feels bad for all of us that we have to sit in front of computer all day for a living. Said it would be a horrible way to make a living. Got me thinking how much I miss the floor and what a special place it was. The energy was unbelievable. I enjoy electronic trading but it is very lonely. The floor was a special place.
In your original post Charlie D, Steve Lawrence, Tom Baldwin.....cowboys.....and true risk takers. At JPM I did a lot of business for East Coast blue bloods and none of these guys were in the same class as the large exchange locals. The blue bloods traded other peoples money and I think they were always schocked when they said "sell 500 hundred bonds" and would then ask who bought em. I would say Tom Baldwin....
Or they had staggering bankrolls..... 