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How I Trade For a Living
Started:August 30th, 2016 (10:48 AM) by rocksolid68 Views / Replies:49,182 / 662
Last Reply:November 7th, 2016 (02:55 PM) Attachments:94

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How I Trade For a Living

Old September 18th, 2016, 07:13 PM   #101 (permalink)
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jstnbrg View Post
Not what I was looking for. I traded interest rate futures on the floor of the CBOT for 16 years and for another 4 years on the screen after that, ending in 2006. On the floor I was a scalper, mostly in the 5 Year Note pit. On the screen I traded the FITE (5 yr./10 yr. spread) and the NOB (10/30yr. spread). These are ratioed spreads, where the position sizing of the relative contracts is determined by the dollar value of a basis point change in the underlying cheapest to deliver cash instruments. It takes less of a price move in a longer term instrument to achieve a basis point (1/100 of 1% yield) than it does in a shorter term instrument, so for example, if you're long the NOB you might be long 3 ZN and short 2 ZB (I think now the ratio is more like 2:1, it changes).

Obviously gold doesn't have a yield, so if you're trying to balance gold against ZB you need some other metric. My question was, what is that metric? Are you long $100,000 worth of gold and long $100,000 worth of bonds, assuming they're negatively correlated? Do you say, the average daily range of a gold contract is $2000 and the average daily range of a bond contract is $1000, so I'll trade 2 bonds for every gold contract? (I'm making up the numbers here, I have no idea any more how much either moves in a day).

Hey,

In your first post, you were not clear enough, hence the wrong response.

Now that I know, here you go:

-I am not trying to balance either.
-I am not hedging against anything nor am I trying to size my positions according to the ADR

When I take a trade on GC, it is totally separate from a trade in ZB. If I am in ZB long, that does not matter to me when I place a GC trade. (as long as I am not trading so much size it used up a lot of margin)

Does this answer your question?

I am sorry for the wrong response earlier. But do note that I tried giving you an answer of value.

     
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Old September 18th, 2016, 11:12 PM   #102 (permalink)
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rocksolid68 View Post
Hey,

In your first post, you were not clear enough, hence the wrong response.

Now that I know, here you go:

-I am not trying to balance either.
-I am not hedging against anything nor am I trying to size my positions according to the ADR

When I take a trade on GC, it is totally separate from a trade in ZB. If I am in ZB long, that does not matter to me when I place a GC trade. (as long as I am not trading so much size it used up a lot of margin)

Does this answer your question?

I am sorry for the wrong response earlier. But do note that I tried giving you an answer of value.

No problem, I guess your use of the term "arbitrage" in the post I quoted threw me, though you did say it was just what you call it, and that there might be better terms.

To me arbitrage has a pretty specific meaning, basically trying to take advantage of shifts in pricing between two or more related instruments, buying one and selling the other, and I thought that's what you were doing. You said you were trying to determine which instrument, GC or ZB was trading at a discount. Typically when one instrument trades at a discount to another, arbitrage is a high probability, low risk strategy to take advantage of the price discrepancy without exposing yourself to outright market risk. And I thought it would be interesting to see how you balanced a gold position against a T bond position.

My first exposure to arbitrage came when I was a cash grain trader, first with General Mills, then with Harvest States Cooperatives. At Harvest States we might buy corn from an elevator in central Minnesota for delivery by rail to our barge terminal at Winona, MN. The elevator chose to sell it for delivery to Winona because at that point in time Winona was his best bid. And we sold that corn for delivery by barge to the Gulf of Mexico. But when time came for delivery of the corn, some different market such as delivery to the West Coast might now be the best market. So we might buy in our corn for delivery to the Gulf from some location where that was the best market, sell the corn to the West Coast, and bill the rail car (which was still at the originating elevator) to Portland or Seattle. In that way we were able to make money on our purchase twice, first in the sale to the Gulf and then in the resale to the West Coast. Arbitrage comes in many flavors! In my opinion the kind of arbitrage I just described is the best kind, because it carries no risk at all, just an improvement in the price we originally got. No bet was made.

So I spent my share of time in Minnesota too, ten years including four in college. And my Mom's family is from St. Paul.

"You don't need a weatherman to know which way the wind blows..."
     
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Old September 18th, 2016, 11:23 PM   #103 (permalink)
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jstnbrg View Post
No problem, I guess your use of the term "arbitrage" in the post I quoted threw me, though you did say it was just what you call it, and that there might be better terms.

To me arbitrage has a pretty specific meaning, basically trying to take advantage of shifts in pricing between two or more related instruments, buying one and selling the other, and I thought that's what you were doing. You said you were trying to determine which instrument, GC or ZB was trading at a discount. Typically when one instrument trades at a discount to another, arbitrage is a high probability, low risk strategy to take advantage of the price discrepancy without exposing yourself to outright market risk. And I thought it would be interesting to see how you balanced a gold position against a T bond position.

That's what I thought too, but like you I was willing to go with it to see the particular meaning in this case.

There's more than one way to skin a cat. So long as it works, that's what matters.

By the way, I do enjoy these stories of your trading experiences. There's just so much good stuff available here on this FIO forum....

Bob.

     
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Old September 19th, 2016, 12:20 AM   #104 (permalink)
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bobwest View Post
That's what I thought too, but like you I was willing to go with it to see the particular meaning in this case.

There's more than one way to skin a cat. So long as it works, that's what matters.

By the way, I do enjoy these stories of your trading experiences. There's just so much good stuff available here on this FIO forum....

Bob.

I am old, very very old! (59). And I've been in various parts of the commodity business since I was 22, just out of college. The futures pits were a unique and colorful place, but the truth is I really liked the grain business. It just didn't pay enough to be worth it. That industry was very depressed in the mid-1980s when I left for the floor.

"You don't need a weatherman to know which way the wind blows..."
     
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Old September 19th, 2016, 12:34 AM   #105 (permalink)
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jstnbrg View Post
I am old, very very old! (59). And I've been in various parts of the commodity business since I was 22, just out of college. The futures pits were a unique and colorful place, but the truth is I really liked the grain business. It just didn't pay enough to be worth it. That industry was very depressed in the mid-1980s when I left for the floor.

Old? You're not old.

There's the (ridiculous) thing that you're only as old as you feel. Let's just avoid that for a moment.

I am very much older than you. (Not telling how much.)

Everyone's got something to add, and I like all these personal stories. They add context in a completely different way. There's also some basic knowledge to be found in anyone who's lived it, in any situation.

More, please.

Bob.

     
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Old September 19th, 2016, 10:06 AM   #106 (permalink)
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jstnbrg View Post
No problem, I guess your use of the term "arbitrage" in the post I quoted threw me, though you did say it was just what you call it, and that there might be better terms.

To me arbitrage has a pretty specific meaning, basically trying to take advantage of shifts in pricing between two or more related instruments, buying one and selling the other, and I thought that's what you were doing. You said you were trying to determine which instrument, GC or ZB was trading at a discount. Typically when one instrument trades at a discount to another, arbitrage is a high probability, low risk strategy to take advantage of the price discrepancy without exposing yourself to outright market risk. And I thought it would be interesting to see how you balanced a gold position against a T bond position.

My first exposure to arbitrage came when I was a cash grain trader, first with General Mills, then with Harvest States Cooperatives. At Harvest States we might buy corn from an elevator in central Minnesota for delivery by rail to our barge terminal at Winona, MN. The elevator chose to sell it for delivery to Winona because at that point in time Winona was his best bid. And we sold that corn for delivery by barge to the Gulf of Mexico. But when time came for delivery of the corn, some different market such as delivery to the West Coast might now be the best market. So we might buy in our corn for delivery to the Gulf from some location where that was the best market, sell the corn to the West Coast, and bill the rail car (which was still at the originating elevator) to Portland or Seattle. In that way we were able to make money on our purchase twice, first in the sale to the Gulf and then in the resale to the West Coast. Arbitrage comes in many flavors! In my opinion the kind of arbitrage I just described is the best kind, because it carries no risk at all, just an improvement in the price we originally got. No bet was made.

So I spent my share of time in Minnesota too, ten years including four in college. And my Mom's family is from St. Paul.

Did you like it here? Most people do not like the Winters here

As far as the arbitrage goes, I feel that it still is a good term for it.

What I am doing is finding a correlation, and finding which is trading at a discount.

Example:

ES, ZB, and GC are all trading in tandem. They are all looking fairly bullish today.

ES is at its day high, GC is making new highs, and ZB is halfway to its day high.

Since these are all moving together, and they are all making bullish moves, I want to trade them long. Which one though? Well, the cheapest one! This one is ZB in the example.


If they are all moving together, people want the one with most yield. If ZB is due for an up move and is still cheap, people will want to buy that one higher to match its companions.

Does this make a little more sense?

(PS. I love the anecdotal pieces in your posts. Really is awesome. Glad to have you sharing with us )

     
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Old September 19th, 2016, 10:23 AM   #107 (permalink)
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Here is some morning analysis:

360-Minute:
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-Remember how I said I expect price to chop within the +1/-1 SD bands on the Monthly?
-We are at the top one right now
-I expect to go lower and test M-VWAP and maybe lower


30-Minute:
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-Met previous resistance and failed twice
-R2 holding as well
-W-VWAP starting to fail for the bulls


Trade Thesis:
-Short all the way to 45 if need be
-puke point will be 45 as well
-be cautious with tight range that we may see.
-Target will be low 30's

     
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Old September 19th, 2016, 11:10 AM   #108 (permalink)
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rocksolid68 View Post
Did you like it here? Most people do not like the Winters here

As far as the arbitrage goes, I feel that it still is a good term for it.

What I am doing is finding a correlation, and finding which is trading at a discount.

Example:

ES, ZB, and GC are all trading in tandem. They are all looking fairly bullish today.

ES is at its day high, GC is making new highs, and ZB is halfway to its day high.

Since these are all moving together, and they are all making bullish moves, I want to trade them long. Which one though? Well, the cheapest one! This one is ZB in the example.


If they are all moving together, people want the one with most yield. If ZB is due for an up move and is still cheap, people will want to buy that one higher to match its companions.

Does this make a little more sense?

(PS. I love the anecdotal pieces in your posts. Really is awesome. Glad to have you sharing with us )

OK, now I understand why I thought the term "yield arbitrage" sounded a little odd for what you are doing.

"Yield", in finance and trading/investing, generally refers to something that pays an interest rate. It does not refer to a gain due to trading it. So, bonds have a yield (you just sit with it and you get paid some money at a given rate), notes have a yield (ditto), but gold does not have a yield (you can just sit with it, but nobody is going to send you any money.)

That's a little simplified, but it'll do: you don't have a "yield" (in usual terminology, anyway) if you don't have interest being paid to you just for holding it.

What you're doing, it looks like, is finding correlated instruments and then trading them based on the idea that the weaker should catch up. Is that the idea? So you're looking for the one that is lagging (at a discount) and buying that.

(Also, if it were strictly speaking "arbitrage," you would buy the laggard and sell the higher one simultaneously, to profit from the spread, which is not what you are saying, but does have a sort of relationship to it.)

This is not nit-picking, I just wanted to be sure I understood what you are doing with this. If I got it right, I think it will be interesting to follow. Did I describe it accurately?

Bob.

     
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Old September 19th, 2016, 11:12 AM   #109 (permalink)
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Well, we had some extreme bullish TICK readings on the way up to my AoI, so I decided to not take it. I was not going to test my luck with this pre-FOMC market.

However, I am having quite a bit of fun with the ZB

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That image is a bit old already. Went a couple more ticks in my favor since I took that!

     
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Old September 19th, 2016, 11:20 AM   #110 (permalink)
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bobwest View Post
OK, now I understand why I thought the term "yield arbitrage" sounded a little odd for what you are doing.

"Yield", in finance and trading/investing, generally refers to something that pays an interest rate. It does not refer to a gain due to trading it. So, bonds have a yield (you just sit with it and you get paid some money at a given rate), notes have a yield (ditto), but gold does not have a yield (you can just sit with it, but nobody is going to send you any money.)

That's a little simplified, but it'll do: you don't have a "yield" (in usual terminology, anyway) if you don't have interest being paid to you just for holding it.

What you're doing, it looks like, is finding correlated instruments and then trading them based on the idea that the weaker should catch up. Is that the idea? So you're looking for the one that is lagging (at a discount) and buying that.

(Also, if it were strictly speaking "arbitrage," you would buy the laggard and sell the higher one simultaneously, to profit from the spread, which is not what you are saying, but does have a sort of relationship to it.)

This is not nit-picking, I just wanted to be sure I understood what you are doing with this. If I got it right, I think it will be interesting to follow. Did I describe it accurately?

Bob.

More or less, yes you did.

However, yield in a less-strict sense just refers to gains. It means returns in a less formal way. Equities can have yield in the sense that they give you a return. Same with gold.

When people buy equities, they are hoping for positive returns, correct? Well, the perceived yield on those equities is ~7% in a year. (estimated number; just example).

When I bought bonds this morning, I was not holding them for the yield they give, but rather the yield they may give in difference of price.

This is not easy to explain, but do you understand what I am saying?

If it makes it easier, we can just call it "discount investing" or maybe "value hunting"

     
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