Is it just me, or does this seem to be glorified gambling? It doesn't seem like these people are contributing anything to the world - Or am I not understanding how it works.
It is glorified gambling, but contribution to the world has nothing to do with it. You may have noticed that the author's confidence was entirely based on emotional, results-oriented thinking (look at that big pot I missed!) and completely unscientific voodoo (patterns!).
It makes me sick that these guys are put in a professional environment which makes them feel like big swinging dicks instead of degenerate gamblers.
It's an empirical process. The results themselves are what you use to construct an idea of probability and risk-reward. Nothing is ever certain which is why position size rules are a must. If an extremely specific pattern continues to show up on one specific stock on days with specific conditions (huge multiples of daily volume, for one), it's likely a significant observation representing an edge rather than noise. Unless you think it's totally random for hundreds of independent traders to exploit a specific pattern on a specific stock on multiple repeated dates and make money repeatedly. It's not a poker/blackjack or a casino game where the odds are fixed and known.
Ask yourself, if you flipped heads on what you thought was a fair coin 500 straight times, did you REALLY just observe an ultra rare event? Or is it more likely another phenomenon at work (like a rigged coin)? Whether you can fully explain it or not doesn't matter.
Why do you care so much what I do with my money? Or how a firm chooses to allocate its money? This wasn't client money or institutional money, it's the money of a few guys (partnership type of structure) who used to be or still are daytraders themselves.
(one last edit: if you're too thick to see it, I deliberately tried to showcase my overconfidence to show how things can go wrong easily. guy makes money and wants to make more, guy wins money and thinks he's a champ -- it's called the human condition. I deviated from normal execution rules and position size rules and paid the price)
Without going into the specifics... when traders "buy low" and "sell high", they reduce volatility in the marketplace. Prices become more consistent. Lets look at one particular place: the Bid / Ask spread.
When you go to much less traded stuff like Bonds, or in the more extreme case... Real Estate... its harder to put an accurate price on these items.
A house might have an asking price of $300,000 but the only buyer might be offering only $250,000. If both sides refuse to budge, then the market stops moving.
A trader can move the market very simply in this case. He can buy the house at $265,000, and then sell it at $285,000. Everyone benefits from their perspective.
The Seller got to sell the house at higher than $250,000.
The Buyer got to buy the house lower than $300,000.
The trader gets away with $20,000 made.
This is in essence, the trader's low-risk function and his job is to move markets.
Now lets say a 2nd trader enters the market, and instead is willing to get away with only $10,000. He buys the house at $270,000, and sells it to the buyer at $280,000. Because this 2nd trader has better offers, he will get the cash.
So this leads to point #2: the more traders compete with each other, the tighter Bid/Ask spreads get, and the "fairer" the market price becomes.
When we get to the tens of thousands of traders who deal with high-volume stocks, these stocks end up having bid/ask spreads smaller than pennies. In fact, bid/ask spreads are so low during the trading day, that most people forget about them during trading!
But at the end of the day, stocks are like any other good. There is a bidding price, and there is an asking price. And the bid is always lower than the asking price. They only become closer because traders are willing to become market movers and take up the risk themselves.
The problem with your depiction is that it is self contradictory: you claim buyers and sellers are unwilling to budge from their 250K/300K position, then have a trader magically buy the house at 265K and sell at 285K. Somehow, the seller sold for 35K less and the buyer for 35K more. And instead of the actual actors of the market splitting the spread in some manner amongs themselves, a service provider gets a disproportionate slice of profit.
When people express their dislike for day trader or HFT, it's exactly for this: people with additional market knowledge extract money from market without creating value.
I've yet to read a coherent description of how the manufacturing and service world is better thanks to new trading techniques. It always seems to come down to having different people pocketing money instead of banks or more traditional wall street firms.
>>> The problem with your depiction is that it is self contradictory: you claim buyers and sellers are unwilling to budge from their 250K/300K position, then have a trader magically buy the house at 265K and sell at 285K. Somehow, the seller sold for 35K less and the buyer for 35K more. And instead of the actual actors of the market splitting the spread in some manner amongs themselves, a service provider gets a disproportionate slice of profit.
Yeah, but "actual actors of the market" don't talk with each other. You inherently rely on traders to set the price whenever you buy / sell stocks.
If you don't trust traders, then don't go into the Stock Market. However, I trust the market and take advantage of the liquidity that it offers me. Its so much easier to buy / sell stocks because of the mass of traders granting liquidity at every corner.
Traders capitalize upon emotion and correct the market. When people are panic-selling, traders look for market bottom and try to buy (sending the price back up). When people are stampeding towards the "buy" button, traders look for a market high and sell (or short sell), correcting the price back down.
Traders inherently watch the crowds, find problems with crowds, and then move the market into the more theoretically sane position.
Note that the "issue" in this blog post occurs when the trader ignores news, and misinterprets a massive drop in price as a false-panic. It wasn't a "false" panic, people were liquidating their position because news came in that devalued the stock. The trader somehow ignored the news and was caught buying stock on a downward spiral. Furthermore, when the crowds were telling him that it was a true market movement, he lost his discipline (with the company's money... but kept discipline with his personal bank account) and failed to liquidate his position.
>>>I've yet to read a coherent description of how the manufacturing and service world is better thanks to new trading techniques. It always seems to come down to having different people pocketing money instead of banks or more traditional wall street firms.
The entire commodity / futures market. The manufacturing benefits off of traders setting the price of oil / wheat / orange juice 6-months or 12-months into the future.
If you want to buy a contract that allows you to buy 1000 barrels of oil in March 2015 (say, you know your factory is going to be open by then), you can go to the futures market.
Or if you're an oil producer and you want to sell 1000 barrels of oil in March 2015 (maybe... you don't have the oil yet. But you expect to have oil by then).
But consumers don't know what the price should be, they'll throw down a call action on the oil. The Oil producer doesn't know the price either, so maybe he'd put down a put action on the oil.
But call actions and put actions don't line up. Someone has to step up to the risk that the producer doesn't sell oil (aka: his refinery blows up and can't make the oil by then), or that the consumer doesn't buy the oil (aka: the factory opening is delayed so you cancel the order). Traders calculate the risk, move the market and satisfies both parties.
Heck, the futures market is the only place where you can buy contracts like that. But without traders taking on the risk for everyone, futures market would be a lot less busy and much less useful.
I have my own theories on why "following others" adds efficiency to the market. It's a losing strategy if applied on every situation with zero context obviously (which is why most traders lose money), but traders who find a consistent edge doing it "bring the market closer to where it's supposed to go" so to speak, in general. But this is all theory in my little head with no substantial research so I don't care to stake my life on it.
In the end, I don't care that much to argue about social utility. I trade my own cash or I trade the money of guys who completely understand my objectives and choose to back me. I respect your views and I won't bother to persuade you otherwise.
I get the feeling if this thread was about losing $200k to Phil Ivey heads up in Hold Em or Nate Silver losing $200k by betting against Obama on a political betting site, nobody would care to bring up social utility.
1. Is it luck or skill. I'd say there must be some skill, but luck too, kind of like poker maybe?
2. Is it useful to society? No idea if its a benefit, a drain, or neutral.
3. Should it be allowed? It is your money after all.
1) There's always some element of luck involved. After all, I can't control everything that happens. I played poker before trading. There are similarities and differences. You can tell when you get unlucky, like when you get aces cracked by two runners. It's hard to tell if you get unlucky when stopped out on a day trade.
2) At the very least, I don't think what I do is harmful to anyone.
I'd also like to add that I make many trades that are a better example of adding value. In the trade example of buying the dip in AAMRQ (prior blog post on my site), I am making the market more efficient (I'm saying this with the benefit of hindsight, of course). AAMRQ was moving adversely against its clear fundamental value (based on a stock merger deal with US Airways) and by buying it on weakness, I'm adding liquidity on the side that it should "eventually go to". This only works if I'm consistently right more than wrong. I also short garbage stocks that have no fundamental value, another example of trying to restore efficient prices. Price discovery is important so capital isn't allocated inefficiently.
3) Impossible to ban trading without destroying market liquidity. It's also way too difficult to define what trading is helpful vs. parasitic and have everyone agree on it. One could easily place a seemingly "outlawed" type of trade and claim to have sound intentions, which is what makes market manipulation difficult to prosecute.
Nah. I've made made multiples in net profits against this loss and I'm net positive 80% of the time. It's still my personal best year despite the loss. It's a nice living. I think I'll stick around.
I don't have a number for my personal account trading but I suspect it would be pretty solid... my equity curve is basically a 45 degree slope from bottom left to upper right with no sharp dips.
My sharpe ratio at my firm (calculated automatically in our database) was well over 3 until that loss. I don't remember it exactly but it was such a crazy number to believe (relative to other sharpe ratios) that I stopped thinking it was a risk metric that mattered for my style of trading.
Where/how do you even "learn" this trading skill. I mean, how did you learn doing this ?
Like most geeks I suck at negotiation. And trading seems to me a very fast-paced very high-stakes game of negotiation where you don't even get to talk to the other guy. How do you get better at that ?
I have to admit that I'm skeptical that it's possible at all to do this. In the longer term I mean. Nobody gives the other side of the argument though : there would be no banks, nor a wall street, if it really didn't work at all.
