Finance Student to Forex Trader

Hi,

I've currently completed 1 year in a Masters in Finance program and I'm considering a career in Trading, particularly Forex Trading for a prop. firm, market marker, hedge fund, or IB.

1) I've looked at books and magazines on trading at my local bookstore and they tend to go deeply into Technical Analysis. Most Finance professors I've met seem to shun Technical Analysis as it goes against the Efficient Market hypothesis (which doesn't always hold true in the real world.) Considering my background and my aspirations towards Trading, is it worthwhile to study Technical Analysis on my own time for Forex Trading?

2) I currently do not have any work experience in this field and have looked at some possible summer Internships. There is one at FOREX Internship Program, FOREX Training, FOREX, Education, FOREX Coaching, FOREX Mentor and actually requires you to pay $299/mo for the "training". I've found another that is not only unpaid but requires a deposit of $2000. Experience is far more important than money at this point; is it typical to require Traders to put up a deposit of their own in this industry? (Understandable since Traders could potentially lose money for the firm as well as make money.)

1) Yes.
for in depth TA, read John Murphy's "Technical Analysis of the Financial Markets"
for practical application of TA read John F Carter's "Mastering the Trade"
for the psychological aspects of trading read Mark Douglas' "Trading in the Zone"

Fcuk your professors, these 3 books are all the education you'll ever need. If those old cnuts knew what they were talking about they'd be doing it, trading for a living, not teaching it.

2) Never pay anything. This business has more charlatans and snake-oil salemen than anything else I know of. Keep looking, you'll find respectable firms who won't try to rip you off, some even pay their interns. But I say again, NEVER PAY ANYTHING for training.

Everything you need is in those 3 books and freely available on this and similar forums.

Shlarin said:

Most Finance professors I've met seem to shun Technical Analysis as it goes against the Efficient Market hypothesis (which doesn't always hold true in the real world.)

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You should ask your professors why they're so out of touch. :cheesy:

So many holes have been poked in the EMH that it's hard to believe anyone in academia still clings tightly to it. Read The (Mis)Behavior of Markets by Mandelbrot for a pretty thorough drubbing of classical financial theory.

That said, it wasn't all that long ago that even among market professionals Technical Analysis was looked at askance. It's definitely gotten to a much higher level of respect and credibility in recent years. As such, you should definitely take the time to at least learn the basics.

Most Finance professors I've met seem to shun Technical Analysis

those that cant do teach as the saying goes

John,

Mandelbrot was a maverick whose work was largely ignored by his peers. I believe Taleb - another maverick - is a strong supporter.

Academic rejection of TA is due to a lack of rational basis on which to make observations/forecasts/ or, at the very least an informed specualtion. I believe it works for those who use it. This not is a contradiction of the first sentence.

Grant.

grantx said:

Mandelbrot was a maverick whose work was largely ignored by his peers. I believe Taleb - another maverick - is a strong supporter.

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True on the Mandelbrot part, though in his book he actually talks about others (Fama, for example) who wrote papers and did research which was contradictory to EMH, etc. So it wasn't just him.

Academic rejection of TA is due to a lack of rational basis on which to make observations/forecasts/ or, at the very least an informed specualtion. I believe it works for those who use it. This not is a contradiction of the first sentence.

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Actually, academic rejection of TA comes from the weak form of the EMH which suggests that historical price information cannot be used to predict future prices. But of course much of classic financial theory is founded on the assumption rational behavior, which any market participant with even a little experience watching the markets knows has no basis in reality.

John,

This is an interesting subject, especially when there is disagreement between academics (and ourselves). Two books in pdf format by Fama covering this area are availble in the bibliography (numbers 20 and 31) together with numeorus articles here:

Eugene Fama - Wikipedia, the free encyclopedia

Grant.

mmm....you will always be better off learning about physics than finance if you want to trade....

my 2 italian lira

To be fair, there's plenty of support for TA in academic circles. One example is Andrew Lo at MIT, who has spent effort to prove that TA works and to develop alternatives to EMH. See Andrew Lo's Homepage. Paper 26 is particularly interesting.

And here in London TA is taught at postgrad level in several places.

As for Benoit Mandelbrot, I admire his fervor and intensity, but his agenda is broader than finance, which to him is but an example. It all boils down to fractional Brownian Motion and the Rescaled Range, none of which were his inventions. The Rescaled Range has some application to intraday fx trading, and uncountable papers have been written applying those concepts to various sets of empirical data - from the SPX to the Asian currency crisis of 1997. But apart from applying a couple of known models Mandelbrot fails to bring any new insight about financial markets - his main contribution is debunking the orthodox acdemics who received Nobel prizes for stupid applications of basic maths to finance, when Benoit should have had one for inventing fractal geometry. Which by the way was invented by Hausdorff and several others almost a century ago.

Sorry for being mean, but let's be honest. While I'm at it I could have a go at Nick Taleb too, but I should probably stop now.

Good night!

Just buy the book Technical Analysis of the Financial Markets by John J. Murphy
and do Series 7 if you are in US or FSA if UK
dont waste money on seminars believe me.....

kenobi said:

mmm....you will always be better off learning about physics than finance if you want to trade....

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I can't agree with that. If I were to go back to school I would study subjects related to mass psychology - behavior of crowds and such. Anything which relies primarily on math to make market forecasts will run into the irrational nature of the markets - something quantitative methods can't currently account for well at all.

r.w. said:

To be fair, there's plenty of support for TA in academic circles.

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That's a relatively recent thing. When I was an undergrad it was quite the opposite.

... But apart from applying a couple of known models Mandelbrot fails to bring any new insight about financial markets - his main contribution is debunking the orthodox acdemics who received Nobel prizes for stupid applications of basic maths to finance, ...

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Won't disagree there. He pretty readily admits fractal methods have not developed to the point of any real forecasting usefulness. I think his real value is in demonstrating that the risks are potentially MUCH larger than classic financial methods assume.

Kenobi,

Out of curiosity (and ignorance), beyond equations in derivatives what other aspects of physics are manifest in any aspect (instruments, risk, etc) of the markets?

Grant.

grantx said:

Kenobi,

Out of curiosity (and ignorance), beyond equations in derivatives what other aspects of physics are manifest in any aspect (instruments, risk, etc) of the markets?

Grant.

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Please excuse me gents, but I'd like to come in here;

Firstly, "beyond equations in derivatives"... it has been said (and I have quoted that) "with knowledge comes appreciation", and I think this is particluarly appropriate here.

Without an understanding of the techniques often used in physics, any applications they have to finance are only going to be underestimated. Grant, I didn't study classics at college (I only stumbled through english!) - and it is a little like me saying the Iliad is a long poem about war, written by a bloke from Cyprus.

There are, IMO, too many parallels to list; the trouble with non-physicists (or mathematicians, engineers, maybe even chemists) is that they see only "derivatives" and "sums", without understanding the concepts they represent. It is not the sums that are important, it is the concepts - which can be remarkable. It is just that calculus is the only language that can explain them.

It is certainly not the case that knowing the laws of thermodynamics are necessary to trade; but, having developed the skills to understand thermodynamics (or any other branch of physics TBH, even errors in experiements), one is in a far stronger position to apply them to another system - financial markets, in this case - to further their understanding.

Addendum: I did pester my Physics tutor to let me use the title "the applications of Physics in Finance" as my Second year essay. He didn't, I got stuck with "The search for the top quark" which was the best out of the 5 or 6 left (and very, very dull).

Rhody Trader said:

Won't disagree there. He pretty readily admits fractal methods have not developed to the point of any real forecasting usefulness. I think his real value is in demonstrating that the risks are potentially MUCH larger than classic financial methods assume.

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I am glad we agree. Incidentally, there has been plenty of data analysis and forecasting work done using wavelets, which is the tool of choice for analysing fractal data. It's more or less standard in many fields of data analysis, and there's even been a monograph written about its applications to finance. See

Amazon.com: An Introduction to Wavelets and Other Filtering Methods in Finance and Economics: Ramazan Gençay, Faruk Selçuk, Brandon Whitcher: Books

For some reason Mandelbrot is silent about these developments, and the researchers in this field don't mention his name... And these methods have been investigated and applied for potential profit in IBs and hedge funds for some time now.

As to your second statement, I believe this is a philosophical matter rather than a question of one model against another. A model is not reality, and before using a model one needs a philosophical/epistemological approach to 'reality' and modeling. Armed with a proper such perspective, anybody would draw the conclusions about MUCH larger risk without recourse to fractals or such fancy. The key issue, I think, is the philosophical naivety in finance circles - a splendid example being how mean-variance analysis a la Markowitz was/is interpreted as a normative theory on how one should invest. Not to mention EMH and much other nonsense.

Which brings me to another post in this thread about studying physics instead of finance - a good reason for that is not having your mind tarnished by mediocre people.

MrGecko said:

Please excuse me gents, but I'd like to come in here;

Firstly, "beyond equations in derivatives"... it has been said (and I have quoted that) "with knowledge comes appreciation", and I think this is particluarly appropriate here.

Without an understanding of the techniques often used in physics, any applications they have to finance are only going to be underestimated. Grant, I didn't study classics at college (I only stumbled through english!) - and it is a little like me saying the Iliad is a long poem about war, written by a bloke from Cyprus.

There are, IMO, too many parallels to list; the trouble with non-physicists (or mathematicians, engineers, maybe even chemists) is that they see only "derivatives" and "sums", without understanding the concepts they represent. It is not the sums that are important, it is the concepts - which can be remarkable. It is just that calculus is the only language that can explain them.

It is certainly not the case that knowing the laws of thermodynamics are necessary to trade; but, having developed the skills to understand thermodynamics (or any other branch of physics TBH, even errors in experiements), one is in a far stronger position to apply them to another system - financial markets, in this case - to further their understanding.

Addendum: I did pester my Physics tutor to let me use the title "the applications of Physics in Finance" as my Second year essay. He didn't, I got stuck with "The search for the top quark" which was the best out of the 5 or 6 left (and very, very dull).

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Excellent post. It's not about the equations, but about the understanding of the concepts and models as well as their applicability.

Again, a good reason for studying science rather than economics/finance...unless you're lucky to have a professor who returned to academia after managing a derivatives desk for a decade or two.

Which makes me think of the CEO of a Fortune 500 company, who was asked for advice on the best education for a young man (my friend) - engineering/technology or business school? "Study reality, you can always pick up economics later."

Excuse me, Mr Gecko,

“having developed the skills to understand thermodynamics...one is in a far stronger position to apply them to another system - financial markets.”

Are you saying it is the intellectual capacity to understand, eg thermodynamics, that is important, not the actual subject?

If so, I would agree. But then we may ask, is the intellectual capacity of, eg a musicologist different from a physicist? It’s reasonable to say that intellectually, an arts academic is not the same as a natural sciences academic; both may be totally blinded by the opposite discipline.

On a purely trading basis advanced mathematics is not necessary (although it may be required). However, it could be argued that pure trading is about ‘what is’, without the knowledge of ‘why’. But does knowledge of
‘why’ improve trading performance?

RW,

Regarding criticism of Markovitz (not to mention Black, Scholes, etc). At the time he was regarded as being in the vanguard. It is only through constant use and appraisal that weaknesses became apparent. And while criticism may be valid, sometimes it seems nothing more than point scoring, especially when no one has offered a credible alternative.

And could it not also be the case that figures such as Mandelbrot become popular (in a financial context) because someone has latched on (possibly through misunderstanding), and others have copied. Isn’t it the case that ‘science’ has little to offer the markets’ ‘irrational’ participants, but practitioners cannot accept the possibly of an irrational system; it makes them feel insecure.

Grant.

grantx said:

RW,

Regarding criticism of Markovitz (not to mention Black, Scholes, etc). At the time he was regarded as being in the vanguard. It is only through constant use and appraisal that weaknesses became apparent. And while criticism may be valid, sometimes it seems nothing more than point scoring, especially when no one has offered a credible alternative.

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Sorry for lack of clarity. I wasn't trying to score points agaisnt Harry Markowitz, whose contributions were impressive given time and context, but rather point out how naively his theories are 'understood' and taught in most business schools today.

And could it not also be the case that figures such as Mandelbrot become popular (in a financial context) because someone has latched on (possibly through misunderstanding), and others have copied.

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Mandelbrot was in the fortunate position to be working for IBM Research, and IBM saw it as good marketing to have this guy show colourful pictures in the media under the name of fractal geometry. As a consequence, he became a bit of a celebrity even though he would perhaps have struggled a bit if he had had to survive in a competitive academic environment. Subsequent academic work made demarcations to separate itself from Mandelbrot. And if his models had an explanatory or predicitive value beyond what we who follow markets in multiple timeframes already know, they would have had more of an impact.

Isn’t it the case that ‘science’ has little to offer the markets’ ‘irrational’ participants, but practitioners cannot accept the possibly of an irrational system; it makes them feel insecure.

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If 'science' is understood as a body of knowledge anxiously guarded by rationalistic bigots, yes, but thorough studies of a science subject can bring a deep understanding of the nature of modeling (and mind) and its relationship to reality, which can offer a lot from a market participation point of view. Such understanding is very rare in the MSc dissertations in finance that I have been asked to take a look at.

grantx said:

Are you saying it is the intellectual capacity to understand, eg thermodynamics, that is important, not the actual subject?

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Yes. More specifically, I would say that the language of thermodynamics (or physics in general) is particularly suited to describing problems in finance, and it is the language that is key.

If so, I would agree. But then we may ask, is the intellectual capacity of, eg a musicologist different from a physicist? It’s reasonable to say that intellectually, an arts academic is not the same as a natural sciences academic; both may be totally blinded by the opposite discipline.

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The capability of an individual to understand the language of physics is wholly seperate from their chosen field of expertise. It is the specific capabilities of the individual that will determine their capacity to understand anything, physics and music included; being a musicologist, in and of itself, does not mean you can't be a physicist too.

(one may make a strong case that experience will draw the physicist to physics and the mucicians to musicology - but this certainly does not make the reverse necessarily impossible).

On a purely trading basis advanced mathematics is not necessary (although it may be required). However, it could be argued that pure trading is about ‘what is’, without the knowledge of ‘why’. But does knowledge of
‘why’ improve trading performance?

Click to expand...

There are no "why's" in physics, or science. I can say with a great deal of certainty that an apple will fall from a tree, and I can describe it's path with a great deal of accuracy thanks to Newton - but Newton doesn't tell me why, he just tells me what. Newton is not responsible for the apple falling, he just developed a set of tools (using the language of physics) to describe what he saw (Newtonian mechanics is a good example, because it doesn't work when you get very big or very small). The same can be said of quantitative finance - it doesn't tell us why prices behave in the way they do, but it does a good job of decribing what prices do.

To give an example; through the medium of calculus (the language of physics), it is possible to describe things that are wholly counter intuitive - to show why the probability of an option expiring ITM isn't necessary to calculate it's price. To explain that so someone who had no grasp of mathematics would prove a difficult task indeed.

grantx said:

Kenobi,

Out of curiosity (and ignorance), beyond equations in derivatives what other aspects of physics are manifest in any aspect (instruments, risk, etc) of the markets?

Grant.

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apart from calculus-the ability to see the 'bigger picture'. i regularly attend the quant classes at work and every week i pick holes in the vol modelling of Prof XYZ..phd. what i continue to struggle to understand is the fact that that the models work under certain assumptions and that when the reality is played out it is merely a deviation from the assumptions. having studied engineering at uni (which is solely based on assumptions) i find i can adjust these guidelines to real work situations.

so in summary i think having a physics/mathematic/modelling background opens your mind to the theory, which is hugely important in options and money markets, to the fact that these models are flawed and have slippage-and more importnantly understand how to trade around the basic assumptions and apply them to a 'real' market.

and to answer GrantX: I find the more sophisticated/intelligent/boring/theoretical guys work in risk and not in trading. to be a trader what is more important is to 'fool' the risk guys with your delta and gamma. hiding vega is easier i find