How do big players trade?

[Pazienza]

Seasonal effects in stock mkts are a much discussed subject. Lots of research on it. I don't know if it violates EMH, per se, assuming you're talking about weak-form EMH.

I think those things are crazy unreliable, but if anyone likes them they should check the Stock Trader's Almanac and the Commodity Trader's Almanac, they're full of stuff like that.

 

[Oppi1904]

Seasonal effects in stock mkts are a much discussed subject. Lots of research on it. I don't know if it violates EMH, per se, assuming you're talking about weak-form EMH.

Yes, there is plenty of research about seasonal effects and there is a debate going on about their importance etc...

They violate the EMH as a trader should not be able to outperform the market by using different time periods. Since everything is incorporated into the prices (according to the EMH) , a trader should have NO chance to do this (outperform the market by using any kind of information...). So, seasonal effects are a clear violation of the EMH since they allow the trader to outperform the market in a PERSISTENT way.

All the research papers dealing with those seasonal effects, ultimately, investigate whether the markets are efficient or not... However, it is quite complicated as many researchers have indeed spotted seasonal effects but allowing for transactions costs most of those effects are not statistically significant.... Also, the fact that those effects may have emerged purely by chance alone cannot be excluded!!! (Please read the paper that I have previously cited. It is very, very interesting!!!). Also plenty of other factors have been mentioned about their exploitability...

It is a very controversial issue, I have to admit...

 

[Oppi1904]

I think those things are crazy unreliable, but if anyone likes them they should check the Stock Trader's Almanac and the Commodity Trader's Almanac, they're full of stuff like that.

Well, as far as I am concerned, I am a bit confused to be honest. I have never traded according to any of those rules. However, my analysis has indicated that there are a lot of exploitable patterns out there....

What I can confidently say is that plenty of Hedge Funds out there are operating this way. Through "Data Mining" (past data- time series) and "Signal Processing" (live data) they identify any kind of patterns and they teach a machine (i.e. black box) how to behave ("Machine Learning" or "Artificial Intelligence" ). This way they "feed" those black boxes with data and they teach them how to adjust and act. Many of those Hedge Funds are generating hundred of millions or even some billions every year...

I have been recently introduced to a Greek Systematic Trader that works for a top Hedge Fund..He used to trade at another very well known Hedge Fund (Top 5 in the world). He is trading this way. He is the one of those "Golden Boys" that has a annual bonus within the range of £400K to £1M on top of his salary (around £200K)....I really wish I was in his position...However, this was not accidental. This guy holds a PhD in Statistics/Machine Learning from Imperial. I think that this was not an easy task to accomplish....

 

[Martinghoul]

Yeah, Oppi, I have read most of these papers. In general, I am a big fan of behavioural finance and everything that it implies for EMH. As I said, I personally don't think seasonal effects violate weak-form EMH, but it's certainly something that's a bit subjective. It's great that you're doing some work in the area, as it's pretty cool stuff. Best of luck to you!

 

[Pazienza]

That might well be different. I'm not saying that it's not possible, just that it lacks appeal to me.

For retail players, I think the problem is a tendency to curve-fit these things.

Well, as far as I am concerned, I am a bit confused to be honest. I have never traded according to any of those rules. However, my analysis has indicated that there are a lot of exploitable patterns out there....

What I can confidently say is that plenty of Hedge Funds out there are operating this way. Through "Data Mining" (past data- time series) and "Signal Processing" (live data) they identify any kind of patterns and they teach a machine (i.e. black box) how to behave ("Machine Learning" or "Artificial Intelligence" ). This way they "feed" those black boxes with data and they teach them how to adjust and act. Many of those Hedge Funds are generating hundred of millions or even some billions every year...

I have been recently introduced to a Greek Systematic Trader that works for a top Hedge Fund..He used to trade at another very well known Hedge Fund (Top 5 in the world). He is trading this way. He is the one of those "Golden Boys" that has a annual bonus within the range of £400K to £1M on top of his salary (around £200K)....I really wish I was in his position...However, this was not accidental. This guy holds a PhD in Statistics/Machine Learning from Imperial. I think that this was not an easy task to accomplish....

 

[Oppi1904]

Yeah, Oppi, I have read most of these papers. In general, I am a big fan of behavioural finance and everything that it implies for EMH. As I said, I personally don't think seasonal effects violate weak-form EMH, but it's certainly something that's a bit subjective. It's great that you're doing some work in the area, as it's pretty cool stuff. Best of luck to you!

When I was doing my dissertation I read around 300 papers in this field. It was quite enjoyable but sometimes it was a nightmare!!! Ultimately, I cited 60 papers simply because it would make no sense to cite all of them. My Literature Review alone was around 5,000 words...My whole dissertation was around 15,800 words...

Thank you very much for your wishing me luck. Much appreciated!!!

P.S. Did you read the paper that I cited? When I first read this paper I was very excited with its findings!!! Of course this paper was included in my bibliography. As a matter of fact, it was on of the papers that I relied on in order to reach some conclusions...

 

[Oppi1904]

That might well be different. I'm not saying that it's not possible, just that it lacks appeal to me.

For retail players, I think the problem is a tendency to curve-fit these things.

I agree with you. This tendency exists! Basically, this argument has been used by many researchers and research papers(the paper that I cited included) in order to question the importance (or even the existence)of those seasonality effects.

In addition, retail traders have many obstacles (high commissions, speed, etc)to overcome in order to exploit those patterns...

 

[Martinghoul]

P.S. Did you read the paper that I cited? When I first read this paper I was very excited with its findings!!! Of course this paper was included in my bibliography. As a matter of fact, it was on of the papers that I relied on in order to reach some conclusions...

I haven't read it yet, but downloading it as we speak.

 

[Depth Trade]

I agree with you. This tendency exists! Basically, this argument has been used by many researchers and research papers(the paper that I cited included) in order to question the importance (or even the existence)of those seasonality effects.

In addition, retail traders have many obstacles (high commissions, speed, etc)to overcome in order to exploit those patterns...

..Then you don't really have a clue what you're talking about, do you?

 

[Depth Trade]

Let's talk some real numbers.
You ran a drawdown to -42%, are willing to accept a lose of up to -14% of your account and average 30.5 trades per week.
If you were to trade out a bad week, you would take yourself out within the first few days.
Trades 30.5x-14%= -427%

Not trying to be a jerk, but you are setting yourself up for a string of losses.

Good luck though.

 

[Oppi1904]

..Then you don't really have a clue what you're talking about, do you?

I think I do. I have been researching this topic for quite some time and I (believe) have acquired some knowledge...

The thing is that there are plenty of evidences (so many papers around) that those patterns are present. However, there is always some curve fitting. This is very well known for all research papers...Example:

You are a researcher and you are looking for those patterns. You have researched (lets say) 10,000 different patterns and you have found only (lets say) 15 of them that have outperformed the market. Most of them have underperformed the market. So basically if you implement ALL of them the result would be that you have actually under-performed the market! So, what do you do?? Do you quit the research?? You don't present your findings??? Of course not!!! You spent 2,000 hours in that project. You sacrificed your family life for this project...So what do you do??? You make the assumption that beforehand(as if you knew about them)you implement ONLY those 15 strategies...The result?? You have actually outperformed the market in such a way that violates the EMH. To my mind (and to may others') those results are worth our attention.

Now the fact that those patterns do exist is quite interesting. Some of them are persistent as well. The thing is that you should be aware of them beforehand! However, there are ways to surpass this obstacle. As mentioned those Hedge Funds have the ability to identify those patterns and when they occur they have the ability to implement ONLY those strategies and not the ones that are not profitable...In addition, they have the ability to identify whether those strategies may stop working and stop implementing them.However, you, as a retail trader, have limited abilities in identifying those patterns and being able to stop the winning strategies when they stop being profitable. In the context of the whole universe (10, 000 strategies) those 15 strategies are not statistically significant at all. They may have occurred purely by chance alone!!! And in order to identify those strategies you should try all of them.However, in the context of implementing ONLY those 15 strategies the results are more than striking!!! You see the curve-fitting???However, whether YOU can exploit them is another issue...This ,however, doesn't mean that somebody else cannot exploit them...

Well, this issue is very well known to all of those researchers. Basically, this is an inherent problem of Economics and Finance. Those sciences are social and not experimental as the exact sciences. This means you cannot generate new data as with the exact sciences. By this I mean, if you want to test something is physics, it is quite straightforward. You have your underlying assumptions and you have a controlled environment in which to test your hypothesis. You can actually generate new data (the controlled environment which you can alter and test your hypothesis under different conditions). However, you can't do that with Economics and Finance. You can't generate the time series of Dow Jones for the next 5 years (and test your hypothesis under different market conditions)!!! So basically you look into the past and try to identify those patterns. In order to test whether those patterns are important you can't test them under different future conditions. So what do you do??? You test them using the past data. When using this method (there is not any other) there is always the issue that purely by chance some of your results will not be applicable in the future. Some of them occurred purely by luck alone.

This is the issue with Economics and Finance. You DON'T have a straight answer (a yes or no) to any possible question as compared with Physics and there is always curve fitting. IF you are asked whether the kinetic power of a ball ,(weighting 1 kg)falling from one meter height is going to be (lets say) 10,000 joules or not you can know the answer. You can create the environment and test it (and you can repeat this experiment for thousand of times) an you get an answer (yes or not). However, with Finance you CANNOT do that. You can't generate the time series of Dow Jones for the next 5 years and then test your strategies and see whether they work or not beforehand.
You can only know that afterwards!!! The same applies for any Economic policy. Do you know whether it is going to work beforehand? Of course not. The thing is that there is a chance that this will work based on the fact that it worked in the past. However, there is not a guarantee simply because of the aforementioned facts. This is the argument that many have used in order to scrutinize Economic policies. The fact that they worked in the past doesn't mean that they will definitely work in the future. The thing is that purely by chance they may have worked in the past but are not applicable in the future (see Keynesian Economic policy ). .So to your original question. Whether those patterns exist and are exploitable there is not a definite answer. You can't say a yes or not. The thing is that they may not work for YOU but they may work for some OTHERS.

I hope that I have given you some explanations...You see, after all, it is not that straightforward....

 

[Depth Trade]

Oppi, I can tell you really do care about understanding the mechanics of the markets and respect that.
...I will have to get back to you though, I have to take a shower and meet someone in an hour and 15 min.
Don't ever put limits or bounderies on what is possible or the reasoning to it.

We still need to discern what types of patterns we are talking about.

Have a good day.

 

[Oppi1904]

Let's talk some real numbers.
You ran a drawdown to -42%, are willing to accept a lose of up to -14% of your account and average 30.5 trades per week.
If you were to trade out a bad week, you would take yourself out within the first few days.
Trades 30.5x-14%= -427%

Not trying to be a jerk, but you are setting yourself up for a string of losses.

Good luck though.

I know that you are not trying to be a jerk and in fact I quite like to talk about this issue that I have spent so much time researching. I also like the fact that are debating about it. It is more than healthy...

As mentioned in my post you can't really know whether this week is going to be bad or not beforehand! You can only know that afterwards!!! The thing is that if you don't implement this strategy you can't have the benefits out of it. The thing is that you will definitely have DD(and maybe a lot of them) but overall your strategy will be profitable (on the assumption that you choose the right one!!!). One of the underlying assumptions of those models is the fact that you are ABLE to surpass those losing strings. And this matter is questioned as well. As with every other Martingaling strategy which makes the assumption of the infinite funds available. If you have indefinite funds available then you can surpass those DD and eventually realise profits. However, you, as an investor (or as a gambler), don't have infinite funds. You can go bust! (Please refer to St Petersburg Paradox). However, a Hedge Fund HAS the ability to overcome those DD as it has so many funds (almost infinite) and can eventually realize those earnings from this strategy. That is because of the rule of large numbers which eventually will offset those DD and generate you profits. The thing is that it may work for somebody else and not for you....

As mentioned before, I have NEVER traded based on those patterns as I am aware of those limitations. I don't have infinite funds and more important I don't have the ability to quickly realize when those strategies will stop working and do it. So I stay well clear of any trading based on those strategies. However, the fact that those patterns existed persistently and MAY exist in the future CANNOT be ignored. It gives you important information about the market that you are trading. I have applied the same methodology for the EUR/USD pair as I personally trade it. The thing is that I tested only one seasonality pattern (the one that was persistently present in the Greek Stock Market for 20 years) and I have found that this pattern is not present in the EUR/USD pair. This information alone is quite useful (for me) in various ways...

I hope that I was efficient in getting the message through. If not I will be more than happy to give you some references in order to investigate this issue further.

P.S. Nice talking to you!! It was a pleasure

Evangelos

 

[Oppi1904]

Oppi, I can tell you really do care about understanding the mechanics of the markets and respect that.
...I will have to get back to you though, I have to take a shower and meet someone in an hour and 15 min.
Don't ever put limits or bounderies on what is possible or the reasoning to it.

We still need to discern what types of patterns we are talking about.

Have a good day.

You have a nice day too!!!

See you!

 

[Martinghoul]

You're not Evangelos Venizelos, by chance, Oppi ?

 

[Oppi1904]

You're not Evangelos Venizelos, by chance, Oppi ?

Not, of course not! I just have the (mis)fortune to have the same first name with him!!!

In case you don't know that, he may be the Finance Minister of Greece, however he doesn't hold any relevant qualification! The fact is that he is a Doctor of Law and the truth is that he is very eloquent in talking in public and he is also a great communicator. And that is the reason why he was chosen for this position. The previous Finance Minister Papaconstantinou wasn't that effective communicator so he was deemed unable to impose his Economic policy. However, he held the relevant Economics qualifications...

The thing is that he might be able to deceive some other citizens but he can't do that with me. Please refer to my previous posts and you will see that I was somehow prepared for this "sudden" Greek debt crisis. He may be an effective communicator but I understand what happens in the Economy so I am in better position to judge for myself... I don't buy whatever they claim...

And there is another issue that concerns me. He was one of the main public figures in 1980s when the father of the current PM was ruling the country and the (Socialist) Party (the one in power right now). The thing is that the PM then implemented a very wild Keynesian Economic Policy with borrowed money!! These loans that we have to pay now... Mr Venizelos was a great supporter of that policy...whistlingNow he tries to implement the exact different Economic policy...The one familiar with Margaret Thatcher's. This is an issue for me...I don't know about what the other Greeks think...whistling Also, I truly believe that he doesn't understand what elasticity (and this is a Greek word) means. I am not implying that he doesn't know the word itself. However, I have doubts whether he knows what exactly elasticity is...Just my point of view though...

Evangelos

 

[Pazienza]

Interesting discussion here, I've enjoyed following it.

 

[Martinghoul]

Not, of course not! I just have the (mis)fortune to have the same first name with him!!!

In case you don't know that, he may be the Finance Minister of Greece, however he doesn't hold any relevant qualification! The fact is that he is a Doctor of Law and the truth is that he is very eloquent in talking in public and he is also a great communicator. And that is the reason why he was chosen for this position. The previous Finance Minister Papaconstantinou wasn't that effective communicator so he was deemed unable to impose his Economic policy. However, he held the relevant Economics qualifications...

The thing is that he might be able to deceive some other citizens but he can't do that with me. Please refer to my previous posts and you will see that I was somehow prepared for this "sudden" Greek debt crisis. He may be an effective communicator but I understand what happens in the Economy so I am in better position to judge for myself... I don't buy whatever they claim...

And there is another issue that concerns me. He was one of the main public figures in 1980s when the father of the current PM was ruling the country and the (Socialist) Party (the one in power right now). The thing is that the PM then implemented a very wild Keynesian Economic Policy with borrowed money!! These loans that we have to pay now... Mr Venizelos was a great supporter of that policy...whistlingNow he tries to implement the exact different Economic policy...The one familiar with Margaret Thatcher's. This is an issue for me...I don't know about what the other Greeks think...whistling Also, I truly believe that he doesn't understand what elasticity (and this is a Greek word) means. I am not implying that he doesn't know the word itself. However, I have doubts whether he knows what exactly elasticity is...Just my point of view though...

Evangelos

Ah, interesting, thank you... One day I might ask you more about Greece, if you don't mind.

 

[Oppi1904]

Ah, interesting, thank you... One day I might ask you more about Greece, if you don't mind.

You are welcome!!!. You can ask me whatever you like!

 

[Depth Trade]

Oppi, I think another angle you should look at is Stoploss hunting and the moving of markets with large amounts of money.
Super huge players or goverment entities moving the market and being able to guarantee there position exits by knowing where large Stoplosses are and the volume available at these points. -Having total access to the 'books'
There is money being made using many different types of strategies, but once you get up into the higher tiers, you have to worry about where your Stops are and how you are positioned, because the big players will use your large volume to accentuate there strategies.