Algorithmic trading

[imranmir1]

I am planning to join a prop firm to start trading. As such I am very new to this. Lately, I have been doing my research about trading in general and have come to know that algorithmic trading is making a big impact in the financial makets and more than 80% of trades are expected to be Algo traded this year, resulting in a massive job cuts for traders, and this trend will continue in the coming months. And a time will come when traders would be wiped out!!! Please advice if it is advisable to go into full time trading as a career option or should I stay away. Thanks.

 

[lewtz]

I am planning to join a prop firm to start trading. As such I am very new to this. Lately, I have been doing my research about trading in general and have come to know that algorithmic trading is making a big impact in the financial makets and more than 80% of trades are expected to be Algo traded this year, resulting in a massive job cuts for traders, and this trend will continue in the coming months. And a time will come when traders would be wiped out!!! Please advice if it is advisable to go into full time trading as a career option or should I stay away. Thanks.

Do you have a source for that number? 80% is a really big number. They may mean that VOLUME wise, 80% of trades are executed by algorithms from large funds and banks. They just a lot of money to play with. Although I still doubt that 80% of transactions are from computers with no discretion behind pulling the trigger.

Even if those institutions end up not needing traders, you can still trade for yourself. That's the whole glory behind this profession, the whole "be your own boss" thing. That's what most people here are trying to attain.

 

[imranmir1]

Hi lewtz, heres the source of my info (see para 3) : Algorithmic trading - Wikipedia, the free encyclopedia

Please go thro and let me know what you think. Thanks.

Does this also mean that now traders don't only have to beat the market but are up against computers as well...and only the very best will survive "survival of the fittest". So , any chance of a newbie like me entering this career path?

 

[jamescummins]

depends what you mean by algorithmic trading firstly. For example, there is a lot of computer driven trading that is designed to hide size - if you wanted to buy say 500,000 shares in one go, you would move the price against yourself. A lot of big size players use computer models to place big orders as they can do it in little bits and try to essentially hide the amount being bought.
Also, many trades now may well be computer driven, but that does not mean that direction of markets is computer driven. For example, if you looked at many of the bond indices, or currencies etc, there are hundreds of computer models out there hunting for arbitrage, or small risk, high probability trades. They may be constantly hitting the bid / lifting the offer etc, but the size moving markets is still coming from the same players - not computers.

Markets are inherently irrational, and a computer cant deal with that. Ultimately shares, or anything else, is worth what someoen will pay for it, not what a computer values it at, so there will always be traders.

Anyway, I am waffling, so I will stop now

 

[trader_dante]

It seems to me that the following group of comments:

"Some f*cker keeps reloading"
"Look, it's ladder man"
"That's a spoof - look he's pulled it"
"Now he's flashing the offer"
"Thats a computer doing that"
"Sh*t, we just blipped down 10 ticks."


and my personal favourite:

"sh*t, I'm being f*ck*ng squeezed"

Can all be successfully resolved by trading a TF higher than 5m.

If you can learn to swing/position trade, these problems are resigned, for the most part, to the ether.

 

[new_trader]

It seems to me that the following group of comments:

"Some f*cker keeps reloading"
"Look, it's ladder man"
"That's a spoof - look he's pulled it"
"Now he's flashing the offer"
"Thats a computer doing that"
"Sh*t, we just blipped down 10 ticks."


and my personal favourite:

"sh*t, I'm being f*ck*ng squeezed"

Can all be successfully resolved by trading a TF higher than 5m.

If you can learn to swing/position trade, these problems are resigned, for the most part, to the ether.

TD,

A 'TF higher than 5min' is utterly meaningless. The market doesn't move in 'chunks' of minutes, it is a continual stream of transactions. A trader must understand wot's wot and wot's not in order to get the full picture.

 

[trader_dante]

TD,

A 'TF higher than 5min' is utterly meaningless. The market doesn't move in 'chunks' of minutes, it is a continual stream of transactions. A trader must understand wot's wot and wot's not in order to get the full picture.

I am fully aware of how the market moves but it doesn't change the fact that when many traders trade, they look at charts on particular TFs. So what I am trying to say then is that the more you look at the bigger picture, the more you don't have to worry about algos or spoofing or squeezing or stop hunting or any of the other problems the scalpers and short term traders have.

It doesn't matter whether you look at a 1m TF or you don't look at a TF at all but rather focus solely on the ladder as alot of my colleagues do, if you base your decisions on where you expect the market to be bid or offered in the next few seconds to minutes, you are going to be a victim of the "noise."

 

[trader_dante]

The subject of this thread concerns someone that is worried about Algos making the market difficult to trade. I have heard this argument put forth before by scalpers I work with that say the computers make the market progressively harder to trade. And all I am saying is that I don't have this problem because I don't scalp. I'm not trying to get into the mechanics of how the market moves I am just stating a fact.

 

[new_trader]

I am fully aware of how the market moves but it doesn't change the fact that when traders trade, they look at charts on particular TFs. So what I am trying to say then is that the more you look at the bigger picture, the more you don't have to worry about algos or spoofing or squeezing or stop hunting or any of the other problems the scalpers and short term traders have.

It doesn't matter whether you look at a 1m TF or you don't look at a TF at all but rather focus solely on the ladder as alot of my colleagues do, if you base your decisions on where you expect the market to be bid or offered in the next few seconds to minutes, you are going to be a victim of the "noise."

You make an incorrect assumption about what traders do and there is no such thing as 'noise'. There is someone in this forum pontificating about matters which he does not undertand, or even worse, matters that he does not understand that he does not understand. The result is he is misdirecting people and causing them to arrive at incorrect conclusions.

Consider a book. You read each word which is made up of letters. Each word is strung together to form a sentence, each sentence is strung together to form a paragraph, each paragraph is strung together to form a chapter and each chapter is strung together to form the complete story. Do you see?

 

[BSD]

NT, its getting really silly and irrelevant again.

You must be the only trader I know who does not trade for a living and who does not get the perfectly obvious point TD is making that everbody else I know who does trade for a living has absolutely no problems comprehending.

What you are doing is spouting BS for the sole purpose of spouting BS.

 

[imranmir1]

Hey guys, are we deviating from the topic of this thread. I get a feeling that you are trying to brush the arguement of algo trading under the carpet. News flash: some computer geeks have built algo system which can even think and react like people. Next up - emotional trading robots. Nothng is impossible in todays hitech world we live in. I do not have the trading knowledge you guys have, but algo trading is taking the traders out of the equation. Even news-flashes are being fed in a way which a computer can decipher, and thus, act accordingly in the market. Any comments?

 

[jamescummins]

Algorithmic trading is still trying to model what people do. Yes they can trade news, to an extent, but they cant make judgement calls - people can. Ultimately, markets are driven by people - that wont change. If you look at base metals, the price is driven by how much metal people use ultimately. This is a factor of 'human-ness' at the end of the day, and a computer cannot calculate that. If you look at any market, it is ultimately determined by what people are prepared to pay for something, not what computers think. You cant model humans accurately, not by a long shot. Yes there is development in AI and all sorts of fear models and everything else, but they are miles and miles and miles away from being complete.
Making money in any market requires you to form a view as to whether somethings price will go up or down. Computers are lagging in that they are looking for signs that people have made that decision.

 

[BSD]

My opinion is actually that if one stays out of the extremely short term realm that algo trading inhabits with its hundreds or even thousands of trades / day that aren't uncommon, and you have a rudimentary understanding of charts, and an ability to trade with good risk / reward ratios, you will always be able to make excellent money as a trader.

A chart from today does not look significanty different than a chart from 1900, and is just as successfuly tradeable.

Matter of fact some of the best market education I ever got is from a hundred years ago from Jesse Livermores fictionalised biography.

Besides, another immense problem with algo trading is that you have far too many market participants essentially doing the same, which is in other words a pretty self-defeating undertaking with diminishing returns all round.

 

[new_trader]

NT, its getting really silly and irrelevant again.

You must be the only trader I know who does not trade for a living and who does not get the perfectly obvious point TD is making that everbody else I know who does trade for a living has absolutely no problems comprehending.

What you are doing is spouting BS for the sole purpose of spouting BS.

Maybe. But at least I am trading my own account.

 

[gooseman]

Even news-flashes are being fed in a way which a computer can decipher, and thus, act accordingly in the market.

Any basis for this?

Algo trading was always going to be a progression in trading-get used to it. You can program computers until the cows come home based on theory but everyonce in a while these will be steamrollered by unexplained events like 2/10 yield spread inverting, or credit swaps blowing out. LTCM based their investment on clearly set parameters (on which algo trading progs will be set) and look what happened to them. There will never be a substitute for human reaction when it comes to trading. Well, in the near future until Skynet creates T1000.

Algo trading tends in my experience to be high speed transactions taking advantage of discrepancies in the market, eg cross mnth arbs pr erroneous orders so what I'm saying is it depends on your trading style as to the extent the algos will have on your market.

 

[new_trader]

Hey guys, are we deviating from the topic of this thread. I get a feeling that you are trying to brush the arguement of algo trading under the carpet. News flash: some computer geeks have built algo system which can even think and react like people. Next up - emotional trading robots. Nothng is impossible in todays hitech world we live in. I do not have the trading knowledge you guys have, but algo trading is taking the traders out of the equation. Even news-flashes are being fed in a way which a computer can decipher, and thus, act accordingly in the market. Any comments?

Yes, if you study the way the market moves it won't matter 'who' is making the trades. Do you see? If the algo's are 'thinking' and reacting like real people why are you concerned?

 

[jamescummins]

I think there is a key point here that is being missed.
People make decisions that a computer cannot model, ever. People might want to buy google shares because they like the logo, and they think it is a trendy firm. I might buy arsenal shares because I support the team. There is no rational logic behind that, and hence a computer can never accurately model a market completely. Algo trading is always just a bit behind people. It is looking at price action, or whatever other factor you like, and making decisions. What moves a market is the initial price action, which has nothing to do with computers. Algo trading is a benefit - there is liquidity available that would not otherwise be there - which ultimately means you get a better price on your trade. It might increase noise, and that might hurt you depending on how you trade, but increased liquidity is never a bad thing.

*someone mentioned earlier where is the proof for algo's being able to trade the news - I think you can buy this pretty much off the shelve now for basic things. You can get loads of different programmes that will watch a reuters feed say, and will trade off the back of a specific number. So in metals for example, everyone looks for the warehouse numbers coming out - you can relatively easily set a programme to scan reuters for that specific news item, and trade on the basis of it.

 

[gooseman]

i ca understand trading numbers depending on input parameters but if for example Paulson comes out and says we are going to bail out fannie and freddie then what the hell will a computer make of that? you can programme a comp to pick out words such as ECB and cut but for the fannie/freddie example then the implications will have to be considered before any trading decision....

 

[jamescummins]

I completely agree that a computer cannot deal with that at all!!! It has to be something very specific for a computer to trade news. It is the decision making process that a computer cant deal with, and is miles away from being able to deal with. Say there is an earthquake in Chile - copper goes up. But how do you know if it was a big earthquake, a little one, did it affect a mine, has there been no impact? All of these things require a person, because ultimately there are too many factors for a computer to cope with.

 

[new_trader]

I think there is a key point here that is being missed.
People make decisions that a computer cannot model, ever. People might want to buy google shares because they like the logo, and they think it is a trendy firm. I might buy arsenal shares because I support the team. There is no rational logic behind that, and hence a computer can never accurately model a market completely. Algo trading is always just a bit behind people. It is looking at price action, or whatever other factor you like, and making decisions. What moves a market is the initial price action, which has nothing to do with computers. Algo trading is a benefit - there is liquidity available that would not otherwise be there - which ultimately means you get a better price on your trade. It might increase noise, and that might hurt you depending on how you trade, but increased liquidity is never a bad thing.

*someone mentioned earlier where is the proof for algo's being able to trade the news - I think you can buy this pretty much off the shelve now for basic things. You can get loads of different programmes that will watch a reuters feed say, and will trade off the back of a specific number. So in metals for example, everyone looks for the warehouse numbers coming out - you can relatively easily set a programme to scan reuters for that specific news item, and trade on the basis of it.

But these 'algo's' if they exist must be modelled on the psychology of people, namely, 'The public'. Trading is a game, a bitter nasty game that is played and controlled by the strong hands. The strong hands have nothing to gain and everything to lose if the algo's make the markets so impossible that people stop participating. There is no point building a highly advanced mouse trap if the mouse doesn't understand how to use it. You'll never catch your mouse! The public have to be 'suckered in' to trading as has been happening for years and years....and years.