Barjon's Money Machine

Soloquan

Established member
646 24
If you assume you have no edge, then spread will eat the account. A good example would be taking random trades, long or short on the toss of a coin. You'll win some, you'll lose some, and over a sufficiently large sample size you'll break even. In that scenario the spread will eat the account.

Although people don't like to admit it, the majority of technical based systems are no better than a coin toss in terms of edge, and therefore, they suffer the same fate.

Most new traders perform significantly worse than a purely random system, and their own incompetence is generally a bigger factor than the spread.

Spreads are the brokers edge, and its a MASSIVE edge, and overcoming that edge is far more difficult than most here would care to acknowledge.

Equivalent to the '0' on a roulette table is essentially what you're saying?
 

barjon

Legendary member
10,705 1,809
If you assume you have no edge, then spread will eat the account. A good example would be taking random trades, long or short on the toss of a coin. You'll win some, you'll lose some, and over a sufficiently large sample size you'll break even. In that scenario the spread will eat the account.

Although people don't like to admit it, the majority of technical based systems are no better than a coin toss in terms of edge, and therefore, they suffer the same fate.

Most new traders perform significantly worse than a purely random system, and their own incompetence is generally a bigger factor than the spread.

Spreads are the brokers edge, and its a MASSIVE edge, and overcoming that edge is far more difficult than most here would care to acknowledge.

All very true, hare. It's perhaps worth pointing out at this stage that I'm simply not going to be drawn on how this has done for me over the three years or so, other than to say I wouldn't have posted about it if I didn't think it deserved worthwhile consideration.

People will have to add their own flesh round the bones and test it themselves if they are interested, although I'm happy as Larry to answer questions about how I do it.
 

robster970

Veteren member
4,566 1,390
And no lulz – which won’t please a whole bunch of people

Sorry Jon, just had to do this

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ChocolateDigestive

Experienced member
1,153 281
I hear this quite a lot and maybe I'm misunderstanding the point totally. If I close a position at anywhere between 10-30 points from where I entered I don't mind paying a 1 point spread. I've had slippage yes but both positive and negative and never by anymore than 2 points.

Have I got the wrong end of the stick because I hear this so often "the spread will eat your account" so on and so forth.

Hey solo

Paying 1 point/tick and shooting for 10 is way too much for me if using a bucketshop. You would have to have a massive edge to overcome that spread. For me I would only use a bucketshop for 30 point target with 1 point spread, that's just me others may disagree. If you are trading the futures you can try and buy at the bid sell ask but the spread may move out of line waiting for a fill, then if you do get a fill you have to manually 'leg' into the other side. You could use a spreader like xtrader/cqg but you are probably looking at £500 to £800 pm software costs.

To illustrate the effect of the cost of execution (spread, commission, exchange fees) I know of a ES trader who does 10,000 lots per day. sounds a lot and it is but he trades with a 50 lot and goes in and out of the market 100 times per day. Mean reverts and averages in once, twice but never thrice. his winners are 2-6 ticks, losers 1 to 5 ticks he makes an average of $1 per contract traded. Tick size is $12.50. So he makes like 8% of one tick per trade! with a retail round turn cost of $2-$4 you can see how he would get killed by execution costs. Due to volume and trading through an exchange clearing prop firm his all in round turn cost is around 40c. I say he makes $1 per contract, he is salaried plus small % of performance.

I know this is an extreme example but it has 2 'lessons'

1. Best not to trade where total execution cost relative to your target is large, it's a personal judgement, don't underestimate the total cost of execution be it bucketshop spread, futures commission, exchange fees etc.

2. More importantly there ARE pro traders out there who are making money from people not paying attention to point 1 as shown by my example above of the guy doing 10,000 per day ES volume. they make money from what they call 'liquidity monkeys' who trade with retail commissions and tight stops.

Sorry for the ramble that's what happens when you get stuck on a train!

Good trading everyone.
 
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Soloquan

Established member
646 24
Hey solo

Paying 1 point/tick and shooting for 10 is way too much for me if using a bucketshop. You would have to have a massive edge to overcome that spread. For me I would only use a bucketshop for 30 point target with 1 point spread, that's just me others may disagree. If you are trading the futures you can try and buy at the bid sell ask but the spread may move out of line waiting for a fill, then if you do get a fill you have to manually 'leg' into the other side. You could use a spreader like xtrader/cqg but you are probably looking at £500 to £800 pm software costs.

To illustrate the effect of the cost of execution (spread, commission, exchange fees) I know of a ES trader who does 10,000 lots per day. sounds a lot and it is but he trades with a 50 lot and goes in and out of the market 100 times per day. Mean reverts and averages in once, twice but never thrice. his winners are 2-6 ticks, losers 1 to 5 ticks he makes an average of $1 per contract traded. Tick size is $12.50. So he makes like 8% of one tick per trade! with a retail round turn cost of $2-$4 you can see how he would get killed by execution costs. Due to volume and trading through an exchange clearing prop firm his all in round turn cost is around 40c. I say he makes $1 per contract, he is salaried plus small % of performance.

I know this is an extreme example but it has 2 'lessons'

1. Best not to trade where total execution cost relative to your target is large, it's a personal judgement, don't underestimate the total cost of execution be it bucketshop spread, futures commission, exchange fees etc.

2. More importantly there ARE pro traders out there who are making money from people not paying attention to point 1 as shown by my example above of the guy doing 10,000 per day ES volume. they make money from what they call 'liquidity monkeys' who trade with retail commissions and tight stops.

Sorry for the ramble that's what happens when you get stuck on a train!

Good trading everyone.

Thanks for the reply CD and yes I completely understand where you are coming from.

However to quote you: "Paying 1 point/tick and shooting for 10 is way too much for me if using a bucketshop. You would have to have a massive edge to overcome that spread."

I think far too much emphasis is placed on this word 'edge'. This is a complete construct (i.e subjective and not based on empirical evidence) that has been fabricated by people looking for answers as to why some people can consistently make money and some lose.

In my opinion and I don't use that word lightly I genuinely mean it is just my opinion, in my opinion I haven't got a "massive edge" as you put it. In fact I don't even have an edge. What I do have is a knowledge of the instrument I'm trading simple as that.

If my bucket shop account is consistently growing in the right direction then all is well. Paying a 1 point spread to make a minimum of 9 is okay with me.
 
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scose-no-doubt

Veteren member
4,630 954
Interesting thread and strategy and something I've looked at myself. The problem I had with it is that I'm still struggling to see what exactly it is you're being compensated for as I'm assuming a fundamental shift factor in the regressed values (i.e. a decoupling in the historic UK/US economic relationship) is not a common enough occurrence to warrant a quasi-continuous reward for acceptance of that particular risk. I'd assume there are some FX considerations too but overall I doubt there is a significant and inherent mis-pricing which would continually provide opportunity. Given what Martinghoul said about edges yesterday, it could just be that offering liquidity outside of normal hours or at times when it's not just about... I'm stumped and I'd never trade something I didn't understand no matter how loud the numbers scream it at me. I'm thinking it;s related to liquidity premiums but I dunno. Do you (or anyone else) have any idea why you're being paid, Jon.
 
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ChocolateDigestive

Experienced member
1,153 281
I think far too much emphasis is placed on this word 'edge'. This is a complete construct (i.e subjective and not based on empirical evidence) that has been fabricated by people looking for answers as to why some people can consistently make money and some lose.

Hi Solo

That's interesting your thoughts on the word 'edge' my own thinking is the exact opposite in that an edge for me is defined by objective empirical evidence over a large sample size.

What matters at the end of the day is that you are making money, so if you are keep on doing that. If you are targeting 9 pips/points/ticks and paying 1 pip/point/tick spread then imo you must have a big edge however you are defining it. just my 2c.

by the way in your signature what does JSA stand for? I am hoping that it doesn't stand for job seekers allowance, apologies in advance if it isn't, no problem if you are genuinely entitled but if you are milking it for the sake of it that is bad cricket.
 
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ChocolateDigestive

Experienced member
1,153 281
Interesting thread and strategy and something I've looked at myself. The problem I had with it is that I'm still struggling to see what exactly it is you're being compensated for as I'm assuming a fundamental shift factor in the regressed values (i.e. a decoupling in the historic UK/US economic relationship) is not a common enough occurrence to warrant a quasi-continuous reward for acceptance of that particular risk. I'd assume there are some FX considerations too but overall I doubt there is a significant and inherent mis-pricing which would continually provide opportunity. Given what Martinghoul said about edges yesterday, it could just be that offering liquidity outside of normal hours or at times when it's not just about... I'm stumped and I'd never trade something I didn't understand no matter how loud the numbers scream it at me. I'm thinking it;s related to liquidity premiums but I dunno. Do you (or anyone else) have any idea why you're being paid, Jon.

you are clearly searching for a reason why this method could work. stat arb traders looking at stat relationships so they are less concerned about the why. If you know the x-y spread as crossed the centre line z times (mean reverted) in the period p and you know the standard deviation is sigma then all you are playing it the probability of that event occurring again. It's not what you want to hear I know but sometimes there is not a why, there is no reason.

This is not the case with all spreads, if you look at 'new crop old crop' or calender spreads various price action can be explained / part-explained by various fundamentals i.e. supply imbalances, carry costs etc.
 

barjon

Legendary member
10,705 1,809
Interesting thread and strategy and something I've looked at myself. The problem I had with it is that I'm still struggling to see what exactly it is you're being compensated for as I'm assuming a fundamental shift factor in the regressed values (i.e. a decoupling in the historic UK/US economic relationship) is not a common enough occurrence to warrant a quasi-continuous reward for acceptance of that particular risk. I'd assume there are some FX considerations too but overall I doubt there is a significant and inherent mis-pricing which would continually provide opportunity. Given what Martinghoul said about edges yesterday, it could just be that offering liquidity outside of normal hours or at times when it's not just about... I'm stumped and I'd never trade something I didn't understand no matter how loud the numbers scream it at me. I'm thinking it;s related to liquidity premiums but I dunno. Do you (or anyone else) have any idea why you're being paid, Jon.

scose

I don't think it's a question of mispricing - as is the case in a true arb - but more a case of DOW leading the way as far as FTSE is concerned in terms of general sentiment. Conditions in UK cause the FTSE to deviate from that relationship for periods but the pull of the DOW brings it back towards the mean even if it doesn't make it the whole way.
 
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counter_violent

Legendary member
11,268 3,005
scose

I don't think it's a question of mispricing - as is the case in a true arb - but more a case of DOW leading the way as far as FTSE is concerned in terms of general sentiment. Conditions in UK cause the FTSE to deviate from that relationship for periods but the pull of the DOW brings it back towards the mean even if it doesn't make it the whole way.

Yeah, it's just normal intra-day /intra-week (however long it takes) variance, and a damm site safer strategy than most employ.
 

DionysusToast

Legendary member
5,963 1,501
No it doesn't matter if you are holding for hours/days. The spread at a bucketshop will be tiny compared to the trade result. For the intraday index arb guys they are mainly automated on the lower timeframes the fills are important in that space. the majority of HFT arb index guys are flat end of day for reason I won't go into.

Well if it's an index arb that you can hold for days...

Then he's found the pot of Gold @ the end of the rainbow....

As for why index arb guys are flat @ the end of the day, it's because the opportunities are fleeting in markets like S&P Futures vs Cash....
 

ChocolateDigestive

Experienced member
1,153 281
Yeah, it's just normal intra-day /intra-week (however long it takes) variance, and a damm site safer strategy than most employ.

aye aye. nothing wrong with 'however long it takes' as long as the trader is aware of the psychological trait of some traders which is 'inability to take controlled losses' something I have suffered from in the past. There is a danger with spreads that a mindset of 'it has to come back' can set in and the high hit rate% of these methods causes this trait to be tested. Strict rules on averaging down (amounts, how many times (if any)) need to be employed as well as the ability to take controlled losers, plenty of pro traders have average loser greater than average winner contrary to popular belief. otherwise things could go pop. :)
 

Soloquan

Established member
646 24
scose

I don't think it's a question of mispricing - as is the case in a true arb - but more a case of DOW leading the way as far as FTSE is concerned in terms of general sentiment. Conditions in UK cause the FTSE to deviate from that relationship for periods but the pull of the DOW brings it back towards the mean even if it doesn't make it the whole way.

For instance... ftse just rose from 5626 to 5638 (a gain of 11 points in a matter of about a minute) however DOW only rose from 12754 to 12768 (a gain of ONLY 14 in the same space of time) As Barjon stated DOW = 2 to ftse so in reality ftse should have seen a bigger gain yet didn't as the DOW pulled ftse back to it's average.

I think on a larger scale it is exploiting this 'anomaly'... well that's the wrong word but I can't think of the word I'm looking for right now, but you know what I mean.
 

scose-no-doubt

Veteren member
4,630 954
you are clearly searching for a reason why this method could work. stat arb traders looking at stat relationships so they are less concerned about the why. If you know the x-y spread as crossed the centre line z times (mean reverted) in the period p and you know the standard deviation is sigma then all you are playing it the probability of that event occurring again. It's not what you want to hear I know but sometimes there is not a why, there is no reason.

No! (n) I refuse to believe it :LOL:

I think I know what it is now anyway...

Dunno if anyone wants this spreadsheet I made whilst bored. Hope BJ doesn't mind :)
 

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