edge init

[Liquid validity]

lulz

Nah this isn't just lulz, this is M&S lulz, quality at its finest :cheesy:

 

[Liquid validity]

So many people are of the opinion that there is only 1 way to do things and everyone else is wrong. Very close-minded.

Peter

Its a never ending common theme amongst tarders, even the big hitters:
Quotes from famous traders and investors

Ultimately, the reason people strongly disagree is because they all have a very strong understanding and belief
in their own approach (even if its unproven as successful - but thats another subject...).
Add to that, bad experiences with a personally unsuitable method and voila - disagreement

In reality, its more a case of an individuals approach suiting them on a psychological and personality trait basis.
Confidence through knowledge.
Obviously confidence alone isn't enough.

Every successful approach shares one common theme - sound risk management.
Even that is not enough, put simply, you have to be better at what you do
than the majority of people you are up against.
The chosen approach and vehicle are entirely subjective.
Trading, business, life, even lulz, its all just a game between people.

 

[Liquid validity]

In my opinion, trying to determine that is precisely what trading is all about ! that's precisely what I spend each and every day trying to do !

However, most markets that I've analyzed exhibit either enough leptokurtosis to exploit in one form or another, or they mean revert reliably enough to earn a few bob

part of the game is learning how to capitalize on those random outcomes. I can probably add 25-30% to my bottom line annually by simply knowing what a trend looks like in the time-frames I trade.

Completely agree, no surprise there as you know I have a similar stance.
The thing that frequently baffles me is why people have such a hard time
accepting randomness.

By that I'm not saying that every factor of price movement is always random.
Thats why people are fooled by randomness, to coin a phrase.
Trade results, which are based on price however are unequivocally random.
Anyone who argues otherwise must by definition have a 100% strike rate with
reward higher than 1 risk or significantly greater.
Yet no one on the face of the earth has.

For me the biggest part of an edge is embracing and accepting that randomness.
Whether or not you buy into Taleb, market being random or not is irrelevant.
Trade results are, so its a moot point anyway

Kurtosis and mean reversion, now that is is a beautiful thing to behold

 

[scose-no-doubt]

Very interesting you think that the opposite party are not directional traders. They are probably just not trading in the same direction.

Again there is a simple way to prove or disprove this theory.

Its up to the individual to probe enough to figure that out, but it can be done.

As far as I'm aware, the mechanics of most markets state that your counter party is likely to be a market maker or liquidity provider.

@ viel geld - On an institutional level, most instruments are held, in massive size, by various funds. A lot of them are looking for functions of total return over a long period rather than just straight short term capital appreciation.

I think that the people I'm engaging have very different outlook on almost every aspect of what the markets are and who is in them and why so there's really no point in continuing along these lines as we've already deviated from the whole edge discussion anyway and will likely never agree.

 

[scose-no-doubt]

As for the topic, the gut feeling interests me a lot. I am many times in a position, and price moves a little against me, not much. And I have no idea what it is, nor can I systemise it, but I just know that price will hit my stop. And that feeling is right every time. But I can't trade on gut, because I can't control or understand it.

Happens to me a lot too and I sit and watch as my stop is hit but as you say, where do you draw the line. Interesting

 

[wallstreetwarrior87]

My trader has to build a $10m position from scratch inside a week without moving the price: he has to play some serious games to do that, and the best ones can do it without even leaving a ripple in the water. As a retail trader you have to be really good to be able spot what's going on yet alone exploit it which I guess comes back to why the success rate is so low / maintaining a sustainable edge is so rare.

Precisely.

You are completely correct, and as these parties participate in transparent markets it all there in front of us on a "chart" but without knowing what to look for this information will remain useless.

OTC will only account for a percentage of transactions. The rest must come from the minions:cheesy:

Everyone plays the part in making a market, which ever one it is.

 

[scose-no-doubt]

OTC will only account for a percentage of transactions. The rest must come from the minions:cheesy:

OTC markets are more than double the size of on-exchange markets

 

[barjon]

Interesting comments WSW, and I think there is definitely 'edge potential' in your view. My observation is that the institutional traders also play games, manipulate, spoof, flip and sweep, simply because they have to. Imagine I run a $1bn institutional equities fund. I want to initiate a 1pc portfolio position in a new stock. My trader has to build a $10m position from scratch inside a week without moving the price: he has to play some serious games to do that, and the best ones can do it without even leaving a ripple in the water. As a retail trader you have to be really good to be able spot what's going on yet alone exploit it which I guess comes back to why the success rate is so low / maintaining a sustainable edge is so rare.

aye, and if people withdraw $1m from your fund you've got to sell even if your directional "edge" is screaming at you to buy.

 

[wallstreetwarrior87]

I think that the people I'm engaging have very different outlook on almost every aspect of what the markets are and who is in them and why so there's really no point in continuing along these lines as we've already deviated from the whole edge discussion anyway and will likely never agree.

This is very true, and this is what makes the market, speculation on what is and what is not.

I do not think we have deviated. The question has evolved and opened up more questions, and this is what needs to be done to get to the hightest level we can achieve.

So many threads de-rail as they are about to get interesting, the majority just want to find the magical M/M or fib ratio. Im not meaning this thread in particular, just in general.

So as a closing note.

Your question about market makers:

They are there to provide (the illusion) of liquidity, to encourage participants into the market. If they did not exist there would be no business as no retail trader wants to trade in a market where their fills will be 10pts away from the mid-price.

So what if for every 50 contracts traded only 5 account for a market maker. Who would the other 45 belong to? Would this then change your perception of how markets really operate?

All done now, there is some good pointers on this thread already. Each point worth its own thread.

Monaco is calling, that set up is about to bounce on my 20 day M/A, the ADX is above 29.5, the RSI is rising, and Ben Bernanke is out for lunch; ca-chingos!

 

[wallstreetwarrior87]

OTC markets are more than double the size of on-exchange markets

Again this statement can be proved to be correct or incorrect, how do we prove this?

If not this is just a statement copied from some website.

OTC orders require a minimum transaction size (depending on the counter party), and is traded away from the market. Each exchange has their own reporting rules.

On the charts you have access to 5-10% of this will represent OTC (delayed reporting).

To do this research you must only concern yourself with transparent markets.

Hope this is useful?

Done now.

All the best.

 

[scose-no-doubt]

So what if for every 50 contracts traded only 5 account for a market maker. Who would the other 45 belong to? Would this then change your perception of how markets really operate?

Possibly it would affect my views on very short term activity in the markets but I'm almost certain that this isn't the case.

I present the following scenario. Ben Bernanke surprisingly announces QE3/4 o wherever we are now and so the decision is not currently priced in. Bearing in mind that there will be significant buy side pressure from capitulation shorts as well as the new buyers, who is shorting QE and how can they afford to do it?

This should give you some indication of the amount of market activity that I believe is due to non directional and institutional trading where net overall exposure is the only thing that matters.

Again this statement can be proved to be correct or incorrect, how do we prove this?

If not this is just a statement copied from some website.

No this is an irrefutable fact. If I can be bothered I'll dig you out a few charts when I get home. Not really sure why you think I'd just copy an unsubstantiated quote from a random website.

These two points I've made probably sum up why I bang on about market pricing mechanisms, efficiency, non-arb etc and why I believe the majority of institutional players aren't directionally punting.

 

[scose-no-doubt]

 

[wallstreetwarrior87]

No this is an irrefutable fact. If I can be bothered I'll dig you out a few charts when I get home. Not really sure why you think I'd just copy an unsubstantiated quote from a random website.

These two points I've made probably sum up why I bang on about market pricing mechanisms, efficiency, non-arb etc and why I believe the majority of institutional players aren't directionally punting.

It was a general comment regarding quoting a website, Im not suggesting you personally did.

We now digress onto institutional players. No one has suggested these players are directional players. They are a combination of.

Direction = continuous effect on market behavior;

OTC/Hedging/Arbing = momentary effect.

OTC is a transaction, i was asking how would you prove say (on the DAX) how much the OTC transactions accounted for the whole daily activity? Thats all.

The job of an individual retail trader is to trade a methodology that can be based on understanding a situation and exploiting value from the situation is value is there to be had.

There is no need to make it any more complicated than that.

That is the edge, and it will always exist if you understand the structure in play.

All the best to everyone.

 

[scose-no-doubt]

Anyway let's get back to talking about edges and not market structures otherwise I'm going to end up talking about market dynamics and opportunity cost and non arb pricing mechanisms for hours, and we'll get neither the rigorous level of detail you'd need to properly understand it as it's beyond me, nor any closer to identifying whether or not outside of informational advantage and sound money management which limits losses in a given sample or trading results, any "edge" outside of statistical analysis is purely a psychological construct. For retail traders anyway.

Also, after re-reading your earlier post about the bigger retail types and their liquidity issues, do you not think that these the vast sums that these lot control gives them an edge in the short term in that they can game the markets? Also do you not think that they will likely be holding long/short which gives them a net exposure far smaller than the amount of contracts that have available to trade? If they do (and I think they do) it kind of negates the liquidity issue doesn't it?

 

[wallstreetwarrior87]

So Unless I misunderstand this (very possible lol).

OTC accounts for only 3.7 % of transactions on the Equity markets, and only 1.6% on the commodity futures, and 9.4% on the Forex markets. So that is even less than I thought.

As these are the markets I trade (as do the majority of retail traders) this is excellent news.

I certainly have no intention of entering the fixed income market at the moment. No edge for me to be had in this market at this time.

Or have I got this wrong?

 

[wallstreetwarrior87]

Anyway let's get back to talking about edges and not market structures otherwise I'm going to end up talking about market dynamics and opportunity cost and non arb pricing mechanisms for hours, and we'll get neither the rigorous level of detail you'd need to properly understand it as it's beyond me, nor any closer to identifying whether or not outside of informational advantage and sound money management which limits losses in a given sample or trading results, any "edge" outside of statistical analysis is purely a psychological construct. For retail traders anyway.

Agreed Scose.

Got to fly now. Hope to back later.

 

[Shakone]

Wallstreet, I don't think you can make that conclusion about equity. From that chart Equity makes up 3.7% of the derivatives market. And if you take everything together, 83.7% is OTC. But you can't say whether equity had more or less OTC

 

[scose-no-doubt]

We now digress onto institutional players. No one has suggested these players are directional players.

http://www.trade2win.com/boards/general-trading-chat/152840-edge-init-3.html#post1896706

They are a combination of.

Direction = continuous effect on market behavior;

The causes of this, I believe are highly dependant on the timeframe we're looking at. I'm assuming you're thinking more short term where I'm thinking short-term leading to long term which is the reason for our difference in thinking.

OTC/Hedging/Arbing = momentary effect.

Disagree

OTC is a transaction, i was asking how would you prove say (on the DAX) how much the OTC transactions accounted for the whole daily activity? Thats all.

Well the reporting requirements are different but I would have thought that the chart would go some way to explaining that.

The job of an individual retail trader is to trade a methodology that can be based on understanding a situation and exploiting value from the situation is value is there to be had.

There is no need to make it any more complicated than that.

I'm not making anything complicated, the markets themselves are extremely complex. I don't disagree with that but I suppose it's our perception of value that differs. I believe that if there is no information value, there is no edge outside of something can be addressed assessed most efficiently and robustly through statistical analysis.

That is the edge, and it will always exist if you understand the structure in play.

All the best to everyone.

But as I've said many-a-time I have never applied any of my beliefs to my trading where I'm a loser anyway so there's a good chance I'm just full of sh1t and quite useless. Or stupid. Either way...

:clover:

 

[YouAreNotFree]

So many people are of the opinion that there is only 1 way to do things and everyone else is wrong. Very close-minded.

Peter

I have said just that to myself many times whilst browsing this forum.

 

[scose-no-doubt]

Wallstreet, I don't think you can make that conclusion about equity. From that chart Equity makes up 3.7% of the derivatives market. And if you take everything together, 83.7% is OTC. But you can't say whether equity had more or less OTC

Exactly. If you extrapolate the breakdown against the 16.8% exchange traded? obviously that's far from an exact science but if you consider this along with this...