How to make money?
Hello,
I'm trying to figure out which route to go to take a shot at making consistent money trading. I've been reading a lot of these posts here, and basically it seems like there are quite a few opinions on how NOT to make money. For instance: day trading-no way 'cause your computer/system/execution/bankroll etc... can't compete with the big boys & market makers; buying a canned system (i.e. "AbleTrend")-no way, 'cause if it was that simple everyone would be doing it, or, too expensive and trend following using EMA MA's is just as good & a lot cheaper; using " 'bots " for a fully automated system-no way, Star Treks' Mr. Data would have a hard time designing a good one;
And on and on and on...
So everyone, is ANYONE making money, and how?
I'm thinking a swing trading time frame, to help eliminate the execution headaches with active intraday trading; seems like it has become a high stakes video game rather than a exercise in strategic thinking. Options maybe?
Thanks in advance for your input!
While I see this post is very old, I was on the first page again, so it obviously seems a question that a lot of new traders continue to ask.
This is my first post as I happened to find these forums by accident, while doing some research. I never post to forums - well not in years, as I usually don’t have the time. However, since I am on vacation and saw this thread, I thought I would toss my two cents in – I had the time, but also 30 years’ experience, where trade/investing has been my only source of income.
So I hope these bits of advice are helpful as they have served me and have proven out my success, year-after-year, decade-after-decade.]
First there is a difference between trading and investing. One trades to make a living, while one invests to build wealth. You can do both, but don’t ever conflate them.
Trading:
It falls down into two basket buckets.
1. Arb
2. Trend
Arb trading falls into many buckets, but for the most part retail traders as well as leverage funds (larger AUM do not participate) – because there is just not enough liquidity for maximum allocation. There is HF Trading Arbs, Volatility Arbs, Deal/Risk Arbs, etc. For simplicity sake, for what we are talking about it is a small portion of the market when we are talking about net capital. True, it can be a large portion of the trading volume, but trading volume in an ARB structure does not constitute a big capital stack.
The rest of us trade/invest in some kind of trending methodology.
In the retail world (which I suspect is the majority on these forums), I would say about 90% are some type of Trend trader. The mechanics/time frame are not that important as per understanding the basic concept. The core concept is they are making a bet that at this moment in time the asset with move in value (price) up or down, over X amount of time. If they are right they make money and wrong they lose.
There are hundreds, if not thousands of trend trading systems. People trade in minutes, hours, days. They use everything from moon phases to moving averages.
Trend trending is also heavy in the leverage fund world, but those are very concentrated, like Hyman, Greenlight, etc.
I trade this way, but my time frame is longer than most retail, but shorter than the likes of Greenlight (he has a law of large numbers he is dealing with, which is not part of my equation). My longest position is about 4-5 months, shortest 1 week. Average in the 1 month range.
Here are some general guidelines to start.
1. Push Heavy:
If it’s a great trade and you have your predefined loss determined on your capital stack (usually some type of hedge). Not only should you have a predefined loss determined, but you should have an exit price determined (which could be a future hedge – if you are fortunate to get a breaking move, to lock in profits). Push as heavy as you can! There have been times when I am in ONE position, all in (hedged of coursed) and with my allocated total capital stack. I am in one trade because there is nothing better than that trade. Looking back over 30 years, it is those few times that have generated me the largest returns, 50+% returns. Most of the time I am still concentrated, but not in one positions. Max deployed symbols, under 10. I would say average about 4-5.
2. Diversification is NOT a strategy and NOT risk management.
Diversification is NOT an investment strategy and certainly NOT a risk management system. It is only a description of a portfolio, nothing more or less. No one ever made serious money diversifying anything.
3. Let it run!
Let your profits run. I have seen more investors cut their profits and let their losses run, then I care to count. Seriously – I am not sure why. I think perhaps some people are not cut out for it. If you hit your exit point, roll-up the hedge.
4. Get comfortable losing money
Understand opportunity cost and get very comfortable losing money. I get far more upset with myself NOT putting on a position and missing out on opportunity then losing on a trade that I have already predefined my losses. Get comfortable losing, many, many times. Note: my win/loss percentage ratio is negative. I win approximately 42% of the time. lose small (1%) / win big (+10%). It's fine having a negative win/loss ratio.
5. Know everything there is about the product you trade
Fully – and I mean FULLY – understand the product you are trading. From execution, market hours, fees, associated derivative products, order flow, interest, everything, how splits work, spin-offs, ETH, different order handling types, VWAPS, balancing, etc. If you don’t know everything there is to know about the type of product you are trading – then frankly you are a fool. A the poker table we say, if you can’t spot the fish, you ARE the fish. The worse thing to do is jump in with real money and not know how the product even works.
- Don’t trade a stock, if you don’t know what the XD date means next to the stock symbol you are trading.
- Don’t trade an option, if you don’t know know the difference between intrinsic and extrinsic value.
- Don’t trade a Future, if you don’t know how it settles.
I don’t pretend to become a mechanic, just because I watch a DYI show on fixing cars and changed a couple spark plugs. I don’t pretend to become an electrician, because I can change a light bulb, but don’t know the difference between 210 and 120v. You get the idea. Trading is not a hobby – it’s a career. I have been doing it for 30 years. Wisdom is a culmination of experience and knowledge, but an educated man will never understand that.
6. Build it – Don’t Buy it!
Don’t trust in other people’s trading systems they are trying to sell you. Why, simple – if it was so good, why are they selling it. Use your own brain, apply some creative reasoning, design something. Apply the scientific method – then rinse and repeat to prove your hypothesis.
I would never ever sell my system. I certainly wouldn’t share it, because that would be reducing my opportunity costs. How much time have I put into this work, just to give it away.
7. Understand what Opportunity Is.
As Bruce Lee once said to his pupil, don't look - FEEL, otherwise you will miss all the heavenly glory.
Too many are looking but don't even know what they are looking for. They rely on a scanner to tell them when and what? Then try to find a trend, that may or may not be there, based on what technical you monitor. They are chasing something and trying to define something that I don’t think exists. As if injecting their emotional bias or curve fitting to verify something is not there. I used to call them mirage traders. To be honest, I could never make money that way, I don’t know how and do not see what they want me to see. I have never attempted it, but it seems what many traders do.
REAL Opportunity is when you have done your OWN analysis and realize that something is not priced correctly based on your analysis. The larger the divergence the greater the opportunity. The bigger the bet.
It is my analysis vs. the market perception. Simple. Nothing more or less.
I seek these opportunities where this divergence is the greatest, usually driven by subjectivity - which increases potential volatility, which only makes it more attractive.
90% of the time I become the contrarian as this subjective perception has push price value relative to potential objective value out of whack. The investors have drunk the kool-aid and I want them to drink as much as they can. I buy when everyone else is selling and sell when everyone else is buying.
For many, it is hard to get their head around it. It can be uncomfortable as everyone around you thinks you are wrong. You do doubt yourself, but I just look at the math and do my best to remain objective.
8. Understand how the market works, why it works, and what drives it.
Why it works?
2 people agree on price, but they disagree on value.
How it works?
Supply vs. Demand
Supply (defined by float or collateral to short)
Demand (defined by access to leverage and leverage ratios)
What is Asset Inflation and Deflation?
Low interest rates increase asset prices
High interest rated decrease asset prices
The market price is a perception, determined solely by credit (debt formation). The unemployment rate, jobs report, CPI, all that stuff has nothing to do with the stock market. If you get caught up in that nonsense it will drive you crazy.
The economy is important, but it is not directly linked to the stock markets current PRICE. Today’s price is strictly based on perception combined with the access to credit.
That is not to say, when the boom cycle ends and we have another bust (not if, but when), the economy and the market mean revert. Until such time to believe in correlation as a proof of causation is a fallacy.
Simple over view of the trading system I use (developed over 30 years).
1. Potential Opportunities
How many opportunities fall within my model. My model analysis current price vs. my price model and calculates a divergence. It then ranks them.
1. Capital Stack:
Once the list is determined, it analysis the hedge, time frame, liquidity, event risk, carry rate. It then ranks them a second time on a capital stack allocation. Could be none, 1, or all.
2. Opportunity Cost Analysis:
Having decades of base line data – runs a sub 1, 3, 6 month ROCs averages. The Capital Stack allocation compares to the Opportunity Cost of previous trades and time frames, to generate a theoretical return and probability ratio (that includes my error rate and standard deviation). This may also re-weight the capital allocation – if the trades fall within or without a standard deviation.
3. Deploy:
Orders are sent into the market at fixed and/or scaling prices. I don’t care about small price slippage and routinely sell on the bid and buy offers (depending on spreads). My model has already calculated the bid/ask spread and liquidity into a slippage risk calculation. So tight markets always buys on the offer and hits bids. I am not trying to make pennies, I am trying to make dollars.
4. Monitor
Monitors position and monitors all vitals (what I consider vital statistics) of the underlying. These include, but not limited to; VWAP, IV, Skew, liquidity, This generates a real time theoretical value– both to determine if my model assessment is correct and to the degree that it is. If not – my loss was already pre-determined.
5. Profit / Loss
If the model is wrong, the hedge is already in place and I can elect to wind down the position for the 1-2% loss or keep it (there is a Theta vs. Vanna/Vega determination).
If the model is correct, let the profit run. Once the price target is hit, the position is re-evaluated to determine if one can lock in unrealized gains and maintain deltas or to unwind (convert/revert usually).
Sometimes the price target is not hit, but still profitable.
System is fairly automated.
Conclusion:
It’s a career. I have been doing this every day, only this for over 30 years. My model has certainly evolved (better computers, better data). However, the core strategy has never changed.
It a value proposition:
I think Value is X and the Asset is Currently Y.
What is that divergence and speed of that divergence?
What is my confidence factor and risk/reward ratio?
Now how much to commit?
My experience has taught me that I am also a rare bread that does NOT believe and does NOT support the following ideas:
Random Walk Theory
Diversification Theory
Model Portfolio Theory
Correlation is Proof of Causation
IV / HV mean reversion theory
And many more.
I hope this offers some food for thought…perhaps just a little.
Good luck, stay focused.
