How do traders trade?
I got into trading a short while ago but am still a very raw newb. Please forgive me if my question sounds naive, because I don't really have exposure to the industry but hope to get there one day.
I hope that you guys could explain how do traders (the non-quant, and non-system ones) at the hedge funds, prop shops, &/or big institutions trade (ie. Goldman Sachs, JP Morgan, etc.) trade. I'm more interested in the FICC side.
Do they implement technical analysis or do they use certain types of financial models/fundamentals similar to those by analysts and portfolio managers.
I'm a bit confused because I hear people always talking about fundamentals whereas what I was taught was more of a model based on market behavior, involving things like pivots, number line, rolling moving averages, opening range, macro indicators etc., which sounds more on the technical side.
I've even seen a post here saying something like technical analysis isn't to be taken seriously.
Thanks.
People will use every strategy imaginable.
http://www.huffingtonpost.com/2011/03/21/hedge-fund-twitter-stock-marke…
Very few funds use pure technical analysis. I also feel bad for whoever taught you to trade purely on TA. that's a scary thought...
Many of the funds who do very well are value oriented/fundamental funds. Many people HATE TA, especially on here. Mostly people use it for entry/exit timing
what do you consider pure TA? Does that include PA as well or just charts? I know profitable traders who use charts and PA only (ignoring all news).
Thanks.
So much for trusting my friend. I'll rib him the next time we meet. Surprisingly his methodology seems to work in the crude and natural gas futures since I've been able to save a good chunk for college. I probably got lucky! I guess I believed him because his mom always boasts to my mom about him working for a guy named Mark Fisher and taking home a 7 figure income. So much for that. She's probably making up stories to make my mom jealous.
Anyways, could you guide me as to what type of books/topics I need to learn on this. How does trading commodities on fundamentals work. I tried looking through amazon to find books on fundamental analysis of commodities but nothing looked right. Also, what do I need to look at for the currency side of things?
Thanks.
I've been trading a while on my own. What I've come up with in general is:
I use TA for entry/exit points. I've noticed that time frame helps too; setting the chart to the period of movements usually.
Other than that, I do fundamental (or something like that) analysis. You don't even need to do half of the work if you can look up analyst reports on the internet... Just be open-minded and astute; anything going on in the world can clue you into what might be the next big thing.
Or undervalued. Forgot about that.
Like if you went to Chipotles, and noticed that there's been a ton of unemployed people looking for decently healthy food at a good price. CMG has been on a tear since Mar 09...
arzoo> I would refrain from ribbing your friend. There are pure technical/price focused funds that do phenomenally well. There are also value/fundamental funds that regularly implode. Systematic CTAs are an asset class which almost fully uses trend following methodology without regard to fundamentals and many of those CTAs have incredible, long term track records.
Guys like Paul Tudor Jones use TA for their trading and he is one of the best traders ever. Commodities Corp which incubated guys like PTJ, Moore, and Kovner used a lot of momentum/TA-style filters so you can bet such thinking is used by those guys.
Mark Fisher is HUGE in the NYMEX and his methodology is TA focused as well. He runs one of the largest trading operations on the floor (MBF). Fisher used to commute to trade in New York while attending undergrad at Wharton becoming one of the youngest floor traders. He and his firm are incredibly successful in the crude and natty futures markets so your friend likely also has a TA based methodology and could very well be making bank.
This is the best part about the markets. There is no right strategy because simply put there can't be only one dominant strategy. If every trader became fundamentally focused then the value ecosystem would become crowded and opportunities scarce while momentum traders would start finding a lot of ways to make money. Vice versa when momentum dominates the markets.
Distressed side - very fundamentals oriented, no technical analysis clearly. Usually a desk analyst type person will dig deep on 2-5 situations at a time, looking at the entire cap structure to find the best risk adj return / return and always have an idea of where you're supposed to be a seller and where a buy (both instruments and levels). Trader in Distressed is very very smart on all the stories in his book and is actively looking for the 2 or 3 catalysts he and his analyst envisioned prior to putting on the position. Sellside spread a bit more thin and less able to pick your spots by nature vs. buyside where you can drill down deep on fewer names/situations
To be even more informative mr. OP, the term "technicals" in distressed is usually relating to specific supply/demand characteristics associated w/ a certain security / part of the cap structure that a market maker may know of.
speaking purely of equities, the hedgies/am's i dealt with looked at technicals only in the context of the broader market sentiment (indices breaking certain levels, vix, etc)....very rare to give too much regard to an individual equity chart.
just my experience. obviously if you're dipping in and out of something (such as a volatile etf) the chart becomes more important.
I like to see the technicals confirming my thesis. There are plenty of "smart" guys that have blown up/massively underperformed because what they perceived as value based on their model the market continued to move lower. The market is telling you that your model is not right, or atleast no one else cares/sees what you see.
I like to use a technical filter to sift through interesting charts then look into the fundamentals or vice versa. I always look at both.
If I may ask, what technicals do you specifically look at?
Recently, I've started solely focusing on a trend following approach in liquid markets (futures and FX). Gave up on using MACD, Stochastics, RSI, Fibonacci (though I do carefully monitor s/r levels) etc ages ago. Currently use Moving Averages and Bollinger bands, coupled price action (s/r levels, price patterns) almost exclusively. I occasionally look at a hybrid Stochastic indicator that I formulated to confirm overbought/ oversold levels though I intend to filter it from my set-up as it just elevates the complexity.
Thanks.
Thanks for all the info.
No wonder my friend speaks quite highly of his boss.
@leverage, sorry I don't know what PA means. I think my use of the word 'technical' was misleading, considering technical analysis means just charts. I think it can be more correctly described as market behavior, using the behavior of the market in the past to get a sense of how much volatility the market has, when the markets are in your favor, and what bias (up/down) based on a number line analysis (something that is based on how the market behaved for the past x days), as well as the meat of the market and pivot levels, things like that. I've also been taught what to watch out for with regards to economic announcements and made to research how each eco. indicator is derived as well as what it means going forward. It took about 6 months of 'weekend lessons', while I practiced, since he only comes home on the weekends to visit his parents. Only after I got most of this core concepts down was another layer added, and only when I really understood the methodology was I allowed to learn charts (technical analysis per se).
He told me it's his way of giving back since his boss did the same for him.
The thing that has me most curious is how models are derived. I've read it quite a bit here, just as trade4size just mentioned, and wanted to ask how would someone like me go about learning about how to create and use valuation models like these for let's say the energy markets and/or currencies.
Hope you guys can guide me as to what to books to read, sites to look at , or what topics to learn to understand how to generate these models. So I can also take the right courses when I go to college.
On the options side, its a combination of fundamental and statistical methods mostly. There are many large funds that are basically black-boxes trying to figure out whether gamma is performing etc. I look at what volatility is realizing vs what's implied in the market, and combined with a fundamental view you can make a judgment on what type of spreads you would ideally like to run.
There are people who swear by it and then there are those who hate it. The way I see it, any trader who doesn't use both tools is missing out as they're both helpful in understanding trends and where the market is going.
For our investment club, the PM for our team focused entirely on technical analysis. We ended up losing everything :P
How do traders make profit/what do they do? (Originally Posted: 07/06/2013)
What do traders at a BB investment bank actually do and how do they make profits?
Are they all just basically market makers, that take client orders, hedge their risks and make profits on the bid/offer spread?
Apart from prop trading, how else to BB traders make money or are they all just simply market makers?
For example, do BB traders trade on behalf of clients and take a commission on profits?
In others words, is there more to trading at a BB bracket firm then being a market maker in your given market and if so how else do traders make money?
Cheers!
market making and arbitrage
http://www.wallstreetoasis.com/blog/day-in-the-life-of-an-options-trader
If you scroll down to one of my replies I go over some of the fundamental ways money is made as part of a franchise in the options space.
in more general terms, its simply either:
A) Buy low and sell high / sell high and buy low
B) Buy a low implied parameter and it realizes more than implied / Sell a high implied parameter and it realizes less than implied
C) Good old commission
straddle is offered, strangle is bid, the put spread is bid, the call spread is offered, and the straddle spread is sheets choice. trade. profit.
buy the straddle, sell the strangle, sell the put spread, buy the call spread, work the straddle spread, and make monies.
What is a straddle spread?
Straddle spread is buying one straddle at one strike and selling another straddle at another strike, in the same month, or in other months as a calendar spread.
Right, so I'm not understanding how you're finding value here... let's get to what you're doing (I'll assume 25d strikes for convenience).
buy the straddle: +ATM
sell the strangle: - 25d c / -25d p
sell the put spread: -ATM + 25d p
buy the call spread: +ATM -25d c
work the straddle spread: Not sure what exactly you're planning on trading here.... a 75d p/ 25d c straddle is fundamentally the same thing as a 25d c + forward and discounting.
Anyway, net net you've double sold the 25d c . so you have risk-reversal exposure. Perhaps I'm not quite getting what you're trying to accomplish, please explain.
No clue what you are talking about but I sense OWNAGE...
the straddle is two ATM options. so after buying the straddle and selling the strangle you are left long the iron fly. after selling the put spread you are just long the call spread, after buying the call spread you are now long the straddle spread. which you will sell for value(sheets choice).
When something is "bid" you can sell it for over value, and when something is "offered" you can buy it for under value, so in my example you have made money on every trade except for the straddle spread, which you can do for value, but it lets so it lets you get rid of every exposed leg of the trade. And, yes, you have conversion issues, but that isn't a big deal at all unless it is on expiration, which sometimes you can even get out on for a profit if other people are more desperate than you are.
Mkt making, but it's, possibly, a somewhat more loosely defined concept that the OP has in mind.
Prtotectedclass, think you got your stuff wrong unless you are giving up edge on something. With your combination you are left long the ATM and short the upside option unless you are giving up edge on the either the put spread or call spread to put the rest of the trade on. If the call spread is bid as well as the put spread then you can make money with your trades. But to do that people would need to be kind of stupid (happens with the COB, I don't doubt but good luck doing it in the call around market).
There are only a few reasons the market would be skewed like that for very long and you are right, expiration would be one of those times. If you find out that you can do this trade at expiration then it is likely that someone is pulling the wool over your eyes and your next quote request will be for a box, followed by a PM laughing his way to the bank after he unloads his conversion risk well below what the market was asking for it outright.
I'll go through it line by line so you can see, futures are at 100.
Straddle is offered(lets say .25 under sheets), so I buy it. now I am long the straddle for .25 under value(theoretical).
90 100 + + 110
Sell the strangle(.25 over value), now I am long the iron fly for .50 under value(.25 + .25)
90 -
100 + + 110 -
Sell the put spread for .10 over. now legged into this position for .60
90 - + 100 +
110 -
Buy the call spread for .10 under now .70
90 - + 100 ++ 110 - -
Buy the straddle spread(110/100) Now you are left in an option neutral position(box) for .70 under value of which you can let expire Call Put 90 - + 100 + - 110
If I made a mistake, help me out and point it out. These types of trades happen regularly if you trade on the screen and have a floor presence.
Trading Edge (Originally Posted: 10/28/2014)
Assuming equal gain and loss amounts, what percentage of trades would an experienced trader be profitable? e.g. Could an experienced trader be confident that they would be profitable 55/60/70% of the time?
I realise this is an extremely open ended questions, with lots of variables at play, but I'm just trying to get a feel of what kind of statistical edge a successful trader has in the markets.
I would prefer this was from a retail POV, however institutional insight would also be appreciated.
I've been a prop trader for 8 years. My stats:
Win %: 54.1 Loss %: 37.2 Scratch %: 8.6 Avg Win Size: x Avg Loss Size: 0.8x
I'm not sure of others' stats in my office, but I'd be very surprised if anyone's win % is > 60. Small edges add up over time.
Further reading: http://traderfeed.blogspot.com/2008/07/small-edges-consistent-returns.h…
@spoonfork: Just out of curiosity, what do you prop trade and have you ever been on the sell-side before prop trading?
It would vary a lot, depending on the strategy, so it's very hard to generalise...
.
Impssible to standardize, as Martinghoul says it varies by strategy. There are a lot of strategies that have a very high win% but very assymetric payoffs (the bad way). I.E. merger arb is something where the return profile is tons of smaller winners and a few disasters.
forex trader here, i use to turn to make 15K every month from 20K balance in acct. leverage 400:1 till i went bust. I've always been a trader that wins consistently 20 days and 1 bad day i lose it all. Now i have no capital left working in a small int'l bank making 35K annual (why did i settle for such less) because all i needed was 2000 stable monthly to attack markets with. I considered trading my real job which started 2am to 7am.. aside from 9-5 @ int'l bank which was my dayjob. Anyways, lacking capital, saving every dollar i can to get back my glory. what i regret? is that fact i wasted 4 yrs which i could've more concentrated on improving my career profile. Hope? if all else fails, all i need is 20K and i will take market in my palm
Ahh no thanks. i admt to being an aggressive trader but can you blame me, i've done some crazy returns in my times and as i have full trust in my technical analysis approach to forex market(purely price action N pivot points) which has been pretty dead on targets 85% of the time. Who else could do what i did with the available resources? November 2010, took my live account from 10k to 244K in 1 month and It wasn't just one big trade i got lucky with being shorterm day-trader, i consistently brought home cash. It's just the "extreme" volatility days i needed to be AWAY handcuffed from market. If i can just save 20K n play markets conservatively,definitely make 100K post taxes annually.
lol who cares ?? Your broke !
You think you can consistently net a 700% return every year? As you already found out when your 244k disappeared, the risk profile associated with any strategy like that leads to ruin. I know a lot of professional traders, the best option traders I come across consistently make 3-4% per month.
Do yourself a favor, invest in your career rather than this 'passion', ultimately discretionary day-trading is a very tough gig to do consistently over the long run and if you ever stagnate or lose money you are left without any recourse. You've already lost a lot of money and years of your life pursuing this, and the only takeaway you've gotten is to stay away from volatile days and everything will be OK?? C'mon man, look at your situation objectively, how much more are you willing to lose in this pursuit?
It's amazing to me that anyone who can fund an account is considered a "trader", if I buy new Jordans does that make me a baller?
You think you can do 700% consistently?
You do know the best traders in history are in the 20% a year range yearly with some up as high as 30%?
Goodluck with your 700% that would mean your 10k you want to save up is going to be worth 40 million in 5 years..
roll bread
YoungHoe i was watching the Paul Tudor jones documentary when it popped up on the internet a while ago, PTJ said a good trader doesn't even have to be right more than 50% of the time. He didn't drop his own stats but said 'a good trader may just need to be right 20% of the time as long as his risk reward is more than 5, any idiot can have a shot'.
Which I thought was a pretty interesting perspective.
How much average trader makes money for the firm? (Originally Posted: 10/16/2010)
So how much does trader in big investment bank( for exmaple GS) maks money for the firm? Lets sey bank gives him 10mil at beginning of the year and year later account is worth 16mil so thats 60% ROI. How much doe average trader makes for the firm?(please tell me in percentage). Thank you
That is not how the "average trader" makes money for a "big investment bank", so to answer that would be useless.
Depending on the product and risk limits an average trader can go anywhere between -250K to +500K on any given day. A bank does not give traders 10 mil like its a large retail account, all traders have access to the banks capital which they can use and not use at any point in time. The question is whether or not the a specific book made money, but its size changes constantly so it is no accurate to use a term like ROI.
Trading - How are traders supposed to make money for the firm? (Originally Posted: 09/07/2011)
With risk being reduced across the board and traders pretty much getting the axe for trading firm's money, how are trader's supposed to make money for the firm? Just through client trades?
read up on what they have to do at sac capital, then youll have a better picture of what 'a trader must do to make money'
wink, wink.
^ The information race.
What Trading Techniques are Most Used in S&T at BBs? (Originally Posted: 06/17/2011)
What types of trading techniques do traders at GS, MS, etc. use?
Algo? Technical Analysis? Fundamental Analysis? Others?
And why don't these extremely profitable traders trade for their own account or start their own shops and keep 100% of profits instead of trading for a bank and getting a small cut?
Huge difference in capital; traders aren't really taking directional positions (anymore). Also, trading for a bank gives you access to waaaaaaay more markets / resources / trade opportunities than you would have on your own, so the chance for profitability is greater
Awesome
Because there are a ton of benefits to capital:
All of this is pretty common knowledge that can be derived from sitting and thinking about the trading business. Sometimes it pays to just sit and think instead of browsing websites.
you cannot find out the techniques used by BB prop desks, sorry and anyways you couldnt implement them. Why don't these "extremely profitable traders" (LOL) trade for themselves? because if they fuck up, hey, who gives a shit, its not their money and they have unlimited US taxpayer dollars at their disposal....
He´s right
You cant use these strategies of BB prop trading for your own accounts. You have no DMA, no Cash (minimum $1 billion), ...
Simple, they make more at a bank.
'Good luck getting a reputable bank to trade most OTC derivatives with you."
Exactly - reputable anyone.
Some do start shops if they can raise the capital - but if they are that good/connected banks normally just raise comp.
We did have some clients start up funds because of BB lay offs re dodd frank.
to trade swaps (interest rate swaps, credit default swaps, ect...), you must have an ISDA agreement with every counterparty (bank)...and in order to get an ISDA, you generally need a minimum of 1 billion dollars.
Research methods used by traders. (Originally Posted: 12/20/2010)
Just something I've been wondering: what research do traders actually do before deciding to buy or sell something? (Referring specifically to energy).
Umm...everything? Industry specific things would be stuff like reserves, rig counts, day rates, etc...
They rely on the bank's research, along with a few news letters (Gartman Letter, Schork Report-for energy). Since a trader is actively in the market, he combines the research, his own analysis, and what he sees happening in the market to help him form a viewpoint.
IMO, the best research is the research the Street isn't reading. I read a lot of the more obscure stuff in the energy space (i.e. reports by energy consultants, energy policy research firms, energy only news publications) because it focuses on a lot of elements that are very important to valuation and the industry, but they are often ignored by the Street.
For example, most everyone reads the Schork Report and the bank's research reports...what edge do they really give me? (sure, I read them too to know what the market is thinking, but research analysts at banks are notorious for being conservative with predictions and for making recommendations that lag the market).
My personal technique is to track vol & open interest and correlate that information with historical charts in an attempt find price/emotional patterns. I like to mathematically have odds in front in me for my entry and exit points.
I guess you can say sort of like a poker game.
How does trading work? (Originally Posted: 08/13/2011)
I don't understand how trading can produce consistent profits. Where does one's "edge" come from? I am a fundamentals guy (long time horizon), so please excuse the ignorance.
are you referring to BB trading operations, or prop shops/HFs?
both; would be great if someone could clarify the difference.
As a buy-side trader I believe that your "edge" comes from "risk management" and your ability to stick to your strategy to generate alpha. Long or short time horizons do not make a difference, so what ignorance are you speaking of if I may ask?
ignorance of trading; i know a bit about long term investing strategies that generate alpha.
Well develop a well defined plan on how and when to cut losses or in your case reduce position size and wha la! Edge...
It's pretty easy to day trade on technicals. It makes no different what the time horizon is, you can make $100k in a year or a minute.
Some traders swear by technicals while others say its garbage. I recently started a demo FX account with a strategy based on technicals only which consistently generated profits (monthly) for about 6 months now. I probably will not ever trade it for real though.
As for prop shops, they have "prop" software, which enables a lot of them to do HFT, which is an obvious edge just in technology for arb etc.
I think the edge for MM is self evident
Information
In actuality what you're hearing from these people is all fluff. What gives traders the ability to make money in the short run is the zero sum game of short run volatility.
Traders rely on other traders to process news differently in order to take profits for themselves if the market moves in their favor. Arbitrage and HFT (which is actually just expidited arbitrage or a way to get to market quicker) are simply other strategies to the zero sum game that give liquidity and more order to the short term game.
In the long term, value investing is the only strategy that could grant returns to the general public. I am quite sure that someone will be able to prove mathematically (if it has not been done already) that if human being's lived long enough the game of short term (trend) trading (holding securities for periods of only minutes to maximum probably 2 weeks) would lead to a single winner outside of the commissions houses.
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