A Little Thesis

Lobster · Nov 20, 2003

Quote from ig0r:

I did a little thinking today and I would like an oppinion...
Futures are a zero sum game, and popular belief (and I guess a little fact too) states that over 90% of traders lose money in the futures market, that means that at max 10% of traders are the ones making big bucks consistently, most of these are heavy weight institutional traders, am I wrong? Now, in general, when you are learning to trade futures, you are consistently told to try to catch the big moves and stay away from the chop, the big moves is where all the money will be made, we are told. Since futures trading is zero sum, and most people lose their money in the chop, we come to the conclusion that the upper 10% are making their money here, since someone must be taking the money that is lost. It can also be said that the money that those in the 90% do make would be in catching the occasional trade/breakout (of course, not riding the whole thing, cutting profits short, but it's still making money). I am now assuming that that top 10% make the majority of their money in the chop, and actually take an initial small loss during a breakout/trend. They do not try to catch the breakouts and beginnings of trends as many preach must be done, instead they always trade the market as if it was always chopping. When the market does breakout or into a trend, the top 10% lose a little money to the other 90%, as soon as the 90% take their small profit off the table, however, I believe this is where the top 10% covers their losses and re-enters in the direction of the trend. Is there some major loophole in my reasoning? If not, is there any way to use this knowledge to our advantage? Just throwing something out for discussion
More...

If you find the right instrument and a way to control your risk there is probably a LOT of money to be made by trading the chop, or as I would say, cutting your winners short and letting your losers ride. I have been trying to implement this with 1-lots (which I guess is a little more difficult than say 10-lots because you cannot scale in and out). So far, I have had reasonable success in ZN and ZB (and YG, although even I don't go for single ticks there), but

1. I still kind of suck. I am estimating that I could make about 4 times as much as I am making right now if I were more disciplined, concentrated and psychologically stable.

2. I can't get this to work with ES or NQ.

This is what this system looks like in my still exceedingly clumsy implementation:

BOT 1 ZB 110 21/32 20031120 09:31:19
SLD 1 ZB 110 24/32 20031120 09:36:41
BOT 1 YG 394.60 20031120 09:45:01
SLD 1 YG 395.40 20031120 09:47:51
BOT 1 YG 394.50 20031120 10:02:49
SLD 1 YG 394.90 20031120 10:08:42
SLD 1 ZN 113'190 20031120 10:13:42
BOT 1 ZN 113'185 20031120 10:14:35
BOT 1 ZB 110 17/32 20031120 10:17:34
SLD 1 ZB 110 18/32 20031120 10:24:30
BOT 1 ZB 110 14/32 20031120 10:33:34
SLD 1 ZB 110 15/32 20031120 10:34:39
BOT 1 ZB 110 12/32 20031120 10:42:12
BOT 1 YG 393.50 20031120 10:47:02
SLD 1 YG 393.90 20031120 11:00:13
SLD 1 ZB 110 14/32 20031120 11:18:14
BOT 1 ZB 110 10/32 20031120 11:44:43
BOT 1 YG 392.70 20031120 11:48:36
SLD 1 ZB 110 11/32 20031120 11:50:15
SLD 1 YG 393.40 20031120 12:01:15
BOT 1 ZN 113'170 20031120 12:31:50
SLD 1 ZB 110 12/32 20031120 12:42:54
BOT 1 ZB 110 11/32 20031120 12:43:56
SLD 1 ZB 110 13/32 20031120 13:01:22
BOT 1 ZB 110 12/32 20031120 13:02:40
SLD 1 ZB 110 15/32 20031120 13:18:46
SLD 1 ZN 113'175 20031120 13:43:05
BOT 1 ZN 113'170 20031120 13:43:12
SLD 1 ZN 113'175 20031120 13:43:36
BOT 1 ZB 110 21/32 20031120 13:43:52
SLD 1 ZB 110 22/32 20031120 13:45:27
BOT 1 ZB 110 21/32 20031120 13:45:39
BOT 1 ZN 113'170 20031120 13:49:17
SLD 1 ZN 113'175 20031120 13:51:29
BOT 1 ZN 113'170 20031120 13:51:36
SLD 1 ZN 113'175 20031120 13:52:49
BOT 1 ZN 113'170 20031120 13:53:18
SLD 1 ZN 113'175 20031120 13:53:32
BOT 1 ZN 113'170 20031120 13:53:57
SLD 1 ZN 113'175 20031120 13:54:57
BOT 1 ZN 113'170 20031120 13:59:28
SLD 1 ZN 113'175 20031120 14:00:57
BOT 1 ZN 113'170 20031120 14:02:40
SLD 1 ZN 113'175 20031120 14:04:10
SLD 1 ZB 110 22/32 20031120 14:06:04
BOT 1 ZB 110 21/32 20031120 14:08:44
BOT 1 ZN 113'170 20031120 14:09:05
SLD 1 ZN 113'175 20031120 14:09:45
SLD 1 ZN 113'215 20031120 14:30:41
BOT 1 ZB 110 26/32 20031120 14:36:40
BOT 1 ZN 113'210 20031120 14:37:32
SLD 1 ZN 113'215 20031120 14:37:52
BOT 1 ZN 113'210 20031120 14:41:23
SLD 1 ZN 113'215 20031120 14:45:34
BOT 1 ZN 113'210 20031120 14:46:09
SLD 1 ZB 110 27/32 20031120 14:52:30

ig0r · Nov 20, 2003

Quote from Lobster:

If you find the right instrument and a way to control your risk there is probably a LOT of money to be made by trading the chop, or as I would say, cutting your winners short and letting your losers ride. I have been trying to implement this with 1-lots (which I guess is a little more difficult than say 10-lots because you cannot scale in and out). So far, I have had reasonable success in ZN and ZB (and YG, although even I don't go for single ticks there), but

1. I still kind of suck. I am estimating that I could make about 4 times as much as I am making right now if I were more disciplined, concentrated and psychologically stable.

2. I can't get this to work with ES or NQ.

More...

Interesting, what methods are you using for your entries and exits?

Lobster · Nov 20, 2003

Quote from ig0r:

Interesting, what methods are you using for your entries and exits?
More...

No methods at all actually. Whenever I have time, I look at the chart and think about current events. This way I pick a direction and an entry price. Once I'm in, it all plays itself, and I keep getting in and out and back in and back out until the price moves away. If that leaves me with an open position, I offset or hedge it at the next reasonable opportunity (which means I won't just set and execute a stop blindly, but if I'm caught long I wait until I see a reasonable short entry to actually sell.) Of course, if I start to get emotional or if I have to leave for some other reason, I usually DO close the position no matter what. Letting your losers ride is fine, but you have to set limits. (or actually i guess "stops" would be a more appropriate word here...)

Runningbear · Nov 20, 2003

When you say chop, you're implying the market is choppy for everyone at the same time. This is simply not true. A market can be choppy in an hourly time frame but trending well in a five minute time frame. One mans chop is another mans trend. Volatility is only relevent to the underlying time period.

As everyone uses different time horizons for exiting their trades, they all experience degrees of success, even if they are in the market at exactly the same time.

Good systems make money when the market is choppy as well as trending.

Runningbear

TheStudent · Nov 20, 2003

One way to think abt this is:

1) trend followers are long straddles - when they bleed slowly in a mkt going nowhere, they are effectively paying the premium of a straddle. When the mkt breakouts, they collect a big big payout from their long option position.

2) traders who trade the chop are short straddles - they collect a stream of small premiums trading against supports and resistance levels and get killed occasionally during a breakout.

So .... no secrets, just whether you prefer to be short a straddle or long a straddle.

PS : a straddle is a long position in both a call option and a put option at the same strike.

easyguru · Nov 21, 2003

Quote from ig0r:

I did a little thinking today and I would like an oppinion...
Futures are a zero sum game, and popular belief (and I guess a little fact too) states that over 90% of traders lose money in the futures market, that means that at max 10% of traders are the ones making big bucks consistently, most of these are heavy weight institutional traders, am I wrong? Now, in general, when you are learning to trade futures, you are consistently told to try to catch the big moves and stay away from the chop, the big moves is where all the money will be made, we are told. Since futures trading is zero sum, and most people lose their money in the chop, we come to the conclusion that the upper 10% are making their money here, since someone must be taking the money that is lost. It can also be said that the money that those in the 90% do make would be in catching the occasional trade/breakout (of course, not riding the whole thing, cutting profits short, but it's still making money). I am now assuming that that top 10% make the majority of their money in the chop, and actually take an initial small loss during a breakout/trend. They do not try to catch the breakouts and beginnings of trends as many preach must be done, instead they always trade the market as if it was always chopping. When the market does breakout or into a trend, the top 10% lose a little money to the other 90%, as soon as the 90% take their small profit off the table, however, I believe this is where the top 10% covers their losses and re-enters in the direction of the trend. Is there some major loophole in my reasoning? If not, is there any way to use this knowledge to our advantage? Just throwing something out for discussion
More...

The 90 and 10 is a folklore.
You are not taking in to consideration that lot of futures are bought by producers and consumers of commodities where the motivation is to hedge risk. These players are not trading them like the remaining traders.
Over the years the rookie traders have disappeared ( talk to any broker in commodity industry and he will tell you that the amateurs who use to trade and on whom they use to thrive, have realized that futures is not as easy as it sounds.) Today most of the money in commodities is being handled by CTA's and commodity pool operators. If you research more on this phenomenon you will realize that lot of the chop is also a result of this phenomenon as all of them follow same techniques or once a system or a trading technique has a small edge everyone uses it and it leads to chop. (eg see what has happened to I-master or Turtle system). Lot of money lost is coming from these players.

ig0r · Nov 21, 2003

Quote from easyguru:

The 90 and 10 is a folklore.
You are not taking in to consideration that lot of futures are bought by producers and consumers of commodities where the motivation is to hedge risk. These players are not trading them like the remaining traders.
Over the years the rookie traders have disappeared ( talk to any broker in commodity industry and he will tell you that the amateurs who use to trade and on whom they use to thrive, have realized that futures is not as easy as it sounds.) Today most of the money in commodities is being handled by CTA's and commodity pool operators. If you research more on this phenomenon you will realize that lot of the chop is also a result of this phenomenon as all of them follow same techniques or once a system or a trading technique has a small edge everyone uses it and it leads to chop. (eg see what has happened to I-master or Turtle system). Lot of money lost is coming from these players.
More...

What about the electronically traded minis? I think this applies there, of course that means someone other than pit traders (because there aren't any) are profiting during the chop

easyguru · Nov 21, 2003

Quote from ig0r:

What about the electronically traded minis? I think this applies there, of course that means someone other than pit traders (because there aren't any) are profiting during the chop
More...

What is your definition of chop. Lot of intraday moment is also due to day traders/ hedge funds trying to game the market. Lot of chop in the stock futures is also a function of big players accumulation or distribution without tipping the market in to trend.

marketsurfer · Nov 21, 2003

Quote from ig0r:

I did a little thinking today and I would like an oppinion...
Futures are a zero sum game.

More...

futures are a negative sum game.

best,

surfer

steve46 · Nov 21, 2003

Although it has not made me rich, I have found trading in futures to be about the same as any other profession. If you take it seriously and obtain the tools to be successful, you will eventually make money. I think all the speculation about what is and is not a "zero sum" game is just distraction. Simply put, you are either a winner or loser intraday and/or over the longer horizon. On any given day, random chance can intrude to make you a winner or loser, but over the long term it is your skill and discipline that provide an element that quantitative traders know as "drift". Drift can be positive or negative. If you find a way to get the proper skills, or if you trade a mechanical system with a positive expectancy, "drift" is on your side. If you don't have the tools or If for instance you flip a coin to decide entries and exits, depending on you position size, sooner or later negative "drift" will take you out. Good luck, Steve46