current/future state of the game?

Discussion in 'Trading' started by darkhorse, Dec 14, 2003.

  1. I've got to get shed of this board again due to pressing time and energy commitments, but thought I'd throw out one last observation + potential food for thought first:

    Perhaps lower risk (shorter term) returns are dominated by large players who have an infrastructure edge that creates an economy of scale like WalMart's in terms of technology, talent and probability. By being huge and efficient at the same time, they

    a) can operate profitably on thinner profit margins per trader

    b) enjoy a more favorable statistical distribution by spreading risk over a large stable of traders (similar to a team of blackjack counters decreasing odds of a bad luck run that hits them all)

    c) have the infrastructure to monitor and trade every viable market, accessing a broader cross section of opportunities than any single trader or small team could handle, thus 'hoovering up more nickels' and leaving less on the table

    and

    d) have a powerful resource edge in terms of statistical studies and ongoing research.

    Because the markets are a zero or even negative sum game (in the short run anyway), built in efficiencies suggest that a skilled solo trader is likely to see his advantage continually eroded over time by deep teams of skilled traders pooling their resources and favorably distributing their risk for the net benefit of a large fund. This is not to say that great traders won't do fine (the top 1/2 of 1% seem to thrive in most all environments anyway)- only that the cards seem to be stacked against the solo trader/small team.

    Because large pools of capital focused on a smooth equity curve lend themselves to building a diverse portfolio of short term strategies that win in aggregate, this creeping of the behemoths is likely to continue taking bread out of joe tradestation's mouth.

    An expected soloist response to this might be "If you're good enough you'll still be fine, and you've got to just keep getting better anyway" - i.e., the nose to the grindstone approach, just keep on truckin' and stay in that top percentile that will always be profitable. If you know you're in that 0. 05 group, no worries.

    If not, a better response might be to think about how to move away from the competition- to refocus on an area where the big boys aren't honing in like megachains delivering destruction to the mom and pops. How this walmartization of short term strategy specifically affects the markets, and what strategies it favors and discounts, is up for debate. But I think one thing is clear:a way to sidestep the advance of the big funds might be intelligent willingness to increase risk.

    The reason this may be an answer is because large hedge funds are so dominated by a low risk approach. The winning ticket for these huge players is being able to deliver consistent returns with low downswings, which completely fits the psychological profile of the accredited investor: someone who's already made a pile of money and is more interested in keeping what they have than shooting for the moon. After the blowups and scandals of recent years, this appetite for low risk is likely to intensify even more. And so the behemoths have a laserlike focus on delivering rock solid, low risk returns by exploiting their scope and depth with utmost efficiency.

    This leaves an opening for the trader willing to accept more volatility in his or her returns, as the big hedgies have mostly sworn off that game. If everyone else is going for a smooth equity curve, it suggests opportunity for the lumpy / jagged approach. There are a number of large mechanical CTAs who go for the lumpy approach, the biggest of which have been around for 20+ years, so it's not as if the pickings are easy there either. But two things still favor the big swing lumpy game imho- the size of the trends relative to the players (a lot more room in weekly, daily or even hourly trends) and the overwhelmingly mechanical nature of the elephants that dominate the jagged space. In short, there may be a niche for a discretionary/mechanical hybrid approach with acceptance of greater volatility.

    As the game gets more challenging and the teams get more skilled, I hypothesize that 'smooth equity' traders will be more exposed to the scylla and charibdis of either a) accepting more risk to make their daily bread or b) keeping the risk dialed down low, but seeing profits suffer at the low heat setting as well. In conclusion, I think future winners in the solo trading space (and the small fund space) will possess a key survival trait: a stable source of free cash flow apart from immediate trading profits, creating the ability to sustain longer periods of drought between wins and thus utilize a higher volatility/higher risk model. In otherwords survival of the fittest, in this case the fittest being the camels who can survive between watering holes and drink deepest when the water comes. There may be smooth equity strategies safe from the probability and technology enhanced behemoths, but I wouldn't count on it.

    to borrow from Dennis Miller: just my opinion, it could be wrong.

    later dudes
     
  2. Should we read that as, "my trading is sucking and here, I think, is why"? :)

    I've got to get shed of this board again due to pressing time and energy commitments, but thought I'd throw out one last observation + potential food for thought first..


    You mean... you're... you're... you're leaving us? Quick, someone call CNBC right away, this is a major scoop!
    Lol. One pseudo-intellectual less never hurt, I think! :)
     
  3. I'm not going on a trip to africa, just planning to take another hiatus from posting for a while, as I've done numerous times. I've been involved in a handful of interesting discussions lately and I only mentioned my withdrawal so the few people who might care wouldn't wonder where I've gone or wait on me for a reponse. It was a small courtesy, nothing more.

    As for how my trading is going, you can believe whatever you choose. I've never been a strict daytrader per se, I've always felt the real money was in taking a larger perspective, and I've been eating my own cooking for quite a while now. If I ever get to the $100 million mark I have no plans to post here and tell everyone about it, so I see no need why I should care what my perceived performance is here and now.

    As for the pseudo intellectual comment, I assume you are the real thing and thus qualified to point me out as a fake. Perhaps you could start by showing me how my posts here have been shallow or fake- doing your fellow man a favor by pointing out the error of his ways?

    If being an intellectual means drawing from a deep well of bitterness and lashing out instead of responding to the discussion at hand, then I'll be a pseudo any day. In attempting to 'expose' me for something, alfonso, you only expose the hate within yourself. If you'll be happier with me silent, I'm glad to give you that little taste of happiness. It sounds like you could really use it.
     
  4. nkhoi

    nkhoi Moderator

    rent out your house between trades?
     
  5. www.elitetrader.com/vb/showthread.php?s=&postid=387586#post387586

    I for one will miss you while you are gone, please see link above.

    I hope your trading is not suffering.


    You say, "This leaves an opening for the trader willing to accept more volatility in his or her returns, as the big hedgies have mostly sworn off that game. If everyone else is going for a smooth equity curve, it suggests opportunity for the lumpy / jagged approach. There are a number of large mechanical CTAs who go for the lumpy approach, the biggest of which have been around for 20+ years, so it's not as if the pickings are easy there either. But two things still favor the big swing lumpy game imho- the size of the trends relative to the players (a lot more room in weekly, daily or even hourly trends) and the overwhelmingly mechanical nature of the elephants that dominate the jagged space. In short, there may be a niche for a discretionary/mechanical hybrid approach with acceptance of greater volatility." Let me tell you from my experience, the smoothness of my equity curve is much more determined by my method of trading than by which market, the size of the trend or the volatility of the market or instrument I am trading.

    I wish you good luck!
    :) :)

    Hope to see you back soon!
     
  6. I never worry about the competition. In relation to the market, what I do is insignificant. If anything, trading as a solo profession is getting better. Costs are down, liquidity is up. Looks good to me.

    Cheers.
     
  7. Arnie

    Arnie

    Ya know, I only casually read your opening post. One thing I've always felt was that we small traders have a tremendous edge over the large Hedge funds and the like in that we don't HAVE to trade. Their size forces them to be in the market. We can step aside. I know others will flame me for saying this because most believe you need a statistical or quantatative edge....something that you can measure accurately. But I think that can be edge, even if it is a small one.

    Another thing that puzzles me is this fascination with computerized trading systems. I know they are viable and some people only trade that way. But if someone could program a system to consistently take money out of the market, to the detriment of discretionary trading, it would already have been done.
     
  8. Darkhorse, I truly enjoy your posts. I hope the trolls roaming about these forums never deter you from posting your thoughts as they are quite often right on the mark.

    Concerning your post and having worked for a large fund, I believe you are somewhat right but I think that they also trade different instruments and in different strategies and time frames.