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Do you need a real edge trading the Bond market?

  1. Hi,

    I have been studying the bond market for a few months. From what I have seen the bond market looks pretty straight forward. I noticed the yield curve, Fed interest rates, unemployment rates, stocks, effect the direction of this market. There is also good opportunities to hedge against the Euro or 5yr etc. Besides money management proper entry exit, what else is worth learning. The bonds market reminds me of more macro event. Could you please open my eyes to other things worth noting. Thanks
  2. The only thing "straight forward" in finance is a bank account, everything else gets progressively more complicated !

    The theory of bonds is relatively simple and "straight forward".

    The practice will soon show you that the textbooks don't tell you everything.

    For example, have you considered :
    - Concerns surrounding limited price disclosure (hint: unlike equities, bonds is a bit more of a closed shop)
    - How you're planning to evaluate credit risk (hint: its hard to do right)
  3. Do you need a real edge? Did you really ask that?
  4. I did .. Guilt as charged. I know you need an edge. With bonds you need a different kind of edge. I'm just looking for ideals about what to look for
  5. If you really want to get into the guts of the yield curve, salomon Brothers did a few papers on understanding the yield curve that you can download for free. Highly recommend. Just google salomon brothers and yield curve. You'll find them no problem... I believe they are all legal downloads.
  6. The word "edge" gets thrown around too loosely on this site. If you sold a house at a $50K profit did you have an "edge"? If someone invests in an index tracking mutual fund and matches the current gains in the S&P 500 did that person have an "edge"?

    The RAESarb that Atticus did as well as the few guys left in the S&P pit selling .30s and lifting .25 offers in the E-mini. Those are/were real measurable edges forward into time. Simply realizing a profit is not an "edge". If I flip a coin with you and I pay you $1 for Tails and you pay me $1 if I flip Heads it does not mean I have an edge over you if I show a profit and you show a loss. Take that same game and I pay you $0.90 for Tails and you pay me $1 if I flips heads, well now I have a provable edge/expected value even if you walk away as a winner.

    You don't have to prove an "edge" to show profitability in Bonds. What you will need is some methodology to show consistent profits in whatever interval/time frame you are trading in. I am not saying that you cannot develop some type of perceived "edge". Anything is possible. But as someone else said, Bonds are more of a closed shop and the phone brokers keep it wide unless you trade size.

    I have often wondered if it is possible to tape read Bonds via TRACE or some other method. For example, you can see in municipal bonds the market participants (both investor and inter-dealer) and some movement at 3:01pm on the tape for this muni, is it possible to coattail this type of stuff with old school tape reading methods? http://www.municipalbonds.com/bonds/issue/13063C5V8/
  7. Do you need a real edge trading the Bond market?

    Yes, in almost any business, trading or investing activity you need a competitive advantage or "edge" to derive consistent profits. That advantage can be financial, technological or skill and knowledge (just to name a few).
  8. No, edge is for sissies. Real men don't need no stinkin' edge to punt bonds!
  9. Hate to burst your bubble here but what you stated here is exactly the correct definition of an edge. An overall probability of repeated long term success.
  10. There is "edge" in the sense that you have great confidence in the ability to profit based on historical results then there is "edge" in the mathematical sense which is provable. Most trading systems are based on the assumption that they will continue to work going forward in time.

    You can't prove that your moving average cross trading system has an edge even if you show a profit. A casino can prove it has an edge when it pays 35 to 1 on a roulette wheel that has 37 possible outcomes. Atticus proved he had an edge when he sold $1.14 May Iomega Calls at PHLX while simultaneously buying $1.10 May Iomega Calls at CBOE.

    My point is that the word "edge" gets tossed around this site so frequently that it has lost its original meaning. Confidence in a future outcome and Proof of Expected Value are two different things.
  11. No, edge is something that changes your personal profitability potential, giving you an advantage. For example, deal flow is an edge. Cheap funding is an edge. Better access to short borrow inventory is an edge. Extreme low latency is an edge.

    In general, most buy-side traders/PM or retail investors do not have any real edges. It does not mean they can not be profitable, it's just harder.
  12. What about a retail trader that makes 50% per annum with $1 million capital? Lets assume he doesnt have access to deal flow, short borrow inventory or a trade execution edge. Does this trader have an edge?
  13. For example, if he's sleeping with a bunch of company secretaries and has a flow of MNPI, he's got an edge. If he's just good at reading the mosaic or he stumbled on an unusual source of mis-priced instruments, he's good and he's got alpha, but no edge. Edge is something structural that differentiates your ability to make money from every other Joe in the market.

    Think of it this way - edge is something that can not be taken away without significant (often prohibitive) upfront investment.
  14. What about if the retail trader that makes 50% per annum consistently has more "skill and knowledge" than the firm that invested heavily in obtaining a "structural edge" and only makes 20% per annum consistently. Does the retail trader have an edge?

  15. What a stupid post.

    Everybody (except you, obviously) knows that risk increases exponentially with returns once you go above 5% .... i.e. the difference between 5% and 10% is already "a lot", the difference between 10% and 20% is "significant" and the difference between 20% and 50% is "a stupid amount of risk".

    Any trader making 50% will only be doing so by either over-leveraging, over-trading or a mixture of the two. You CANNOT make 50% in the markets without taking on a SIGNIFICANT amount of risk (unless you are very lucky and pick the right stock to go long at the right time, but let's face it, you've probably got more chance of winning the lottery).

    Therefore I would go with the "firm that invested heavily to return 20% consistently" any day of the week. Because I know that firm will have taken a good hard look at risk.

    However lets face it, there aren't firms that consistently return 20%, because, as I said above ... ITS A LOT OF RISK.

    So, in summary, you shouldn't care about percentages, you should care about how much risk you are taking on to achieve a percentage. And its a fact that the majority of retail traders take on far too much risk, blow up their accounts and become big fat loosers. Its not a case of if, but when !
  16. Let's not get off track here, I am sure what Algofy and other people call an "edge" just equates to a high level of personal confidence based on past results. I don't have any problem with someone who has a high level of confidence in a system or methodology. But the OP was asking about needing an "edge" in the Bond market.

    I along with Sle just wanted the OP to be clear on what an actual "pure edge" is. You can be profitable without a provable mathematical edge. People talk a lot on this site about HFTs and "speed" and "low-latency" but they never really talk about what the speed is for. If I have a bad trading idea it does not matter how quickly I execute it, it is still a bad idea. In Vegas it does not matter how quickly I can stuff quarters into a slot-machine, it is still a bad bet. However, if HFTs can be first for example in a maker-taker venue/ECN to get to your incoming market order they can scoup up the rebate or cancel if there is no order to lean against. They can pick people off who telecast with "smart routes". This is just a small example of what a true edge is. This is vastly different from someone saying "gee, my moving average trading system is making money!".

    To sle's point, a structural edge is an advantage over other participants. If I can get locates to short stocks that you cant get to then that is an advantage over other participants. Anyone can slap indicators on a chart and some will be profitable doing that. No one is denying you the ability to slap indicators on a chart. However, "edge" is zero-sum in the sense that someone wins and someone loses on execution. That "loss" could be speed of execution to be first to get a rebate/fill or it could be a "loss" in the sense that I have access to short a stock and you don't. "Edge" and "Advantage" almost become interchangeable here.

    If you slap a 200-Period Moving Average on a chart then that is not an advantage, anyone can do that. No one is denying you the ability to do that. And yes you can be profitable doing that. Let's all just be clear on what a casual reference to "edge" is and what it means in its purest sense.
  17. About the closed aspect of the bond market, the large spreads, higher commissions, than the fine print, like how would a bond act in case of a take over, my impression is it looks more atractive for a retail investor to buy bond ETFs than individual issues, especially if you are not looking at superliquid emissions.
    I'm regulary looking at single bonds, also on tws, and banks sure seem keen on selling them, especially that I ask, but it doesn't look like a retail friendly market.
    Talking about buying bonds to hold long term btw,not to flip them.
  18. Thanks Tim, if I change it to 20/10%, will that be enough for you to take your medication?

    I guess the key point I was trying to make is skill and knowledge is just as much an edge as any other type of edge. The ability to take on more risk and achieve higher returns might also be regarded as an advantage due to larger players being excessively risk averse.

    Maybe the trader's logic is a bit more sophisticated than a moving average system, is based on sound logic and will continue to work well into the future.

    Isn't that a bit condescending to others that simply claim there's other types of edges other than a trade execution edge? I'm not sure anyone even mentioned indicators let alone a moving average system.

    Isnt that your definition? Not everyone is trying to win on execution. My definition of an edge is anything that gives one an advantage to derive consistent profits and it seems many online sources agree with that notion.



  19. What rubbish !

    The "larger players" are, as you put it, "excessively risk averse" because they know the market a lot better than you do (they've got access to better data than you do, they've got teams of staff with more combined experience than you do). They know the realities of the market and they know exactly how much risk they can take without being stupid.

    You see, the difference is, if you blow up your retail trading account, nobody gives a toss, you're just another one of those numbers of loosers making up the statistics.

    But if the "larger players" blow up, their name will be all over the financial papers, they'll go bust, and to add to their joys, the regulators might start breathing down their backs too.

    Slow and steady wins the race in the financial markets. Patience tends to be well rewarded.

    Greed and gluttony tends to be eventually rewarded with the financial markets teaching you a lesson.
  20. "More risk averse" is probably what I was looking for.

    If I'm wrong then I guess it must make Michael Halls-Moore wrong also because he says something very similar in this interview.


    Retail traders arent exposed to risk on the same scale as the larger players and as you said are less accountable so they can afford to be less risk averse.
  21. That's a thing, as mentioned by Lovethetrade above, retail/private investors don't need to avoid at all cost or be fired a drawdown of 20/30/40% and they can use riskier strategies , although it's most probably a road with far more tragedies than successes.
    Lower risks/less volatile strategies make a lot of sense, but if one has enough capital or a significant extra source of income.
  22. So maybe, I just need to change the word edge to alpha?? I actually like alpha better as I agree edge gets used to much.
  23. Yeah, alpha is more appropriate. Or a mix of alpha and beta, if you are more of an investment type.
  24. No, this retail trader has alpha, but no edge. I am not saying that a retail-sized trader can't have an edge. For example, if you have a way to collect information that's not available to other players, it's an edge.

    Knowledge and skill can be obtained by any market player and is an edge requires prohibitively high time or infrastructure investment.
  25. On the topic which I assume is corporate bonds for a retail sized guy. Fixed income is more diverse and more technical then equity. I think it's actually possible to extract alpha as a small trader, depending on your skill set, but be prepared to learn a lot of stuff.
  26. Well, it looks like the majority of online sources are wrong then. Better send an email and educate them as to what edge really means based on your own unreferenced, unsubstantiated definition.
  27. Sle's definition of "edge" is what institutional traders use. Only retail traders are so insecure that they have to call their indicators and models an "edge."
  28. My definition is consistent with anyone who has worked in the financial industry, as opposed to sources peddling bullshit online to naive general public. Those very same online sources want you to believe that making money is as easy as signing up for a seminar at the cost of $399.95 :)

    That definition of "statsical advantage due to the setup" itself comes from gambling, where the house has an edge (http://vegasclick.com/gambling/houseedge). That edge is intrinsic, you put almost anyone in the dealer seat and they will make money.
  29. Or maybe it's the other way around, "employees" of institutions are so insecure about not being able to build models or trade their own account they have to piggy back an institutions financial clout.
  30. But you can't find one single source to back it up. No worries, we'll all take your word for it.

    An edge at a casino is not the same as a trading edge.
  31. There are plenty of finance-related lore that you would not be able to find on line. In all honesty, I did not bother looking cause, as I said, it's common knowledge in the industry
  32. Using edges plural is well within reach of any trader that works on it. I have half a dozen edges - it's not rocket science. Being under capitalized, taking on to much size in proportion to your capital, and not having a solid risk mgmt strategy is the opposite of an edge - it the road to ruin.
  33. That's fair enough but to be honest I couldn't two hoots about industry "lore", based on my many years of education and industry experience, an edge is any competitive advantage that allows you to derive consistent profits.

    If a poker player consistently cleans up the house and sends them bankrupt, he has an edge. If Soros consistently cleans up the market with subjective decision-making, he has an edge on the market, if a trader consistently cleans up trading his own account, he has an edge, if an institution invests heavily in obtaining a structural edge, as you put it, and consistently derives profits from it, it has an edge also.
  34. I guess we can agree to disagree on the terms. What's important is that there is a big difference between skill that can be acquired by anyone and a structural advantage that takes a prohibitive investment to build. That distinction is what determines the longevity of your alpha.
  35. Your definition of an edge is actually a "structural edge" which I have no problem with. It doesn't mean the short name you adopt makes your definition applicable to every other type of advantage an individual or firm may possess.

    Yes, I think we need to agree to disagree.
  36. @Tim Smith Where is your response to this? I was looking forward to one of your generic "the industry that employs me is so much smarter than you" type of responses.
  37. @lovethetrade

    How about I add you to my blocklist instead. Then I don't need to read any of your nonsense.

    Believe what you like about your magical ability to take stupid amounts of risk, one day, sooner rather than later, the markets will teach you a lesson you'll remember for the rest of your life.