Although the ES has volume in the millions, it must be understood that this volume is not evenly dispersed across all price levels and time periods. 15,000 contracts trying to enter at the same price 3 am will have a different effect then at 9:30 am during the opening bell. Likewise, following the notion that the majority of market participants lose money, the majority of profitable traders are entering where the minority of volume exists making the proper maintenance of market impact that much more important. As for simply holding the contracts for longer, that is a partially valid point. More contracts entering in the direction of your trade is not necessarily a good thing. People that are running scalp plays with limit orders bank their success largely on tight slippage. Too many contracts trying to enter and exit where you are means that you are less likely to get filled. Risk exposure will also increase as a result of increasing your stop loss to stay in the trade longer. If your profit target is going to increase proportionately, then one can reduce position size and still take the trade. However, if your strategy becomes popular enough, not even this will help. I keep track of the average volume during the entry and exit times for my systems. Applying my own analysis, I know what I can theoretically scale up to. If I see consistent significant deviation from the average volume during my entry and exit times, it is most likely that my edge has been compromised, and my system needs revision. Under this assumption, the market would never move, or barely ever move. As a reaction to a considerable amount of trades in one direction entering at specific price levels in a limited period of time, either directly or planning to do so through options, the market will move in one direction by a certain amount without an equal amount of retracement in an equal amount of time. This is why the market moves. I feel that I have given you fair explanation of the logic to my statement. If you want more details, then ask what it is exactly that you want to know. If I can, I will answer. I am not saying this in a negative way to start an argument. I just want you to understand where I'm coming from. I am studying applied math right now to go into quantitative finance. During the course of my studies, I am sure that I will run into professors that have made some good money through their own trading ventures. However, I am not expecting these professors to divulge the specifics of their trading strategies. They will teach me about math, economics, and business.. the tools I need to build my own trading strategy, but they will not give me exact blueprints.
I do understand where you're coming from. Thank you. Good luck with your studies. Math is beautiful. If you want to get some laughs ask one of the professors who insist on EMH just how in world is it possible that in a system which is supposed to be random, the two of the variables behave in a non-random fashion with respect to each other: http://elitetrader.com/vb/showthread.php?s=&postid=1034264&#post1034264 That way you can find out if they know what they're talking about. And I don't mean it in a negative way to start an argument either.
pclark, ok, i would share the secret with you because you are a nice guy and you have shared business tricks with other people before. but would you share back once you have built on this secret info? i am worried that once you start making big $$, you will turn from a cheerful willing-to-share person into a sulking secretive a-hole.
Thanks for the great reply. You are exactly right about knowing where I was coming from. I will take what you said to heart. Man, I am on vacation and checking this on my iPhone and I see my little thread has grown. Hopefully it's not causing any fights.
I just want everyone to know I not trying to "skin" anyone. Quite a few of the threads I read it seemed like people were making comments then intentionally not backing up there comments or with holding info. I am just used to a profession and forum where people are a little more free with their knowledge. I am not the kind of person that free loads. That being said, if there is knowlege that would save me years of time and money and someone is willing to share it I would be stupid to turn it down. There have been several helpful posts even though my first may have been somewhat short sighted and I appreciate them. Paul
Most people choose to analyze the market in one of two terms: as a stochastic process (not to be confused with the stochastic indicator) or chaotic. The former states that movement is random whereas the latter states that every outcome is the result of the event before it (deterministic). I believe that both these view points are true. I believe that everything is deterministic. However, if not all of the factors substantially influencing the outcome after are known the observer will deem it to be random. These unknown factors may equally affect two different variables leading to correlated movements across stochastic processes. This generally occurs on lower time frames explaining why statistical arbitrage so often involves short hold periods. As we get into higher time frames, some of the factors which are unknown to the observer are less imperative to determining the outcome of the next event, making deterministic analysis possible (chaos theory applied to finance markets). Stochastic processes might occur on higher time frames and deterministic ones on lower time frames, but I don't want to get too far into it. Either case, the factors which influence the generation of price points - known or unknown to the observer - are present and may equally affect multiple instruments. This is why "random" movement can exist, yet the changes in the values of these variables can correlate heavily with other variables. Random is not fully random. But you are right.. I will be asking this question to my professors. It is a good way to gauge their perceptions.
Only because they missed some important concepts from Math 101. More accurate statement would be - measuring isolated aspects of a non-random system may produce data points that a random. Concluding based on such measurements that the system is random - bad science.
That's pretty much it exactly. People cannot explain certain parts of an otherwise deterministic process (they do not know what is causing it) and therefore deem the entire process to be random. A good analysis of the markets requires respecting both view points, even though one might be prevalent over the other.