Every profitable trader I know assumes axiomatically that underlyings trace out some sort of Brownian motion. In the case of equities (or SIFs) it is Geometric Brownian motion. It is at the heart of the most important equation in all of Finance, the Black Scholes model of options, of which using it and modern versions of it have made people money as if it is as easy as printing it. I ask you then, how is it that the biggest players in the market, derivatives traders, assume a random underlying, and make money hand over fist? If the underlying is random, how can anyone make money? If you bet on a fair coin, how can you make money playing the flip of that coin? It is the answer to that question that is interesting and will take you down the correct path. Asking whether to predict or not is asking waaaay the wrong question, because it's answer will only confuse you. nitro
Just curious. Since you are obviously quite familiar with these concepts, are you making money as easily as if you were printing it?
For the last time, it is all about semantics. You arrive at a Stop sign, look around and then when nobody is coming proceed crossing the intersection. You say, you are driving a car. I say, you are predicting that you have the right of way and nobody is going to crash into you, because they are most likely (you are hopig,predicting,expecting) will folow the rules of the road. We are both right. Again, it is all semantics....
evey morning I tell myself I am not trading today but I make sure I have my platform opens..just in case
if you read any of the studies on brownian motion related to financial markets, you will discover that the action of financial markets is in fact NOT random as the model predicts.... there are fat tails instead.... so, perhaps not everyone can just print money using this concept eh?
Well, that was my guess as well. But I'm curious to know how nitro would respond to my question. (Not that I'm familiar with Black Scholes. As for Brownian motion, I'm simply not smart enough to adapt an observation that applies to the physical sciences and properly apply it in a meaningful and profitable manner to the social sciences, such as market behavior. That kind of stuff is beyond me.)
I am currently not live trading on a large scale. The trading that I do at this point is vol/skew "arbitrage" (mispricing is perhaps a better term) - it is 100% research so done with small size. I am gearing to manage OPM within the next three months. It will be 100% ATS and assumes the underlying is a random variable. The firm I work for currently prints money. It assumes the underlying is completely random. I am in contact with people that work for several large firms downtown chicago. They all assume a random underlying to a great extent. nitro
how can anyone make money in a market that is completely random, especially when you factor in commission? its like predicting a coin toss but with less than 50% odds, as you have commission to deal with? can you give us an example of how the firm you work for overcomes this and prints money?
If you can't beat the underlying, what can you beat? You hear the joke on Saturday Night Live? "Today no shares traded on the NYSE - I guess we all have what we want now." Why does a single share trade? What moves prices, other than the obvious informational event not priced in? Is news really constantly entering the market so that ten seconds from now GE's fundamentals say it is worth .10 less than 1 minute ago? I will ask again. How can you make money from the result of flipping a fair coin? It is not a trick question - you can't predict it any better than 50%. If you can't make money from predicting the actual event, then how can you make money from playing? nitro