

The Day I Lost a Sh*t-ton of Money, Part II (trading/stock Market) - peterkto
http://ptotrading.blogspot.com/2014/11/the-day-i-lost-sht-ton-of-money-part-ii.html

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andrewchambers
Is it just me, or does this seem to be glorified gambling? It doesn't seem
like these people are contributing anything to the world - Or am I not
understanding how it works.

~~~
dragontamer
Without going into the specifics... when traders "buy low" and "sell high",
they reduce volatility in the marketplace. Prices become more consistent. Lets
look at one particular place: the Bid / Ask spread.

When you go to much less traded stuff like Bonds, or in the more extreme
case... Real Estate... its harder to put an accurate price on these items.

A house might have an asking price of $300,000 but the only buyer might be
offering only $250,000. If both sides refuse to budge, then the market stops
moving.

A trader can move the market very simply in this case. He can buy the house at
$265,000, and then sell it at $285,000. Everyone benefits from their
perspective.

The Seller got to sell the house at higher than $250,000. The Buyer got to buy
the house lower than $300,000. The trader gets away with $20,000 made.

This is in essence, the trader's low-risk function and his job is to move
markets.

Now lets say a 2nd trader enters the market, and instead is willing to get
away with only $10,000. He buys the house at $270,000, and sells it to the
buyer at $280,000. Because this 2nd trader has better offers, he will get the
cash.

So this leads to point #2: the more traders compete with each other, the
tighter Bid/Ask spreads get, and the "fairer" the market price becomes.

When we get to the tens of thousands of traders who deal with high-volume
stocks, these stocks end up having bid/ask spreads smaller than pennies. In
fact, bid/ask spreads are so low during the trading day, that most people
forget about them during trading!

But at the end of the day, stocks are like any other good. There is a bidding
price, and there is an asking price. And the bid is _always_ lower than the
asking price. They only become closer because traders are willing to become
market movers and take up the risk themselves.

~~~
pierrebai
The problem with your depiction is that it is self contradictory: you claim
buyers and sellers are unwilling to budge from their 250K/300K position, then
have a trader magically buy the house at 265K and sell at 285K. Somehow, the
seller sold for 35K less and the buyer for 35K more. And instead of the actual
actors of the market splitting the spread in some manner amongs themselves, a
service provider gets a disproportionate slice of profit.

When people express their dislike for day trader or HFT, it's exactly for
this: people with additional market knowledge extract money from market
without creating value.

I've yet to read a coherent description of how the manufacturing and service
world is better thanks to new trading techniques. It always seems to come down
to having different people pocketing money instead of banks or more
traditional wall street firms.

~~~
dragontamer
>>> The problem with your depiction is that it is self contradictory: you
claim buyers and sellers are unwilling to budge from their 250K/300K position,
then have a trader magically buy the house at 265K and sell at 285K. Somehow,
the seller sold for 35K less and the buyer for 35K more. And instead of the
actual actors of the market splitting the spread in some manner amongs
themselves, a service provider gets a disproportionate slice of profit.

Yeah, but "actual actors of the market" don't talk with each other. You
inherently rely on traders to set the price whenever you buy / sell stocks.

If you don't trust traders, then don't go into the Stock Market. However, I
trust the market and take advantage of the liquidity that it offers me. Its so
much easier to buy / sell stocks because of the mass of traders granting
liquidity at every corner.

Traders capitalize upon emotion and correct the market. When people are panic-
selling, traders look for market bottom and try to buy (sending the price back
up). When people are stampeding towards the "buy" button, traders look for a
market high and sell (or short sell), correcting the price back down.

Traders inherently watch the crowds, find problems with crowds, and then move
the market into the more theoretically sane position.

Note that the "issue" in this blog post occurs when the trader ignores _news_
, and misinterprets a massive drop in price as a false-panic. It wasn't a
"false" panic, people were liquidating their position because news came in
that devalued the stock. The trader somehow ignored the news and was caught
buying stock on a downward spiral. Furthermore, when the crowds were telling
him that it was a true market movement, he lost his discipline (with the
company's money... but kept discipline with his personal bank account) and
failed to liquidate his position.

>>>I've yet to read a coherent description of how the manufacturing and
service world is better thanks to new trading techniques. It always seems to
come down to having different people pocketing money instead of banks or more
traditional wall street firms.

The entire commodity / futures market. The manufacturing benefits off of
traders setting the price of oil / wheat / orange juice 6-months or 12-months
into the future.

If you want to buy a contract that allows you to buy 1000 barrels of oil in
March 2015 (say, you know your factory is going to be open by then), you can
go to the futures market.

Or if you're an oil producer and you want to sell 1000 barrels of oil in March
2015 (maybe... you don't have the oil yet. But you _expect_ to have oil by
then).

But consumers don't know what the price should be, they'll throw down a call
action on the oil. The Oil producer doesn't know the price either, so maybe
he'd put down a put action on the oil.

But call actions and put actions don't line up. Someone has to step up to the
risk that the producer doesn't sell oil (aka: his refinery blows up and can't
make the oil by then), or that the consumer doesn't buy the oil (aka: the
factory opening is delayed so you cancel the order). Traders calculate the
risk, move the market and satisfies both parties.

Heck, the futures market is the only place where you can buy contracts like
that. But without traders taking on the risk for everyone, futures market
would be a lot less busy and much less useful.

------
joshu
You are a muppet. Stop trading before you lose everything. Seriously.

~~~
peterkto
Nah. I've made made multiples in net profits against this loss and I'm net
positive 80% of the time. It's still my personal best year despite the loss.
It's a nice living. I think I'll stick around.

~~~
joshu
What is your sharpe ratio?

~~~
peterkto
I don't have a number for my personal account trading but I suspect it would
be pretty solid... my equity curve is basically a 45 degree slope from bottom
left to upper right with no sharp dips.

My sharpe ratio at my firm (calculated automatically in our database) was well
over 3 until that loss. I don't remember it exactly but it was such a crazy
number to believe (relative to other sharpe ratios) that I stopped thinking it
was a risk metric that mattered for my style of trading.

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fsk
The author did something super-unethical/illegal. He sold in his personal
account before selling in his firm account.

In effect, he transferred $48.5k from his employer's account to his personal
account.

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waps
Where/how do you even "learn" this trading skill. I mean, how did you learn
doing this ?

Like most geeks I suck at negotiation. And trading seems to me a very fast-
paced very high-stakes game of negotiation where you don't even get to talk to
the other guy. How do you get better at that ?

I have to admit that I'm skeptical that it's possible at all to do this. In
the longer term I mean. Nobody gives the other side of the argument though :
there would be no banks, nor a wall street, if it really didn't work at all.

------
slashnull
awwww yiiissssss

