A path towards profitability

[garachen]

Quote from speero:



Already liked this post after this.

[/B]

The desperate are just gamblers at a new slot machine.



I'm curious what you think about the game 'Stratego'. [/B]

I'm glad you enjoyed my post. My original intention was to put some thoughts down for my kids to read when they get older so they can get a taste of some of the things I was going through when they were small. And I thought what the heck, stick it in a public forum and have people comment. Maybe it would help me formulate things better.

I have some dim memory of having played strategio once or twice when very young. Not sure I grocked it completely at the time.

 

[garachen]

Quote from loogling:

garachen,

I am curious about your experience in trying to find suitable traders. I'm guessing that you don't experience the 90+% failure rate from your applicants, unlike the results that would normally be seen at many prop firms. How successful were you at finding the right traders?

I'm also guessing that you try to teach your traders tape reading skill for the manual part of your business. From your experience, is it a skill that can be easily adopted? (i.e. Anyone that you teach can develop the feel within a year?)

Also, how do you keep a good trader from leaving your firm to trade on his own account?

I don't know which study this 90% number comes from.

I see a lot of confusion around the difference between a 'prop trading company' and a 'trading company'. I would never run, join or associate myself with a prop trading company. These are people who take a deposit of your money and then charge you commission to trade. In return they offer some leverage and steal your idea if you are profitable. Maybe it works for some people and I'll preemptavely apologize to them but it just smacks of a scam to me. Maybe there the failure rate is quite high.

Trading firms have very low failure rates. I'd guess on the order of 10%. And they pay a salary for the first few years.

Every person I have hired to trade still trades with me successfully. I did try to teach a friend of mine but after a few hours it was pretty obvious he did not have the aptitude for it.

Training takes about 6 weeks. They are profitable after that. At around a year they should be doing $5k per day. To get to that is pretty mechanical. To go much beyond requires certain personality traits.

I use a variety of methods to retain people. Money is just one tool. As you can read from my other post there are some significant hurdles to getting properly set up and lowering fees. Also, clearing companies do not want to risk aiding someone in breaching their contract with a prior employer. When I first set up an account I had to send them a copy of my prior employment contract so they could be sure there was no conflict of interest.

 

[loogling]

Quote from garachen:

I don't know which study this 90% number comes from.

I see a lot of confusion around the difference between a 'prop trading company' and a 'trading company'. ... Maybe there the failure rate is quite high.

Trading firms have very low failure rates. I'd guess on the order of 10%.

The 90% is a rough estimate from a friend in a prop company, counting the people that came and went. You're correct in pointing out my unclear usage of the term "prop firm".

I do believe that the "trading firms" have low failure rates. I also believe that many traders in "prop firms" have genuine determination to succeed. The difference between 90% and 10% is a lot bigger than what I would imagine. To remain on the topic of "A path towards profitability", what factors do you think explain this difference?

 

[garachen]

Quote from loogling:

The 90% is a rough estimate from a friend in a prop company, counting the people that came and went. You're correct in pointing out my unclear usage of the term "prop firm".

I do believe that the "trading firms" have low failure rates. I also believe that many traders in "prop firms" have genuine determination to succeed. The difference between 90% and 10% is a lot bigger than what I would imagine. To remain on the topic of "A path towards profitability", what factors do you think explain this difference?

Difference is that anybody with a heartbeat can sign up and join a prop firm. They are not selective because they don't care if you make money they just want your deposit and fees. The prop firm itself generally will not have a trading strategy - you are expected to bring your own.


Trading companies are quite selective. They will hire directly out of school for the top few percent of people in a quantitative field. There is really no path from a prop firm to a trading company. Prior trading experience is not but intelligence is. The firm already has a trading philosophy and you are very constrained on what you are allowed to do. Many trading firms will fire you immediately if you trade unhedged outrights if you are supposed to only be trading spreads. Trading companies have extremely high sharpe ratios and and not at all interested in taking deposit money from their employees or outside money from anybody else.

So the 2 major differences are the pre-screening of people and how each company makes it's money.

 

[gmst]

Quote from garachen:

Difference is that anybody with a heartbeat can sign up and join a prop firm. They are not selective because they don't care if you make money they just want your deposit and fees. The prop firm itself generally will not have a trading strategy - you are expected to bring your own.


Trading companies are quite selective. They will hire directly out of school for the top few percent of people in a quantitative field. There is really no path from a prop firm to a trading company. Prior trading experience is not but intelligence is. The firm already has a trading philosophy and you are very constrained on what you are allowed to do. Many trading firms will fire you immediately if you trade unhedged outrights if you are supposed to only be trading spreads. Trading companies have extremely high sharpe ratios and and not at all interested in taking deposit money from their employees or outside money from anybody else.

So the 2 major differences are the pre-screening of people and how each company makes it's money.

Many Thanks for the thread!
Curious, what Sharpe ratio have you been able to sustain in your firm over the years? It will be great if you can throw some Sharpe numbers for different divisions/instruments/strategies (without naming the instrument or strategy perse). Just trying to see what a good level of benchmark would be!

 

[garachen]

Quote from gmst:

Many Thanks for the thread!
Curious, what Sharpe ratio have you been able to sustain in your firm over the years? It will be great if you can throw some Sharpe numbers for different divisions/instruments/strategies (without naming the instrument or strategy perse). Just trying to see what a good level of benchmark would be!

It kind of becomes a nonsensical number. There was one strategy that made money 242 days consecutively. Kind of silly to put a sharpe ratio on that.

Overall, with a hefty inclusion of manual trading it's around 7-9.

Anything over 3-4 probably means you shouldn't take in outside money.

 

[gmst]

Quote from garachen:

It kind of becomes a nonsensical number. There was one strategy that made money 242 days consecutively. Kind of silly to put a sharpe ratio on that.

Overall, with a hefty inclusion of manual trading it's around 7-9.

Anything over 3-4 probably means you shouldn't take in outside money.

Many Thanks again for the information. Yeah if you are positive 242 days out of say 252, sharpe would be ....hahahaha Its just a question of capacity at that time

Very happy to see that your overall sharpe is 7-9 and you do 75% manual trading. Good to know what best guys out there are able to achieve - which efficient markets professors in Ivy League can't even think of!

Also interesting to know about your comment that if the sharpe is 3-4, then should not take outside capital. I assume you are saying best to leverage the hell out of it and compound your own trading capital real fast.

My analysis shows that if you are really aggressive with your risk and a sharpe of 3-4, making 10x your capital in a year is a piece of cake. (not saying I am doing it - not even close - just that maths says 10x is naturally possible with such a sharpe and leverage).

 

[Rationalize]

Quote from garachen:

...The firm already has a trading philosophy and you are very constrained on what you are allowed to do. Many trading firms will fire you immediately if you trade unhedged outrights if you are supposed to only be trading spreads...

Hold on a sec .. I thought we were talking unhedged outrights in this thread - flow, passive orders that kind of thing.. If we're talking rates spreads, then, well that's entirely different.

 

[garachen]

Quote from Rationalize:

Hold on a sec .. I thought we were talking unhedged outrights in this thread - flow, passive orders that kind of thing.. If we're talking rates spreads, then, well that's entirely different.

Yeah. We are different in that we generally trade unhedged or lightly hedged outrights. Most trading firms do not. Even our algo stuff generally trades outrights.

A great number of firms focus on fixed income products and we currently do zero of those.

 

[Cdntrader]

Quote from garachen:

Yeah. We are different in that we generally trade unhedged or lightly hedged outrights. Most trading firms do not. Even our algo stuff generally trades outrights.

A great number of firms focus on fixed income products and we currently do zero of those.

Might have missed it, but how long have you been trading?