A Question for Scalpers

F

FaderTrader

I just finished reading Fooled by Randomness and also read one of Taleb's papers titled, "Bleed or Blowup? Why Do We Prefer Assymetric Payoffs?"

His key argument is that most people bet dollars in order to make a steady stream of pennies rather than pennies in order to make dollars less frequently.

He takes the example of LTCM who produced steady returns for several years only to give it all back - along with its entire capital base - in a single observation. This is not new information.

So, my question is this...

Behind all my trading is my firm belief that the ONLY thing that separates successful from unsuccessful traders is that the former allow themselves to get lucky.

When I get into a position, I'm holding it until it either looks like it's going to reverse or surprises the hell out of me with how far into the money it went. And I'm hitting out of losers immediately and getting back in when the risk/reward again looks favorable.

My question for scalpers is this: How can you hope for long-term success if you are betting dollars to make pennies and cutting off your upside by negating the opportunity to get lucky?
 
Quote from FaderTrader:

I just finished reading Fooled by Randomness and also read one of Taleb's papers titled, "Bleed or Blowup? Why Do We Prefer Assymetric Payoffs?"

His key argument is that most people bet dollars in order to make a steady stream of pennies rather than pennies in order to make dollars less frequently.

He takes the example of LTCM who produced steady returns for several years only to give it all back - along with its entire capital base - in a single observation. This is not new information.

So, my question is this...

Behind all my trading is my firm belief that the ONLY thing that separates successful from unsuccessful traders is that the former allow themselves to get lucky.

When I get into a position, I'm holding it until it either looks like it's going to reverse or surprises the hell out of me with how far into the money it went. And I'm hitting out of losers immediately and getting back in when the risk/reward again looks favorable.

My question for scalpers is this: How can you hope for long-term success if you are betting dollars to make pennies and cutting off your upside by negating the opportunity to get lucky?
More...

The only problem I have with that statement is where it says you are betting dollars to make pennies.

How does that make sense?


Many traders are bringing in at LEAST a dollar per trade in gain if trading 100 shares of stock. People are betting thousands of dollars to bring in a few dollars, so if using the authors views, that doesn't make for a profitable trader either.

The author says we need to bet pennies to make dollars. Is he insisting we bet on penny stocks?

If you look at someone like Red Ink on the P&L, he pulls in anywhere from 50 to 200 dollars on average per winning trade. But he potentially puts thousands of dollars at risk to do this, from what that article says, I'd assume Red is doomed to failure then....? No, because his risk vs. reward is right, and he can generally have at least 50% of his positions be winners and the average winner > average loser.

Doesn't matter what timeframe you trade on.

Commissions can be a problem if paying too much, but other than that and the fact commissions are so low these days, especially if trading prop.


Hopefully someone else can explain.
 
Quote from JMowery1987:

The only problem I have with that statement is where it says you are betting dollars to make pennies.

How does that make sense?
That actually makes no sense at all and was a stupid statement.

Many traders are bringing in at LEAST a dollar per trade in gain if trading 100 shares of stock.

If you look at someone like Red Ink on the P&L, he pulls in anywhere from 50 to 200 dollars on average per trade.

Just not understanding what the difference is if the Risk vs. Reward is the same.

Commissions can be a problem if paying too much, but other than that... just not understanding what the author is talking about.

Hopefully someone else can explain.
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Don't be such a literalist.
And don't be an abusive asshole, either.

I believe FT's POINT is that a scalper's trading capital is ON THE ORDER OF 100 times larger than his expected profit. If I scalp 1000 shares of AAPL at $60/share, I'd be damn pleased to snag $600 for my $60k of capital. FT's basic argument seems to be that scalpers don't let their profits run.
 
Quote from Martin Gale:

Don't be such a literalist.
And don't be an abusive asshole, either.

I believe FT's POINT is that a scalper's trading capital is ON THE ORDER OF 100 times larger than his expected profit. If I scalp 1000 shares of AAPL at $60/share, I'd be damn pleased to snag $600 for my $60k of capital. FT's basic argument seems to be that scalpers don't let their profits run.
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Did you even read anything FT posted??????

lol

First off, I'm not arguing at all with FT, I'm arguing the author of the article, I didn't even consider FT's opinion on this.

I have been talking to FT btw and been exchanging ideas with him VIA pm, so don't you look like a dumbass now? Congrats, now say you are sorry and go play with the other kiddies.

:D

Oh and just incase you didn't READ what FT posted:

His key argument is that most people bet dollars in order to make a steady stream of pennies rather than pennies in order to make dollars less frequently.
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NOTICE something here.
 
My mistake -

Step back and take another look at my point. Say you are scalping SUN - looking to make 5 cents 20 times over the course of the trading day.

What happens when it gaps against you by 50 cents? Half of your day is gone.

Playing the odds of consistent small profits underestimates the REGULAR occurence of low probability events - sounds perverse, right?

Low probability events are so frequent that I base my entire strategy off of it.

I'm just wondering why scalpers think that hitting out of something for a 5 cent gain is a good strategy when it WILL EVENTUALLY move against you by 30 or 50 cents more frequently than you think. Better to take smaller losses and hold onto winners rather than settle for a linear win/loss profile PLUS the incidence of outlier events manifesting themselves.
 
Quote from FaderTrader:

My mistake -

Step back and take another look at my point. Say you are scalping SUN - looking to make 5 cents 20 times over the course of the trading day.

What happens when it gaps against you by 50 cents? Half of your day is gone.

Playing the odds of consistent small profits underestimates the REGULAR occurence of low probability events - sounds perverse, right?

Low probability events are so frequent that I base my entire strategy off of it.

I'm just wondering why scalpers think that hitting out of something for a 5 cent gain is a good strategy when it WILL EVENTUALLY move against you by 30 or 50 cents.
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How would it gap 30 or 50 cents though?

I've never seen anything like that while i'm trading.

I generally take like 10 - 20 cents on AAPL per trade. Never had anything remotely close to that happen.

Hopefully someone else can comment on this. It kinda questions why any scalper is successful.

If a stock was to gap against us 30 to take away all our gains, the smart traders would not trade it. Although I know sometimes traders get stuck in a stock that will move against them and they can't get out easily.

That can be coslty, but that is for traders that trade the illiquid stocks. I trade very liquid stocks like AAPL and NEM and such.
 
What's presumptious about it? Scalper assume that a coin toss is a completely random event - that heads is just as likely as tails - when in reality, this seemingly random example often produces long runs of all heads or all tails. Again - we underestimate the frequency of outlier events.
 
You've never seen anything gap 30/50 cents? Check out SUN, AHC, PD... I make all my money on being on the right side of these gaps and getting out when there's no catalyst (safety).

Quote from JMowery1987:

How would it gap 30 or 50 cents though?

I've never seen anything like that while i'm trading.

I generally take like 10 - 20 cents on AAPL per trade. Never had anything remotely close to that happen.

Hopefully someone else can comment on this. It kinda questions why any scalper is successful.

If a stock was to gap against us 30 to take away all our gains, the smart traders would not trade it. Although I know sometimes traders get stuck in a stock that will move against them and they can't get out easily.

That can be coslty, but that is for traders that trade the illiquid stocks. I trade very liquid stocks like AAPL and NEM and such.
More...
 
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