Competing Objectives...Who Wins?

[limitdown]

I applaude anyone succeeding in these markets.

I succeeded. Others are succeeding, and still other will also.

However, seperating the discussion into exactly what trader99 sees and others are missing, or seeing in part, is what is important.

Market Wizards, and just about every other trading book tells you is that you must look the gift horse in the mouth, instead of just take favorable good fortune for granted.

By reviewing these premises,

• as well as the extremely high failure rate in the business;
• the revolving door policy;
• the high cost of learning without earning (on average $25,000 per person),
• in some cases over 9 months or longer without earnings sufficient to pay one's expenses;
• the pitiful "so called" training that makes you competent;
• the actual results vs. the hype

you get a truer picture of what you're dealing with.

• Say that your TCO (total cost of operation) or expenses average $3,000 monthly (rent, transit, lunches, phones, etc.) * 9 months without earnings = $27,000
• add to that the initial desk capital contribution of $25,000 or so
• now you're looking for individuals with $52,000 risk capital or higher and you offer them
• no guarantees (not that any firm could) of success

For one thing, this form of trading is not investing, its actually

• being a MM (market maker) in the case of the scalpers holding for <5 mins. trading NASD
• being a Specialist Assistant in the cases of NYSE stock trading

knowing that going in tends to provide a truer picture of what sitting on these propretary desks are really all about

 

[Andre]

this form of trading is not investing

Umm... what kind of trading is investing? Do you consider yourself a trader or an investor? I really do think it comes down to either/or.

André

 

[trader99]

Quote from spreadem:

I know what you mean trader99. Just imagine having a trade that started out as a scalp for $200 turn out to be a $4500 winner in a few days. When something like that happens to a person, they'll change their mind about chopping off those winners.

Tell me about it!!!

I had 2000 shares on AMR. I scalped for a fuckin' LOUSY few hundred bucks her and there, when I could have easily gotten 5000-8000shares (and it would be still not betting the entire wad like somone here suggested going 25x your entire acct! that' s just plain crazy!) and rode it up to $7.

That would be like 35K+ in a week a half! DOH! DOH!!!!!!!!!!!!!
DOH!! Pure Gravy man!

 

[trader99]

Quote from limitdown:

I applaude anyone succeeding in these markets.

I succeeded. Others are succeeding, and still other will also.

However, seperating the discussion into exactly what trader99 sees and others are missing, or seeing in part, is what is important.

Market Wizards, and just about every other trading book tells you is that you must look the gift horse in the mouth, instead of just take favorable good fortune for granted.

By reviewing these premises,

• as well as the extremely high failure rate in the business;
• the revolving door policy;
• the high cost of learning without earning (on average $25,000 per person),
• in some cases over 9 months or longer without earnings sufficient to pay one's expenses;
• the pitiful "so called" training that makes you competent;
• the actual results vs. the hype

you get a truer picture of what you're dealing with.

• Say that your TCO (total cost of operation) or expenses average $3,000 monthly (rent, transit, lunches, phones, etc.) * 9 months without earnings = $27,000
• add to that the initial desk capital contribution of $25,000 or so
• now you're looking for individuals with $52,000 risk capital or higher and you offer them
• no guarantees (not that any firm could) of success

For one thing, this form of trading is not investing, its actually

• being a MM (market maker) in the case of the scalpers holding for <5 mins. trading NASD
• being a Specialist Assistant in the cases of NYSE stock trading

knowing that going in tends to provide a truer picture of what sitting on these propretary desks are really all about

limitdown,

I think you hit the nail on the head!!! You outlined the TRUE COST of PROP TRADING. It's more , much MORE than just the commissions you paid. It's the foregone opportunity cost in terms of earnings, lost opportunities, and risking your own capital.

Let me just say that there's NOTHING wrong with INTRADAY trading. That's my main time horizon. I only do the occassional overnite or swing if everything lines up. But my bread-and-butter is still intraday/ daytrading.

My only point is that if you are successful scalping 1.5cents then great. BUT that means on "average", you better be losing only .075 cents in order to achieve what Van Tharp called 2R expectancy. I'm not sure how to lose 75th of 1 penny if the the smallest increment on NYSE is 1 penny. So... Hmm..

My R expectancy after commissions(NET R) is about 1.75R over many trades. That is I try to make 1.75 unit for every R unit I risk. I'm trying to push it to 2R and if I ever get to 3R then I can think myself as succeeding in this business. If not then I should be OK at 2R.

Anyhow, good points limitdown. The subtle costs of not getting pay for months, transportation, missing out on big moves, and just churning are all important aspects.

But the bottomline is - try to get 2R. If you are making tons of money at 1.5cents and still getting 2R then you are a good trader nevertheless. Congrats.

- peace

trader99

 

[limitdown]

Quote from Andre:

Nitro: I can tell you one thing though and this has been discussed before at ET ad-naseum : From principals at firms that I have talked to that have access to MOUNDS of data of hundreds of traders over many years, the statistic is that the decent traders make about .013 to .017 cents per share per. 01 penny spent (assuming .01 per share pricing - those that get their commissions down make that much more.) The really terrific traders make .02 per share + and are talking advantage of the commission charge limit at these firms that cap the commission at $20 - $25 (about 2K shares at .01 per share)...

André

how do we understand .013 to .017 & .020 per share?

does this mean that in one month, if one trades 1,000,000 shares (highly desireable goal from the Prop Shop's perspective; highly questionable goal for one individually) per month that they earn .017 cents per share or $17,000 (minus $10,000 commissions (i.e. $.01 per share * 1mil)) or $7,000 earnings or basically 41% profit share?

 

[Don Bright]

Quote from uptik2000:

I think successful trading firms realize that they will make a ton of cash if they have a ton of successful traders. There have been many firms after the fast buck. They do not train traders. They think they made a lot of money.

I see so many existing firms that have the opportunity to become big. Really big. They risk blowing it because they have no real vision.

Firm's like Schonfeld , First NY, Susq, are monsters because they focus on making good traders.

Do you want 200 guys churning to death for 3-6months at a time? Or do you want 2000 guys putting $ in the firm's pocket for the next 10 years?

To paraphrase Jack Welsh, "I'd rather make 5% on a billion than 10% on a million."

I respect the quote from Jack, and if you think about it.....isn't that a "value added" by a trading firm, allowing "free" use of capital (intraday) for those who are part of the "successful minority"? The market and marketplace changes constantly. Firms rarely seek out the type of "daytraders" spawned from the OTC bubble of the 90's....(those days are gone)....and speaking for ourselves, we are focusing even more on the "career oriented" individual/entrepreneur type trader.

We have modified our trading programs, offered longer and more intense continuing education. Spawned a couple of very rigid training disciplines via affilliates....all with the sincere hope that our people will do better than the average. Economies change, global markets evolve, and the "few" will survive only if it's a positive return for both firm and trader. We'd be poor business people to think otherwise.

We are responding to our traders needs/wantsand elvolving as well. Stay tuned!

(Feel free to naysay if you like, I'm used to it....but we will continue to cater to the serious traders who are out there doing well).

Don

 

[trader99]

Quote from limitdown:



how do we understand .013 to .017 & .020 per share?

does this mean that in one month, if one trades 1,000,000 shares (highly desirable goal from the Prop Shop's perspective; highly questionable goal for one individually) per month that they earn .017 cents per share or $17,000 (minus $10,000 commissions (i.e. $.01 per share * 1mil)) or $7,000 earnings or basically 41% profit share?

Yeah. 41% return is a nice margin for prop owners. Anyhow, it's not that simple though.

Even though you can say 1.3 or 1.7 or 2.0 cents for the good high volume scalper prop traders doing a 1M++ shares a month produces a net $7K payout per month. This is a decent pay, but it makes LINEAR assumption about one's trading when it's really nonlinear.

This assumes a lot of things have to go right though. I'm pretty darn sure that the VAST majority of prop traders DO NOT make $7K net per month. Yes, there are those who do that and even greater amounts than that.

But the average newbie trying to do that is a losing game for him.
Because it doesn't highlight the complex nature of returns in any trader lifecycle. That statement IGNORES the possibilities of bad drawdown periods or when one's trading is out of sync. The 1.3 or 1.7cents will NOT be enough to cover when one is down 20cents or 30 cents when the specialist play with ya. Freezing books and printing out of no where. Or a short squeeze or who knows what strange news comes up. If you are holding a couple of thousand shares and have been earning 1.7cents all along, then all of sudden a gap up or gap down move and you get slippage of 20-30 cents, it could wipe out your entire day or days gain. And a few of those in a bad day or week and your entire month is gone. I've seen it.

So, that's why trading books and good traders in Market Wizards say you gotta do the following:
1) capital preservation so that you can play another day
2) Cutting losses fast(small losses)
2) hitting singles and doubles(the small winners)
3) Occasional home runs that is large multiples of your losers 2x-3x-even 10x-20x. It's those that you will cover you in your down period.

that's all folks!

trader99

 

[esc_trader]

Quote from trader99:



So, that's why trading books and good traders in Market Wizards say you gotta do the following:
1) capital preservation so that you can play another day
2) Cutting losses fast(small losses)
2) hitting singles and doubles(the small winners)
3) Occasional home runs that is large multiples of your losers 2x-3x-even 10x-20x. It's those that you will cover you in your down period.

that's all folks!

trader99

+.02 profit/share sounds easy enough when scalping, its actually .04 per trade when you figure both sides of the trade, and it ain't always easy.

It's true the one big loser will wipe you out, but I would also stress the importance of pyramiding/pressing (or whatever you want to call it). When you have a big winner and everything is going your way, you've got to really go for the jugular. If you are long and the shorts are getting hammered, don't sell - keep buying until you have squeezed every penny out of that winner!

 

[TraderJimR]

This is one of the few times I will agree with Don... I am getting lost in all the math in a lot of these posts, but all I know is that I have done quite well in trading and it is solely because I was at prop firms. If retail were better, I'd do it, I'd be stupid not to.

But I firmly believe that if you do this full time you need to be prop, and every successful trader I know is prop and will never go retail.

I don't believe there is much value in prop firm training per say, I firmly believe that no one reveals the truly good edges they have found until they don't work anymore (but they always will show the sheets from when it did work well). But to do the kind of trading required to truly milk a consistent living from the markets, I just don't believe you can do it retail. The account size I would have to maintain for all the orders I place and various hedged positions I carry would be astronomical at a retail firm.

Don's statement about the value of free intraday leverage is 100% correct as far as I'm concerned, it is that which has provided my meals for many years. I don't want to offend anybody here, but I look at the people that buy a stock here and a stock there based on this or that chart pattern as unenlightened, the failure rate in that approach from what I have seen is ridiculously high.

The enlightened, in my experience, find that little consistent edge and do it over and over and over, squeezing every edge for every last drop of blood it has, always concentrating on finding more inefficiencies and edges to play.

OK, so yes, the firm you trade for wants to make money off you. Big deal, so does your phone company, your mortgage company, the company that sold you the computer you use to trade with, anyone who provides you with a service is not doing it out of the goodness of their hearts. Every time I go to church they seem to always be either giving a sermon on tithing or starting some new building fund also. Everyone wants your money. They want to get paid, big deal, that's how life works. If someone can show me a not-for-profit trading firm then I am wrong, but as far as I know they do not exist.

So do we have competing objectives with our trading firms? I don't think so. We want to make money and they want to make money. And as far as I have seen, the more money I make, the more volume I trade, and thus the more the firm makes. So with that, I would think that the firm wants me to make money too. And, they seem to act like they do so I'll assume that is true.

Here's where I really go out on a limb: I actually want the firm I trade with to make money. You know, not too much where they get more than I do off my trading, but I think a fair profit for them is in my best interest also, if I know they are making money I am secure they will always be around. It's like buying insurance in a way, insuring I will get to keep grabbing my living out of the markets for years to come.

Let me now extend my best piece of advice for the newbies in the crowd: If you truly want to make money, you don't need a firm to show you how, you need a mentor. And not a firm backed mentor who makes money based on how many shares you trade, you need to cultivate a relationship with a good trader who knows how to trade, has no relation with a firm other than the fact that he trades there, and you need to learn what he does and then do it yourself only after you completely understand it. Don't reinvent the wheel until you are successful and completely understand the game you are playing.

How you go about doing this is the difficult part, not many will show you anything. I won't, so don't even ask. But I learned from someone way back when, and I showed other people along the way, a few times guys paid me and a few times I showed friends for free. How you find these guys and convince them to do this, that is your homework. Good luck, but it does happen.

I'm sure many here will disagree with me, but I've been doing this a long time now and I have only the perspective of my own experiences, but I will be a prop trader as long as I am a trader as I truly believe that there is no retail firm that can do for me what any one of the prop firms does.

Wow, that is my longest post to date I think... For anyone who read this far, my apologies I went way off topic and rambled forever. Could be the 5 free refills of Pepsi I nabbed out of the McDonalds tap that have my brain going haywire. Refill your inkjet machine before you print this to read my novel again later.

 

[trader99]

Quote from TraderJimR:

This is one of the few times I will agree with Don... I am getting lost in all the math in a lot of these posts, but all I know is that I have done quite well in trading and it is solely because I was at prop firms. If retail were better, I'd do it, I'd be stupid not to.

But I firmly believe that if you do this full time you need to be prop, and every successful trader I know is prop and will never go retail.

I don't believe there is much value in prop firm training per say, I firmly believe that no one reveals the truly good edges they have found until they don't work anymore (but they always will show the sheets from when it did work well). But to do the kind of trading required to truly milk a consistent living from the markets, I just don't believe you can do it retail. The account size I would have to maintain for all the orders I place and various hedged positions I carry would be astronomical at a retail firm.

Don's statement about the value of free intraday leverage is 100% correct as far as I'm concerned, it is that which has provided my meals for many years. I don't want to offend anybody here, but I look at the people that buy a stock here and a stock there based on this or that chart pattern as unenlightened, the failure rate in that approach from what I have seen is ridiculously high.

The enlightened, in my experience, find that little consistent edge and do it over and over and over, squeezing every edge for every last drop of blood it has, always concentrating on finding more inefficiencies and edges to play.

OK, so yes, the firm you trade for wants to make money off you. Big deal, so does your phone company, your mortgage company, the company that sold you the computer you use to trade with, anyone who provides you with a service is not doing it out of the goodness of their hearts. Every time I go to church they seem to always be either giving a sermon on tithing or starting some new building fund also. Everyone wants your money. They want to get paid, big deal, that's how life works. If someone can show me a not-for-profit trading firm then I am wrong, but as far as I know they do not exist.

So do we have competing objectives with our trading firms? I don't think so. We want to make money and they want to make money. And as far as I have seen, the more money I make, the more volume I trade, and thus the more the firm makes. So with that, I would think that the firm wants me to make money too. And, they seem to act like they do so I'll assume that is true.

Here's where I really go out on a limb: I actually want the firm I trade with to make money. You know, not too much where they get more than I do off my trading, but I think a fair profit for them is in my best interest also, if I know they are making money I am secure they will always be around. It's like buying insurance in a way, insuring I will get to keep grabbing my living out of the markets for years to come.

Let me now extend my best piece of advice for the newbies in the crowd: If you truly want to make money, you don't need a firm to show you how, you need a mentor. And not a firm backed mentor who makes money based on how many shares you trade, you need to cultivate a relationship with a good trader who knows how to trade, has no relation with a firm other than the fact that he trades there, and you need to learn what he does and then do it yourself only after you completely understand it. Don't reinvent the wheel until you are successful and completely understand the game you are playing.

How you go about doing this is the difficult part, not many will show you anything. I won't, so don't even ask. But I learned from someone way back when, and I showed other people along the way, a few times guys paid me and a few times I showed friends for free. How you find these guys and convince them to do this, that is your homework. Good luck, but it does happen.

I'm sure many here will disagree with me, but I've been doing this a long time now and I have only the perspective of my own experiences, but I will be a prop trader as long as I am a trader as I truly believe that there is no retail firm that can do for me what any one of the prop firms does.

Wow, that is my longest post to date I think... For anyone who read this far, my apologies I went way off topic and rambled forever. Could be the 5 free refills of Pepsi I nabbed out of the McDonalds tap that have my brain going haywire. Refill your inkjet machine before you print this to read my novel again later.

TraderJimR,

Great Post!! Congrats on your first superduper UPER long posts.

I actually AGREED with you. I trade prop as well b/c of leverage and use of capital blah blah. That point I agree with you totally.

My only issue was the that APPROACH pushed by certain prop frims or perhaps all of them - that high volume trading is the only way to go. I don't mind doing volume. I do decent enough volume to keep them happy. But I do volume, because I see certain opportunities and I want to MAXIMIZE that opportunity through PROPER POSITION SIZING. To maximize the reward for the perceived edge. But I ain't going to do volume for volume sake when I don't see things or setups that fit my criteria.

I see a lot of prop traders just bang away day after day being flat or gross positive but net down huge b/c they feel compelled to do volume. That to me is NOT the way to trade at a prop firm or a retail firm. Trading should be done for good trading reasons. Not so that you can meet some arbitrary volume quota or whatever.

Well, that's all. But really good post TraderJimR.

trader99