Quote from New2thegame:
I'm new to actually trading, but have studied for quite a while. I'm a pretty sharp dude, but just haven't pieced a necessary pile of knowledge together yet and I hope to get help here. I know there's a lot of negativity here and I aim to avoid attracting it. I do want honesty even if it's brutal, so please feel free to be appropriately pointed in your arguments.
My intent with this initial thread is to use a series of questions to spark a discussion that hopefully will help me and possibly others form useful beliefs that can possibly used to for a winning method. I lean hard to an empirical approach and try my best to stray from untestable or subjective methodology, but am open to anything well thought out.
I know we all know some things, and nearly all of us think we know some other things, but if I had to guess, a solid way to approach trading is to form a belief system that is close to truth as possible and hoping to end up with enough legos to build something. That said, I have a lot to learn, but I at least think I am entering with a good level of skepticism, high hopes, a general understanding of the topic, and a lot of hopefully reasonable questions.
1) I've read some books lately that I've been told are some of the better trading books out there (feel free to opine): Winner Take All (Gallacher), and Evidence-Based Technical Analysis Aronson), and a hefty amount of Larry Williams books which contrast the previous two sharply in their level of optimism, amongst other things. It seems Gallacher is an intellectual that is rather depressively convincing. He more than suggests that while technical system trading can make money, that opportunity is dwindling fast due to technological advances and increasingly more efficient markets. He claims that he can't really recommend the mechanical approach as it's increasingly hard to follow as the available gains are reducing. Alternately, he suggests trading on fundamentals is the only way to have a substantial edge and experience large gains. How depressing since I've apparently wasted a ton of time focusing on first TA, then having moved on to mechanical systems trading... I suppose I want to start by finding out about how people here feel about this? How correct is he?
The advances in technology make trading a lot easier. One of your contributors pointed out average 1,000 to 1,200 dollars a day as his goal. Lets apply technology to that using 30,000 dollars as the stake 20 contracts) In ES you would have to, techincally, extract 1 point or 5 ticks a day to do that. You may wish to connect a few bars by a trendline and measure how many minutes it takes to accumulate that level of profit. This morning it was 5 minutes or less for the first 15 minutes of trading.
Technically speaking, it looks like your sourse is off base.
2) Which markets offer the least efficiency or the greatest odds of systematic exploitation? I've read much about how the most highly liquid markets offer the least amount of opportunity since edges vanish quickly. I've heard people say that the markets that are traded less offer more opportunities because less pros and bots are abound. Of course a concern here might be these less traded markets have larger spreads and higher general costs which may hurt any advantage we might find there. Thoughts on this? Is it rational to believe that futures (being zero-sum technically, and have a high-level of interest) are more difficult to systematically trade than a small cap stock?
Both stocks and commodities offer sweet spots for making money. You may want to nudge yourself to an extraction orientation instead of inefficient. Others ultimately offer you an anvantage once you adjust to being parasitic to their behavior.
Costs of trading are trivial once knowledge and skills are acquired. Both come from purposeful experience. Simply stated most people experience repeated failure and work their way out of trading. From 1. above, you may wish to examine how to extract a point a day over any short period of time you prefire.
The sweet spot for stocks is position trading high beta stocks. The sweet spot of commodities is based on market capacity and trading where smart money gives you leading indicators.
3) I understand how important costs are to the game at any timeframe, but also realize to make substantial returns requires you zoom in some from buy and hold. In other words, long-term investing being one extreme, and scalping to be the other. Many suggest you need to swing or position trade to reduce the markets (read house edge) edge to give yourself a chance. That said, is scalping a realistic possibility anymore, even with very low non-retail commissions? Do you have opinions on where the best opportunities lie for retail traders in terms of costs regardless of market?
There are three best opportunities: position trading stocks (target 60 to 100 turns a years @ 10%); trade the ES intraday working up from 4 to 7 trades a day to 20 to 40 trades a day by strying on the right side of the market always and doing reversal trades to take profit segments. The segments for 4 to 7 are most observable on the 5 min charts; the leading indicator of doing 20 to 40 trades a day is the YM but do the trades on ES. Sector rotaion is the third oppoutunity; this is slower and you can use unlimited funds. there are 197 sector and in ech there are "leader" and Lagger qualtiy stocks. Use leader stock signals to get the lagger timing. Partial fills are required in all trading after a given level of capital is deployed.
4) What types of edges exist? This could and possibly should be a thread unto itself, really. I know many claim reversion to the mean, excursion from the mean, seasonal cycles, other types of time cycles, spreading between correlated markets, intraday patterns, longer-term patterns, fundamentals (finding value mostly, I suppose), volume/price relationships, volatility speculation in options, mispricing of options, etc. Did I miss anything? I know of things such as arbitrage but as I understand it, there really doesn't appear to be an opportunity to an outsider to trade this way.
There are many many edges and always have been. Inductivel derived ones do not owrk for long as you will find out. Critical thinking is a requirement for building knowledge and skills through purposeful experience. You may have missed out on the opportunity, judging from the space you occupy as determined by the scope and bounds of your searching. One thing you may want to consider is setting up your means of observing the markets.
. You might not find use in the label, but it is necessary, even outside of the academic realm for those that are empirically-minded.