Prop firm business model

[Don Bright]

Quote from darmasdt:

Dear Don,
what is the timeframe/time horizon the traders use mostly in your company ?
Are there traders who trade a long term trend-following system with your prop money ?
Have you seen a consistently profitable intraday futures/forex trader in you company ?

Thanks in advance.

Our time frames range from seconds to months and everything in between. I suggest that traders develop a trading plan, complete with time frames, and then expose themselves to other ideas for profits, and then sit down and work out a scenario that works well for both the Firm and the trader.

Maverick pointed out additional benefits of prop trading, especially the interest on short stock sales which allows our pairs and Mergers guys to collect $$...without such, this successful trading strategy would be hard pressed to make as much money.

For example, a pairs trader may have 50 separate pairs with one or two "layers" on each (say 2,000 shares long and short)....they may trade the "frequency" making quarters and such, while all along they are holding a core position on a longer term basis, looking for dollars. With the software we have, these positions can be monitored well without second by second screen watching.

All the best,

Don

 

[euphoria]

Hi Don:

Call me stupid but I still don't get the concept of pairs trading. I read Darren Cliffords article as he described the Coke and Pepsi example. Going short PEP going long Coke. Which one was suppose to move in a profitable direction? How do you profit from this if their both going higher? Can you put this strategy into "words for idiots" ?


Thanks,

Euphoria

 

[darmasdt]

Quote from euphoria:

Hi Don:

Call me stupid but I still don't get the concept of pairs trading. I read Darren Cliffords article as he described the Coke and Pepsi example. Going short PEP going long Coke. Which one was suppose to move in a profitable direction? How do you profit from this if their both going higher? Can you put this strategy into "words for idiots" ?


Thanks,

Euphoria

Will it be like trading the forex pairs ?
How to generate chart for these stock pairs ? Are those chart available ?
And what about execution ? When entering a Long position on a pair, so we should long at one single stock and short the other. The execution of each single trades will effect the executed price of the pairs ?
Thank you for any advice, i'm new to this.

 

[Maverick74]

Quote from darmasdt:

Will it be like trading the forex pairs ?
How to generate chart for these stock pairs ? Are those chart available ?
And what about execution ? When entering a Long position on a pair, so we should long at one single stock and short the other. The execution of each single trades will effect the executed price of the pairs ?
Thank you for any advice, i'm new to this.

You both can sign up for Don's 3k class on pairtrading.

 

[whitster]

"Call me stupid but I still don't get the concept of pairs trading. I read Darren Cliffords article as he described the Coke and Pepsi example. Going short PEP going long Coke. Which one was suppose to move in a profitable direction? How do you profit from this if their both going higher? Can you put this strategy into "words for idiots" ?"

i am not familiar with bright's methods, but this sounds like some of the spread trades i have done in futures.

for example, you believe the YM will outperform the ES. you go long YM, short ES.

this is a spread trade. you will benefit as long as the YM outperforms ES. they can both go up, both go down, it doesn't matter.

if the YM goes down 5% tomorrow, and the ES goes down 5.5% - it makes money

these trades are nice also because you (essentially) have little market risk.

certainly less than simply being long or short an index future.

i love these trades. these are great income producers, and you only have to be right about relativel outperformance - NOT direction. we are in a value rally right now, for instance. that obviously opens up spread trade opp's.

and then you have the calender spreads you can do, especially with crude etc. if the market is contango or whatever and you are capitalizing on widening or narrowing spreads.

 

[midnightdavid]

I'm new here - this is my first post. (I joined to researching prop firms, intend to get my S7 soon and join one.)

I wasn't exactly sure what pairs trading was. I did a google search and found this article:

http://www.investopedia.com/articles/trading/04/090804.asp

A short clip from the text -

What Is Pairs Trading?
Pairs trading has the potential to achieve profits through simple and relatively low-risk positions. The pairs trade is market-neutral, meaning the direction of the overall market does not affect its win or loss.

The goal is to match two trading vehicles that are highly correlated, trading one long and the other short when the pair's price ratio diverges "x" number of standard deviations - "x" is optimized using historical data. If the pair reverts to its mean trend, a profit is made on one or both of the positions.


- David

 

[Maverick74]

Quote from whitster:

"Call me stupid but I still don't get the concept of pairs trading. I read Darren Cliffords article as he described the Coke and Pepsi example. Going short PEP going long Coke. Which one was suppose to move in a profitable direction? How do you profit from this if their both going higher? Can you put this strategy into "words for idiots" ?"

i am not familiar with bright's methods, but this sounds like some of the spread trades i have done in futures.

for example, you believe the YM will outperform the ES. you go long YM, short ES.

this is a spread trade. you will benefit as long as the YM outperforms ES. they can both go up, both go down, it doesn't matter.

if the YM goes down 5% tomorrow, and the ES goes down 5.5% - it makes money

these trades are nice also because you (essentially) have little market risk.

certainly less than simply being long or short an index future.

i love these trades. these are great income producers, and you only have to be right about relativel outperformance - NOT direction. we are in a value rally right now, for instance. that obviously opens up spread trade opp's.

and then you have the calender spreads you can do, especially with crude etc. if the market is contango or whatever and you are capitalizing on widening or narrowing spreads.

OK, I need to say something here. I hear statements like this all the time and I have to call BS when I hear it. Guys, it does not matter if you are trading direction, volatility, or a spread price, there is nothing easy about trading. Trading a spread is no easier then trading direction. In fact, I will go on record and say it's harder. And let me tell you why. Usually when a spread goes against you, you have no reason why it's going against, you just know that it should trade within a certain band. You don't understand it except you believe it should. At least if you are long or short the ES at certain levels, you have an idea why you are wrong if you get stopped out.

Also, when spreads go against you, they can explode against you. They can get very violent. In fact, the irony is they are actually much more volatile then the actual indices themselves. I love how guys paint pair trading like it's so easy. It's incredibly difficult because you are driving the car but you don't know what's underneath the hood and if the car breaks down, you don't know why. You are basically driving blind.

 

[darmasdt]

Quote from Maverick74:

OK, I need to say something here. I hear statements like this all the time and I have to call BS when I hear it. Guys, it does not matter if you are trading direction, volatility, or a spread price, there is nothing easy about trading. Trading a spread is no easier then trading direction. In fact, I will go on record and say it's harder. And let me tell you why. Usually when a spread goes against you, you have no reason why it's going against, you just know that it should trade within a certain band. You don't understand it except you believe it should. At least if you are long or short the ES at certain levels, you have an idea why you are wrong if you get stopped out.

Also, when spreads go against you, they can explode against you. They can get very violent. In fact, the irony is they are actually much more volatile then the actual indices themselves. I love how guys paint pair trading like it's so easy. It's incredibly difficult because you are driving the car but you don't know what's underneath the hood and if the car breaks down, you don't know why. You are basically driving blind.

So a pure technical trading style, no fundamental, will be the most appropriate approach for these "sythetic instument" ?

 

[Maverick74]

Quote from darmasdt:

So a pure technical trading style, no fundamental, will be the most appropriate approach for these "sythetic instrument" ?

No, see, that's the problem. It's not technical or fundamental. It's all stat correlation. Firms like Citadel have 100 PHD's quants writing all sorts of very complex stat correlation models that they adjust every day. It's not as simple as saying, oh the spread is too narrow, I think I'll buy it. The hedge funds that trade this way spend millions on research and millions more on technology to create their stat cor models. That's why I find it humorous when guys on ET think, oh this looks easy. Just trade the spread, you don't care which way the market goes. LOL. Guys, trust me, it's not that easy. You better be very well versed in statistics and programming if you want to have a go at this. Because ma and pa kettle are not the ones taking the other side of these trades. It's Citadel that you are trading against.

 

[e-miNY]

Quote from Maverick74:

No, see, that's the problem. It's not technical or fundamental. It's all stat correlation. Firms like Citadel have 100 PHD's quants writing all sorts of very complex stat correlation models that they adjust every day. It's not as simple as saying, oh the spread is too narrow, I think I'll buy it. The hedge funds that trade this way spend millions on research and millions more on technology to create their stat cor models. That's why I find it humorous when guys on ET think, oh this looks easy. Just trade the spread, you don't care which way the market goes. LOL. Guys, trust me, it's not that easy. You better be very well versed in statistics and programming if you want to have a go at this. Because ma and pa kettle are not the ones taking the other side of these trades. It's Citadel that you are trading against.

Yes, if you dont agree with maverick, just look at the chart of wheat z6/u7 spread. Front month limit up, and back month limit down. U get whacked twice just when you think your position is natural. If you are just trading in one direction, you lose 1 limit up. When you trade spread, who knows how much you can lose? Still not convinced? Just ask the great Myron Scholes who won the nobel price for developing the black scholes model. Even he got blown up in LTCM trading spread.