When do I become enlightened in terms of price action trading?

[qlai]

@longandshort, I am curious what you think about order flow concepts like volume at price, absorption/distribution, auction/Market profile, etc? Not asking if it “works”, but rather if the concepts make sense.

My understanding is that Brooks is more of a scalper (taking small profits often) which is, imho, taking advantage of the “price noise” throughout the day.
Personally, I think he overcomplicates things, maybe even on purpose.

 

[deaddog]

well, from a speculators standpoint, you need to pay attention to your factor risk, risk budget (var), and other metrics. Stop losses aren't effective tools because you when you really need it, it doesn't work as well; and if your investment framework is just momentum, it is hard for you to come up with an expected return framework to compare vs. ex-ante risk.

I have yet to have a situation where a stop loss didn't work. There are gap downs where I didn't get filled where I planned but I have always been able to get out of a position that was moving against me.
I use SPY as a benchmark. I guess it's comparing apples to oranges but it seems to me that if I can't outperform the index I shouldn't be trading.

This is where (a) sources of return, (b) sources of alpha, and (c) sources of risk need to come together. For example, if you are seeking to invest in XYZ security because (a) company is expanding production (b) faster than expected you can distill this into a price and generate an expectation of returns.

I try and keep it real simple. The only reason for me to take a position in any stock is because it is increasing in price. What the company does isn't a big concern. I'm more concerned with liquidity, can I get out in a hurry if I decide to.

Sources of risk include factors (how sensitive is the stock to market, to interest rates, etc.), its own historical volatility (how much does it fluctuate on average), and liquidity (how much will it cost you to enter or exit the trade?) + others/idiosyncratic issues.

I look mainly at volatility and liquidity.

So if the stock is trading at $25 expected EPS growth of 15% and your view is that EPS growth will be 20%, then you think the stock is actually worth $33.2 which is a 32% expected return.

If the stock fluctuates on average by 20% each year, then you can expect the stock go move up/down $5 from 25 (even if you are wrong the stock can still go up to $30). You will know whether you are right or wrong when the company reports earnings and those higher production numbers will be printed.

So now you have two risk items you can use -- 1) you should expect the stock to not go down past $5/252 * days to earnings, 2) you will know whether your thesis is right/wrong once earnings are announced.

Now you can set risk limits to trim/add to position when risk limits are breached. You can do so either cyclically or counter cyclically depending on your conviction.

I just look at the stock price. If it's increasing there must be a reason why. Do I really have to know the reason? I take a position, if it keeps increasing in price I make money. If it stops increasing in price I get out.

 

[longandshort]

I have yet to have a situation where a stop loss didn't work. There are gap downs where I didn't get filled where I planned but I have always been able to get out of a position that was moving against me.
I use SPY as a benchmark. I guess it's comparing apples to oranges but it seems to me that if I can't outperform the index I shouldn't be trading.

I try and keep it real simple. The only reason for me to take a position in any stock is because it is increasing in price. What the company does isn't a big concern. I'm more concerned with liquidity, can I get out in a hurry if I decide to.

I look mainly at volatility and liquidity.

I just look at the stock price. If it's increasing there must be a reason why. Do I really have to know the reason? I take a position, if it keeps increasing in price I make money. If it stops increasing in price I get out.

You should look at the stocks you own and compare the returns of the basket if you bought & held vs. your portfolio performance. But if you are confident in your approach, what's stopping you from using leverage?

 

[Fonz]

I get a lot of flack for this... ... you should then start reading leading papers on major anomalies you’ve heard of such as the momentum, value, and size factors. From there you’ll be able to learn about various anomalies or discrepancies and can then do your own research to see if there is an opportunity. This is the path of successful traders.

One of the best thread in 2022 so far. Thank you for taking the time to write it.

I wish I understood that few years ago.
Best!

 

[Sprout]

Orders aren't fed into the HFT...millions of people are submitting their orders at any given time for a variety of reasons (selling stock to buy a house, trimming a positions you dislike, etc.). So at any given timeframe, there are a bunch of orders passing through HFT without any explicit intention. It could even be that someone submitted an order and has slower internet, which means their order arrives 500 ms later vs. 250 ms.

All the HFT tries to do is match the buy and sell orders before they get to an exchange. They are not "trading" in the traditional sense. They are losing on most trades, but make them up when they successfully front run larger orders.

Day traders are a miniscule part of the market and provide noise that informed traders use to obfuscate their orders. They are not moving markets, investors are.

You are contradicting yourself.
1) Hft’s aren’t an exchange’s matching engine
2) hft’s match orders
3) orders pass through an hft

We’ll just have to disagree.

Bottom line - a tick is a signal to some and noise to most. If you don’t value it, nbd.

 

[deaddog]

You should look at the stocks you own and compare the returns of the basket if you bought & held vs. your portfolio performance. But if you are confident in your approach, what's stopping you from using leverage?

Hard to compare. Last year I made 55 trades, so which companies would you compare to my portfolio that holds at a maximum of 10 stocks. Usually not that many. Some of the stocks I sold and then rebought, some higher some lower. Some just kept falling. Some recovered but the stock that replaced it did better.

I do use leverage from time to time when things are really running hard.

 

[longandshort]

You are contradicting yourself.
1) Hft’s aren’t an exchange’s matching engine
2) hft’s match orders
3) orders pass through an hft

We’ll just have to disagree.

Bottom line - a tick is a signal to some and noise to most. If you don’t value it, nbd.

you don't get it dude. As I mentioned, HFTs act as market makers on an exchange OR as internalizers.

The former races to fill orders as they arrive -- concepts like ticks don't even matter at these timeframes, as it is all a game of latency arbitrage. Quantifying the high-frequency trading "arms race" (bis.org). Are you saying that latency arbitrage is "bulls" and "bears" on a candle or tick lol?

The latter makes money like this: Breaking Down the Payment for Order Flow Debate (a16z.com)

 

[longandshort]

Hard to compare. Last year I made 55 trades, so which companies would you compare to my portfolio that holds at a maximum of 10 stocks. Usually not that many. Some of the stocks I sold and then rebought, some higher some lower. Some just kept falling. Some recovered but the stock that replaced it did better.

I do use leverage from time to time when things are really running hard.

I’d just compare your total portfolio quarter by quarter and see how well you did vs buy and hold through the period. Or get one of those trading journals.

 

[Sprout]

you don't get it dude. As I mentioned, HFTs act as market makers on an exchange OR as internalizers.

The former races to fill orders as they arrive -- concepts like ticks don't even matter at these timeframes, as it is all a game of latency arbitrage. Quantifying the high-frequency trading "arms race" (bis.org). Are you saying that latency arbitrage is "bulls" and "bears" on a candle or tick lol?

The latter makes money like this: Breaking Down the Payment for Order Flow Debate (a16z.com)

Lol, yeah I understand latency arbitrage as well as English.

A tick can be the difference between an order triggering or one filling.

If you want to continue to think of a tick as noise, nbd.

 

[deaddog]

I’d just compare your total portfolio quarter by quarter and see how well you did vs buy and hold through the period. Or get one of those trading journals.

Let me take a look this evening. I'll get back to you