Why predict?

Every profitable trader I know assumes axiomatically that underlyings trace out some sort of Brownian motion. In the case of equities (or SIFs) it is Geometric Brownian motion. It is at the heart of the most important equation in all of Finance, the Black Scholes model of options, of which using it and modern versions of it have made people money as if it is as easy as printing it.

I ask you then, how is it that the biggest players in the market, derivatives traders, assume a random underlying, and make money hand over fist? If the underlying is random, how can anyone make money? If you bet on a fair coin, how can you make money playing the flip of that coin?

It is the answer to that question that is interesting and will take you down the correct path. Asking whether to predict or not is asking waaaay the wrong question, because it's answer will only confuse you.

nitro
 
Quote from nitro:

Every profitable trader I know assumes axiomatically that underlyings trace out some sort of Brownian motion. In the case of equities (or SIFs) it is Geometric Brownian motion. It is at the heart of the most important equation in all of Finance, the Black Scholes model of options, of which using it and modern versions of it have made people money as if it is as easy as printing it...
Just curious. Since you are obviously quite familiar with these concepts, are you making money as easily as if you were printing it?
 
For the last time, it is all about semantics. You arrive at a Stop sign, look around and then when nobody is coming proceed crossing the intersection. You say, you are driving a car. I say, you are predicting that you have the right of way and nobody is going to crash into you, because they are most likely (you are hopig,predicting,expecting) will folow the rules of the road.

We are both right. Again, it is all semantics....
 
Quote from Steve Tvardek:

... Every morning I sit down, turn on my computer and have NO CLUE what the market is going to do. ..
evey morning I tell myself I am not trading today but I make sure I have my platform opens..just in case:D
 
Quote from Thunderdog:

Just curious. Since you are obviously quite familiar with these concepts, are you making money as easily as if you were printing it?


if you read any of the studies on brownian motion related to financial markets, you will discover that the action of financial markets is in fact NOT random as the model predicts....

there are fat tails instead....

so, perhaps not everyone can just print money using this concept eh?
 
Quote from jasonjm:

if you read any of the studies on brownian motion related to financial markets, you will discover that the action of financial markets is in fact NOT random as the model predicts....

there are fat tails instead....

so, perhaps not everyone can just print money using this concept eh?
Well, that was my guess as well. But I'm curious to know how nitro would respond to my question. (Not that I'm familiar with Black Scholes. As for Brownian motion, I'm simply not smart enough to adapt an observation that applies to the physical sciences and properly apply it in a meaningful and profitable manner to the social sciences, such as market behavior. That kind of stuff is beyond me.)
 
Quote from Thunderdog:

Just curious. Since you are obviously quite familiar with these concepts, are you making money as easily as if you were printing it?
I am currently not live trading on a large scale. The trading that I do at this point is vol/skew "arbitrage" (mispricing is perhaps a better term) - it is 100% research so done with small size. I am gearing to manage OPM within the next three months. It will be 100% ATS and assumes the underlying is a random variable.

The firm I work for currently prints money. It assumes the underlying is completely random. I am in contact with people that work for several large firms downtown chicago. They all assume a random underlying to a great extent.

nitro
 
Quote from nitro:

I am currently not live trading on a large scale (the trading that I do is vol arbitrage at this point), but I am gearing to manage money within the next three months. It will be 100% ATS and assumes the underlying is a random variable.

The firm I work for prints money. It assumes the underlying is completely random.

nitro



how can anyone make money in a market that is completely random, especially when you factor in commission?

its like predicting a coin toss but with less than 50% odds, as you have commission to deal with?

can you give us an example of how the firm you work for overcomes this and prints money?
 
Quote from jasonjm:

how can anyone make money in a market that is completely random, especially when you factor in commission?

its like predicting a coin toss but with less than 50% odds, as you have commission to deal with?

can you give us an example of how the firm you work for overcomes this and prints money?
If you can't beat the underlying, what can you beat? You hear the joke on Saturday Night Live? "Today no shares traded on the NYSE - I guess we all have what we want now."

Why does a single share trade? What moves prices, other than the obvious informational event not priced in? Is news really constantly entering the market so that ten seconds from now GE's fundamentals say it is worth .10 less than 1 minute ago?

I will ask again. How can you make money from the result of flipping a fair coin? It is not a trick question - you can't predict it any better than 50%. If you can't make money from predicting the actual event, then how can you make money from playing?

nitro
 
Quote from jack hershey:

As cocaine says "you don't get it."

You first paragraph has absolutely zero content that applies to many trading systems whether manual or ATS.

Specifically. I am in the market all of the time. I continually perform a series of tests that give me a set of binary answers.

One of the elements of each set is a question that is answered always in the affirmative.

It is: are my contracts on the right side of the market? That is, am I on the same side as the minority which is causing price change in my favor? There is no predicting involved. I am not hoping or anything like hoping ever at any time. I have zero expectations when I am trading. I must be on the right side of the market at all times and that is one of few very important considerations. You do not get this about trading. What is required to trade is to know what is going on and to know that you know.
you are betting and probability oriented and that is not in any way related to making money. It is not a factor for making money. Betting and using probability are unecessary in trading.

Here is an example. Consider price movement. Try to think up how many directions in which price can move. It is a small mumber. the number is so small that if price is observed in the present as moving in one direction, you know for certain that is is not moving in the only other possible direction.

This kind of certainty is the gift of the markets to traders. People do NOT determine market direction; it is given by the market to a person. The person accepts it as time passes and acts accordingly.

Your second paragraph expresses a kind of forcefulness and intensity. There is no intensity nor "forcing of anything" to be making money all the time during RMH's or RTH's. At all times it is just a matter of fact what the market is doing and secondly what the capacity of the market has to do what it is doing. Capacitiy is not force.

I have a neutral bias so does the ATS that I use. People tune their trading systems to a neutral bias as part of an optimization process.

Making money is a neutrally oriented enterprise. To be systematic about making money requires that a person not be like you are and what you believe. your beliefs are not helpful for making money. They interfear as a a matter of fact and that has been well proven through simple statistially significant testing procedures of very skilled (with respect to their paradigm) and highly paid mediocre traders.

The market dictates how money may be made at any instant of time. A trader stays neutrally bias to be able to hear what he is being told and what he is being told to do. Anyone who is otherwise biased or taking personal control to determine his bias is screwing up. You are being told this repeatedly and you even post threads to ill inform others in educational locations. It is a damn shame that these initiatives on your part can continue.

finally, your second paragraph imparts a falsehood of prime consideration. It is a major major mistake to ever trade using as a reference yourself. You are not important. The market is the only important thing to traders. Using an entry price and direction as the standard against which to measure is a cardinal sin of the stupid trader. the one and only reference in the present (where all trading takes place) is the market and what it is dictating to the trader. One never bases any trading activity in any way whatsoever on a market position.

For trading there are two basic requirements that a traders has to meet at all times:

He must maintain a nuetrla bias in order to be instructed by the market which is always correct at any time.

Second, he may not kill the liquidity of the market by violating the capacity of the market at any time. you do not have to worry about that since you do not have that capability nor will you ever. personally I make it a rule to NOT trade any more than 10% of the cummulative volume being dictated to me by the market on any day during RTH's.

Your comments are totally off the mark and you are now obligated to bear their consequences permanently. There is no way you, at this point can recover mentally from what you, by your choice, have visited upon yourself.

Excellent post!
 
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