WorldQuant’s New Fund Said to Lose 9.5% as Chaos Smashes Algos

[Gotcha]

Everyone has become so accustomed to the "Fed put", they think the sky is falling after a few down days.

Years ago a 20% decline in the market was considered "merely noise". Players coped with it, most by just holding through.

Today's players should wish for such volatility to return to the markets... much better profit potential if traded well.

The math of it I think works differently these days. Consider a 1% move in 2009 when the ES was 700. This means a 7 point move. Now that 1% move is about 26 points. With dollar values, its $350 vs. $1,820.

Now I don't know what margins were back then, but perhaps a 5% move wouldn't risk blowing your account, whereas now, that 5% move might very wipe out your account just because it will mean a much higher dollar value. If you had 5k in an account and were holding 1 ES contract long, this means price would have to drop 100 points before you lost it all. 100 points when the ES was 700 would be a 14% move, whereas now, that 100 points is less than a 4% move and can almost happen in just one day.

So I really think these days, the markets won't be able to absorb these wild swings as well as in the past.

 

[Scataphagos]

So I really think these days, the markets won't be able to absorb these wild swings as well as in the past.

Seems to me Fed policy has been based upon something other than "how much volatility the market can absorb".

 

[schweiz]

Now that 1% move is about 26 points. With dollar values, its $350 vs. $1,820.

26 points is $1,300, not 1,820.

In 1995 when the s&p was at 550, my margin was $160 per mini for intraday trading (in fact it was $800 per 250$/point contract as the emini did not exist yet).
Today when the s&p was at 2600, margin would be $756 per mini to have the same ratio. Today that margin is possible for a daytrader that has proven to be profitable.
So a 5 point move would be $1,375 in 1995 (550*0.05*50) and today it would be $6,500 (2,600*0.05*50).
So percentage wise the risk is more or less the same. The index rose roughly 4.7272 times and the margin too.

 

[Gotcha]

26 points is $1,300, not 1,820.

Oppps... of course you're right and a big mistake on my part.

Your example of 1375 vs 6500 is just for margin if I'm following your properly, but margin doesn't really represent the amount you can lose. (smaller margin would actually be beneficial since you would be liquidated sooner before losing more actual money)

If we take into account the 7% circuit breaker for example, when the ES was 700 in 2009, the 7% would shut down the markets and this would be a 49 point drop, so being long 1 ES would have you down $2,450. Now with the ES at 2600, the 7% is 182 points, and hence $9,100. (I don't know if the 7% breaker applied back then)

2009 is not that long ago, and inflation isn't very much of a factor. Of course housing went up, but I think most people agree that $100 is about the same amount of money now, as back then. So the point I was making was that percentage wise, the drops now are much more money than back then. When the media talks about 10% drops or whatever, its much more expensive now to stomach that than 10 years ago. Losing 9k is way more than losing 2.5k, even though both would represent a 7% drop.

 

[schweiz]

2009 is not that long ago, and inflation isn't very much of a factor. Of course housing went up, but I think most people agree that $100 is about the same amount of money now, as back then. So the point I was making was that percentage wise, the drops now are much more money than back then. When the media talks about 10% drops or whatever, its much more expensive now to stomach that than 10 years ago. Losing 9k is way more than losing 2.5k, even though both would represent a 7% drop.

Indeed inflation was smaller then the move up in $.
Losses are bigger, but the same is true for profits, they are also much bigger. So it works in both ways. If it works equally in both ways the final result in risk/reward stays the same. Number of winning trades are not changed, but average profit per winning trade and average loss per losing trade changes. But as they will change for the same percentages, the final result will be that a winners stays a winner and a losers stays a loser. Only the amounts will be bigger in both ways. I like this as I make now more money then before. Risk should always be compared with profits in a ratio.

 

[Gotcha]

Indeed inflation was smaller then the move up in $.
Losses are bigger, but the same is true for profits, they are also much bigger. So it works in both ways. If it works equally in both ways the final result in risk/reward stays the same. Number of winning trades are not changed, but average profit per winning trade and average loss per losing trade changes. But as they will change for the same percentages, the final result will be that a winners stays a winner and a losers stays a loser. Only the amounts will be bigger in both ways. I like this as I make now more money then before. Risk should always be compared with profits in a ratio.

Nobody ever blows up when they gain 7% though! And in fact, is there even such a thing as a limit up halt? I think the markets only ever halt on the way down. It doesn't happen often, but I have already been in front of my trading screens minimum of 2 times to see the the limit down halt get hit.

Its true that wins should be just as big as losses so that would cancel out, but once again, when we talk percentages, a 10% loss requires more than a 10% gain to get back to breakeven, so even here percentages are tricky. Furthermore, you would assume that if big losses are cancelled out by big wins, most traders should hover around breakeven, but we all know this isn't the case as most really will lose.