|
PureBytes Links
Trading Reference Links
|
Ric,
This is an excellent, thought provoking post! Thank you. It's got the kind of detail that will lead me to look at these market relationships without telling me exactly what to do.
It definately gets me interested.
Steve
On Fri, 08 February 2002, ric ingram wrote:
>
> <html>
>
>
> <font size=3>Hi,<br><br>
> This is a long email. For those who like to 'read'
> pictures I suggest the delete key.<br><br>
> As a trader are you trying to be a master of the difficult or are your
> hoping to become a student of the easy?<br><br>
> As your still with me, this email gives:<br><br>
> <x-tab> </x-tab>-<x-tab> </x-tab>a
> possible explanation of why most (it is said 95%) traders lose
> money,<br><br>
> <x-tab> </x-tab>-<x-tab> </x-tab>a
> practical example of one of three trading styles that seem to account for
> <x-tab> </x-tab><x-tab> </x-tab>the
> majority of the successful traders.<br><br>
> The approach taken is to suggest it is perhaps easier to make money as a
> not too effective trader, trading an inherently highly profitable
> approach, than to try to learn to be a highly tuned money-making-machine
> using a hard to win at style of trading.<br><br>
> I repeat, as a trader are you trying to be a master of the difficult or
> are your hoping to become a student of the easy?<br><br>
> Traders who regularly make money trading with the trend are rightly
> applauded.<br><br>
> For it is a difficult task to master, and that is why such traders are so
> are few in number and rarely make more than 50% per annum every
> year. <br><br>
> Even a consistent 20% plus a year is impressive for such trading, and an
> investment manager that can make a regular 20% plus a year with limited
> draw-downs and is willing and able (psychologically) to manage other
> peoples money will have many ready takers.
> And deservedly so, for such managers are masters of the difficult and
> deserve every penny they make.<br><br>
> Some manage a trend following trading style without much stress and good
> luck to them. There are techniques that can catapult them to
> lower stress, more regular and higher profits - for example risk of ruin
> considerations and position sizing and service concepts.<br><br>
> The fact that most trading material that is written assumes that trading
> with the trend is the only way to trade is to be expected as:<br><br>
> <x-tab> </x-tab>-<x-tab> </x-tab>it
> is simple,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>it
> meets instant gratification needs,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>it
> is what the majority of new traders want to hear,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>it
> is assumed to be the only way to go,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>many
> of 'fundamental' based players are natural trend followers,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>a
> majority of 'technical' based techniques are trend followers tools,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>most
> like to be a member of the crowd,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>most
> spend their lives seeking rather than offering service.<br><br>
> So most new traders try to trade this way, hoping to emulate the masters
> of the difficult, but then most traders lose and drop
> out. But still the 'penny does not drop' - and for
> some, because of human nature, perhaps never will, at least in this
> life.<br><br>
> Most successful traders, and certainly an overwhelming majority of those
> that regularly make 50% or more per annum seem to mostly use one of three
> trading techniques or variants or combinations of :<br><br>
> <x-tab> </x-tab>-<x-tab> </x-tab>spread
> trading strategies,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>volatility
> breakout techniques,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>market
> making techniques.<br><br>
> This is because these trading styles/techniques tend to have lower stress
> and are inherently more profitable - so a mere student of the easy can
> often exceed the success of the masters of the difficult.<br><br>
> We will look at the spread trading concept - as it is simple to describe
> and to give some examples.<br><br>
> Some of the biggest traders by capital employed are
> spreaders. Arbitrage of index futures against the underlying
> cash instruments is a example of spreading. Let us look first
> at these traders.<br><br>
> Let us assume the fair premium of the S & P 500 future (based on
> interest rates, margin requirements, dividend distributions, time to
> expiry) is 4 points for 2 months to go to expiry.<br><br>
> Imagine that the index future stands at 6 points above the cash
> stocks. An index arbitrageur will buy the cash stock
> (probably via an ongoing arrangement with a pension fund) and sell the
> futures to an equivalent value.<br><br>
> He/she will then pick up the two points discrepancy to fair value by
> holding the cash and futures to expiry of the futures and sell the cash
> stock back to the original owner at the going rate.<br><br>
> He/she will pick up a net, near risk-less, 2 points in 2 months less
> annual fees to the stock lender for his trouble.<br><br>
> Only 2 points you say, in 2 months - not a good return.
> But often the profit is on money borrowed for the purpose, and that 2
> points in say 1,000 is worth having - on say, $500,000,000 of stock, as
> it amounts to a million bucks.<br><br>
> Yes, this is not an untypical trade size for arbitrageur of this
> kind.<br><br>
> Also, in practice the premium often varies from 2 points above fair value
> to 2 points below fair value and back again many times in two
> months. Often the swings available are much higher than those
> in the example.<br><br>
> So our hero/heroine takes his/her four points (or more) often many times
> in the 2 month period.<br><br>
> So now you know why the big guys get bigger - they take nearly risk-less
> profits over and over again on their own and/or other peoples
> money.<br><br>
> They get paid well because they provide a range of services:<br><br>
> <x-tab> </x-tab>-<x-tab> </x-tab>they
> are low risk borrowers for the banks and pay interest on big
> <x-tab> </x-tab><x-tab> </x-tab>chunks
> of money to the lenders,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>they
> help keep the futures premium within reasonable bounds so more
> <x-tab> </x-tab><x-tab> </x-tab>near
> a fair premium is paid by future traders,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>they
> provide a large supply of future contracts when everyone is bidding
> <x-tab> </x-tab><x-tab> </x-tab>up
> the price of the future compared to the cash index - that is when the
> <br>
> <x-tab> </x-tab><x-tab> </x-tab>premium
> is high,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>they
> provide a large demand for future contracts when everyone is
> <x-tab> </x-tab><x-tab> </x-tab>selling
> the future compared to the cash index - that is when the <br>
> <x-tab> </x-tab><x-tab> </x-tab>premium
> is low,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>they
> help keep the market makers books more balanced and requiring
> <x-tab> </x-tab><x-tab> </x-tab>less
> cash for their activities,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>they
> permit big buy and hold institutions such as insurance companies
> <x-tab> </x-tab><x-tab> </x-tab>and
> pension funds to earn extra stock lending fees to add to dividends,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>...<br><br>
> But let us look at a more practical spread available to those only with
> pennies a point (not $50,000 a point) to risk and available more than
> once most weeks.<br><br>
> Imagine you have an account with an internet trader that allows you to
> trade in 1 cent units on the S & P 500 and the DOW. Real
> time prices, updated every 20 seconds or better is provided free - so
> your costs are limited to your internet charges. This is all a
> reality now.<br><br>
> You have analysed the relationship between the movements on the DOW and
> the movements on the S & P 500. You believe they move in
> a ratio of 7 to 1, 8 to 1 ... 12 to 1 - each traders perception is
> different. Whatever works for you.<br><br>
> This morning they move out of line (according to your ratio) by 25 (or 50
> or 100 or other parameter) DOW points. You buy the cheap one,
> you sell the expensive one.<br><br>
> Your studies tell you that such a discrepancy unwinds within the
> hour/day/week/month 30%, 40%, ... 90% of the time - every traders
> time horizon and perception is different.<br><br>
> When it unwinds or reverses (another alternative view) you take your
> profit. If the divergence gets bigger you take your
> loss or increase your position - another alternative.<br><br>
> You find perhaps you can take the equivalent of 2 full S & P 500
> points every day out of the market net of losses.<br><br>
> An example based, for simplicity on 25 points discrepancy and assuming a
> 10 to 1 ratio will perhaps help.<br><br>
> I am sure your research will verify that 10 to 1 is not appropriate, but
> it makes the arithmetic easier.<br><br>
> The S & P 500 today is say at 1000.0 at open and the DOW is at 10,000
> at open.<br><br>
> By 10:03 a.m. the DOW has risen to 10050 and the S & P 500 has risen
> to 1001.5.<br><br>
> They have not moved in line and you feel the discrepancy is sufficient,
> based on your research, to try and exploit.<br><br>
> You buy 10 cents a point of the S & P 500 at 1002.0 (including all
> dealing costs), and you sell 1 cent a point of the DOW at 10046
> (including all dealing costs).<br><br>
> Your spread is much lower risk than just buying 10 cents a point on the S
> & P 500 or just selling 1 cent a point of the DOW as you have a
> spread and they tend to move together.<br><br>
> The margin for this trade will be less than $10 (that is right ten
> dollars).<br><br>
> Your margin is higher - you pay margin on both sides - helping to stop
> you overtrading.<br><br>
> Your research is good and most of the time (your percentage from your
> research) the two markets come back in line by the end of the hour/day
> ... and you unwind at <br>
> 1019.5 and 10198 including all costs with the results:<br><br>
> <x-tab> </x-tab>profit
> $0.10 x (1019.5 -1002.0) = $1.75<br>
> <x-tab> </x-tab>loss
> $0.01 x (10198 - 10046) = $1.52<br><br>
> Net profit $0.23. Not bad on a low risk trade in a hour or so
> and on a standard margin of say $10 excluding running profits or
> losses.<br><br>
> Assume you have an account of $1,000 and so you are only trading (in
> terms of the $10 margin) about 1% of your account size.<br><br>
> Sometimes, based on your research - you take a loss.
> Let us assume that $0.03 average allowance for losses must be made for
> each profitable event.<br><br>
> You have made $0.20 profit, (net of allowance for losses) on
> $1,000.<br><br>
> Assume this is available just once each and every day and you trade 200
> days a year.<br><br>
> Your yearly net profit is $40 or 4% per annum.<br><br>
> Let us assume that you can continue this profit profile over several
> months, building confidence slowly to be able to trade 20 cents against 2
> cents (assuming the mythical 10 to 1 ratio).<br><br>
> You are now making 8% per annum. You take the time to
> back-test by hand (by hand for optimum confidence) using the free data
> supplied by your internet dealer over 30 years of data to include a very
> big up day and a very big down day. <br><br>
> Your confidence grows. You go, small step by small step to
> trading $1 on the S & P against 10 cents on the DOW (assuming you
> still feel 10 to 1 is the appropriate ratio) - 10 times your original
> risk level - your daily standard margin (excluding running losses or
> profits) is now about $100 - well within the original $1,000 account -
> leaving lots of room for any sudden dramatic doubling or trebling or even
> quadrupling of margin. You are not going to be in the class
> of losers that get closed at a loss out because you run out of
> margin.<br><br>
> You are now making a net $2 a day - $400 a year and 40% per annum profit
> ignoring compounding. And low risk and stress-free
> too. You are a student of the easy, not a master of the
> difficult.<br><br>
> As often as your research tells you, you count your profit and assess
> against five criteria:<br><br>
> <x-tab> </x-tab>-<x-tab> </x-tab>profit
> percentage per unit time after allowing for occasional losses,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>net
> reward per unit risk,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>net
> reward per unit margin,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>the
> stress level,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>actual
> market behaviour against theoretical behaviour.<br><br>
> You find the first is good, the second outstanding, the third poor, the
> fourth lower than you have ever known, the fifth to build your
> confidence, give you early warning of changes in spread relationships,
> and data to refine your risk of ruin calculations.<br><br>
> Why predict and invoke your ego?<br><br>
> Why emote away and suffer for it?<br><br>
> Why not provide service in this case:<br><br>
> <x-tab> </x-tab>-<x-tab> </x-tab>by
> buying that index most oversold,<br>
> <x-tab> </x-tab>-<x-tab> </x-tab>by
> selling that index most overbought,<br><br>
> so you do not self-sabotage as you know you have provided service and
> profit is your due reward. You get to keep your
> profit.<br><br>
> Good thinking leads to stress-free enjoyable and profitable
> trading.<br><br>
> And a life outside of trading - and the money and stress-free existence
> to enjoy it to the full.<br><br>
> Effortless and simple. Much better to be a student of
> the easy than to try to be a master of the difficult.<br><br>
> Unconditional regards, Ric.<br>
> www.traderscalm.com
> <br><br>
> P.S.<br><br>
> There are many pairs of markets to spread, each with their own opportunities and risk profiles.<br><br>
> Sometimes you can spread the same pair of markets for a profit several times in the same day.<br><br>
> The possibilities are as large as your imagination. </font>
> <br>
>
> <!-- |**|begin egp html banner|**| -->
>
> <table border=0 cellspacing=0 cellpadding=2>
> <tr bgcolor=#FFFFCC>
> <td align=center><font size="-1" color=#003399><b>Yahoo! Groups Sponsor</b></font></td>
> </tr>
> <tr bgcolor=#FFFFFF>
> <td align=center width=470><table border=0 cellpadding=0 cellspacing=0><tr><td align=center><font face=arial size=-2>ADVERTISEMENT</font><br></td></tr></table></td>
> </tr>
> <tr><td><img alt="" width=1 height=1 src="http://us.adserver.yahoo.com/l?M=221000.1882886.3382503.1261774/D=egroupmail/S=1705001779:HM/A=965714/rand=116319124";></td></tr>
> </table>
>
> <!-- |**|end egp html banner|**| -->
>
>
> <br>
> <tt>
> To unsubscribe from this group, send an email to:<BR>
> realtraders-unsubscribe@xxxxxxxxxxxxxxx<BR>
> <BR>
> </tt>
> <br>
>
> <br>
> <tt>Your use of Yahoo! Groups is subject to the Yahoo! Terms of Service.</tt>
> </br>
>
> </html>
________________________________________________
PeoplePC: It's for people. And it's just smart.
http://www.peoplepc.com
------------------------ Yahoo! Groups Sponsor ---------------------~-->
Get your FREE credit report with a FREE CreditCheck
Monitoring Service trial
http://us.click.yahoo.com/ACHqaB/bQ8CAA/ySSFAA/zMEolB/TM
---------------------------------------------------------------------~->
To unsubscribe from this group, send an email to:
realtraders-unsubscribe@xxxxxxxxxxxxxxx
Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/
|