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Bobr
At Date: Wed, 20 Feb 2002 08:08:52 -0800 you wrote:
From: "BobR" <bobrabcd@xxxxxxxxxxxxx>
Subject: Re: Where do trading profits come from?
Ric, in an earlier post you mentioned learning a trick from a broker to
buy/sell the open and manage the trade into profits. Is that something
you can go into detail here? How and when do you decide whether you are
going to go long or short at the open? What is the entry and exit
criteria?
thanks,
bobr
All entry/exit 'criteria' will be revealed - it is called market
making. But before we can make money at trading such a system
(or any other) there is a pre-requisite of clarity of perception - and I
give some examples to explain.
The original text (14th Feb) was:
" - how
two of the best FTSE locals would trade futures at the market open
and
then go home with open positions,"
"These mysteries arose from listening to, and questioning one FTSE
option guy and two FTSE futures guys I occasionally met through two close
friends."
Your mis-remembering or mis-quoting as it being a broker rather than
three traders met via friends, is a small error compared to so many
others mis-remembering or mis-quoting on this forum.
Some have accused me of calling myself a master when I specifically
claimed to be a "student of the easy" rather than a
"master of the difficult". You will, of
course, have noticed that the higher the emotion, the greater the
mis-perception and the higher the self-righteousness of those who have
mis-perceived - it being easier to go along with others emotions than
actually read what was written.
If this were not so, the losers in the market would not be so blind as to
keep repeating their mistake of following others emotions and so losing
money again. It takes a certain kind of blindness to do so
this - I had it for the first ten years of my trading, I hope others on
this forum learn faster.
But emotion has a way of clouding our perceptions and often making us see
a reflection of ourselves, rather than what is actually
there. Two examples I tell against myself that are also in
the 14th Feb email are:
"I never really fully grasped what they were telling me because I
had a trend following perspective and was misunderstanding their wisdom.
"
"When the market was rising, he would say he was going to take an
opening trade, selling it at 15 points higher if it got there. In my
arrogance I assumed he meant he would buy it and he was just confused - I
never twigged why he seemed to make 40 points for every hard won 10
points I made and 100 points when I lost 5. God, I was dumb! I still did
not get it when, having been in and out of employment and very poor, he
retired at 28 to live in the Bahamas!"
The quantity and quality of mis-reading and mis-quoting by some on this
forum is typical of highly emotional people. One
wonders how they can possibly see market behaviour clearly when they
cannot even see what is said in writing. But some obviously
feel 'never let the facts get in the way of a good emote.'
So I guess some of my trading profits come from emotional people on this
forum that is why I explain rather than complain. To complain
would be churlish - for they are part of the source of my
profits.
If we want to succeed at trading any style of trading, it is necessary to
curb our emotional clouding of our perceptions - and this is something
only each one of us can do for ourselves - what one of my clients
eloquently described as "a kind of price of entry to the winners
enclosure". One can point out the personal cost of
emotional behaviour as I am doing here to help the emotional a little,
but in the end each person is responsible for curbing his/her own
emotions and so having a small chance of success at trading.
But back to the market making style you asked about.
You repeatedly sell if the price is repeatedly rising and repeatedly buy
if the price is repeated falling, and just wait. So entry and
exit criteria are determined by the crowd - you just fade
them. As they eventually lose, you eventually win - and boy
do they pay well.
You service the majority and the majority pay you, and very
well. You make a small profit each from a large number of
players and they keep coming back to pay you more because you provide a
regular service to satisfy their regular emotional wants.
As you use multiple entry and running losses can add up, trade size must
be very low (many times lower) compared, to say, a trend following
style. Risk of ruin is as always used to determine
appropriate trade size. But each traders acceptable risk of
ruin is different.
To perform market making on even a mini US contract requires an amount of
capital most traders do not possess or wish to allocate to
trading. So before the advent of the internet and
availability of low unit sizes I was only able to do this in my pension
fund where I controlled the unit size.
The internet now makes the market making approach potentially available
to a wider range of participants as the unit size can be controlled by
the trader from 1 penny a point upwards.
With market making:
If trade goes your way straight away fine. If not, you
typically need a 30% retracement to break even.
You just take out all the volatility and any reasonable retracement puts
money in your account.
So you make money even when the market moves against you. In
practice, the more the initial running losses (that is the more the
market moves against your initial position), the more profit is
eventually made. In my experience, the eventual profits grow
at a faster rate than the running losses needed to be supported
first.
It took me some time to get over being disappointed (detachment being the
ideal) when my initial entry went straight into profit - as this is the
least profitable market path.
So yes, you make money in a sideways market and this is more than if
price goes in favour of first entry, but the real money is in fading a
big 'trend' - but you need to really under-trade so you can stand the
adverse moves and be there enjoy the eventual profits.
Only spreading as a trading style comes close to profitability of market
making in my experience.
If you think about it, the smaller the group you are in, the fewer the
number of people there are to share the profits - so more profits per
person.
No trading style is for everyone and a market making strategy requires
more confidence and more patience than most. Spread
styles provide good profit potential without needing so much confidence
and with a little less patience.
But as always a rounded education, including understanding what others
do, is always useful even if you never trade that way, except for the
emotional - who prefer to emote rather than learn.
If you want more, just ask privately.
Unconditional regards, Ric.
www.traderscalm.com
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