The truth about trading arcades

[TWI]

I would advise anybody who asked me, not to join anywhere that asks you to put up a stake and then makes that the primary risk capital. Either you are self funded or you are funded. If there is some half/half deal then it better ensure that if you fail you share the risk. I do not know the truth of it myself but if it is true then this is likely to damage what is on the whole a reputable business.

rog111 - The method I trade now is a combination of what I was taught by some x-floor traders who have been proven successful on the screen and things I have learnt myself over years of being in the market.
Without the floor traders knowledge I would not be self employed now as I did not have the confidence or know how to make such a consistent return on capital.
The large commercials generally trade on fundamentals and take very large positions in derivatives and futures. Fact is, a company like Cargill has people on the ground in every country and information is shared throughout the company allowing very informed positions to be taken. It is quite rare to take positions based on technicals in these environments. A lot of the commercials businesses are actually making their money from processing products to add value or shipping products across the globe and making profit on costs of getting that product from the producer to consumer. Naturally there ends up being a continuous and large exposure to risk and this tends to be centralised in a department who controls the entire companies overall risk in a given sector. Commercials love supply/demand projections far more than price charts. I spent 3 years as a trader in a commercial house before I ever heard of technical analysis. Other commercials are companies like the former Enron where you have such dominance of a marketplace that you manipulate the price based on extensive so probably well founded research and push it the way you want it to go with everybody else going along for the ride. It is not possible to use these methods as an individual but appreciating how the commercials work is useful in understanding commodity markets.

wisestguy - By prop trading business I mean a business that trades its own rather than a customers money. prop = proprietary. IB = Investment Bank. Regarding taking people on, yes I do, although I prefer to keep it low key and I also trade for myself.

 

[wisestguy]

twalker ,

well , if you are a PT then why employ people and why force them to trade your system , if that's the case , why not just computerise everything , especially if they have to stump up their own risk money.

 

[rog1111]

twalker

thanks for the excellent post. So would you say that the Comms would sell a certain level based on underlying physical value/supply/demand, regardless of other traders actions ? Or is it more dynamic than that ? A study of COT reports for futures reveals that for many commodites the Comms are essentially always on the opposite side to the public, presumably because they are providing liquidity. eg as price rises, the public get longer & longer, naturally enough, and open interest rises, while the Comms get steadily shorter.

rog1111

 

[TWI]

wisestguy,
I do believe it is possible to computerise this sort of trading but I have not been able to do this to date as I do not have the coding skills or the API to develop on as of yet. I have investigated the possibility at length. It is ultimately a complex set of decisions that need to be made when you break down the logic. I think with enough IT resource and plenty of time something good could be produced. I doubt however whether it would out perform a room full of good traders. The advantage of employing and training is that no two traders will trade in exactly the same way. Once they are trained in the basic methodology they tend to develop their own style and so by employing a number of traders you end up with a certain diversification that is not possible either on your own or with a basic system. I have never seen two traders with exactly the same performance there is a radical difference between the above average and below average performers despite the fact they receive identical training.

rog111 - I made a mistake in what I wrote previously when i said "very large positions in derivatives and futures" I meant in Physicals and derivatives.
Yes the commercial will sell if they consider their supply/demand shows that the product is overpriced irrespective of what the technicians think. When you see the comms on the other side it is not possible to say what their actual position is as a large amount of derivative volume will be hedge volume against their physical exposure. Generally commercials will always be bullspread (long on spot with short hedge against it further back) as they are by their nature providing physical commodities to their customers so must always be long on the spot and likely also have ships on the water full of product to also supply near term needs. The comms keep a very close eye on this "basis" risk which is the spread between the exchange price and the delivery price in the location whether within the US or anywhere else in the World. For example with soybeans, they are price vs. Chicago to create a market in Brazil or Argentina that trades x or y dollars vs Chicago, even within US there is a market that trades a spread to Chicago depending where the beans are to be delivered. As a result of this the commercial usually plays massive spread positions which entail far more risk than their outright exposure.

 

[rog1111]

twalker

Thanks, presumably you meant to say far less risk ?

Bearing everything you have said in mind, the futures floor traders seem to be quite aware of Comm orders when they come in, and prices often seem to move accordingly, short term. I am interested to know whether, in your opinion and experience, & from a trading point of view, you think that there anything at all useful that can be gleaned from readily available COT reports & CTi order identities ?

rog1111

As a result of this the commercial usually plays massive spread positions which entail far more risk than their outright exposure.

 

[dr_d_michaelson]

Was Anley right all along?

Wow ... well, who knows? There can be a first time for anything ...

 

[TWI]

no, I meant more risk, they play big spreads and smaller flat price positions as this is the nature of their business. I think if you are in the pit and see order flow this is useful in the immediate time frame, otherwise I do not put a lot of store in which way the comms are positioned in the exchange as it is just one component of their risk. Probably more is to be read into the spec positions and how that changes over time.

 

[wisestguy]

twalker ,

still doesn't make good logical sense to me . if you want true diversity in risk , but with the best performance available , why not let them trade their own way , albeit within the " fundamental analysis " parameters .

unless that is what you already mean , and this is a conversation confused by mixing speakers of US and UK english .

 

[TWI]

I will only allow them to trade a certain way, allowing for their own development around a core strategy, because I am confident that better returns will be achieved in that way than any other that these guys might have come up with themselves. If they have some great way to trade then they will not need my money to prove it and I do not want to risk my capital on that hope either. It is about what I know works vs. what somebody might claim works and past experience with claims vs. reality . If somebody shows me a real track record that reflects a return equivalent to what I would expect one of my guys to make then I may reconsider but I haven't seen that yet. I actually think it better to take a person with no prior trading experience as they will tend to be more disciplined about what they are taught. I have seen many examples of people who thought they had a clue before they started and generally they lose money while trying to prove a point that doesn't exist.
I don't think there should be any confusion about that point.

 

[anley]

Wow ... well, who knows? There can be a first time for anything ...

Even a clock is right two times a day

 

[anley]

not if its 5 min fast - then it never is.

wot u meant to say is...


even a broken clock is right twice a day


am i pedantic or wot

No, you're right. I suddenly thought about this and came back to change it but you had beaten me to it.

Even a BROKEN clock is right two time a day.........

 

[stevespray]

twalker - What sorts of returns do your guys make using your core strategy ?

Steve.

 

[TWI]

for who? themselves or the business?

 

[stevespray]

Both or, in fact, overall.

Steve

 

[TWI]

I PM, do not want to continue discussion on here.

 

[wisestguy]

ah , as you say , you haven't seen one yet , but that don't mean they don't exist .

I turned up for an interview for a PT job and showed them my record , and they snapped me up in an instant .

needless to say , it realy was what I expected and I hated it .

 

[Roberto]

I turned up for an interview for a PT job and showed them my record ...

Part-time or proprietory trader?

 

[TWI]

wisestguy,
From my perspective there is no point in taking that sort of risk with my capital. It is simply not my business model.
If you have a good track record there will be a few hedge funds out there that would be interested in your talents and give you the capital to trade. People like Beach or Orn Capital do this sort of thing.
Good luck to you.

 

[stevespray]

In my experience ( I am self employed and run a couple of businesses and have interests in others) there is nothing more rewarding than being successful as a self employed person. Other people may feel differently and enjoy the security of full time employment + the benefits that brings such as paid holiday and medical cover etc.

With regard to trading - My best guess is that people grossly under-estimate the amount of trading capital required in order to make a regular living. If you have an extremely large block of capital then you are not going to worry about regular profits on a month by month basis as your capital will always be a buffer between you and the dole queue. On this thread people have suggested that £10,000 might be enough to 'get you started' - this is utter nonsense in my opinion. In my own experience you will need in excess of £100,000 in order to become a relaxed and controlled trader. "Scared money always loses" - that is a well known saying. If I was trading with £10k and had to meet monthly expenses plus find my costs of living then I'd be very scared. Under-capitalisation is one of the many reasons most people fail.

Steve.

 

[TWI]

Steve,
There are plenty of people earning a living with 20-30k accounts. A lot of the guys in the arcades do not keep more margin than that in their account and many do not have more to put up. I think a lot depends on your trading style, if you are a trend follower or take a view for any more than an intra-day perspective you will need to be more capitalised but for the majority of locals this is not the case.