5 ms·

Book Review: The Laws of Trading

159 points by feross 3y ago

carabiner 3y ago
Waiting for Jumpcrisscross's commentary...
moneywoes 3y ago
Very well written Enjoyed the analysis, thanks for sharing.
hsjqllzlfkf 3y ago
I love it that the author says "understand why you're trading", when in reality market makers are usually the least informed players in the market. They don't know what instruments are worth, they mostly just believe whatever "the market" believes, and tweak a bit around that.
- unknownhedgie 3y ago
  That's true to an extent at the base level, but there is a pretty large pre-trade/post-trade analytics infrastructure in place to analyze trade quality and market trends. It's not uncommon to lose weeks worth of profit due to predators dumping shares into slow-moving MMs since such predators can send orders faster than MMs can cancel them in reaction to significant market movements. Some fundamental understanding of the asset class and market microstructures is needed (if not on the tech side then the quant side, but ideally both) so you know what you're trading. Given the sheer volume that goes through your typical broker-dealer, that's quite a reasonable investment to make.
  - dogmayor 3y ago
    Very true. MMs have to always be adjusting their marks due to new trades made, market moves, interest from other players, etc. Like you said, if an MM's bid keeps getting hit and they don't lower they get dumped on until they do adjust.
    - unknownhedgie 3y ago
      Yeah, I think there is a tendency to over-simplify the duties of responsibilities of a MM as "printing money", as if it's a passive business that solely relies on existing infrastructure (of course, just the existence of a boat load of directors and MDs all with their niche electronic trading/MM products is an indication it's not so simple, but I digress) and scale -- that is just not true. I try to explain to retail investors and outsiders interested in markets that this whole operation requires a truly mind-boggling amounts of money and brainpower to keep going on a regular basis, but it's hard talking to people who have never experienced working in the industry.
      - dogmayor 3y ago
        For sure. The infrastructure costs, both initial and maintenence, are astronomical. The underlying infra of a single shop, not to mention the entire market plumbing, is so complex and severely underestimated in general.
- jshaqaw 3y ago
  The market makers do understand why they are trading and understand it has nothing to do with fundamental value. That may be your reason for trading. They are there to rapidly and correctly assess short term supply and demand so they can extract compensation for providing liquidity. And that’s a good thing. A market made of heterogenous actors with different objectives and time scales is far more robust.
- anonymoushn 3y ago
  Well, we're trading because the last 30,000 times we traded in the last day we made most of a basis point per trade on average
- dogmayor 3y ago
  This is entirely wrong. MMs aren't doing deep analysis like a hedge fund, but they do have insight into the buy/sell interest across the market. And how do you think one makes a market if they don't have an idea what something is worth? Prices aren't necessarily values, MMs value instruments and then trade accordingly at prices quoted. They don't search for misvalued items like a l/s fund, but they always have a theoretical value and make a market around that internal number when asked.
halfcat 3y ago
The sentence I agree with most: > In as technical a field as trading, sheer willpower is often what gets things done in the end. Institutional and retail trading are as different as Microsoft and a solo startup side project. Some principles transfer, like gambling theory, expected value, risk of ruin. But retail trading tends to be more like the person who just really loves Excel, and they’ve somehow built an inefficient monstrosity of linked Excel files that only they understand, to accomplish what should be handled by an enterprise ERP. But it works. And it turns out you can make a living this way. Institutional trading is no doubt one of the hardest games one can engage in. But retail trading: They’ve figured out how to plow a field with a spoon. Either because they are obsessive about fields, or spoons, and it just happens to be the case that one can make a living plowing fields.
- sidlls 3y ago
  > But retail trading: They’ve figured out how to plow a field with a spoon. Have they, though? Or, perhaps a better question, who is "they" and how do they make a living retail trading? Aren't most successful retail traders successful by being on the correct (lucky) leg of the random walk? I have been under the impression that the ratio of successful to busted retail traders is quite close to zero.
  - halfcat 3y ago
    For sure. Nearly all retail traders lose. But it’s primarily a result of unrealistic expectations and low barrier to entry. If there were YouTube ads for weekend boot camps to become a doctor in 3 days and start making 6-figures next week, we’d ask why 99% of doctors fail. Aside from luck, many appear profitable for a while, maybe 1-2 years, but even most of those have tricked themselves. They use too much leverage and beat the market until an infrequent correction happens and wipes them out, or they follow scammy systems that have high win rates and a very long duration before they hit a drawdown that wiped out all prior profits. Picking up pennies in front of a steam roller. For instance, you can pick whatever win rate you’d like, but it won’t necessarily be profitable. The scammer selling the course understands how that works, but the newly certified trader doesn’t. Determining who “they” are is honestly hard, because luck and leverage can pave a long runway. If someone starts a business, and exits 5 years later with 7-figures in the bank, is there a way to know if they’re successful at business or just lucky? It’s hard to answer that question, good business people still exist.
Terr_ 3y ago
> A book about trading isn’t ever actually about trading Hmm, would "A Random Walk Down Wall Street" [0] qualify as another exception? It's been a while, but I seem to recall it as neither a "I'm genius invest with me" nor "let's point and laugh at those guys". [0] https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
- JimtheCoder 3y ago
  I recall it mostly as efficient market BS...
deleted 3y ago
[deleted]
dpweb 3y ago
There's always a plethora of misinformation about trading, so here goes.. Retail and institutional is the difference between playing in a casino and being the casino. It's important to understand - on the whole - he average probability of guessing the direction of a trade is 50/50. Any obvious (and virtually all non-obvious) edges, arbitrage for instance, are removed by the market participants. That's what a market IS. In that respect, 'random walk' is correct. However, that does not mean all participants cannot expect profitability over the short or long term. Which are also themselves, very different things. For retail traders, transaction cost (commissions + bid/ask spread) make it a negative expectancy. In fact, bid/ask spreads and commissions ARE PRICED right at a level to remove any positive expectancy, but leave the APPEARANCE of a possible positive one. Getting that up just a couple percentage points to a positive expectancy is difficult in the short term, and VERY difficult over the long term. Not impossible. That's why about 70-80% of active retail traders are losing overall at any given time. For firms, order flow and much lower transaction costs make for a positive expectancy. The value of order flow alone is responsible for the zero-commission trading industry. Skill isn't the issue. The trader with skill level at lose a little or break even trading - from his bedroom - would very possibly be winning on the big banks trading desk. Even if executing the SAME trades they were at retail. More so, the more frequent the trading activity. So if big institutions have a built in edge why do they sometimes fail? Easy, they still sometimes make stupid bets (ie.. Silicon Valley Bank's bond bet which killed it).
- tnecniv 3y ago
  I have a family member who was a speculator for about a decade and worked in a secondary role for investment banks for the rest of their career. Their advice, as a retail investor, was to just build a diverse portfolio so you are profiting from the market averaging above inflation in the long term. Obviously, later in life you want to transition toward more stable investments like bonds so your retirement money isn’t gone if there’s a crash, but that was the core idea. Is that not sound advice? Based on your comment, any investment at retail is a loss on average.
  - DavidSJ 3y ago
    I think that's consistent with their comment. They said it's still possible to expect profit over the long-term, you just won't have an edge over the market as a whole.
fuidani 3y ago
Enjoyed reading this book review. I am encouraged to buy the book. Thank you for sharing.
katrinaroberta 3y ago
[dead]

159 points by feross 3y ago

carabiner 3y ago

Waiting for Jumpcrisscross's commentary...

moneywoes 3y ago

Very well written Enjoyed the analysis, thanks for sharing.

hsjqllzlfkf 3y ago

I love it that the author says "understand why you're trading", when in reality market makers are usually the least informed players in the market. They don't know what instruments are worth, they mostly just believe whatever "the market" believes, and tweak a bit around that.

unknownhedgie 3y ago
That's true to an extent at the base level, but there is a pretty large pre-trade/post-trade analytics infrastructure in place to analyze trade quality and market trends. It's not uncommon to lose weeks worth of profit due to predators dumping shares into slow-moving MMs since such predators can send orders faster than MMs can cancel them in reaction to significant market movements. Some fundamental understanding of the asset class and market microstructures is needed (if not on the tech side then the quant side, but ideally both) so you know what you're trading. Given the sheer volume that goes through your typical broker-dealer, that's quite a reasonable investment to make.
- dogmayor 3y ago
  Very true. MMs have to always be adjusting their marks due to new trades made, market moves, interest from other players, etc. Like you said, if an MM's bid keeps getting hit and they don't lower they get dumped on until they do adjust.
  - unknownhedgie 3y ago
    Yeah, I think there is a tendency to over-simplify the duties of responsibilities of a MM as "printing money", as if it's a passive business that solely relies on existing infrastructure (of course, just the existence of a boat load of directors and MDs all with their niche electronic trading/MM products is an indication it's not so simple, but I digress) and scale -- that is just not true. I try to explain to retail investors and outsiders interested in markets that this whole operation requires a truly mind-boggling amounts of money and brainpower to keep going on a regular basis, but it's hard talking to people who have never experienced working in the industry.
    - dogmayor 3y ago
      For sure. The infrastructure costs, both initial and maintenence, are astronomical. The underlying infra of a single shop, not to mention the entire market plumbing, is so complex and severely underestimated in general.
jshaqaw 3y ago
The market makers do understand why they are trading and understand it has nothing to do with fundamental value. That may be your reason for trading. They are there to rapidly and correctly assess short term supply and demand so they can extract compensation for providing liquidity. And that’s a good thing. A market made of heterogenous actors with different objectives and time scales is far more robust.
anonymoushn 3y ago
Well, we're trading because the last 30,000 times we traded in the last day we made most of a basis point per trade on average
dogmayor 3y ago
This is entirely wrong. MMs aren't doing deep analysis like a hedge fund, but they do have insight into the buy/sell interest across the market. And how do you think one makes a market if they don't have an idea what something is worth? Prices aren't necessarily values, MMs value instruments and then trade accordingly at prices quoted. They don't search for misvalued items like a l/s fund, but they always have a theoretical value and make a market around that internal number when asked.

halfcat 3y ago

The sentence I agree with most: > In as technical a field as trading, sheer willpower is often what gets things done in the end. Institutional and retail trading are as different as Microsoft and a solo startup side project. Some principles transfer, like gambling theory, expected value, risk of ruin. But retail trading tends to be more like the person who just really loves Excel, and they’ve somehow built an inefficient monstrosity of linked Excel files that only they understand, to accomplish what should be handled by an enterprise ERP. But it works. And it turns out you can make a living this way. Institutional trading is no doubt one of the hardest games one can engage in. But retail trading: They’ve figured out how to plow a field with a spoon. Either because they are obsessive about fields, or spoons, and it just happens to be the case that one can make a living plowing fields.

sidlls 3y ago
> But retail trading: They’ve figured out how to plow a field with a spoon. Have they, though? Or, perhaps a better question, who is "they" and how do they make a living retail trading? Aren't most successful retail traders successful by being on the correct (lucky) leg of the random walk? I have been under the impression that the ratio of successful to busted retail traders is quite close to zero.
- halfcat 3y ago
  For sure. Nearly all retail traders lose. But it’s primarily a result of unrealistic expectations and low barrier to entry. If there were YouTube ads for weekend boot camps to become a doctor in 3 days and start making 6-figures next week, we’d ask why 99% of doctors fail. Aside from luck, many appear profitable for a while, maybe 1-2 years, but even most of those have tricked themselves. They use too much leverage and beat the market until an infrequent correction happens and wipes them out, or they follow scammy systems that have high win rates and a very long duration before they hit a drawdown that wiped out all prior profits. Picking up pennies in front of a steam roller. For instance, you can pick whatever win rate you’d like, but it won’t necessarily be profitable. The scammer selling the course understands how that works, but the newly certified trader doesn’t. Determining who “they” are is honestly hard, because luck and leverage can pave a long runway. If someone starts a business, and exits 5 years later with 7-figures in the bank, is there a way to know if they’re successful at business or just lucky? It’s hard to answer that question, good business people still exist.

Terr_ 3y ago

> A book about trading isn’t ever actually about trading Hmm, would "A Random Walk Down Wall Street" [0] qualify as another exception? It's been a while, but I seem to recall it as neither a "I'm genius invest with me" nor "let's point and laugh at those guys". [0] https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

JimtheCoder 3y ago
I recall it mostly as efficient market BS...

deleted 3y ago

[deleted]

dpweb 3y ago

There's always a plethora of misinformation about trading, so here goes.. Retail and institutional is the difference between playing in a casino and being the casino. It's important to understand - on the whole - he average probability of guessing the direction of a trade is 50/50. Any obvious (and virtually all non-obvious) edges, arbitrage for instance, are removed by the market participants. That's what a market IS. In that respect, 'random walk' is correct. However, that does not mean all participants cannot expect profitability over the short or long term. Which are also themselves, very different things. For retail traders, transaction cost (commissions + bid/ask spread) make it a negative expectancy. In fact, bid/ask spreads and commissions ARE PRICED right at a level to remove any positive expectancy, but leave the APPEARANCE of a possible positive one. Getting that up just a couple percentage points to a positive expectancy is difficult in the short term, and VERY difficult over the long term. Not impossible. That's why about 70-80% of active retail traders are losing overall at any given time. For firms, order flow and much lower transaction costs make for a positive expectancy. The value of order flow alone is responsible for the zero-commission trading industry. Skill isn't the issue. The trader with skill level at lose a little or break even trading - from his bedroom - would very possibly be winning on the big banks trading desk. Even if executing the SAME trades they were at retail. More so, the more frequent the trading activity. So if big institutions have a built in edge why do they sometimes fail? Easy, they still sometimes make stupid bets (ie.. Silicon Valley Bank's bond bet which killed it).

tnecniv 3y ago
I have a family member who was a speculator for about a decade and worked in a secondary role for investment banks for the rest of their career. Their advice, as a retail investor, was to just build a diverse portfolio so you are profiting from the market averaging above inflation in the long term. Obviously, later in life you want to transition toward more stable investments like bonds so your retirement money isn’t gone if there’s a crash, but that was the core idea. Is that not sound advice? Based on your comment, any investment at retail is a loss on average.
- DavidSJ 3y ago
  I think that's consistent with their comment. They said it's still possible to expect profit over the long-term, you just won't have an edge over the market as a whole.

fuidani 3y ago

Enjoyed reading this book review. I am encouraged to buy the book. Thank you for sharing.

katrinaroberta 3y ago

[dead]