8 ms·

This. I love crazy projects and Show HN's until the cows come home, but this one is dangerous that I must repeat the warning to others. I cannot emphasize how

by yajoe 14y ago

This. I love crazy projects and Show HN's until the cows come home, but this one is dangerous that I must repeat the warning to others. I cannot emphasize how important it is to understand that people who trade using price action (http://en.wikipedia.org/wiki/Price_action_trading http://en.wikipedia.org/wiki/Price_action_trading ) are just speculating based on where they expect the price to move. It's no different than people who play Texas Hold'em online and speculate what cards others have based on betting patterns. If you get good at spotting the patterns (like this guy did) you can go on a winning streak, but when the game changes (as it did for this individual after 2009) then you either go home or go broke. This guy found one edge in 2009. It won him 500k. Fantastic. More than any edge ever won me. But, the market has changed so much since then, with HFT becoming so prevalent (http://www.theverge.com/2012/8/7/3226187/high-frequency-trading-animated-gif http://www.theverge.com/2012/8/7/3226187/high-frequency-trad... ) that please be careful before you follow this course. His code is unlikely to be worth much today unmodified, and when you modify it you'll realize, as I have, that when the other players have access to the order books and can jump the line you have no chance in the game in 2012. One last nit: Please, please post recent data when you talk about projects like this. 2009-2010 is 3 years ago. Since then there was significant turmoil in the US, Asia, and the EU. How are these returns relevant for today?

beagle3 14y ago
The Instagram guys found an edge. It won them 730m. Fantastic. More than any edge ever won by me. But the market has changed so much since then, please be careful before you follow this course. You are not wrong, but what you wrote here is applicable to any success story posted on HN. Caveat lector. Always.
- toomuchtodo 14y ago
  I think with the automated trading example, it makes it seem much easier for anyone to dip their cup in the stream. When you think Facebook/Instagram, you think "Damn, those guys got lucky as hell". When you think automated trading, you think, "Hey, it can't be that hard", and start firing up your IDE and rolling out code to talk to an easily provisioned API. Sure, it may take months to lose your shirt selling a photo service to Face/Goog/Apple. You can lose everything overnight with automated trading. My father used to trade commodities for a living in the pit at the CME many moons ago, and when I was growing up I would be his technical side when he was trading out of our suburban Chicago home (setting up FM receiver/satellite dish/etc for real time quote data, staying up late nights with him running through trading scenarios in Tradestation on Win3.1 with data downloaded in bulk from Knight Ridder, and so forth). Something very important I learned from him was: "The market can stay irrational longer than you can stay solvent." With a startup, you can hit bottom. In the right market, bottom is much further down than you can ever see.
  - beagle3 14y ago
    > You can lose everything overnight with automated trading. I'll take it ad absurdum: You can lose everything in a second by not looking left and right while crossing the road. Or even by looking left and right while crossing the road, when someone else is driving recklessly. It is possible to attempt HFT with not much more risk than stating a new InstaFaceGoogApple service. Put $10,000 in your margin account, and use a broker that practices proper margin checking. Tada! You're not going to lose more than $15,000 over that. (Yes, you can lose more than you put in your margin account, but not by much). While that's more, upfront, than InstaFaceGoogApple, it is comparable to the 4 months of salary that you're going to forfeit while building the InstaFace service. And unlike most InstaFace apps, you have immediate market feedback, which can only be a good thing. Note: Instagram did have immediate feedback from the public at large, forcing them to scale much earlier than they expected - but they did not have a feedback as to the financial value of their proposition. In fact, it wouldn't take much for instagram worth to be zero. Read, e.g. http://www.jamesaltucher.com/2011/02/my-name-is-james-a-and-im-an-alcoholic/ http://www.jamesaltucher.com/2011/02/my-name-is-james-a-and-... - a $100M acquisition back then is like a $300M acquisition in today's valuations; not Instagram but definitely nothing to ignore. > With a startup, you can hit bottom. In the right market, bottom is much further down than you can ever see. That's true. But you still have to remember that 90% of startups fail, and of those that succeed, many are just moderately successful. And yet no one keeps yelling "but most startups lose money!" at every HN story. > When you think automated trading, you think, "Hey, it can't be that hard", and start firing up your IDE and rolling out code to talk to an easily provisioned API. Which is what we should address, and these "it's a gamble" warning do not. When you see Suzanne Vega singing, you might think "Hey, it can't be that hard to sing". Many people do. And yet, they grow out of it, usually without trying to publish an album (and failing). This should be no different.
    - kamaal 14y ago
      >>You can lose everything in a second by not looking left and right while crossing the road. Or even by looking left and right while crossing the road, when someone else is driving recklessly. The point is you are lured into crossing the road, when you absolutely didn't have to.
- yajoe 14y ago
  I love this comment :) What pains me is just this year I've heard in 3 separate occasions for 3 separate startup businesses {industries: ['transportation', 'social', and 'mobile ads']} people propose "Let's do the Instagram strategy." It may be obvious to you and me how absurd that sounds, but there are a non-trivial number of people who blindly follow headlines. Edit: I agree with @toomuchtodo. It's just too easy to risk with HFT that the warning is needed here more than elsewhere.
- demione 14y ago
  Agreed... in essence this is why we're all here. As entrepreneurs we all educated risk takers, and we realize any venture is essentially gambling if there is no edge. At any time, there could be a new idea that pushes any one HFT algorithm (or mobile photo sharing app, or words with friends clone) past the established mindshare into blue ocean territory. When that time comes, do you want to be caught with your pants down, lumbering under the excuse that you thought the oceans were too red for you to bother?
DennisP 14y ago
This is a bit off-topic, but it's actually quite feasible to get a real edge in Hold'em, and it's not just about spotting other people's patterns. To start with, there's simple probability: knowing the odds of making you hand vs. the payoff in the pot, or the chance of winning with various starting hands. This is pretty basic but a lot of low-stakes players screw it up. If you get it right, their mistakes are your gain. At a more advanced level, game theory comes into play, using bluffs and so on. The game is complex enough that it's not completely solved, and it's an active area of research. The University of Alberta is doing a lot of working developing poker bots using game theory. By playing a good strategy, you can prevent other players from exploiting your patterns. Only after you've got a good grasp on all that should you really think much about exploiting a particular player's weaknesses. The Alberta guys are doing work on that part too. Exploitative play can improve your profit but also makes you more vulnerable. For a good overview of this stuff, the book Mathematics of Poker by Ankenman and Chen is a good place to start. I agree though that HFT is awfully competitive these days. If I had to choose between the two I'd play poker.
- randlet 14y ago
  Thanks for posting this so I didn't have too. Poker is "a game of skill with an element of luck" and should not be confused with say, gambling on roulette or the outcome of a coin toss.
  - unreal37 14y ago
    The same could be said of HFT. Traders are "skilled" at having nanosecond access to the orderbook, having their servers co-located in the same rack space as the exchange itself. They are also "skilled" at recognizing a price movement nanoseconds before it actually happens and getting their order in just in time. But the HFT game changes and you have to keep up. Just as a poker player from 10 years ago would not survive in the game today without adapting his style of play.
    - oelewapperke 14y ago
      Most HFT firms simply do arbitrage. They don't do actual price predictions.
jspaulding 14y ago
Hey, I didn't actually intend this to be a course. I do not make any money in the market right now so am certainly not qualified to teach a course on it. And of course, if I was making money in the market I wouldn't have posted this at all. So please everyone remember that. These comments have made me realize it's probably for the best if I do not post the source code. Basically you are competing against armies of PHDs who are buying buildings next to the exchange so they can get their executions slightly faster. It is indeed surprising to me that I was able to make money in the first place. But I do know for a fact that I did make money and I also know that I was not at risk of losing a bunch of money. As mentioned the most I lost in one day was $2000. That's all I was risking.
- bjourne 14y ago
  Guess you are familiar with http://en.wikipedia.org/wiki/Survivorship_bias http://en.wikipedia.org/wiki/Survivorship_bias? In 2009, there were probably tonnes of people trying to exploit the market using similar low-tech methods as you. Even if all of them were at best break-even, some of them likely made a lot of money on their unprofitable algorithms by pure chance thanks to the size of the cohort. Those few blogged about it and those who lost money didn't. :) I'm not saying that you just were lucky (please dont take this as criticism) - survival bias is just one of those things that always come to mind when people write about how they broke the market or when some investor is presenting his incredibly smart investment strategy that has netted him millions.
  - jspaulding 14y ago
    It's a great point and seems like a very smart thing to keep in mind. I think in my case, based on the statistics involved, the odds that my success was luck just seems astronomically small. But, guess I'm biased in my own way :)
    - highfreq 14y ago
      By luck and skill you found a temporary systematic bias that other players missed. It was even luckier that you found it without a lot of upfront losses. But you could have made many attempts and not found any bias and overall lost money and gave up. If lots of people are losing small sums to find these biases, then it may be that the expected return of trying to find biases is zero or negative. At best HFT is a near zero sum game. It isn't creating value for customers. It isn't making the world a better place. It is an unfortunate flaw of our economic system that so many smart people put so much effort into playing zero sum games with each other.

by yajoe 14y ago

beagle3 14y ago

The Instagram guys found an edge. It won them 730m. Fantastic. More than any edge ever won by me. But the market has changed so much since then, please be careful before you follow this course. You are not wrong, but what you wrote here is applicable to any success story posted on HN. Caveat lector. Always.

toomuchtodo 14y ago
I think with the automated trading example, it makes it seem much easier for anyone to dip their cup in the stream. When you think Facebook/Instagram, you think "Damn, those guys got lucky as hell". When you think automated trading, you think, "Hey, it can't be that hard", and start firing up your IDE and rolling out code to talk to an easily provisioned API. Sure, it may take months to lose your shirt selling a photo service to Face/Goog/Apple. You can lose everything overnight with automated trading. My father used to trade commodities for a living in the pit at the CME many moons ago, and when I was growing up I would be his technical side when he was trading out of our suburban Chicago home (setting up FM receiver/satellite dish/etc for real time quote data, staying up late nights with him running through trading scenarios in Tradestation on Win3.1 with data downloaded in bulk from Knight Ridder, and so forth). Something very important I learned from him was: "The market can stay irrational longer than you can stay solvent." With a startup, you can hit bottom. In the right market, bottom is much further down than you can ever see.
- beagle3 14y ago
  > You can lose everything overnight with automated trading. I'll take it ad absurdum: You can lose everything in a second by not looking left and right while crossing the road. Or even by looking left and right while crossing the road, when someone else is driving recklessly. It is possible to attempt HFT with not much more risk than stating a new InstaFaceGoogApple service. Put $10,000 in your margin account, and use a broker that practices proper margin checking. Tada! You're not going to lose more than $15,000 over that. (Yes, you can lose more than you put in your margin account, but not by much). While that's more, upfront, than InstaFaceGoogApple, it is comparable to the 4 months of salary that you're going to forfeit while building the InstaFace service. And unlike most InstaFace apps, you have immediate market feedback, which can only be a good thing. Note: Instagram did have immediate feedback from the public at large, forcing them to scale much earlier than they expected - but they did not have a feedback as to the financial value of their proposition. In fact, it wouldn't take much for instagram worth to be zero. Read, e.g. http://www.jamesaltucher.com/2011/02/my-name-is-james-a-and-im-an-alcoholic/ http://www.jamesaltucher.com/2011/02/my-name-is-james-a-and-... - a $100M acquisition back then is like a $300M acquisition in today's valuations; not Instagram but definitely nothing to ignore. > With a startup, you can hit bottom. In the right market, bottom is much further down than you can ever see. That's true. But you still have to remember that 90% of startups fail, and of those that succeed, many are just moderately successful. And yet no one keeps yelling "but most startups lose money!" at every HN story. > When you think automated trading, you think, "Hey, it can't be that hard", and start firing up your IDE and rolling out code to talk to an easily provisioned API. Which is what we should address, and these "it's a gamble" warning do not. When you see Suzanne Vega singing, you might think "Hey, it can't be that hard to sing". Many people do. And yet, they grow out of it, usually without trying to publish an album (and failing). This should be no different.
  - kamaal 14y ago
    >>You can lose everything in a second by not looking left and right while crossing the road. Or even by looking left and right while crossing the road, when someone else is driving recklessly. The point is you are lured into crossing the road, when you absolutely didn't have to.
yajoe 14y ago
I love this comment :) What pains me is just this year I've heard in 3 separate occasions for 3 separate startup businesses {industries: ['transportation', 'social', and 'mobile ads']} people propose "Let's do the Instagram strategy." It may be obvious to you and me how absurd that sounds, but there are a non-trivial number of people who blindly follow headlines. Edit: I agree with @toomuchtodo. It's just too easy to risk with HFT that the warning is needed here more than elsewhere.
demione 14y ago
Agreed... in essence this is why we're all here. As entrepreneurs we all educated risk takers, and we realize any venture is essentially gambling if there is no edge. At any time, there could be a new idea that pushes any one HFT algorithm (or mobile photo sharing app, or words with friends clone) past the established mindshare into blue ocean territory. When that time comes, do you want to be caught with your pants down, lumbering under the excuse that you thought the oceans were too red for you to bother?

DennisP 14y ago

This is a bit off-topic, but it's actually quite feasible to get a real edge in Hold'em, and it's not just about spotting other people's patterns. To start with, there's simple probability: knowing the odds of making you hand vs. the payoff in the pot, or the chance of winning with various starting hands. This is pretty basic but a lot of low-stakes players screw it up. If you get it right, their mistakes are your gain. At a more advanced level, game theory comes into play, using bluffs and so on. The game is complex enough that it's not completely solved, and it's an active area of research. The University of Alberta is doing a lot of working developing poker bots using game theory. By playing a good strategy, you can prevent other players from exploiting your patterns. Only after you've got a good grasp on all that should you really think much about exploiting a particular player's weaknesses. The Alberta guys are doing work on that part too. Exploitative play can improve your profit but also makes you more vulnerable. For a good overview of this stuff, the book Mathematics of Poker by Ankenman and Chen is a good place to start. I agree though that HFT is awfully competitive these days. If I had to choose between the two I'd play poker.

randlet 14y ago
Thanks for posting this so I didn't have too. Poker is "a game of skill with an element of luck" and should not be confused with say, gambling on roulette or the outcome of a coin toss.
- unreal37 14y ago
  The same could be said of HFT. Traders are "skilled" at having nanosecond access to the orderbook, having their servers co-located in the same rack space as the exchange itself. They are also "skilled" at recognizing a price movement nanoseconds before it actually happens and getting their order in just in time. But the HFT game changes and you have to keep up. Just as a poker player from 10 years ago would not survive in the game today without adapting his style of play.
  - oelewapperke 14y ago
    Most HFT firms simply do arbitrage. They don't do actual price predictions.

jspaulding 14y ago

Hey, I didn't actually intend this to be a course. I do not make any money in the market right now so am certainly not qualified to teach a course on it. And of course, if I was making money in the market I wouldn't have posted this at all. So please everyone remember that. These comments have made me realize it's probably for the best if I do not post the source code. Basically you are competing against armies of PHDs who are buying buildings next to the exchange so they can get their executions slightly faster. It is indeed surprising to me that I was able to make money in the first place. But I do know for a fact that I did make money and I also know that I was not at risk of losing a bunch of money. As mentioned the most I lost in one day was $2000. That's all I was risking.

bjourne 14y ago
Guess you are familiar with http://en.wikipedia.org/wiki/Survivorship_bias http://en.wikipedia.org/wiki/Survivorship_bias? In 2009, there were probably tonnes of people trying to exploit the market using similar low-tech methods as you. Even if all of them were at best break-even, some of them likely made a lot of money on their unprofitable algorithms by pure chance thanks to the size of the cohort. Those few blogged about it and those who lost money didn't. :) I'm not saying that you just were lucky (please dont take this as criticism) - survival bias is just one of those things that always come to mind when people write about how they broke the market or when some investor is presenting his incredibly smart investment strategy that has netted him millions.
- jspaulding 14y ago
  It's a great point and seems like a very smart thing to keep in mind. I think in my case, based on the statistics involved, the odds that my success was luck just seems astronomically small. But, guess I'm biased in my own way :)
  - highfreq 14y ago
    By luck and skill you found a temporary systematic bias that other players missed. It was even luckier that you found it without a lot of upfront losses. But you could have made many attempts and not found any bias and overall lost money and gave up. If lots of people are losing small sums to find these biases, then it may be that the expected return of trying to find biases is zero or negative. At best HFT is a near zero sum game. It isn't creating value for customers. It isn't making the world a better place. It is an unfortunate flaw of our economic system that so many smart people put so much effort into playing zero sum games with each other.