6 ms·

The Day I Lost a Sh*t-ton of Money, Part II (trading/stock Market)

40 points by peterkto 12y ago

slashnull 12y ago
awwww yiiissssss
andrewchambers 12y ago
Is it just me, or does this seem to be glorified gambling? It doesn't seem like these people are contributing anything to the world - Or am I not understanding how it works.
- dragontamer 12y ago
  Without going into the specifics... when traders "buy low" and "sell high", they reduce volatility in the marketplace. Prices become more consistent. Lets look at one particular place: the Bid / Ask spread. When you go to much less traded stuff like Bonds, or in the more extreme case... Real Estate... its harder to put an accurate price on these items. A house might have an asking price of $300,000 but the only buyer might be offering only $250,000. If both sides refuse to budge, then the market stops moving. A trader can move the market very simply in this case. He can buy the house at $265,000, and then sell it at $285,000. Everyone benefits from their perspective. The Seller got to sell the house at higher than $250,000. The Buyer got to buy the house lower than $300,000. The trader gets away with $20,000 made. This is in essence, the trader's low-risk function and his job is to move markets. Now lets say a 2nd trader enters the market, and instead is willing to get away with only $10,000. He buys the house at $270,000, and sells it to the buyer at $280,000. Because this 2nd trader has better offers, he will get the cash. So this leads to point #2: the more traders compete with each other, the tighter Bid/Ask spreads get, and the "fairer" the market price becomes. When we get to the tens of thousands of traders who deal with high-volume stocks, these stocks end up having bid/ask spreads smaller than pennies. In fact, bid/ask spreads are so low during the trading day, that most people forget about them during trading! But at the end of the day, stocks are like any other good. There is a bidding price, and there is an asking price. And the bid is always lower than the asking price. They only become closer because traders are willing to become market movers and take up the risk themselves.
  - andrewchambers 12y ago
    But this guy is buying and selling without any knowledge of the item, he is literally just following other people. If he actually used domain specific expertise to make judgements on value of what he is trading, I would agree.
    - peterkto 12y ago
      I have my own theories on why "following others" adds efficiency to the market. It's a losing strategy if applied on every situation with zero context obviously (which is why most traders lose money), but traders who find a consistent edge doing it "bring the market closer to where it's supposed to go" so to speak, in general. But this is all theory in my little head with no substantial research so I don't care to stake my life on it. In the end, I don't care that much to argue about social utility. I trade my own cash or I trade the money of guys who completely understand my objectives and choose to back me. I respect your views and I won't bother to persuade you otherwise. I get the feeling if this thread was about losing $200k to Phil Ivey heads up in Hold Em or Nate Silver losing $200k by betting against Obama on a political betting site, nobody would care to bring up social utility.
      - andrewchambers 12y ago
        I kind of mixed 3 points. 1. Is it luck or skill. I'd say there must be some skill, but luck too, kind of like poker maybe? 2. Is it useful to society? No idea if its a benefit, a drain, or neutral. 3. Should it be allowed? It is your money after all.
        peterkto 12y ago
        1) There's always some element of luck involved. After all, I can't control everything that happens. I played poker before trading. There are similarities and differences. You can tell when you get unlucky, like when you get aces cracked by two runners. It's hard to tell if you get unlucky when stopped out on a day trade. 2) At the very least, I don't think what I do is harmful to anyone. I'd also like to add that I make many trades that are a better example of adding value. In the trade example of buying the dip in AAMRQ (prior blog post on my site), I am making the market more efficient (I'm saying this with the benefit of hindsight, of course). AAMRQ was moving adversely against its clear fundamental value (based on a stock merger deal with US Airways) and by buying it on weakness, I'm adding liquidity on the side that it should "eventually go to". This only works if I'm consistently right more than wrong. I also short garbage stocks that have no fundamental value, another example of trying to restore efficient prices. Price discovery is important so capital isn't allocated inefficiently. 3) Impossible to ban trading without destroying market liquidity. It's also way too difficult to define what trading is helpful vs. parasitic and have everyone agree on it. One could easily place a seemingly "outlawed" type of trade and claim to have sound intentions, which is what makes market manipulation difficult to prosecute.
- qewrffewqwfqew 12y ago
  It is glorified gambling, but contribution to the world has nothing to do with it. You may have noticed that the author's confidence was entirely based on emotional, results-oriented thinking (look at that big pot I missed!) and completely unscientific voodoo (patterns!). It makes me sick that these guys are put in a professional environment which makes them feel like big swinging dicks instead of degenerate gamblers.
  - peterkto 12y ago
    It's an empirical process. The results themselves are what you use to construct an idea of probability and risk-reward. Nothing is ever certain which is why position size rules are a must. If an extremely specific pattern continues to show up on one specific stock on days with specific conditions (huge multiples of daily volume, for one), it's likely a significant observation representing an edge rather than noise. Unless you think it's totally random for hundreds of independent traders to exploit a specific pattern on a specific stock on multiple repeated dates and make money repeatedly. It's not a poker/blackjack or a casino game where the odds are fixed and known. Ask yourself, if you flipped heads on what you thought was a fair coin 500 straight times, did you REALLY just observe an ultra rare event? Or is it more likely another phenomenon at work (like a rigged coin)? Whether you can fully explain it or not doesn't matter. Why do you care so much what I do with my money? Or how a firm chooses to allocate its money? This wasn't client money or institutional money, it's the money of a few guys (partnership type of structure) who used to be or still are daytraders themselves. (one last edit: if you're too thick to see it, I deliberately tried to showcase my overconfidence to show how things can go wrong easily. guy makes money and wants to make more, guy wins money and thinks he's a champ -- it's called the human condition. I deviated from normal execution rules and position size rules and paid the price)
    - andrewchambers 12y ago
      Even if it is an empirical process of following trends - It's not contributing anything - its betting on trends. It just feels like you aren't investing to build industries, just to gamble.
joshu 12y ago
You are a muppet. Stop trading before you lose everything. Seriously.
- peterkto 12y ago
  Nah. I've made made multiples in net profits against this loss and I'm net positive 80% of the time. It's still my personal best year despite the loss. It's a nice living. I think I'll stick around.
  - joshu 12y ago
    What is your sharpe ratio?
    - peterkto 12y ago
      I don't have a number for my personal account trading but I suspect it would be pretty solid... my equity curve is basically a 45 degree slope from bottom left to upper right with no sharp dips. My sharpe ratio at my firm (calculated automatically in our database) was well over 3 until that loss. I don't remember it exactly but it was such a crazy number to believe (relative to other sharpe ratios) that I stopped thinking it was a risk metric that mattered for my style of trading.
fsk 12y ago
The author did something super-unethical/illegal. He sold in his personal account before selling in his firm account. In effect, he transferred $48.5k from his employer's account to his personal account.
waps 12y ago
Where/how do you even "learn" this trading skill. I mean, how did you learn doing this ? Like most geeks I suck at negotiation. And trading seems to me a very fast-paced very high-stakes game of negotiation where you don't even get to talk to the other guy. How do you get better at that ? I have to admit that I'm skeptical that it's possible at all to do this. In the longer term I mean. Nobody gives the other side of the argument though : there would be no banks, nor a wall street, if it really didn't work at all.

40 points by peterkto 12y ago

awwww yiiissssss

Is it just me, or does this seem to be glorified gambling? It doesn't seem like these people are contributing anything to the world - Or am I not understanding how it works.

dragontamer 12y ago
Without going into the specifics... when traders "buy low" and "sell high", they reduce volatility in the marketplace. Prices become more consistent. Lets look at one particular place: the Bid / Ask spread. When you go to much less traded stuff like Bonds, or in the more extreme case... Real Estate... its harder to put an accurate price on these items. A house might have an asking price of $300,000 but the only buyer might be offering only $250,000. If both sides refuse to budge, then the market stops moving. A trader can move the market very simply in this case. He can buy the house at $265,000, and then sell it at $285,000. Everyone benefits from their perspective. The Seller got to sell the house at higher than $250,000. The Buyer got to buy the house lower than $300,000. The trader gets away with $20,000 made. This is in essence, the trader's low-risk function and his job is to move markets. Now lets say a 2nd trader enters the market, and instead is willing to get away with only $10,000. He buys the house at $270,000, and sells it to the buyer at $280,000. Because this 2nd trader has better offers, he will get the cash. So this leads to point #2: the more traders compete with each other, the tighter Bid/Ask spreads get, and the "fairer" the market price becomes. When we get to the tens of thousands of traders who deal with high-volume stocks, these stocks end up having bid/ask spreads smaller than pennies. In fact, bid/ask spreads are so low during the trading day, that most people forget about them during trading! But at the end of the day, stocks are like any other good. There is a bidding price, and there is an asking price. And the bid is always lower than the asking price. They only become closer because traders are willing to become market movers and take up the risk themselves.
- andrewchambers 12y ago
  But this guy is buying and selling without any knowledge of the item, he is literally just following other people. If he actually used domain specific expertise to make judgements on value of what he is trading, I would agree.
  - peterkto 12y ago
    I have my own theories on why "following others" adds efficiency to the market. It's a losing strategy if applied on every situation with zero context obviously (which is why most traders lose money), but traders who find a consistent edge doing it "bring the market closer to where it's supposed to go" so to speak, in general. But this is all theory in my little head with no substantial research so I don't care to stake my life on it. In the end, I don't care that much to argue about social utility. I trade my own cash or I trade the money of guys who completely understand my objectives and choose to back me. I respect your views and I won't bother to persuade you otherwise. I get the feeling if this thread was about losing $200k to Phil Ivey heads up in Hold Em or Nate Silver losing $200k by betting against Obama on a political betting site, nobody would care to bring up social utility.
    - andrewchambers 12y ago
      I kind of mixed 3 points. 1. Is it luck or skill. I'd say there must be some skill, but luck too, kind of like poker maybe? 2. Is it useful to society? No idea if its a benefit, a drain, or neutral. 3. Should it be allowed? It is your money after all.
      - peterkto 12y ago
        1) There's always some element of luck involved. After all, I can't control everything that happens. I played poker before trading. There are similarities and differences. You can tell when you get unlucky, like when you get aces cracked by two runners. It's hard to tell if you get unlucky when stopped out on a day trade. 2) At the very least, I don't think what I do is harmful to anyone. I'd also like to add that I make many trades that are a better example of adding value. In the trade example of buying the dip in AAMRQ (prior blog post on my site), I am making the market more efficient (I'm saying this with the benefit of hindsight, of course). AAMRQ was moving adversely against its clear fundamental value (based on a stock merger deal with US Airways) and by buying it on weakness, I'm adding liquidity on the side that it should "eventually go to". This only works if I'm consistently right more than wrong. I also short garbage stocks that have no fundamental value, another example of trying to restore efficient prices. Price discovery is important so capital isn't allocated inefficiently. 3) Impossible to ban trading without destroying market liquidity. It's also way too difficult to define what trading is helpful vs. parasitic and have everyone agree on it. One could easily place a seemingly "outlawed" type of trade and claim to have sound intentions, which is what makes market manipulation difficult to prosecute.
qewrffewqwfqew 12y ago
It is glorified gambling, but contribution to the world has nothing to do with it. You may have noticed that the author's confidence was entirely based on emotional, results-oriented thinking (look at that big pot I missed!) and completely unscientific voodoo (patterns!). It makes me sick that these guys are put in a professional environment which makes them feel like big swinging dicks instead of degenerate gamblers.
- peterkto 12y ago
  It's an empirical process. The results themselves are what you use to construct an idea of probability and risk-reward. Nothing is ever certain which is why position size rules are a must. If an extremely specific pattern continues to show up on one specific stock on days with specific conditions (huge multiples of daily volume, for one), it's likely a significant observation representing an edge rather than noise. Unless you think it's totally random for hundreds of independent traders to exploit a specific pattern on a specific stock on multiple repeated dates and make money repeatedly. It's not a poker/blackjack or a casino game where the odds are fixed and known. Ask yourself, if you flipped heads on what you thought was a fair coin 500 straight times, did you REALLY just observe an ultra rare event? Or is it more likely another phenomenon at work (like a rigged coin)? Whether you can fully explain it or not doesn't matter. Why do you care so much what I do with my money? Or how a firm chooses to allocate its money? This wasn't client money or institutional money, it's the money of a few guys (partnership type of structure) who used to be or still are daytraders themselves. (one last edit: if you're too thick to see it, I deliberately tried to showcase my overconfidence to show how things can go wrong easily. guy makes money and wants to make more, guy wins money and thinks he's a champ -- it's called the human condition. I deviated from normal execution rules and position size rules and paid the price)
  - andrewchambers 12y ago
    Even if it is an empirical process of following trends - It's not contributing anything - its betting on trends. It just feels like you aren't investing to build industries, just to gamble.

joshu 12y ago

You are a muppet. Stop trading before you lose everything. Seriously.

peterkto 12y ago
Nah. I've made made multiples in net profits against this loss and I'm net positive 80% of the time. It's still my personal best year despite the loss. It's a nice living. I think I'll stick around.
- joshu 12y ago
  What is your sharpe ratio?
  - peterkto 12y ago
    I don't have a number for my personal account trading but I suspect it would be pretty solid... my equity curve is basically a 45 degree slope from bottom left to upper right with no sharp dips. My sharpe ratio at my firm (calculated automatically in our database) was well over 3 until that loss. I don't remember it exactly but it was such a crazy number to believe (relative to other sharpe ratios) that I stopped thinking it was a risk metric that mattered for my style of trading.

fsk 12y ago

The author did something super-unethical/illegal. He sold in his personal account before selling in his firm account. In effect, he transferred $48.5k from his employer's account to his personal account.

waps 12y ago

Where/how do you even "learn" this trading skill. I mean, how did you learn doing this ? Like most geeks I suck at negotiation. And trading seems to me a very fast-paced very high-stakes game of negotiation where you don't even get to talk to the other guy. How do you get better at that ? I have to admit that I'm skeptical that it's possible at all to do this. In the longer term I mean. Nobody gives the other side of the argument though : there would be no banks, nor a wall street, if it really didn't work at all.