[MidKnight]

At the start of the year I had the opportunity to have dinner with a senor FX trader for the ANZ bank (they account for over 30% of all NZD transactions). He was a very nice UK chap, really warm and friendly buying drinks non stop for the table (damn those bank bonuses!). Anyhow, the guy told me that the majority of the bank profits generally come from their FX trading division and as has already been said it comes from the spread and the fact that they do front run large client orders. Also quite a lot comes from structured products too. I tended to envision it a little bit like being in the pits - they can see the order flow and play accordingly.

Later on the guy gave a talk on something and made a prediction that the pound was going to rally. This was in about Feb 2010 and with hindsight we all know what has happened. Goes to show ya though, these guys have no idea where the market is really going. Embrace the uncertainty of the markets - everyone must face it.

With kind regards,
MK

PS: On a separate topic, I've read about 1/2 of that millipede thread that daedalus posted and there is really really good stuff in there I think. I'm testing his 'legs' approach across 13 pairs for the year to date.

[cornhusker]

Originally Posted by MidKnight »

I tended to envision it a little bit like being in the pits - they can see the order flow and play accordingly.

That's exactly right.

[MightyMouse]

Originally Posted by cornhusker »

Alright, Kiwi, replace bank trader with "big speculators." My point is simply that trading is not the flashy video game or weekend word puzzle it's made out to be. Everyone gets caught up in all the old price data, abstract statistics, joe blow TA, ect, but none of those things move the market. I don't want to sound as if I'm ruling all of that stuff out, some of it can be useful, but it's peripheral to whats really going on.

To illustrate this, lets look at EU and yesterdays strong bearish move. What caused EU to drop like it did? Leave fundamentals out of the answer and explain it in the context of orders, asymmetric information, adverse selection, fear, and greed. I leave logical things like FA out because I consider it pre-trade stimuli; fundamental info is aggregated into price later down the chain of events via orders and quote adjustments.

I invite anyone to take a crack at the question.

Regards,

Cornhusker

Cornhusker,

I think I like the way you think and I would be interested in why you think the EU fell yesterday.

[cornhusker]

Originally Posted by MightyMouse »

Cornhusker,

I think I like the way you think and I would be interested in why you think the EU fell yesterday.

Because when size trades, or everyone wants to trade at once, the liquidity then disappears too; not because it's all consumed as if it were just sitting there static, but because the bids were extremely thinned out and/or canceled. The market was offered down until buyers came in and a new working range was established. I'm not saying no trades happen in between, but for all intensive purposes the market quickly flocks to a new zone in which dealers can buy and sell in approximately equal volumes again. This is how fundamental information is impounded into a market. Those with the most working capital are the ones who can afford to do good research (so we hope), they then trade and the market responds accordingly. I'm making it sound simple, and in a sense it is, but there is a lot of strategy and trickery that goes on that makes the market very difficult to read.

[SIUYA]

Ah finally..... while it has been known by some for a while it has always amazed me by the amount of people who think there is a global conspiracy of bank traders who know everything and make all their money trading...... There are very few real speculators or true traders.
Most take the clip, most are market makers or client order operators, or managing structured products. So when you see any investment bank reporting that its trading division made money on 95 days out of the last 100, it feeds this image. You cant actually delve into many of the internal divisions and see who makes what, and with all such endeavors, the internal workings have everybody claiming they made the money, and they forget the brand of the bank and the associated products which brought in the clients. A lot of it maybe be about the definitions of a trader v speculator v broker v operator, but think about it this way - its all marketing and perceptions.
The bank traders push the idea that they make the money, so they get the bonuses, they like to feed their own egos, the banks also like the idea of a gun trader, management will attach themselves to them (until they blow up). Also in order to attract the clients, the banks push the idea of trading as a way to make instant riches, so they get them to pay them commissions, and trade their products. (imagine if a car seller said, statistics show 95% of you who actively purchase our product will crash!)
if 95% of traders loose money, do you think the banks have a monopoly on most of the good traders - just so they can give them 10% of what they make....
(hedge funds are a slightly different story - but the internal workings here can also be similar)
This is not meant to be a rant, but its good to see it brought up and its topical as its a concept a lot of retail traders(and even bank employees) dont get, and I am glad its been brought up by others.

As an example to think about - the investment banks are meant to divest themselves of their trading divisions - how many people do you think that will cause to leave the banks, how much will it affect their profits..... far far less than many would like to guess at.

[SIUYA]

Cornhusker - why the EU dropped.
Actually I did not see it, as I was doing other things, however while in the thread of re thinking concepts, one of the the things I have always thought about which may give food for thought and actually agrees with Cornhuskers idea.....
while everyone gives a variation of "markets fall because there were more sellers than buyers, more aggressive sellers etc etc"
think about it in terms of the market will go down as there are no buyers at certain levels, or up as there are no real sellers. Its a little bit semantics but this can be particularly true when many of the participants setting the price levels are market making (spreaders).
As a theoretical example try an think of what would happen if a market opened for 5 mins, then closed for 55 mins, then opened again for another 5 mins, then closed again for another 55 mins...... what would happen.

[BlowFish]

Aww cornhusker you answered your question before everyone else had a go. Markets as liquidity matching mechanisms and trading as the search for, and provision of liquidity provides a pretty robust conceptual model. Things like supply and demand support and resistance and various market profile concepts can all be thought of in terms of liquidity. Incidentally If banks are making most money from customer order flow it is in their interest that the market trades where the most liquidity (order flow) can be found.

Another interesting thread daedulus.

[SIUYA]

Another related concept as food for thought. - Psychology and scalping v longer term trend following......
(related to the post by Midknight and KeytotheCastle, and the milipede plus Zdo will like this)

The scalping black hole we get sucked into (while it can be done, and is a method to make money, its not for everyone, and yet, the scalping black hole is an apt description for those who know its not for them, and yet constantly are pulled back into it)

Think about this (and I am paraphrasing/taking from "Stumbling on happiness" - Daniel Gilbert here)
Why its so hard to sit on winners.....
Delays are painful. When people imagine the pain of waiting, they imagine it will be worse if it happens in the near future than in the far future and this can cause odd behaviour......
example; most people would rather receive $20 in 1 years time than $19 in 364 days time, and yet will generally choose $19 today rather than wait for $20 tomorrow. In economic theory this is irrational as the expected waiting time between receiving 19 and 20 is the same in both case, hence changing what we would chose is irrational.

The point is - waiting for tomorrow (or one day) now is more painful than waiting for tomorrow (or one day ) in one years time. Even thought the pain of waiting one day in both cases should be the same.

(think about it this way - people will pay $1 now to avoid the pain of waiting, but will not if the payoff is in one year time as they think its so far away)

This definitely contributes to the lack of patience of sitting on a winner.... many would rather pay to take profits. its comforting - or less painful. We want instant gratification (?). Our immediate imagination is possibly our worst enemy.

One way to get around this is to set the stops at breakeven, and then give it to someone else to manage..... out of sight out of mind. So the concept is not so much on money management, entries exits, etc..... the normal stuff, but in tricking ourselves by deceiving ourselves even more than we already do everyday. ( a related experiment I have always wanted to try (or variation of) is have one person always put on longs, another always only put put on shorts, another just takes trades off at a stop loss or BE - separate them all. )

This however does not get over the issue of adding to winners but is clearly related. Every time you put on a new buy or sell after the very first day you do a trade in a particular instrument it is likely to be at a higher or lower price than the original trade. So first you need to get over the issue of it being a trade that adds to a position..... every trade should be a new trade that stands on its own merit.

Now this is slightly different thinking from the general concept of many trades either being a "series of trades", it also is different to any martingdale strategy, or the idea of averaging in.......
Also if adopting the millipede example......having no idea of the reward element of the R:R concept..... and hence letting the market decide, maybe just maybe Dr Van Tharp has actually done many traders a disservice by popularizing the concept......(maybe he works for the broker conspiracy and they just want us to day trade more and pay extra commissions)

It seems to me often the concepts that we traditionally/continually look at or focus on for trading are actually doing more harm than good (better money management, better entires, exits, indicators, more focus, more discipline, new trading idea)...... a bit like continually asking how to make a horse/car/plane go faster rather than asking why we are trying to go somewhere and is there an easier alternative than traveling. The issue is not in new trading ideas, but rather in ways to avoid thinking or tinkering too much.

(thankyou and Damm you Daedulus - for some reason this thread has struck a chord.)