however, as a short-term, point-and-click, discretionary directional trader, one does not have access to the same process required to generate alpha. for traditional traders, the new market conditions insure that the playing field is tilted against them. retail traders continually find themselves falling behind these new competitors, in large part because the game has changed and because they lack the tools required to compete effectively. nevertheless, as the complexity of trading increases, it is still possible for a trader to separate from the pack and profit. the trader who has the better (more complete) and more timely (current) analysis will enjoy the greatest edge and have the greatest success, because they will have increased the gap between the traders who have adapted to the new environment, and the less informed, less diligent, and less talented ones.

it’s not that alpha doesn’t exist- it just doesn’t exist for the retail trader. what traders earn beyond the risk-free rate is not a true profit but simply factor compensation—the market rate for the risks they take. any positive expectation is the result of accepting that risk: the payment for taking such a position is compensation for risk, not an excess return. so, a trader must assess his approach to trading and decide what steps must be taken to find a proxy for alpha; and it begins with adopting an attitude, that is both realistic and relevant. the best any trader can hope to achieve, under any circumstance, is an incomplete, but probabilistic knowledge of the trading environment. so a trader must realize and accept that the markets are dominated by the rules of chance and randomness, both skill and luck come into play. how traders cope with probabilistic uncertainty and their imperfect view of the market is critical to their success. the essential job of traders then is to reduce uncertainty, not risk.

as a leveraged trader, one makes short-term decisions/trades, but understands what is happening at time frames greater than the one he's currently trading. the decision to trade and its management, flows from an analysis of price action. he is aware traders operate at different time-frames, markets are interconnected, themes abound in markets and that probabilities and departures from value govern trading opportunities. he understands and incorporates relevant informational signals from a wide range of deterministic processes to arrive at a summed probability that acts as deeper context.

he manages the risk through diversification,

keeps draw-downs to manageable levels and strikes a balance between profit maximization and loss mitigation by adjusting trade size and stop-loss levels, so that only an extreme event will trigger the stop. he keeps losses in a predetermined range, and prevents getting stopped-out of a potential winner by managing expected value along with p&l, while allowing for a margin of error, so that he may stay-in-the-trade.

he is not concerned about how often he is right about the market, and frequently adds to his winners and turns short-term winning positions into longer ones. yet, never loses sight of the fact there is a downside scenario with an associated probability. the way decisions are evaluated affects the way decisions are made, so one does not allow stress, cognitive load, emotions, and bias, to non-linearly affect the decision process.

smart traders have the capacity to aggregate and synthesize large volumes of information, analyze it, and then derive an edge from it. the primary step in this process is to develop the capability to gather timely information from all the various sources and attach relevance to the information as accurately as possible. then merge both data sets, public information and proprietary tools, to derive insights that are applied in making trading decisions. good traders figure out what game is working and play that game. if they can understand the interactions of the individual factors and their effects on the market as a whole, then they will be able to identify higher order patterns that are the result of these interactions. going beyond the standard correlation/causation question, the trader must ask, does this source of edge make sense? is there a behavioral or structural reason why this source of edge should persist? and he must expect to be surprised and have to make adjustments, and build that into his expectancy.

good traders are always working on themselves, always refining what they do. in an important sense, they don't just use introspection to improve their performance. they work on their performance as a means of extending their personal mastery. the best traders spend significant time generating trade ideas, researching markets, and staying on top of developments worldwide. the ratio of time spent in preparation to time spent actually in trading, is a measure of a trader's professionalism

every trade a trader makes provides an opportunity to learn. gathering information from every trade, as opposed to a select few, helps give the trader a better understanding of how those trades may perform in the future. the more frequent the analysis, the more relevant the findings will be. however, the findings serve a purpose only if they are acted upon. the key is to use information to guide actions whose outcomes are then analyzed and the findings reapplied. this creates a continuous iterative loop that drives towards ever greater efficiency.

if you look at alpha as various types of beta doing different things at different times, then a trader's returns are going to be lumpy and cyclical in nature and performance will revert to the mean. the central message for traders then, is to trade efficiently, and make the most money with the least cost. it's not how often you're right, but how much you're right. if you want to make money, then maximizing geometric returns should be front and center in your thinking.

the market and its past is identical for all observers. yet, the market and the future are understood uniquely by each trader. no matter how crude or refined a method one follows in ascertaining the likelihood of change, it still boils down to surviving against one's own incomplete intellect, a misfired bout of randomness, in controlling the risk, and in executing a set of consistent ideas day in and day out, so that chance can prevail. the opportunity is there for the traditional trader to capture his personal alpha. all he has to do is see the market for what it is, and not what it was, or what it appears to be.

Man thats good!

Yeah, we know.

For current trading, most days, along with some other heavy hitters, click here:

Spoo-nalysis ES e-mini futures S&P 500 Lame Ducks Both Fed Chairman Bernanke’s remarks yesterday and President Obama’s speech last night about his jobs plan; combined, failed to reassure the market that a solution to the country’s economic woes was at hand, and the …

The spoos thread is one of the FIO classics.

Bob.

Thanks Bob!

I've noticed that thread alot. It seems quite macro/micro financial and newsy. Maybe thats my ignorance because I don't trade that way.

I trade charts but mostly just trade management.

I will give it a second look as I've found your posts extremely helpful.

Also I'm here to learn and to hopefully pick up and pass on some useful information.

Thank you

Sent using the NexusFi mobile app

There are so many different ways to trade....

I mentioned the spoos thread because it's tigertrader's main thread. He dips in and out of it, as do a number of others. If you've liked his stuff, it's where he's currently posting, for the most part anyway.

Everyone will have their own way, and should stick with what works for them, and of course refine it, adapt it to changing conditions, and sometimes change it, always based on their own judgment. But it is also a good idea to see what else is being done. Otherwise, we're just talking to ourselves.

But if you liked the "floored" thread, the spoos thread is where tigertrader is currently posting, at least on FIO. After a long layoff, I might add, and we're glad to have him back.

As to trading styles, one guy will say, "Hey, I'm doing this," and another will say, "Hey, I'm doing that," and both (or either, or neither for that matter) may learn something from the exchange.

One simple trick is to listen to the people who are making some money. Whether you ever trade their way, it's useful to know what they are doing....

And definitely follow your own way. It's the only thing you'll ever do anyway.

I still recommend the spoos thread. I've learned from it, as have a whole lot of people.

Bob.

I randomly stumbled upon this thread, because one of the posts was talking about the correlation between 6E and ES, after reading a few posts, I scrolled all the way to the beginning and read every single post.

As a screen-only trader who's always heard legend & stories about the pit, this was an amazing journey into the past. This is a must read for every new trader, not just because of the interesting bits about the evolution of the futures market, but because of all the problems that pit traders were facing back in the day that are still relevant today.

I've already watched all the shows & documentaries that were mentioned in this thread, but @tigertrader paints a very different picture. I'm honestly a little ashamed that I wasn't aware about the benefits that locals had. I always assumed that it was hard to transition from the pit to screens because locals no longer were able to read the top market participants as they weren't right next to them. I never knew that locals were able to sell the offer & buy the bid, and I assumed that brokers & locals were as separated as they are now.

I vote with both hands for this thread to be stickied in the traders hideout section, every futures trader should read it.