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We need to define some things first to get real color on that.
First, the distinction between market maker and position trader needs to be qualified. Then, how those roles function to both make money and lay off risk. Third would be fitting an individuals personal style and situation into appropriate participation that fits an outcome and a risk profile.
Most of the response will be generally accepted , but some of it is, for sure, my experience...so somewhat subjective.
Everyone feels various pressure associated with risk and profitability. As a market maker you had a built in edge. You bought the bid and sold the offer, the opposite of the customer. Thus the spread was "yours" and that was a built in edge. Market makers are responsible for providing a fair and orderly market for securities. Some lay off or hedge their position pretty quick. Some will lean a position. During the end of my time on the CBOE the "local" was disappearing. Big firms sought and got the role of DPM, or direct primary market maker. Those firms had different expense structures and of course they had other and various roles that would impact how they priced options in the pit. Some guys had to be on every trade and at the biggest size they could. Often there was a salesman or a stock desk "upstairs" that had something to do with whatever position was being brought in.
So, a local could lay off most trades with a 1/4 or a 1/2 pretty easily. How you did that depended on what pricing style you favored. Some guys were spreaders some guys priced reversal, conversion, box roll...all kinds of ways. But the main difference between a market maker and a position trader was that the market maker does not usually care which direction it moves, just that it moves and fast. The reason is because he has all kinds of plays he can call and there is a certain edge in being on the floor.
On Nasdaq, you would sometimes carry a position. Almost always that was part of a plan...not because you thought a name was going up or down but because you were aware of where other liquidity might come from. For example, you could call "sales" and offer additional credit in a name. That would motivate brokers to talk to customers about that name.
So the professional market maker (trader) was usually not a portfolio manager (also considered a trader). The main difference was that a market maker is taking them in and putting them out. A position trader does something and then needs something to happen. Maybe consider one "arbitrage", so a nearly simultaneous transaction. The other short term directional speculation where something or someone else had to be involved...whether that is a counter party found, a price movement occur, etc.
What most retail does today is buy or sell and hope and subsequently struggle.
When trading firm money or my money I never had a different "feeling" or approach/response to risk. It was all my effing money when the score was recorded. Make good trades the result will follow is how I approach that now. While I HATE losing, one of the key items that I had to learn "upstairs" was that you must learn to lose fast and lose little. You can not be deterred by that...but if you lose slow and lose big, you are dead, might as well sell insurance (which I did) or learn a trade (which I wish I did)
A great deal could be said about the emotional/psychological response...the "mind game" part of participation. Also SIM is the devil...not like the devil or from the devil...but the actual devil. Some very small amount might be beneficial, as with "back testing"...but avoid the devil.
Define what you do. Describe in detail the process. Is the desired outcome realistic? Do you have an executable edge? WHY do you believe that is true? When you can affirm with certainty those items, trade it with enough size to know right away.
Losing trades are relative to the individual, but being prepared and executing are kind of universal.
I believe that many folks have their participation all wrong. "Trading" meaning intra day and swing time frame speculation should be done with vigor and at scale...BUT most people trade with capital and undefined risk they have no business taking. I use three trading accounts. Each of those is funded at the level of a "regular" sized investment position. On the investment side I usually carry between 30 and 50 positions (including bonds)...so "trading" gets about 5% of none real estate investment capital. The moral of that story is it takes a long long time. Initially maybe it is a win to make $100 a day, then $1000 a day. I think, and it does benefit me, that most participants get tricked into thinking the 1) it is easy and 2) fortunes are made in quick order. The truth is, it is very challenging to be consistently profitable and fortunes are LOST way way faster than they are made.
I'm not trying to be discouraging. Folks think they can sling a one lot of micros while casually paying attention while at their regular job. It is discounted because it is $1.25 a tick. I'd suggest a high dividend etf with the proceeds on reinvest for most people.
What has developed in the industry (the thought I initially wanted to respond with in this thread) is a new retail mantra where we are the product, not the customer. It is a system that is designed, if you let it, to take all your money over time...and it will.
How do you differentiate between investing and trading?
I define it as investing is buying assets to earn a return and trading as speculating on price movement.
What kind of risk control do you employ on the investment side?
"The days when I keep my gratitude higher than my expectations, I have really good days" RW Hubbard
I'm probably going to have to centralize my participation to my journal thread. If I type in one place it is way easier to manage and follow the discussion.
This may have been discussed earlier...or I may have intended to type it.
What I do:
Investment Longs are:
Equity "growth" names that meet a specific criteria.
Equity "value" names which are really dividend growth names that meet a specific criteria.
Bonds typically held to maturity and often counted as one "name"..I'll explain
Market overlay ETF's.
BTC
Gold
Money Market.
I have bonds coming due every month through mid 2025. I went there "overweight" when rates were zero and my equity outlook was bleak.
Bonds are held to maturity as the "cuts" never came...shit.
Equities are generally held until they are overvalued or they cut their dividend.
I very seldom have an investment side loser that gets untenable, but I do cut or add to positions if the fundamental changes.
I sell a lot of premium:
condors flies and individual puts and buy/writes.
Typical is 30 to 40 delta 40 to 50 dte on the spreads.
Short puts and Buy/writes I do weekly, usually thursday for next friday.
I buy premium:
based on short term speculation, up to 60 dte
these are "event" driven so held till they work or draw down 50%
based on either "unusual activity" or speculative "idea" position...think rent to own
I am always working the wings:
buying long premium in anticipation of the big one.
this is always done from "revenue" premium..credits from sale of other premium.
often strongly related to the "premium selling" listed above.
Mark Spitznagel wrote a book that very well describes this. "Safe Haven".
this very often works out like a hedge against portfolio longs
I day trade futures:
Almost exclusively /ES
The futures trade is not where I'm seeking big returns, though sometimes that happens. The day trade is my day job. I feel great at $1000 a day. I take that account down to around 80,000 every month and send that money to the investment side, same with the two options accounts. Sometimes the distributions are too long in between. If I am thinking of adding to the "trading" accounts Im also considering no longer executing that strategy...has not happened since 2014, close in 2018.
So I share your point of differentiation, perhaps with more deference to time.
Specifically on the investment side risk control...almost always have a hedge working or lined up on the portfolio. I do re-balance or buy puts on individual names if there is trouble on the fundamental or if they go actionable signal down on the weekly.
My first trade all by myself was from the pay phone in the lunchroom at Unocal Corp. I bot Global Marine, now part or Transoceanic (RIG). The western region VP, Tom Matthews heard me on the phone and invited me to the "Executive Dining Room" to ask me about my interest in stocks. Long before BRK.B, he gave me a BRK annual report. That was it, when the light went on. I had a project for one of my finance classes and I was encouraged to reach out to BRK every day till I got through. This time it was a pay phone from outside the auditorium, I was working security for a Richard Marx concert...yes Im old...I got Uncle Warren on the phone. He answered all my questions. Within a week I thanked Tom Matthews, quit my job at Unocal, and went to work as a bond salesman. Buffett said...max your retirement plan and try to save 50 bucks a week. Put both in a fund that indexes large cap US until you have 10,000. Then pick the best stock in the fund and buy 10 shares. My "salary" at Unocal was $1,243 a month. Selling bands was all commission. It took a while and it was never easy or without setback.
If you are getting an extreme reaction when putting on a trade, you need to take the money out of it. if you look on the journal that I need to get back to you'll find a method to instead of trying to make money, you're just getting points. Then reduce your size down to the minimum. If 1 mini is too much, then switch to the micros. You're not trying to make money. You are learning how to make points. Then once you are consistent getting your points every day, then you can slowly start increasing your size.
I play with 6 figures everyday. I think I got up to 180k in margin today, It's just a lot of zeros. It's just something I do. I play with a lot of money everday. It's no big deal. I had a good day today. I owe the government another couple grand. Did I ever mention they want too much.
So first you have to take the money out of it. Then you have to learn how to trade. Consistently, day in and day out making the points you need. Then and only then slowly start increasing your size and the money will take care of itself. But if you don't first learn how to consistently make your points, no need to ever worry about the money because there isn't going to be any.
There is more than one way to look at a problem. Most traders are looking at the problem totally wrong and then they wonder why they lose money. You need to know TA. You need to know the chart patterns. And then you need to know how the markets work. Most everything else you can ignore.
If I was to hand you the chart for the day the day before, how much money could you make? You already know what is going to happen, how much could you make? And we'll say to make this exercise useful your contract size is 1. Then you need to decide how much you want/need to make everyday. So if you want to make say $1k a day and there is only $500 available, that's a problem. But if there is $30-40k available and all you want to make is a few K a day, that makes the problem totally different.
I'm leaving $10's of thousands on the table everyday. But if I'm capturing 5-10% of what was available, what do I care. I'm still making ridiculous amounts of money. Part of having the proper mindset is how are you looking at the problem. Are you trying to do something next to impossible or are you simplifying the problem so almost anybody can do it. I'm an ok trader. Nothing special. I still keep trying to screw up but I've simplified the problem so that no matter how hard I try to F up, I'm still making ridiculous amounts of money.
Part of knowing how the markets work is time. I just happened to wakeup around 3am so glanced to see what the markets had been doing overnight. So what is 3am? Europe starts trading. I couldn't resist so I traded the open. I'm already at 4 figures for the day, so I've already made my money for the day. If I don't make another dime today, what do I care. I typically like to have about a K in my pocket before the 9:30 open. Then I don't feel pressured to have to make any money.
Today though I'm definitely going to make more money. Why? Because it's free money Friday. At 8:30 we get the monthly employment numbers. Part of making money in the markets is knowing when are they giving away the money. One of those times is today at 8:30. As much free money as you can stuff in your pockets. Of course you have to know how to trade to get any of it. But it is there to be made. Time for a nap.
This in itself deserves a separate thread: does the strategy really have to be tested over a very large set of data? I know, this is the accepted norm, but is it true? Does the price behave the same way today that it did in 2010? They say you have to have a system that withstands all kinds of market conditions, but is it possible?
It may seem like a rookie question, but I think it is worth exploring.
When I come up with a profitable algo the following happens more often than not. The last fifth of the equity curve is either flat or pointing down, while the rest of it - the preceding eighty precent is going up nicely. The results of the backtest are averaged out, and overall the stats look good, but who cares what the strategy did in the last fifteen years if in the last year it fell apart?
This actually is an excellent question. I have wrestled with this question as an algo developer for a long time. it gets more difficult when I started to use "look inside" each bar at the tick level to avoid ridiculous curve fitting. it makes optimization a very long process.
I think if you construct the algo from some form of price action, maybe 20- 50 occurrences of the signal is enough. Whatever length of time it may require.
On the other hand, if your algo is based on statistical distribution of price and other attributes like order flow and volume plus it's derivatives, then I think more data is required because the bigger the data set is, the more statistically reliable the conclusion maybe.
Now we are talking huge data sets and weeks of number crunching.
When I see people talking about tick data I have to just laugh. You do know these days tick data is useless, right. Maybe 20 yrs ago it was useful for something, but these days it's just a waste of time. You have to understand how the markets work these days. The NYSE these days is basically a data center in Mahwah, NJ. Co-loocated in the same data center are the hedge funds and HFTs with their super computers. The first question you should ask is, wait a minute, how is that fair. Those super computers work on submillisecond times. Any data that you are getting even if it is only a few 100s of milliseconds behind is ancient history as far as those super computers are concerned.
Have you heard of spoofing? So what are the super computers that are co-located in the same data center as the NYSE computers up to all day? They are trying to fake each other out to get some kind of edge. Wouldn't that mean that the tick data then is just super computers trying to fake each other out? What could one possibly do with that data. It is totally useless and if you think otherwise, you are just kidding yourself.
I've got a homework assignment for you. This will be fun and hopefully a learning moment. I want you to do an algo that at random times does a coin flip, heads you go long, tails you go short and then 10 mins later closes the trade out. That's it. No charts, no indicators, no nothing. Just at random times randomly go long or short and close the trade out 10 mins later. And you could set it so it does that say, 10 times a day, 50 times a day and 100 times a day and see what happens. And since the futures trade 23 hrs a day, use the whole 23 hrs, not just 9:30-4:00. And then if you want, you can look to see if it works better at certain times of the day. I'm actually kind of curious to see what the data says.
For anybody that is following along, unless you are consistently day in and day out making money, I don't care what method you are using or what indicators, you are basically doing a variation of the above. You are just doing coin flipping. You may be trying to convince yourself otherwise by using the indicator of the month, or some convoluted method, but if the results you are getting is the same as coin flipping, then you are basically doing coin flipping.
Most traders don't make money because they are trying to make the problem way harder than it actually is, and they are looking at the problem wrong. How many of you are aware that on Friday NVDA and its crazy brother SMCI both hit all times highs on Friday, and yet they both closed in the red and both were at some point in the day over $100 down from the high of the day? That's just like crazy stuff. So on Friday NVDA topped out around 10:25 and about 11:00 crashed. You look at the Nasdaq chart, about 11:00 it crashed and sold off about 350 points. Even one contract would have been good for $7k. And you're looking at tick data. Why?
