Saturday, 17 January 2009

Make Me A Trader (2)

Back to the first episode of Million Dollar Traders, and just where exactly are these 'ordinary people' supposed to get their edge from? We saw a very limited amount of their training, so we may not have the whole picture, but the limited training revealed consisted of the group being told that there were no hard-and-fast rules, that trading was about generating ideas, that trading psychology tended to favour over-confidence, and a study of technical analysis ("charts are simply a mathematical representation of momentum in the market").

We've probably all been through similar learning curves on Betfair. First we try out different ideas to try and find what suits our style. We learn not to fall in love with positions, and to take a loss if the market moves against us. We use the (limited) charts that Betfair provides to help us see where the market has been, and where it is likely to go. We read books on trading, and we learn everything about the markets / sport that we end up specialising in.

For the most part, we see the group staring a a screen full of numbers and under pressure to make trades. Again, where are they supposed to have an edge over everyone else (far more experienced) in the market? Reading the newspaper (where the 'news' is at least several hours old) hardly seems likely to give anyone an edge, and because of their inexperience, any news on the TV is likely to be digested and understood by more savvy people a lot faster than this group.

At least with sports, we get to see pictures of what's going on. We get to see what team is playing well, who is struggling, which way the momentum is going, injuries, substitutions, weather etc. and as long as we know our stuff, we can turn this to our advantage.

My experience of technical analysis is that it is very useful looking back, but is of limited use in predicting the future, and because the information is out for for anyone to see, it is not going to give me any kind of edge.

It will be interesting to see if any of the group succeed. Right now, they all seem completely lost, and there doesn't appear to be any specialisation at all.


Anonymous said...

Apart from the basic/stereotypical errors made by novice traders the biggest mistake I believe they made was not appreciating/acknowledging what was already priced into the stocks price when they opened a trade.

When they had the poor results about Citibank (I think it was them) they all saw it as signs to sell financial institutions. However, they didnt realise that the market had already priced this in and the results werent as bad as expected meaning the stocks generally rose (and no hedge position to limit the damage.) This I suppose comes under what you describe as the "savvy people" although I simply call it "feel." Something I suggest you can only obtain with experience.

To be fair to the program, (or at least the two guys financing & managing the team) I dont think there was the pressure to be in the market as much as it was portrayed by the TV production team.

Remember the "Russian" guy when he was told that one of the women closed both her two positions, his initial comment was "maybe she's just re-thinking her positions?" The manager, having the advantage of watching and talking to them mentioned that she only closed because she was scarred to have any position whatsoever (which with the emotion shown later was probably true.)

I agree that often, its better to be not in a market at all but only if the reason behind why you're not involved is a good one. Generally, a frightened mental state is probably not a good reason!

I must also agree with the two guys running the operation, that the general level of focus probably wasnt high enough. Im all for office banter/inter-action but if I had been trading in that room (on any kind of market, betting exchange or otherwise) I would have been disrupted to some extent.

Cassini said...

Some good points. When I talk about having an edge, I guess I mean 'what do I know that the market doesn't'. Anyone can read news in the paper, but unless we see an angle that others are missing (unlikely in the shark infested waters of finance) it's not giving us an edge, and indeed, if we fail to appreciate that the news is already factored into the price, it can hurt us.

As for the focus, well Simon (the Croydon fool) clearly hasn't got it. He's eating his breakfast when the market opens and he has an open position! For crying out loud! Anyway, thanks for stopping by, good luck.

Anonymous said...

No worries mate. You're definitely on to something regarding the edge. However, the religious reading of newspapers I wouldnt consider a waste of time, Id consider it as part of the background research to build up your "feel" that you can apply to markets forever forwards. No immediate edge can be gained, Id agree but as long as you're aware of that as a trader and not believing its a holy grail answer, I still consider it worthwhile as a better, all-round knowledge of the World must go at least some way to better understanding it and interpreting it.

Im also of the view that to profit from trading, it has more to do with the person within then any edge over external participants, at least in the long term. Get the Worlds best two traders together and force them to have opposite positions on the same stock/selection each time, Id still bet that both would make profits in the long run. The managing and reacting being the qualities that set them apart from "joe average."

You ever done any real financial trading Cassini as I must admit, I havent.


Cassini said...

JPG - for a while when I was working in the City for a trading firm (as a computer geek, not a trader) and had more money than sense (late 80s) I got sucked into it and traded in Futures (pork bellies, orange juice, Candian dollar etc.) and options but after initially doubling my bank in short order, I then proceeded to lose 3/4 of it before realising that I was competing with people who did this full-time and that as a part-timer, I was never going to win the game. I was always going to be the last to hear any information affecting these markets. Nowadays my financial investments are for the long-term.