Curve AdvisorKeymasterNovember 18, 2014 at 8:55 amPost count: 612
1) 2:1 + 2:1 = 1 (aka Be Diversified)
In a nutshell, a 2 to 1 bearish reward to risk trade + a 2 to 1 bullish reward to risk trade equals 1 unit of profit regardless of whether we rally or sell off.
It is very difficult trading for a career trying to analyze/predict/guess a 10-25+bp move in rates. Let’s face it – even if you are right most of the time, you are going to be wrong plenty of times or you may get stopped out before your move happens. Maybe you get a few major opportunities a year to put on a “real” position. And then something unexpected happens and you get this… http://www.bloomberg.com/news/2014-11-17/goldman-fund-said-to-fall-5-6-on-interest-rate-position.html Bill Gross was right about wanting to accumulate the reds… and he indirectly got stopped out by his management because he was a few months off on his timing. It happens all the time.
How many “big” trading opportunities do you get in a year? 5? 10? 15? Run a monte carlo simulation on that and see what the dispersion of results is. It’s not pretty. Any time the line ends up below your minimum P&L target, you get a talk with your manager. If it is far enough below, you start looking for a new job. Is that really what you want to base your career and your livelihood on?
What you want is consistency year in and year out. So I am a big believer in accumulating VALUE – regardless of whether it fits my bullish/bearish view. Because if I am bullish, I should have some cheap bearish protection in case I am wrong, and vice versa. I’m not saying you shouldn’t take those big bets that strongly fit your view. I’m just saying if you see a good reward to risk play going the other way, it may not be a bad idea to consider adding some protection. And when you take your big trade, make sure you are expressing your view in the most optimal way possible.
Curve AdvisorKeymasterNovember 19, 2014 at 12:55 pmPost count: 612
2) Know your Edge
Trading futures is a zero sum game. For you to make money, someone else has to lose it to you. It is actually a negative sum game because both parties have to pay brokerage. I would guess there are 2x as many losers as winners. So what is your edge?
I would venture to say that most traders think one of their edges is the ability to make better decisions than others in the market. So 80+% of traders (myself included) think they are in the top 20+% of decision-makers. Does not compute.
Keep in mind that you have some of the smartest people in the world looking at these markets – traders, economists, quants. As you go over your strengths and your trading strategies, think about how the existence of those players in the market would affect what you think your edge would be.
Curve AdvisorKeymasterNovember 20, 2014 at 3:57 pmPost count: 612
3) Know what your Edge is NOT [DRAFT – I will need to revise]
Here is where your edge *probably* is NOT:
* anything you read in a book – including pretty much any technical ever created. I have never seen a consistently successful technical trader. Period. I think technicals are helpful to look at – but technicals can be manipulated. I’m not saying books aren’t helpful for building a foundation – but you need to think outside the box.
* ability to process economic data – there are full-time economists who look at various pieces of data regularly. Even if you get their analysis, you are probably not the first to see it. Even if you are, there is this thing called insider info that is allegedly illegal, but happens all the time. In any event, assume you will be the last to know, in a zero sum game.
* ability to analyze central bank, political, earnings, etc data – Ditto. Especially the part about being the last to know in a zero sum game.
* Anything that can be duplicated by an algo. Anything and Everything you can think of… because there are algos that just look for relationships and patterns. You will never trade faster than the algo.
Curve AdvisorKeymasterNovember 23, 2014 at 4:06 pmPost count: 612
4) Develop a Revenue Pipeline
There have been many “prominent” traders who ended up being 1 trick ponies. You can have some view that works phenomenally well for years, and then something changes and the wheels fall off the wagon.
Take a broader perspective. If you are going to open a business, would you really just sell the few products you currently have? Any business that expects to last should invest in some Research & Development. Take a new look at other markets, other products and other strategies. It could possibly take you years to understand the new venture, so start developing that pipeline now. Because you never know when those additional revenue streams could come in handy.
I am going to be the first to admit that I too could be expanding my horizons past EDs, but for me this has been more of a time-usage decision. But don’t be surprised if you start seeing some international coverage some time in the next year (or two).
Curve AdvisorKeymasterDecember 1, 2014 at 1:56 pmPost count: 612
This article today made me think about my comment about “assume you will be the last to know”: http://www.bloomberg.com/news/2014-12-01/fed-leak-handed-traders-profitable-tip-prompted-secret-inquiry.html
Curve AdvisorKeymasterDecember 1, 2014 at 2:31 pmPost count: 612
5) Always Keep Learning (aka Be Humble)
The trading profession sees more than it’s share of arrogant personalities. This is particularly ironic, because there are very few (if any) who actually have a “decisive” edge on the markets. So always be humble and always keep learning.
Curve AdvisorKeymasterDecember 8, 2014 at 9:11 pmPost count: 612
6) Look for Singles
I’m not saying you shouldn’t go for the huge trade when the opportunity presents itself. However, those are sometimes few and far between. You should always be looking to pick up loose bits of P&L whenever and wherever you can. Because those are the things that is going result in “regular” profitability. To use a poker analogy, most good cash game players make the majority of their money picking up the small to medium sized pots. You should try and pick up all the small pieces of profit floating around the curve.
Curve AdvisorKeymasterDecember 30, 2014 at 6:01 pmPost count: 612
7) Always be Trading
The only exceptions would be if you have some kind of drawdown and you need to take some time off, or if you are taking some vacation. But I have never been a fan of waiting until Jan 1 (or some other arbitrary deadline) to trade, or stopping trading because you hit your target for the year (how are you ever going to get noticeably above your target?), or not trading when the markets are too volatile (just find trades that do well in volatile markets), or when the markets are too thin (that’s where you pick up little bits of value!). When you know you have a positive expected value trading style, every day you do not trade is losing money. It’s like if you owned a slot machine in a casino. Why would you turn it off? I suppose you could find a few reasons here and there, but all other things being equal, you should have it on as much as possible.
Curve AdvisorKeymasterNovember 12, 2015 at 10:44 amPost count: 612
[I am going to break out #5 into two points – “always keep leaning” and “be humble”]
To make good decisions, never overestimate how much you know. There will always be other people in the market who know more than you. So when you see something that seems “mispriced,” unless the markets are fast-moving, take a minute to consider why it is that the market has take the (opposite) view that it has. There could be various reasons, like hitting a stop, positioning for important data or event, supply/demand imbalance, key technical levels, etc. The smartest people in the world (allegedly) make up the pricing in the markets, so if a market is trading at a particular level, there are probably “good” reasons for it. Consider those reasons carefully, rather than succumb to the “I am awesome, therefore I am right and they are wrong” approach. The more you consider the other market participants’ views, the more unbiased you will be about your positioning, and the better the decisions you will make.
Curve AdvisorKeymasterDecember 3, 2015 at 11:56 amPost count: 612
8) Constantly look for the best possible expression of a view
This applies not just when you initially put on a trade but also on an ONGOING basis. A common trading mistake I see is that someone puts on a trade they like, and as it moves for (or against) them, they do not fully assess all the trade alternatives, and they become fixated on the trade they have on and think only about what to do with that trade. For example, say you are bearish and decide the best trade is to buy the EDZ5-H6 spread. Assume this is the best risk/reward representation of your view at that time. If the trade moves against you and you still like the trade, you can add. But the markets just moved. The conditions/environment may have changed since you initially did your analysis. There may be a better trade to add to your bearish view, from the new rate/curve levels. The optimal decision may not be to add to EDZ-H spread – it may be to substantially unwind that trade in favor of the new trade because the risk/reward is that compelling. Conversely, if the trade moves in your favor, the best way to “take profit” may not be to unwind the trade – there may be another trade that is even more compelling as a bullish trade that you would want to put on in conjunction with your bearish EDZ-H trade that would allow you to still profit on further downside, but protect you on a retracement. So constantly review at all your trade alternatives to optimally express your view.
Curve AdvisorKeymasterMarch 5, 2016 at 10:54 amPost count: 612
9) Be prepared
One of my cardinal rules is to always prepare for all outcomes before a big number / event. In the US, the two most important events are the Fed meetings and the Employment Reports. Think about what you think the consensus expectations are and what the whispers are. Think about the various outcomes: (1) bullish/dovish, (2) neutral/in-line and (3) bearish/hawkish, and consider the various degrees to which these outcomes can arise. Think about what you would expect to see in occur in the various parts of the curve in each scenario. Then think about what you want to do with your existing positions in each of the cases. And think about what new positions you would like to put on in the various scenarios.
Preparation will also help you become more decisive in a shorter period of time. For example, you should also be able to look at: (1) headline payrolls, (2) UR, and (3) avg hourly earnings, and determine how good/bad the number is within a few seconds. You should already have prepared for this scenario earlier, and within a few seconds, you should be implementing your plan from earlier as well as making any adjustments to the plan based on the market reaction. Time is money, and I’ve made a lot of it by being prepared and acting quickly in fast-moving markets. Preparation is the key to success.
Curve AdvisorKeymasterApril 4, 2016 at 5:08 pmPost count: 612
I wanted to elaborate on Point #5 (always keep learning). I was talking to someone today and they felt a little frustrated because what they like to make money on was mispricings in curvature caused by large flows. However, with the increasing presence of algos, and the flatness of the curve, there were not very many opportunities to do their bread & butter trades. This is why you always need to keep learning, and to develop a revenue pipeline (Point #4). I have been looking at the Eurodollar curve for 15 years now. And even though I think about EDs and am constantly working on new projects, I STILL have a long list of projects I want to develop. For example,
* looking more at some kind of volatility adjusted fly structures. This may be useful when looking at capturing optimal rolldown, and could be useful for looking at options value.
* modeling the open interest for rolldown. Depending on the point in the cycle, open interest can show more noise than there actually is. For example, when a quarterly future rolls off, there is typically a drop in OI of about 1 million contracts. This “noise” needs to be accounted for.
* creating an open interest model, that also uses CFTC (net long/short) data. Combining these metrics with what I see in curvature could result in have a good read on what everyone else is thinking and what parts of the curve they are looking at.
Those are only three things on a long list of things I want to look at. So if someone like me can still learn and find projects to work on, you should be able to as well.
Mike GParticipantMarch 5, 2017 at 11:10 pmPost count: 20
This is very interesting and it goes back to your framework of understanding the markets positioning to get a feel of what people are thinking about.
I wonder if looking at seasonal open interest roll downs can help differentiate between rolls and actual positioning changes. For example looking at all April contracts going back in time and looking at the pattern to when and by how much oi changes as the contract expires. Backing that out gives you the residual oi change that is not related to the roll over. Not sure if this makes sense…
Curve AdvisorKeymasterApril 12, 2016 at 3:10 pmPost count: 612
10) Have a Trading Buddy (aka Two Heads Are Better Than One)
You swim with a buddy, you have beers with a buddy, and you watch the game with a buddy. If you are going to have a buddy around for all those “unimportant” moments, why WOULDN’T you have have a buddy when you have a lot of your money on the line? You should always have a Trading Buddy (or Buddies) you can bounce your ideas and thought processes on. You never know if you are going to miss something. Rather than get blind-sided, it’s better to gather all the information possible before you do a trade. What you want in a Trading Buddy is someone who will point out things you may not have considered and challenge your thinking. This is not to create unpleasant confrontation. Only by having your views challenged can you realize what any flaws in your thinking may have been, and if after the challenge, your view is strengthened, you will be all the better for it.
Curve AdvisorKeymasterJanuary 23, 2017 at 9:51 pmPost count: 612
11) Use the 90% of the time you are “free” to make yourself more productive in the future.
With interest rate trading, 90% of the time there is very little going on. I’m not saying you won’t have marginally productive stuff to do most of the day, but interest rate trading can be like watching grass grow at times. You may get a few large move days but they are usually followed by many days where rates consolidate. And even when the price action becomes more interesting, you may not have a strong enough view to pull the trigger on anything. And this is coming from someone who may have over a dozen trades, and many dozen orders of scales working at any one time.
Rather than stare at the screen and hope that something miraculous happens, or wait for that fill that only comes sporadically, try and spend your time improving your future expected earnings. Unless you are some kind of day-trader, or feel-trader, just starting at the price action is a huge waste of time. I’m not saying I haven’t been guilty of it, but the computer will let you know when something moves or trades. And there are always things you can be doing:
* do a thorough evaluation of your positions and what you expect in the near future. See #8 and 9 above. A related topic is that you should make sure your set-up is optimal. When the markets are going nuts and you are getting fills left and right, will you be able to keep pace? If no, you have some work to do. You need to be able to make decisions within seconds.
* work on the various projects you have been putting off. See #4 and 5 above. If you haven’t been keeping a list of projects to work on, there is no better time than the present. Learn to code, pick up a good book, listen to a podcast, etc. There are plenty of productive things you can be doing to expand your horizons.
Curve AdvisorKeymasterMarch 8, 2017 at 5:47 pmPost count: 612
This is very interesting and it goes back to your framework of understanding the markets positioning to get a feel of what people are thinking about.
Well, there’s only one way to find out!
I would suspect though that there would be too much noise in a small sample, but if the theory makes sense to you, look into it.
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