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Strategies & Market Trends : Classic TA Workplace -- Ignore unavailable to you. Want to Upgrade?

To: _scar_face_ who wrote (61108)	12/7/2002 12:01:14 PM
From: GraceZ	Respond to of 209892

No one would argue that you can't make money trading, obviously you can. In addition, while most people who trade go bust there are individuals who can make money doing it for long periods of time and there are certainly periods where trading in and out would provide you with superior returns to buying and holding long, just as bonds or real estate out perform equities for extended periods of time. That said, short term trading still has a negative expected return. The positive expected return belongs to the market maker or specialist the same way the negative expected return belongs to the casino customer and the positive goes to the house. There are a few reasons for this. The first is the most obvious, the spread goes to the MM and the trader pays it. The second reason is less obvious but actually far more damaging to the public trader. The MM is forced to take the opposite side of the public action at the extremes of price movement. In other words, they are the buyer of last resort and the seller of last resort. When you see these parabolic moves on a gap up or down you can almost guarantee that it is the MM on the opposite side of that trade and it is that sort of buying and selling which they do as a requirement of their job as primary MM that nets them the lion's share of the profits from short term trading. This is not to say that a smart public trader couldn't attempt to mimic that function, they could. But I have to tell you from talking to friends of mine who have done the job of market maker, that it's very difficult to pull off because at that moment when the action is the most crazy you are absolutely certain that you're going to lose your shirt taking the other side and they frequently do when a peak or a low turns out to be temporary. I have a friend who was a MM covering QCOM right before their split in 1999. For the three days prior to the split the public buying was so intense that it brought the system to it's knees. They wound up losing about 60-100k a day for three days simply because the price action kept moving faster than the SelectNet system could keep up with. On the afternoon of the split they decided to be a seller (naked short, which an MM is allowed to do) primarily because no sellers could be found to match the intense buying and no shares were available to borrow. (the routine function of an MM is to simply match buyers with sellers the way an ECN works only with a spread, or to assemble large blocks for a booked order) After having the position move against them for a tense hour or so finally sellers came in, buyers started drying up, price started down and my friend was able to start covering. When the frenzy was over they had not only made up for the previous horrendous three days of losses but had made their entire year's profit. This all happened in the space of a few hours and not before feeling like they had made a mistake that would end their career. Now they feel that way playing with 10 million of the firm's money and with pretty good knowledge of what's in the book, at least their own books...think how about how the public trader feels? Maybe you know. -g- Now if you talk to most traders, you'll find that most prefer to trade, not at the extremes, but out of the middle or when they feel that a trend has been established. They wait for confirmation of a trend change. This risk averse behavior allows them to make more trades that are successful but they wind up excluding themselves from the trades which would provide them with superior returns, whereas the MM doesn't have a choice they are pushed there by the wild ass unpredictable public action. Risk avoidance always produces returns that approach bond yields. In order to make real money in the market you have to engage risk. Traders for the most part are risk averse. The bond fund I held last year probably beat out all but the most successful traders on SI and it was a hellova lot less work (two trades, one in, one out). There probably isn't anyone on this thread (aside from the da_cheif) who wouldn't tell me how risky it is to be holding a basket of stocks long right here. Most don't even want to be left holding something overnight. Maybe they don't know just how well one can do holding individual stocks even in a terrible market for equities like we've had these last few years. It's not like you had to go looking, the good ones are almost always hidden in plain view. It's been this way as long as I've been in the market.