SIUYA

you are not ready. 1st question you should ask yourself is this -- what have you learnt from reading,watching and knowing about the technicals and fundamentals so far. Then build from there. If you dont have a plan for how you are going to do something you have no base to the next step. To get out of the comfort zone - to steal a quote - just do it. --- do it small, do it in Sim, then do it small or blow up quick and then learn. but just do it.

your question - "I'm a little confused as to what you mean by relative trades? Are you referring to the market price of the option as opposed to the calculated price using a model? Or, are you referring to different option series (relative to each other)." a model simply provides a guide to what each option strike and series is worth relative to the other options.....so the relative aspect applies to all things you mention. -- the bid ask spread of an option price in the market is usually relative to the model and its theoretical fair value. --- and due to the constant spreading market makers will do, the options are relative to other options. You have to remember that a MM thinks and acts differently to a single strike/series option person. they are constantly spreading relative values and risk and using a model to help keep things in line. Whereas a single option trader might be looking at a choice of which options to purchase based on a number of factors....one of thise might be, which series or strike is cheapest. As in options there is no easy answer as there is a lot going on. Once you understand more about put call parity, synthetically reproducing options and that options are about the transference of risk some of it may make more sense. (as a new subscriber your posts may have been delayed - stops spamming - plus while many trading message boards have falling attendances and traders lab is a little bit quiet - it is also a lot more sensible and less toxis than some other message boards)

market makers use this type of strategy - in a general sense of it. there are many types of models and many types of variations but the concept is the same. A market maker buys and sells options that a relatively priced to each other based on a model in the hope that they do enough trades and take a small margin from each trade around the theoretical model prices. Then they hope that the theoretical model represents reality closely enough that if they are left with residual open option positions (ie; those that they could not close out with different clients buying and selling) then they have enough margin or buffer to not lose much money. Of course as this is an ongoing process of continual spreading and trading by a market maker it cant simply be thought of as a one or 2 off options trade strategy. For the retail or institutional guy the use of theoretical option pricing is used differently as they are not necessarily doing many many many trades but often one off, directional or hedging trades. Remember - all of the models are simply theoretical models that represent what the options are supposedly worth at that point in time relative to other options. Any change in any of the parameters for the model or changes in supply and demand then changes the prices in the model - the key point is the relative pricing. Prior to the models people traded options in much the same way, however the models give more precise prices for relative trading.

Very true - there are different factors, emotions and worries involved. There is also the simple economic issue of time management and opportunity cost (is it even worth doing yourself) Which is why the saying "dont trade with scared money" or "only trade with money you can afford to lose" is important in minimising mistakes.

so what you are suggesting is that given the same amount of money a professional will make more mistakes than an amateur? or that you have to have money at the start....cant people start small and grow. Plus I think you are missing the point - how do you move from being an amateur to being a professional.....one answer is to make less stupid mistakes. The money is the end result. The only thing about having more money or a larger pool of money is that in an absolute sense you can afford some more mistakes.....if you compare like for like in percentage terms then it makes no difference. A 5% loss is a 5% loss. Of course this is different again from the problem of using your own money as opposed to other peoples. The best kind.

If a Sigma is a car model then - its a bit harsh to call it a mistake. The whole Sigma 6 hooha and 0 defects can be well applied to engineering processes but when it comes to trading I am not so sure. Even if you are 100% automated, you can eliminate technical errors, but the rest are not mistakes as such, but part of the trade strategy....which may in its self be a mistake. Mistakes will not be eliminated, accidents are accidents and black swan events by their definition cant really be anticipated. However - we are often talking about either mistakes in character, or mistakes in process and most likely perfectionism, pride, stubbornness and greed etc. yet while the simplest mistakes may have their root cause in these, they should be the easiest to fix.....and will see the biggest payoff ......and the key is often not trying to be a genius, but simply in trying avoid being stupid. This will eliminate a lot of mistakes. ................. I am reading about insight at present and how it comes about. One of the factors that can help insight is making errors, making mistakes and then learning from them. I guess there are mistakes....stupidity for repeating them or not recognising them and then insanity - when you deliberately repeat them.

related book that I am currently reading and enjoying. Seeing What Others Don't: The Remarkable Ways We Gain Insights: Gary Klein: 9781610392518: Amazon.com: Books Gary Klein it also relates a lot to what others talk about in trading regards - how to see things, how to break through and where insights come from. Of particular interest is that 'insights' and 'aha' moments are not always either gradual, or flashes of brilliance. Nor are they necessarily following a fixed path of gaining insight....but what they do do is change the fundamental beliefs or anchors - they often get turned upside down. So when it comes to making changes sometimes i guess a lot depends on if you are on a path of false beliefs or not....or if you need a massive upset of the status quo. If things a re working small changes are best, if they are not large may be just what the doctor ordered. How often is it said that once the correct insight is gained by a person everything else seems to fall into place.....flow is easier, or we simply choose to do other things reaslising from the insight that what we want out of the market is not what we require. ...............Saturday musings as the sun shines, and summer flies annoy.

Hi, I thought I got it but now I am confused again (too much wine tonight)....from your example at the end of the month, its like you are reweighting based on 2 different formula components. A normal reweighting formula --- this takes you from 60% to 70% for stock A and An inverse profit formula - you are taking the profit for the month (1k) and rebalancing on a % of that, as an inverse % of the total weighting. Hence you are actually increasing your winners by a smaller amount if there is a profit (assuming the first normal reweighting formula is flat). So I get that you are now reweighting across all portfolio instruments. Regardless of where the PL came from. I dont think compounding makes much difference as to how you are getting it as it looks more like you are capturing a little bit of both trend following and mean reversion. Like having a mix of two strategies in one, and you are making the most of the only free lunch there is - diversification......which makes a lot of sense....and is an interesting take on it.

hi, re alpha yes - I thoughts you were simply talking about alpha 'generally' and not in direct ref to an equally weighted benchmark, and even then the benchmark needs to be standardised...but my confusion. (too much beer on the weekend in Prague) The way you are referencing it is good. I think this is also one of the issues when people pigeon hole a strategy type as men reversion, breakout, trend etc; as it needs to be compared to a standard otherwise it is hard to compare apples and oranges. '''''''''''''' "The key question I'm asking though is this: when profits can be traced to a particular portfolio component, should the "benefit" of increased position sizing be passed to just this one component, or to the portfolio as a whole? What I have found in this instance is that performance is improved when the benefit is passed equally to every component in the portfolio. This must mean that the improvement in performance is the result of increasing position size for poorer performing components, surely?"" If you are rebalancing your whole porftolio, then you must be doing it taking into consideration all parts of the portfolio if you are doing it properly, otherwise its hindsight(???) How would you decide to not increase some or others....or are you simply doing the 'dogs of the dow ' theory and buying laggards but with extra leverage on top of a evenly balanced portfolio. eg; buy 2 at $1, when one goes to $2 and the other is at $1, you dont sell any at $2, but simply buy the more of the one still at $1. ''''''''''''''''''''''' I think I am getting at what you are talking about.....I remember doing a test once that had a portfolio limitation of not having too many correlated instruments and so it did not rebalance but it did not take new entries in what we determined to be highly correlated instruments if you were 'full up' in that sector. In a classic do your head in thing, during the Internet bubble approx 2000, because the portfolio was full of equities already it never took the nasdq buy signals. This meant massive underperformance of a benchmark.....and because we never rebalanced it never changed. When introducing variants (even small ones) for rebalancing, or spreading over further instruments, or even concentrating it more it had big changes in return profiles, and this also looked different over the time frame of the tests - eg; it never had the same issue when the naq burst and it even managed to put on a short. So my guess is all you can do is simply test and see what happens over the long run and what you can live with....sometimes its great to be full tilt othertimes not.

You have simply modified the portfolio strategy..... if you rebalance every month you are making quantity to buy decisions based not on mean reversion, breakouts or any such changes in prices. You are making it based on your rule for rebalancing. There are many ways to do this, no rebalancing, rebalancing monthly, quarterly, at some change in % or absolute equity.....etc;etc. Imagine it this way - you are a fund manager and you have to deal with subscriptions and redemptions each month. You have to have a rule that either simply increases/decreases each quantity each month, OR you will have a change in each individual position proportionally - ie; investors either are diluted or get increased concentration to different positions for their returns going forward if you treat all investors the same with the same NAV calculation. (One of the great reasons why similar styled funds have different returns even if they have similar entry exit triggers and many of them say its all in the money mgmt) So in a nutshell its just another component to consider as part of an over all strategy for the portfolio simply as you have added the extra rule of rebalancing - (and why when many backtesting systems say they are able to test for a portfolio is BS, as it can get more complicated than they allow for) ......I also think that you are miss using the common usage of alpha. Your may or may not get extra alpha out of your strategy, depending on what the benchmark for your alpha measurement does. Hence while it might underperform the SP recently, it might be great over 10-15-20 years. Your point might be better described as - if I apply this money mgt rule to a breakout type entry strategy does it massively change the returns over the long run, and deviate from the strategy I am implementing, or does it provide a better risk return profile--- at a complete guess it might smooth the returns and lower them.

This is not really a trading related article but I think much of the same lessons apply here. dont focus on being a star focus on avoiding mistakes. How often as traders are people trying to capture every tick, get every trend, get out or in at the top.....and yet are still making simple mistakes over and over. We all make mistakes, but how many stupid mistakes do you make over and over. (plus the blog often puts up interesting articles and books as well) http://www.farnamstreetblog.com/2014/06/avoiding-stupidity/

offer the bird tribute - worms, seeds, bread in very small amounts. We all respond positively to food.

small changes - incremental changes are key You often hear of the huge change, but these are only successes that only come after disasters and rock bottom IMHO. Huge changes for the sake of it are usually a disaster waiting to happen. (think corporate types who want to implement huge changes when incremental ones might work) I have found from my own experience and friends that its amazing how many large companies have really crappy processes in side them, and often I think this is a direct result of undirected and non-holistic change (either it was a huge change or organic small growth over many years, but it was undirected). Key I think for individuals or small companies is get the small things right -- right from the start.....change is then easier. Have a good weekend - I have a lovely highly regarded restaurant to attend Sat night - 7 courses ---- lets hope they get the small things right!

your first post is interesting as there are many ways to move forward (as standing still is a poor option and I assume this is what you mean by making a change - otherwise your self destructive changes are just insane) 1) trade more instruments 2) trade larger size 3) trade more often (usually a bad choice) 4) trade more patterns or ideas (probably a bad choice IF as you state it messes up whats working, and I have a sneaky suspicion you would naturally trade at similar levels and hence you revert back to 1 and 2) 5) Invest in others who do something different but they do it well 6) Invest in completely unrelated businesses 7) Be satisfied you trade well and get a different hobby to move forward. Re the zero sum game - well yes in a closed environment it is all a zero sum game, but in the realm of the size of world markets, the 5%/95% ratio of retail winners, loooosers is irrelevant. Larger players are benchmarking and so we can ignore all this IMHO. Do you know about the Quincunx / Galton Board ? Maybe we are fated to naturally split things and hence the question is how do we give our selves the best opportunity of being an outlier, and if what you are doing works at present with that in mind - why change in the hope of joining the norm. Luv Friday ramblings.

if you like risk Video: Caution Do Not Fall - Pinkbike

what you suggest is a good idea - however - all I mean to say is the risks of doing this in terms of getting a number that is a best fit from some back testing as a stop is searching for perfection. I dont think this is too much clutter in the thread as it does get to the core of some systems such as the SLA that are discretionary but with rules. Its not about a fixed number, its dynamic. These systems require zen focus and not automation. (Mods feel free to move this if you feel this is better suited elsewhere, but this is all I mean to say.) eg; what if one week you see the best fit number is 4 tics, the next week its 5 or 6 because volatility has expanded? What happens if you set it at 4 tics and have 3 losses in scenario A, whereas if you set it at 5 tics you had 0 losses in scenario B, - In scenario A how will you feel on the 4th trade - will you take it, will you let it run or be happy to get out at BE? In scenario B - after watching it wing around a few times and nearly stop you out, will you run it thinking you were lucky not to be stopped and hence better take some profit while you can, in case you actually get stopped out next time? Often setting a fixed level - or 'expected norm' / the sweet spot causes more problems than not.....just understand the trades offs that go with it. However - dont let me dissuade you from doing what works for you, just understand there are more issues when backtesting v reality of application v reviewing occurs. Which i think DBP is saying - there is more to simply having 1D reviewing postmortem.

At this stage I think adding to what DBP is saying - Think about progress - not perfection. Everything is a trade off - if you enter quickly or enter at every signal you till trade, more get more small losses (or less larger ones) but you will get every entry. if you enter only on a second retracement, or one that closes below, or one that only follows some other filtered reason - you will get less trades, probably less heat but will also miss some moves. flip flopping between one or the other trying for perfection in capturing everything will do more damage to the progress of getting your process working to perfection. ////////////// I had a lovely weekend of dry fly fishing and for those who have tried it you can understand the analogies between trading and dry fly fishing. Wait for the right times, choose a target, choose the right fly, place the fly correctly and wait - amend fly if its not working because you can do so quickly and easily and have reason to from experience - dont worry about the other fish, they will still be there, you wont catch them all, but you will also be more involved and enjoy the process and ultimately thats what pays off....but I digress.

beyond my expertise, but I would guess you would use the Delta of the short option (as a fudge) to trigger an exit of the spread and you would have to use the TWS API (probably using excel) to track this. Best bet would be to ask IB directly or look at the yahoo or TWS API chat groups.

I think it is pretty much the same definition - interchangeable, but while levergae is expressed as a % gearing might be expressed as a ratio. I also thought that gearing was more the coloquial expression - that family is geared to the hilt, v the more formal business definition - that firm has a leverage ratio of 300% on its assets. It seems only a few places use this expression but it seems appropriate given the use of gears to increase/decrease speeds! Usually if say you have 4: 1 (or 400%) leverage, it means you have gearing of 4:1. ........side bar deviation Its an interesting issue as there are lots of definitions around, and I have seen some argue that if say for every $1 in an account, $1 is borrowed this is 100% geared.....which is why one needs to be clear about how they define many things, and exactly what it is they are getting. Which is why I pretty much look at things from an 'exposure' point of view. an example.... when the marketing of 130/30 funds are bandied about then one might think this means it has greater than 100% leverage. However most often the gearing might only be 30%-60%, and some would argue that it is Net Exposure neutral (hence the introduction of gross and net exposures to often disguise gearing IMHO), as the long 30%, v short 30% offset each other...... In my terminology I would say the fund has the potential to have an additional 30-60% gearing/leverage through its gross exposure, but even though its net exposure is likely to be neutral, you still have gearing/leverage. All too often leverage is hidden, or implicit in many things and yet we over look it - Taleb talks about this in his recent book and like him or hate him, if you look at the leverage you can get in some things in life particularly the leverage from convexity and optionality it changes how you look at things. As an old market maker we often had a lot of gross exposure, a lot of leverage and were highly geared, but we also had a lot of net neutral exposures with low risk. Think of what it costs to buy calls, sell stocks on margin.....and do this many, many times, with offsets whereby puts are sold, or other offsetting calls are also sold. ...i deviated a little from my first answer

you can look through all the definitions on the net, but when it comes to trading think of it this way. If your gross exposure to an instrument or portfolio is more than your cash in an account you are using leverage. This will then apply to futures - as they are traded on margin. Options - as they can give you extra convexity shares - if you are trading on margin shorts - because technically your losses may be greater than what is in your account. fxeconomst is incorrect when he says - "While your order is active you can't lost more than your trading margin" The broker will chase you for any extra losses your account sustains as a result of gaps and stops not being sufficient to cover your margin.

I love this saying. I first heard it playing golf with an old bloke who finished telling me about his 3 ex wives, houses and boats.....I already knew he was loaded so there was no surprise in his stories, When he came out with this saying and telling me that if you learn nothing through life, remember this...."it it floats, flies or f.cks, lease it dont buy it" - always brings a smile to the face. For BS of the day/week...... dont sniff glue - it makes your eyes water

looking at the system you are looking at it seems that it basically just a pretty crappy pricing system. If it is getting actual prices then its not updating or using any sensible model to check these, and hence the data you are seeing is crap. This would explain your confusion. There are multiple ways of looking at options prices..... 1) your model with fixed parameters OR variable ones 2) their model with fixed parameters OR variable ones 3) live prices of bid ask - which you have to know if they are correctly updating, or simply leaving prices at levels 4) extrapolated prices from a model or ATM volatilities 5) last sale prices (useless if the last sale was 10 days ago) 6) a sh.t model.

Hi DBP, a couple of questions that popped into my head about this quote. Assuming one is happy to trade both towards the short term mean (like the rubber band approach), and also with continuations away from the short term mean (probably back toward the longer term mean when trading at the extremes - more a bouncing ball - for an analogy) In your experience for the short term mean - trading toward or away from it - is one easier than the other, or occurs more than the other?....of course the short term will occur more often that the long term, but would you say that the majority of good intra-day moves are away from the intra-day/o'night mean? I know often these are mutliple layered questions and I hope it makes sense but I thought it might be interesting to see if there was a particular area that you thought easier, more profitable or more reliable? Lets assume you were only given a choice between only trading toward or away from the short term mean. (*I have my suspicions on what I think but I would like to hear from your experience) thanks. The best trades are at the extremes since those represent maximum fear and confusion among those who don't know that that's where they're trading. Trading around the means is always choppy. Which is why, after reversing off the lower limit of the March TC, I'd rather wait until we get to the other side.But one can trade the SLA without considering AMT. I choose to trade both whenever possible. As to multiple means, I consider only two: the mean of the 2009 channel and the mean of the March channel (there is currently a confluence between the two). The little trading ranges and ultra-short-term trend channels provide clues to ultra-short-term sentiment, but they aren't anything I'd trade, particularly since hardly anyone sees them. But then I'm content not to trade until the best opportunities arise. There are occasions when price launches itself off the mean after having had a lay-by for an extended period of time, but these tend to be less reliable than bounces off the mean from either extreme. One sometimes sees opportunities whereby he can enter before price reaches the mean, then hold until he determines whether or not price will pass through to the other side, as with yesterday. More often, however, again, trading around the mean tends to be choppy. I'd rather not bother. Keep in mind that this is not a mechanical approach, and I trade far less than anyone else who is attempting to implement it. Thanks - I agree prime trades are probably at the extremes.....and given what you said about trading rarely, only using the 2 means and also not often using the micro channels/ means etc, I guess then its hard to tell. Thinking out loud.....if you wanted to more actively trade this. I would imagine it might be worth investigating if filters are worth it. It's not a matter of "actively trading" but of locating the best opportunities and trading size. Otherwise, one is just overtrading with no particular purpose. eg; if longer term mean is trending down, and you are at the upper trend channel, then only take SLA shorts, if longer term mean is up, only take longs at the lower channel. If at the mean - take both but realise you are at the mean and maybe be extra vigilant at exiting. This might be overkill, but hence my question - do you see better moves away from the over night means, as opposed to reverting back toward them when at the extremes? This is part of characterizing one's market. But as for overnight means and moves and so forth, I'm first interested in where traders have been unable to find trades, up and down. Whether or not they will continue to have these difficulties after the NY open gives me a clue as to the direction for the day. If both sides open up, as has often been the case recently, this presents additional challenges and difficulties. Being alert and decisive and quick matter more than being thoughtful and philosophical and what iffy. Also - I hope these questions are not too repetative and part of the 1000s of posts. I hope instead they may be more of a QandA above and beyond simply 'how do you draw a line?". Let me know it they are repeats. thanks (I like this editing format - good one TL)

does this remind you of some internet arguments.

dont forget to renew your domain names if you have them - doh!