No Free Lunches in Trading
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- čas přidán 3. 07. 2024
- Trading has a connotation by many that you just need to figure out the secrets of the market and then you'll make millions of dollars. While trading is a viable career and the compensation for the very best can be in the millions it is much harder than most expect. Many view trading as a simple buy and sell model but very few really understand the amount of research that goes into trading. Most trading firms (at least larger ones) have entire research departments. It takes a lot of time, intellect, and research to make a trade happen. As soon as a strategy becomes profitable it will disappear as others take advantage of the same opportunity. Markets are smart and adapt to inefficiencies. On top of finding strategies you need to find strategies that are scalable. Making 80% return on a $100 position is useless if you can't scale it up to a $1,000,000 position. While algo trading takes advantage of very small miss-pricing (less than $0.01) they are able to scale the number of trades to a profitable amount.
The key lesson, trading is a LOT of work. There are no free lunches in trading!
Yes you are right, I work as a trader for brokerage firm, when people says me that they do day trading and earn monthly returns of 5%, I just say, if that is possible, everybody will sell their property, or took a loan and do it, nobody will work in different professions
I love hearing your insight on topics like this one! I enjoy and listen to people that have had experience and not just talking out of their ass. Appreciate it, and keep up the great videos.
Thanks a ton from India :D
Guess it's also to do with the mind if your in risk .so the first thing a risk person will think of is how much do you put in to make some .. and if the markets are efficient then you will likely have to risk more to make less.. no free lunch indeed . But does keep you connected to the mkts so learning all that helps ..
Dmitri spitting good knowledge out here.. Martin Shkreli told me the same all these fools think they Joe Lewis..... day trading is a great way to lose money... hungry sharks out there happy to eat u up and take the profit
Dimitri you already know this, but LTCM is the hallmark story of this.
1. Nobel prize winners in econ employ some of the first quant FI arb strategies.
2. Eventually market catches up on trading/technology.
3. start making directional bets / lose all sense of risk mgmt
4. Market disruption and capital depletion on bad positions + recently returned capital
5. break up of the firm with NY fed mediation.
Sadly this lesson doesn't seem to sink in to younger people. I see countless stories of people who trade when markets are going up and think they are geniuses. The market crashes and they lose everything. It's why a few people jumped from buildings on Black Tuesday.
There are two questions about:
1) how stressful it is working as a trader? It looks at 5 pm you're at home but at the same time it seems to be intensive.
2) what is a complete knowledge someone should need to be a good trader?
It depends on the amount of responsibility you have over the positions. While some love the job there are physical consequences if the stress is too high. I've known people who have had internal bleeding due to the stress.
The knowledge of trading is a mix of analytics, product knowledge, and market experience. It's not something you can pick up reading or in school. You really have to learn on the job and a lot of people just don't have what it takes.
Can you share your strategies for handling market making questions? And also is there some general theory(I’m thinking utility theory/ some part of game theory etc.) to optimally answer such questions. Thanks.
A lot of trading interviews (including market making) will have brain teaser questions. Interviewers like to ask you random questions like, "if you dip a 6x6 rubik's cube in paint how many of the cubes will have paint on them?" A lot of times they will ask you to walk them through your solution to see how you think. Market making is really done by computers these days due to their efficiencies. The goal of market making is to avoid a position (hold as little as possible) so you won't make or lose money from large moves in the market. You make profit by buying slightly lower and selling slightly higher. You are just creating market liquidity.
If you are interviewing for a job to create market making programs then questions about C++ will be asked. For example, "what is a smart pointer?" If you are interviewing for a general market making position then I would just look for articles online to get an idea of the terminology. A lot of the market making comes down to execution speed. You will be competing against other market makers which is what drives the profits to be very small on each trade.
Hi Dimitri,
do you think data science and machine learning is highly related to jobs like quantitative analyst in finance? I am a statistics student and learned many courses about time series, machine learning and statistical inference. I am also going to take the FRM exam soon. Do you think it's a good choice to join a data science or statistics related master program in order to be a quant or AI trading system designer?
Thanks.
Statistics is required for most quant finance jobs and is a good masters to get if you want to work in quant finance. Data science is still in its infancy and most view it as just another stats tool.
Dimitri Bianco Thanks for your opinions
Hi Dimitri, do you still have time to trade while being a quant? How to deal with the work & trading balance?
I no longer have the time so I've stopped short term trading. I do long term investing and I'll take advantage of news events occasionally.
I c. Thanks. That's also a great choice.
@@DimitriBianco news events meaning "Event Driven" right?
Hi Dimitri. Do you refer to the kind of trading made by institutional investors? or do you also include retail traders such as daytraders? I know that you work in the production of alphas using time series, monte carlo methods and other results of stochastic calculus, and programming language, but these tools cannot work efficiently in the first hours when the market opens (a lot of noise), and this is the time where retail traders are more profitable. Thanks in advance.
In the video I am referring to all traders (retail and institutional). Retail traders make up a very small fraction of actual trades by volume and dollars so institutions don't really pay attention to them. A day trader might make a few thousand dollars but institutions (banks, hedge funds, algo, and HFT traders) are concerned with making millions. Both institutional and retail trading takes a lot of time and effort if you want to be a serious trader. Sure, there are guys who essentially gamble but that's no way to make a living.
Dimitri, I’m close to finishing undergrad and considering grad school. Do you think it’s more beneficial to go straight into a graduate program, or to work in industry for a few years first? Thanks in advance!
It depends on what you want to do for a career. If you want to work in traditional finance or business then it is better to work for 2 years and then get an MBA. If you want to work in quant finance then I suggest going straight for a Masters or PhD in statistics, financial engineering, or math.
My experience is otherwise. Might be a timeliness issue (I trade in weeks or months not days). Just time the market and you'll get a free lunch. I pick a strategy every Jan.... and 5 years on no issue finding plenty of free lunches.
E.g. when silver is trading so low physical refuses to sell, negative oil prices, economic closures in March, liquidity crisises, legislation.... trading the gold silver ratio. Market making in thin markets have arbitrage all the time,,, stocks listed on 2 exchanges have huge gaps.
Hi Dimitri,
What is your opinion about the books called "A random walk in wall street" and "The bogleheads:Guide to investing"? They basically say that trading/active investing etc are not the most efficient ways to earn money and it's like flip a coin.
Thanks!
This is a great question but somewhat complicated to answer. If you don't mind I'll create a video answer so that I can cover it in greater depth.
@@DimitriBianco Thank you!
Looking forward to hearing your opinion!