The Day I Lost a Sh*t-ton of Money, Part II (trading/stock Market)

awwww yiiissssss

Without going into the specifics... when traders "buy low" and "sell high", they reduce volatility in the marketplace. Prices become more consistent. Lets look at one particular place: the Bid / Ask spread.

When you go to much less traded stuff like Bonds, or in the more extreme case... Real Estate... its harder to put an accurate price on these items.

A house might have an asking price of $300,000 but the only buyer might be offering only $250,000. If both sides refuse to budge, then the market stops moving.

A trader can move the market very simply in this case. He can buy the house at $265,000, and then sell it at $285,000. Everyone benefits from their perspective.

The Seller got to sell the house at higher than $250,000. The Buyer got to buy the house lower than $300,000. The trader gets away with $20,000 made.

This is in essence, the trader's low-risk function and his job is to move markets.

Now lets say a 2nd trader enters the market, and instead is willing to get away with only $10,000. He buys the house at $270,000, and sells it to the buyer at $280,000. Because this 2nd trader has better offers, he will get the cash.

So this leads to point #2: the more traders compete with each other, the tighter Bid/Ask spreads get, and the "fairer" the market price becomes.

When we get to the tens of thousands of traders who deal with high-volume stocks, these stocks end up having bid/ask spreads smaller than pennies. In fact, bid/ask spreads are so low during the trading day, that most people forget about them during trading!

But at the end of the day, stocks are like any other good. There is a bidding price, and there is an asking price. And the bid is always lower than the asking price. They only become closer because traders are willing to become market movers and take up the risk themselves.

It's an empirical process. The results themselves are what you use to construct an idea of probability and risk-reward. Nothing is ever certain which is why position size rules are a must. If an extremely specific pattern continues to show up on one specific stock on days with specific conditions (huge multiples of daily volume, for one), it's likely a significant observation representing an edge rather than noise. Unless you think it's totally random for hundreds of independent traders to exploit a specific pattern on a specific stock on multiple repeated dates and make money repeatedly. It's not a poker/blackjack or a casino game where the odds are fixed and known.

Ask yourself, if you flipped heads on what you thought was a fair coin 500 straight times, did you REALLY just observe an ultra rare event? Or is it more likely another phenomenon at work (like a rigged coin)? Whether you can fully explain it or not doesn't matter.

Why do you care so much what I do with my money? Or how a firm chooses to allocate its money? This wasn't client money or institutional money, it's the money of a few guys (partnership type of structure) who used to be or still are daytraders themselves.

(one last edit: if you're too thick to see it, I deliberately tried to showcase my overconfidence to show how things can go wrong easily. guy makes money and wants to make more, guy wins money and thinks he's a champ -- it's called the human condition. I deviated from normal execution rules and position size rules and paid the price)

Even if it is an empirical process of following trends - It's not contributing anything - its betting on trends.

It just feels like you aren't investing to build industries, just to gamble.

The problem with your depiction is that it is self contradictory: you claim buyers and sellers are unwilling to budge from their 250K/300K position, then have a trader magically buy the house at 265K and sell at 285K. Somehow, the seller sold for 35K less and the buyer for 35K more. And instead of the actual actors of the market splitting the spread in some manner amongs themselves, a service provider gets a disproportionate slice of profit.

When people express their dislike for day trader or HFT, it's exactly for this: people with additional market knowledge extract money from market without creating value.

I've yet to read a coherent description of how the manufacturing and service world is better thanks to new trading techniques. It always seems to come down to having different people pocketing money instead of banks or more traditional wall street firms.