I see discussion about entries and exits in systematic trading. I don't really think like that.
I trade when:
1) I can get a good price
2) I have to.
1) is dependent on others. You can't force people to trade with you at bad prices.
It needs patience.
Let's say you wait and you take an opportunity to buy cheap.
Now you are long.
The market moves and now it's trading at a price you think is fair.
What do you do?
You would like to reduce your exposure because you have no edge anymore.
Carrying positions with no edge costs you in pnl variance, with no expected returns.
But reducing the position involves trading. And trading at a fair price is an immediate loss. It costs you money.
So do you pay up and reduce, realizing a loss on trading?
Or do you wait for someone to want to buy it from you too rich - exchanging higher expected returns for increased pnl variance?
It depends on a few things.
How much risk do I have on?
How much flow is there (how likely am I to find a desperate buyer?)
How big is the cost to trade compared to my expected pnl?
How volatile is the thing?
Trading is really all about navigating this trade-off between:
- Expected Return
- Variance
- Cost to trade.
And the key thing is that, to maximize your expected return, you have to be trading when you *can* - not when you want to.
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There's a podcast he did with @choffstein where he talks about "disturbances in the force" and how traders get paid to provide liquidity where its needed and offset it elsewhere.
The prices of the futures as a function of their time to expiry looks like below.
You step away from the desk to make some tea.
And, upon your return, you see a different picture...
1/n
What happened to the Feb expiry?
It kinda sticks up.
The curve looks kinky now.
Why?
2/n
Could be many things:
1. Random large demand for that expiry has created temporary price impact, likely to revert 2. New info impacting that month is being priced efficiently 3. Somebody knows something and you're likely to see more demand come in behind in that expiry
3/n
People say a lot of things about trading, and most of it is worthless.
So it's useful to be able to quickly discard ideas.
Let's take an example...
Many in crypto, including @zhusu, will tell you that buying new highs is a good plan.
Is it? Let's have a look...
1/n
It's important to understand that discarding ideas is a lot easier and quicker than verifying ideas.
Your mission is not to do the most perfect simulation of reality from the offset. You'll waste a lot of time doing that.
You want to do very quick data analysis.
2/n
Plenty of time to go deep later.
We: 1. pull daily price data for all FTX spot contracts 3. for each asset for each day, calculate the 20d high 4. calculate the distance in days from the 20d high 5. calculate next day log returns
3/n