Keeping an open mind

I had an interesting "debate" on the forum of a well-known trading software company. I say debate, at times it felt like a meeting of soccer fans where I had the only blue scarf amongst a sea of red ones.

Still, what do you expect when a male enters the domain of other males who think they can do no wrong and nobody else is right.

A small minority of the same males then let themselves down by visiting this site (as my weblogs show) and leaving messages unworthy of intelligent debate.

The main thrust of my opponents' argument was that I did not have an open mind to scalping. I do have an open mind to scalping but it must be a logical open mind and not one based on feeling. I want to know how and why scalping works and when scalping does and doesn't work.

I also want to know if scalping is the best use of my time and resources. I want to be able to make the most amout of money possible in the least amount of time. And from past experience of scalping, it is not the best use of my time and does not offer me the highest return on my investment of time and money.

An open mind is always desirable in the creation of trading systems. There is no one single method. Those who hitch their wagon to the scalping juggernaut are limiting themselves to one form of trading. One that shows less returns per trader, year on year.

You have to keep adapting as markets evolve. What worked this year might not work the next. Trading is an arms race and you can't keep using a longbow when your opponents have upgraded to muskets.

To gain greater wealth from trading you need (as Nassim Nicholas Taleb discusses in The Black Swan) a scalable system. For example, a hairdresser does not have a scalable job as they can only work on one head at a time. The owner of many hairdressing salons does have a scalable job as he can employ many people to work on many customers.

If the salon owner wants more wealth then they need only to grow their business by opening more salons. A salon owner's job is scalable and so is their potential income. The hairdresser's job is not scalable and so their income is fixed.

A scalper's income in horseracing markets is fixed as they can only effectively trade one market at a time. Trading one market at a time limits the trader as they cannot take advantage of possible trades in other markets. A trading bot designer, on the other hand, has a scalable job as they can trade (all forms of trading and not just scalping) every market available to them simultaneously. Another market? Fine, another bot.

The software you use can be a limiting factor to scalability. If you buy software that limits you to certain ways of trading then you will never open your mind to other ways of trading. Only by writing (or designing if you have to get someone else to write the software for you) software to do whatever you require and not what vendors' software forces you to do will allow you to discover something new about the market that you trade in.

And so, I am afraid that many of my "colleagues" on the forum of a well-known trading software company are as guilty as anyone else of having a closed mind. They limit themselves to one form of trading, with software that while sophisticated is not the zenith of capability and which in turn limits them to trading one race at a time. A truly unscalable method of earning wealth, which although it might be more than they have ever earned in their life is not making the most of their potential.

10 comments:

  1. If your looking at something scaleable for scalping why don't you do what I believe already happens on all the horses and use "wash trades". You simply provide the liquidity on every horse and match your own money until real money arrives and then move against it matching your own money out the way creating what looks like a market move for a short term sale. You could scale this to every race and every horse if you are looking for scaling something up.

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  2. Thanks for the comment.

    In my article "scalability" refers to parallel trading all races simultaneously. Something that a manual trader cannot do.

    Only a fully automated bot can view all races and trade upon them in a time frame that a manual trader simply cannot.

    What you suggest is not scalping but market making and is a lot harder to achieve than your given simplified example.

    By the way, a "wash trade" is a financial term referring to the fraudulent buying and selling of a stock at the same price by the same insitution to create the illusion of volume. It is best not to confuse sports trading with irrelevant financial trading terminology.

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  3. The practice that is under taken is the same. Market making is offering money to both sides of the spread but if you have the ability to create the illusion something is happening when actually nothing is happening (change stock foe numbers) and you have a big enough bank you can always move against new money to push it into a negative position. Of course it could turn into a gamble but if people suddenly see a lot of money being pushed one way they try and jump in front of it or behind it showing the market maker who is washing their own money their get out position.

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  4. Many people equate scalping with offering money on both sides of the spread, hoping to grab a one tick profit. Others see scalping as aiming to capitalize on moves to grab a handful of ticks. Which are you referring to above?

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    1. I wouldn't say that scalpers offer money on both sides of the spread. That would be a market maker or a spread trader.

      In futures markets a scalper is a pit trader looking to get on one side of the spread and take a tick or two on the other side after the price moves. Scratching if they are on the wrong side of the move.

      In the stock market a scalper has another meaning, the illegal interjection between a buyer and seller. However, that appears perfectly normal and above board in High-Frequency Trading.

      To answer your question, I would say my definition of a scalper is your second offering.

      These days I now regard sports exchange scalping as no more than a form of front running using hardware. I doubt that scalpers really think about the market. They have their own perceptions about if the market is going to move and in which direction though I doubt they could quantify it.

      A suitably equipped sports exchange scalper places his bet on one side of the spread, hopes it moves when the slower scalpers move in so he can profit off their tardiness. He then closes out before the value traders push the price back in the other direction. If the speedy scalper has miscalculated and the market turns the other way before they have profited then they hope to scratch just as quickly too.

      It's little more than a game of speed with little to no quantifcation. If you are a slow scalper then you will get burned.

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  5. Also, on a related topic, what are your thoughts on closing or partially closing your trade when it has moved x ticks in your favour, in order to smooth your equity curve?

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    1. That is something which my trading rules require. It provides me with some liquidity that can be used to bolster the portfolio of trades.

      I like the phrase "smooth your equity curve", which describes the process very well.

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  6. Thanks James.

    On another matter, when you open and close trades do you offer to the queue or take money from the market?

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    1. Ummm, okay, I'll offer you a freebie. The rest you pay for with your soul.

      It depends on the width of the spread. Doesn't it?

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  7. I'm afraid I cannot offer what Betfair has already taken...

    Jeff

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