Print Story Currency trading; Sense: it makes none
Diary
By squigs (Tue Oct 13, 2009 at 10:20:00 AM EST) (all tags)
I've been playing with an online fantasy stock trading game.

This uses real market data.  And I seem to have made a pretty decent profit on every single trade (okay - only 0.2% of my bankroll, but that's not a bad return for a few hours.  I easily made 5% in the space of a day). 


And there's the problem.  It doesn't make sense that I could hypothetically make so much money.  The method seems to be eyeball a chart of the past 2 hours, look for a general trend.  If there's a sudden shoot above this trend then sell, if there's a sudden drop below then buy.  As long as I keep my nerve, and not cocked up with the transaction, I've not had this method fail for me once. 

Surely it can't be that easy.  Why have I been doing so well using this method?  Most people lose money at this.  Where's the catch!?  Or do all currency traders just make heaps of money based on vague heuristics?
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Currency trading; Sense: it makes none | 17 comments (17 topical, 0 hidden) | Trackback
FX trading by Breaker (2.00 / 0) #1 Tue Oct 13, 2009 at 10:29:07 AM EST
Scary stuff ATM, rates all over the shop and no clear underlying reason to be found in the fundamentals.

It's not a normal market out there right now.  You're basically speculating on short term volatility, of which there is a fair amount at the minute.

Does your 5% include transaction costs and capital gains tax?


And it also assumes... by gzt (2.00 / 0) #2 Tue Oct 13, 2009 at 10:34:11 AM EST
...that you're able to get the price that you see at that exact moment. No latency. And, okay, the guy is dealing with small volumes, but eventually you have to consider Heisenberg-style effects.

[ Parent ]
The big boys do that. by Breaker (2.00 / 0) #3 Tue Oct 13, 2009 at 11:02:58 AM EST
To the point that in order to not move the market they chunk their deals into smaller tranches. 


[ Parent ]
indeed they do. by gzt (2.00 / 0) #4 Tue Oct 13, 2009 at 11:11:18 AM EST
But, yeah, especially on shorter time scales, fantasy trading isn't like real trading.

[ Parent ]
Indeed, and vice versa, allegedy... by dmg (2.00 / 0) #13 Tue Oct 13, 2009 at 06:43:25 PM EST

--
dmg - HuSi's most dimwitted overprivileged user.
[ Parent ]
I'm looking at you, Tin! by Breaker (4.00 / 1) #16 Wed Oct 14, 2009 at 05:09:00 AM EST
Wonder how that one's going to play out...


[ Parent ]
Is latency a large factor? by squigs (2.00 / 0) #7 Tue Oct 13, 2009 at 11:29:04 AM EST
It would explain things, depending on how long it can take to actually perform the transaction. 

Granted, I'm aware that this is probably different from real trading, but the basic share trading stuff seems to apply all the real world factors so I assumed that FX trading would be much the same.


[ Parent ]
Yes. by Breaker (2.00 / 0) #9 Tue Oct 13, 2009 at 11:41:28 AM EST
FX markets are the fastest markets.  If you can't get your order filled quickest someone will eat your lunch.

The systems the banks have in place are the sort that even with multiple clusters of top end Oracle gear, the volumes nearly swamp the cutting edge of technology.


[ Parent ]
And have you ever seen pictures of trading floors? by gzt (2.00 / 0) #10 Tue Oct 13, 2009 at 12:01:20 PM EST
And how they work? The relationship between the price you get quoted on the ticker and what's going on down there is an illuminating thing to keep in mind. Fantasy trading has no trading floor: you just have the ticker.

[ Parent ]
Latency by lm (2.00 / 0) #14 Tue Oct 13, 2009 at 07:31:51 PM EST
. . .  a few weeks ago NPR did a story on how trading companies were building data centers in New Jersey because locating their machines there put them on hop up from the machines at the NYSE. Eliminating the latency of a few microseconds were making these companies money hand over fist.

There is no more degenerate kind of state than that in which the richest are supposed to be the best.
Cicero, The Republic
[ Parent ]
Latency arbitrage it's called. by Breaker (2.00 / 0) #17 Wed Oct 14, 2009 at 05:11:29 AM EST
Been going on for the last 5 years or so.  Interestingly, the SFA appears to be about to ban it because they don't understand it.


[ Parent ]
Okay. That makes some degree of sense. by squigs (2.00 / 0) #5 Tue Oct 13, 2009 at 11:16:34 AM EST
The 5% is pretty ad-hoc.  Not sure how much transaction costs are in the real world, or whether the difference in sell and buy prices. 

Honestly, if I really thought I could make that much in a single day, I don't think I'd object too much to being lumbered with a lump of capital gains tax.  It is only applied to profits isn't it?


[ Parent ]
Hmm by yicky yacky (2.00 / 0) #6 Tue Oct 13, 2009 at 11:27:38 AM EST

Or do all currency traders just make heaps of money based on vague heuristics?

No. Some lose heaps of money based on vague heuristics. Some make heaps of money based on incredibly complicated and intricate heuristics. Some lose this way, too. Some are just lucky. Some aren't.


----
Vacuity abhors a vacuum.
That's what I thoguht by squigs (2.00 / 0) #8 Tue Oct 13, 2009 at 11:35:16 AM EST
Which doesn't explain how I did so well.  

Well, I can - but while I'm fond of the explanation that I'm a genius, I think it's probably more that FX trading doesn't quite work like that.


[ Parent ]
It could be by TheophileEscargot (2.00 / 0) #11 Tue Oct 13, 2009 at 12:41:58 PM EST
That there are frequent small gains balanced out by occasional large losses.

For instance, suppose most of the time the markets are moved by small amounts on animal spirits; but occasionally there's a large movement based on a released statistic or policy announcment.

Or it could just be a coincidence.
--
It is unlikely that the good of a snail should reside in its shell: so is it likely that the good of a man should?

[ Parent ]
I seem to have read by wumpus (2.00 / 0) #12 Tue Oct 13, 2009 at 05:34:22 PM EST
(either in New Market Wizards, or a related work) that American Express does the largest amount of currency trading in the world (presumably plenty of guys doing what you do). They lose n billion (US billion) a year. The reason they do that (this was well before any recent bubbles and crash, so I have no idea how current it is) is since they are the biggest trader, they get n+1 billion bucks in currency exchange services.

I don't know many other places that really can make a loss up in volume.

Wumpus

[ Parent ]
In theory, you're exploiting an inefficiency . . . by lm (2.00 / 0) #15 Tue Oct 13, 2009 at 07:34:52 PM EST
You're eyeballing a chart that has information that not all of the rest of the market has on the same time scale as you do. Therefore, it is possible for you to get better than market returns by cashing in on that inefficiency of the market.

But in practice, you most likely just got lucky. Do the same thing all day, every day for an extended period of time. Odds are good that the inefficiency you're exploiting is really only an artifact of the law of averages.


There is no more degenerate kind of state than that in which the richest are supposed to be the best.
Cicero, The Republic
Currency trading; Sense: it makes none | 17 comments (17 topical, 0 hidden) | Trackback