Monday, August 18, 2014

Oliveira, Traders of the New Era

According to a 2011 study that used data from the Taiwan Stock Exchange over a 15-year period (1992-2006), less than one percent of day traders are profitable two years in a row. “But,” the researchers note, “the stock picking ability of these investors is remarkable. Top day traders (based on prior year ranking) earn gross (net) abnormal returns of 49.5 (28.1) bps per day on their day trading portfolio, while the tens of thousands of day traders with a history of losses in the prior year go on to earn gross abnormal returns of -17.5 (-34.2) bps per day.”

Every year new traders come on the scene, though certainly not the hordes who tried their luck in the era. They hope against hope that they will be among the top one percent. By definition, the odds are staggeringly against them.

Fernando Oliveira is a relatively new trader who struggled to achieve profitability. In search of answers, he set out to interview, as the subtitle of the book says, “a select group of day and swing traders who are still beating the markets in the era of high frequency trading and flash crashes.” Actually, not all of these traders are delivering alpha; one interviewee admits to struggling and another is described as a “former winner.”

Traders of the New Era is a surprisingly decent book, even if unpolished. The interviewees are not exactly household names—Flemming Kozok, Denis Dick, Jeffrey Goldman, Eric Scott Hunsader, Mitch Semon, Wayne Kulcheski (plus two anonymous traders and one who uses a nickname). But that may be the reason the book has a freshness to it.

Most of the interviewees are discretionary traders who rely on screen time rather than backtesting to develop informed instincts, who tend to look at order flow rather than technical indicators. They focus on the mechanics of order entry (type of order, routing, etc.), risk management, and emotional discipline. Most of what they know and what they have done is only in their heads, not in trade journals.

Traders of the New Era is not a particularly useful book for the rank novice. The main message he could glean from the book is to devote hours and hours (if not the “magical” 10,000) trying to get a feel for the way individual stocks and markets move. But those with some experience will find helpful pointers and occasionally insightful analysis.

For instance, one trader says: “I hate using market orders, because it’s just a blank check. It’s such a fast trading world right now, and I believe that some HFT participants can see your market order coming down the pipe, especially if your order is pinging multiple destinations. … I would rather use a marketable limit order. For example, if the offer was at $94.50 and I really wanted to own a stock, I would maybe put a $94.55 limit or something like that. I’d probably get filled at the $94.50 offer, but if the price changes rapidly, I’m not going to get filled at something crazy like $95.”

Another trader notes: “I’ve been more strategic about getting in and out of positions. The way to think about [it] is that HFTs are like parasites and you’re the host. They do not want to a buy a stock unless you want to buy it. They don’t want to sell it unless you want to sell it. So just know that when you send an order, it will have three or more times the impact on the market than it used to have. So buying 100 shares is like buying 300 shares.”

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