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Does taking opposite trades work?

  • #21
  • Sep 22, 2015 11:49pm Sep 22, 2015 11:49pm
Good answers by Copernicus and FerruFx on a topic that has been discussed more than a few times.

But what if... we have a strategy that can't beat execution costs, and in reverse it also can't beat execution costs and we determine to convert from being price takers to price makers, effectively "making a market" when our trade signals happen? So instead of using market orders, we only buy at the bid, and sell at the ask, netting a 1-2 pip spread. If we run both systems simultaneously how would it turn out?

My feel (I think this is based on some testing) is that it will still not break even due to adverse selection after entry - you get filled on the order you wish you didn't get filled on, while the order you wanted a fill on never gets filled. In this case you're trying to get a fill on both sides of offsetting buy / sell orders separated by 1-2 pips.

But what if you decide that to pay for this adverse selection, you increase your fill range from 1-2 pips to something larger like some fraction of the current x bar moving ATR? Any thoughts on the viability of becoming a retail HFT using an edgeless system?
  • #22
  • Edited 12:32am Sep 23, 2015 12:06am | Edited 12:32am
Quoting FXEZ
But what if you decide that to pay for this adverse selection, you increase your fill range from 1-2 pips to something larger like some fraction of the current x bar moving ATR? Any thoughts on the viability of becoming a retail HFT using an edgeless system?
Now you are stretching my grey matter. I am going to have to chew on this FXEZ. Just when I thought I had a grip on things, you shove a cracker into the midst.

Let me know if I have interpreted you correctly. Are you suggesting that as a market maker, by increasing your fill range from 1-2 pips you are deliberately creating arbitrage opportunities and forcing the market's hand? If so, then are you then capitalising on order flow that will naturally be attracted to your orders and in a position to catch the laggards that don't get filled using HFT? I just need to understand the modus operandi of your post.
  • #23
  • Sep 23, 2015 2:49am Sep 23, 2015 2:49am
Quoting She1
{image} We all know that it's not easy to make steady profit in forex market, but its very easy to loose your entire balance! are you agree with me? specially for newbies. All right, here is the scenario, we have two traders, and one of them is newbie, they start trading in in 1st day of the month, the newbie trader tell another trader what he/she does, and the second trader act exactly opposite, I'm really curious to know the results at the end of the month! what do you think? I'm willing to try it once...:nerd:

Never true that if you take opposite trade you will always win!!! Forex is highly predictable if just follow all rules and signal properly!!! Indicators are not bogus but you need to know how to use them on proper time.
  • #24
  • Sep 23, 2015 8:58pm Sep 23, 2015 8:58pm
The short answer is "no", the long answer is "yes, but... "


If you take an individual trader, or an individual strategy, and reverse it, you will not necessarily create a winner. Reversing an individual losing strategy merely creates another losing strategy. You can easily prove this with an ea which has verified a losing strategy.

However, what if you take a whole bunch of losing strategies, and then reverse them, while also becoming a market maker as FXEZ has suggested? Why, then you're nothing but a common retail fx broker following a B-model
http://www.nobrainertrades.com/2014/...good-guys.html

Ethics aside, being a B-model broker is extremely profitable, therefore reversing losers as an aggregate, while reversing the spread, is profitable.

However, anecdotal evidence also points to the fact that most B-model brokers have an "a list" of clients, against whom they don't hedge. These are clients who are profitable overall; therefore, by filtering out these "winners", the brokers increase their percentage of "losers" whose trades they reverse.

You and I as retail traders don't have access to the amount of data B-model brokers do. Nor do we have the ability to filter out winners.
(If anyone reading this does have this data - it's completely useless. Please send it over to me )
  • #25
  • Sep 23, 2015 10:00pm Sep 23, 2015 10:00pm
Quoting AshR
The short answer is "no", the long answer is "yes, but... " If you take an individual trader, or an individual strategy, and reverse it, you will not necessarily create a winner. Reversing an individual losing strategy merely creates another losing strategy. You can easily prove this with an ea which has verified a losing strategy. However, what if you take a whole bunch of losing strategies, and then reverse them, while also becoming a market maker as FXEZ has suggested? Why, then you're nothing but a common retail fx broker following a B-model...
B - Book brokers are effectively bookmakers.
There objective is to make you lose.

A broker is one who facilitates between a buyer and a seller and shouldn't care about the outcome.
  • #26
  • Sep 23, 2015 10:10pm Sep 23, 2015 10:10pm
"taking opposite trades" in futures and options trading roughly refers to spreading. Spreaders are generally believed to be among the most consistently profitable traders. Market makers in futures and options are tasked daily with trading, essentially, a big book of spreads. They do well....

An example: the trade below is a calendar spread. I buy the Oct5 QQQ $90 put and sell the (week earlier expiry) Oct4 QQQ $90 put for $11 per contract (plus comms). (So, I'm both long and short the $90 puts, with just a week between expiries for the contracts.) If I think QQQ is going to $90 or lower by the end of the 4th week of Oct, I could just buy the Oct4 $90 put.....for $26. By spreading, I do three things: 1) I lower the cost of a trade that expresses a particular bearish view about QQQ 2) I decrease the $risk per contract (i.e., $11 risked vs. $26 risked per contract), and 3) I bring the break-even point of the bearish trade about $6 closer. The trade-off is that the spread has a limited profit, whereas the long put has a much higher profit potential.

I would set this trade up to catch a big equity market move (down) in the week of the Oct FOMC.

Traders who are putting significant resources at risk are very very frequently (I won't say always) hedging their risk via spread trades of some kind. There are many kinds of spreads, a topic for a thread in and of itself....
Attached Image (click to enlarge)
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"If The Fool persists in his Folly he will become wise." - William Blake
  • #27
  • Sep 23, 2015 10:13pm Sep 23, 2015 10:13pm
Quoting The Fool
"taking opposite trades" in futures and options trading roughly refers to spreading. Spreaders are generally believed to be among the most consistently profitable traders. Market makers in futures and options are tasked daily with trading, essentially, a big book of spreads. They do well.... An example: the trade below is a calendar spread. I buy the Oct5 QQQ $90 put and sell the (week earlier expiry) Oct4 QQQ $90 put for $10 per contract. (So, I'm both long and short the $90 puts, with just a week between expiries for the contracts.) If I think...
Thanks for that detailed explanation. Very interesting. :-)
  • #28
  • Sep 23, 2015 10:18pm Sep 23, 2015 10:18pm
Quoting The Fool
"taking opposite trades" in futures and options trading roughly refers to spreading. Spreaders are generally believed to be among the most consistently profitable traders. Market makers in futures and options are tasked daily with trading, essentially, a big book of spreads. They do well.... An example: the trade below is a calendar spread. I buy the Oct5 QQQ $90 put and sell the (week earlier expiry) Oct4 QQQ $90 put for $11 per contract (plus comms). (So, I'm both long and short the $90 puts, with just a week between expiries for the contracts.)...
That's price making
  • #29
  • Sep 23, 2015 10:20pm Sep 23, 2015 10:20pm
Quoting lasty
That's price making
meaning?
"If The Fool persists in his Folly he will become wise." - William Blake
  • #30
  • Sep 24, 2015 12:27am Sep 24, 2015 12:27am
Quoting Atokys
{quote} Why even require two people to act it out? Just take a look at what doesn't work and do the opposite.
You cannot trade opposite of what you think of market in your own mind. This thought has entered my mind several times but still I can't act like trading against my trade entries.
  • #31
  • Sep 24, 2015 12:54am Sep 24, 2015 12:54am
Quoting Marker7
{quote} You cannot trade opposite of what you think of market in your own mind. This thought has entered my mind several times but still I can't act like trading against my trade entries.
Indeed you cannot trade that way. Though what im suggesting is that you take notice of the commonalities between traders who go bust and do the opposite.

In my time lurking here ive seen many trade explorers get suddenly decimated by a handful of large losers. Perhaps it would be worthwhile to avoid anything that can lead to this outcome or better yet put yourself in a position that exploits large trends rather than have them blow you up.
  • #32
  • Sep 24, 2015 1:18am Sep 24, 2015 1:18am
Quoting The Fool
{quote} meaning?
Meaning you are a price maker which is fine .

Were talking about taking the opposite side of the trade until they close out.
  • #33
  • Sep 24, 2015 1:24am Sep 24, 2015 1:24am
Quoting She1
{image} We all know that it's not easy to make steady profit in forex market, but its very easy to loose your entire balance! are you agree with me? specially for newbies. All right, here is the scenario, we have two traders, and one of them is newbie, they start trading in in 1st day of the month, the newbie trader tell another trader what he/she does, and the second trader act exactly opposite, I'm really curious to know the results at the end of the month! what do you think? I'm willing to try it once...:nerd:
Ever heard of beginners luck ?
  • #34
  • Sep 24, 2015 3:48am Sep 24, 2015 3:48am
Quoting Copernicus
{quote} Are you suggesting that as a market maker, by increasing your fill range from 1-2 pips you are deliberately creating arbitrage opportunities and forcing the market's hand? If so, then are you then capitalising on order flow that will naturally be attracted to your orders and in a position to catch the laggards that don't get filled using HFT? I just need to understand the modus operandi of your post.
I don't know if I understand all the implications at this point, just an idea in incubation. Let's say you have a trading system with no edge, and where the opposite also has no edge. Clearly the costs are churning the systems into a loss. So to counteract this you break it into a long only version and a short only version where you attempt to capture those costs as profit, turning a no-edge strategy into a winner.

For example you get a trade signal to buy on the underlying system. So you place a buy order at the current bid, and a sell order at the current ask, presumably these orders are now 1-2 pips apart waiting for a fill. In this model you will get filled very often on both orders just due to short-term market noise. But sometimes you'll only get filled on one of the two orders. The position that was filled will then be in loss. To make up for these inevitable losses what can be done? I proposed moving the prices out to increase the profit per successful trade from 1-2 pips to something like 50% of ATR.

So if your system is based on the 15 minute chart and you compute a 30 bar ATR and take some fraction of that value, say 50%, this may equates to something like 10 pips at certain times of day. So The idea is to calculate the midpoint of the b/a (bid+ask)/2 and add/subtract 5 pips for the sell/buy orders, giving a profit target of 10 pips for each successfully closed set of two orders.

So to take this a bit further AshR compared this idea to running your own B-book. I think that's good insight. So how do market makers adjust their books to prevent having too much losing inventory when there is a strong directional move? It seems the same general principle could be applied here:
1) moving order prices further away to discourage more fills on that side,
2) moving order prices closer on the side you want filled to encourage balancing out the book
3) not trading / quoting or widening the "spread" between your buy/sell orders during times of known high volatility, such as major news releases

A special case of this idea could involve ditching the system altogether and just placing orders every 15 minutes, and unfilled orders from the past 15 minutes get cancelled. That's getting more like a pure market maker model but with no advantage. Market makers have the advantage that a majority of their clients lose money over the long term, so it is like they are trading a positive expectancy system over the long term and getting good fills in the short term.
  • #35
  • Edited 6:54am Sep 24, 2015 6:40am | Edited 6:54am
Quoting FXEZ
{quote} I don't know if I understand all the implications at this point, just an idea in incubation. Let's say you have a trading system with no edge, and where the opposite also has no edge. Clearly the costs are churning the systems into a loss. So to counteract this you break it into a long only version and a short only version where you attempt to capture those costs as profit, turning a no-edge strategy into a winner. For example you get a trade signal to buy on the underlying system. So you place a buy order at the current bid, and a sell...
Looking at things from this perspective of splitting your edgeless strategy into long and short components is doing my head in as I have never really looked into this concept before.... and have never looked closely at ways of turning the tables on the transactional costs of trading by simulating market maker models. For some reason it is refusing to gel in my mind.......I wish I could add to your and Ash's brainstorming here but I may have to leave it to the pro's to nut this out with you FXEZ and simply observe in admiration (with a bag of popcorn) as the detail here lies well outside of my comfort zone. I have a feeling I am peering into the brain of a quant
  • #36
  • Sep 24, 2015 5:41pm Sep 24, 2015 5:41pm
Quoting FXEZ
{quote} I don't know if I understand all the implications at this point, just an idea in incubation. Let's say you have a trading system with no edge, and where the opposite also has no edge. Clearly the costs are churning the systems into a loss. So to counteract this you break it into a long only version and a short only version where you attempt to capture those costs as profit, turning a no-edge strategy into a winner. For example you get a trade signal to buy on the underlying system. So you place a buy order at the current bid, and a sell...
Being a market maker on MT4 is laughable and should not be considered by any trader
  • #37
  • Sep 24, 2015 9:18pm Sep 24, 2015 9:18pm
Quoting FXEZ
{quote} I don't know if I understand all the implications at this point, just an idea in incubation. Let's say you have a trading system with no edge, and where the opposite also has no edge. Clearly the costs are churning the systems into a loss. So to counteract this you break it into a long only version and a short only version where you attempt to capture those costs as profit, turning a no-edge strategy into a winner. For example you get a trade signal to buy on the underlying system. So you place a buy order at the current bid, and a sell...
This still depends on the edge of the underlying system which points out which side you want filled and less of the other. We could still get filled more of the 'wrong side' where we encouraged the fill.

We are unlike the marketmakers whose edge is to "reverse losers as an aggregate", ", by filtering out these "winners", the brokers increase their percentage of "losers" whose trades they reverse." .......AshR

So, like AshR, if you have access to the data he mentioned send it my way too.
  • #38
  • Sep 24, 2015 9:24pm Sep 24, 2015 9:24pm
Quoting She1
{quote} but it doesn't make sense! i buy EURUSD, then you sell, EURUSD will drops, i close it, you close it too, I've lost money, you have made profit
You have just discovered the art to money laundering in forex. If you want to send 10m to your friend without any questions simply buy EU and he sells EU and just wait for the margin call to happen in one. Instant money transfer.
  • #39
  • Sep 24, 2015 9:29pm Sep 24, 2015 9:29pm
Quoting Atokys
{quote} Indeed you cannot trade that way. Though what im suggesting is that you take notice of the commonalities between traders who go bust and do the opposite. In my time lurking here ive seen many trade explorers get suddenly decimated by a handful of large losers. Perhaps it would be worthwhile to avoid anything that can lead to this outcome or better yet put yourself in a position that exploits large trends rather than have them blow you up.
I would say that the accounts being popped by large orders is because of traders bias of not cutting the lose. Many of the trader explorers you will see that the person has entered either in a accumulation which they were slowly losing pips and then came the big 50 to 100 pip spike against them. Use large orders is ok as long as you have a strick sl rule to go along with it. You will see many traders aim for 100 pips, but when they have floating losses they end up being 500 even 1000 pips. I have even seen a trader talk about how he has 100% win % (fxtyrant) only to see that he closes position for profit for 20 pips but lets the losers run for 500 even 600 pips at a time. Imagine how rich we would be if we took the opposite trade of FXTYRANT
  • #40
  • Edited Sep 25, 2015 12:21am Sep 24, 2015 9:39pm | Edited Sep 25, 2015 12:21am
Quoting skyway
{quote} This still depends on the edge of the underlying system which points out which side you want filled and less of the other. We could still get filled more of the 'wrong side' where we encouraged the fill. We are unlike the marketmakers whose edge is to "reverse losers as an aggregate", ", by filtering out these "winners", the brokers increase their percentage of "losers" whose trades they reverse." .......AshR So, like AshR, if you have access to the data he mentioned send it my way too.
Christ I am struggling with this....... I can see how (with enough historical data) by segregating those without an edge (losers) and those with an edge (winners) into two discreet aggregated pools, as a market maker you can now offset the losing pool with strategies offerring positive bias (to fund the deficit created from seperation eg. by further increasing or manipulating spread) .....but won't the winning pool which you also need to compensate for exactly reverse the artifical bias you created in the losing pool?.........hold on a minute........not if you transfer the winning pool to another counterparty where it becomes their problem....but how do you do this?.......one way I am thinking is to encourage the winners to move to ECN models (straight through processing) which I know is common practice amomgst market makers.

.....but isn't what FXEZ is proposing different to standard market maker practices that benefit from slight of hand market manipulation via aggregation? The way I am interpreting his comments is that I think he is suggesting that perhaps we as retail traders having the ability through HFT to act as 'quasi' market makers in this capacity? If so, how is this being done and the only way I can see this happening is through order processing 'lag' that can be harvested by HFT. In the miniscule period of time, HFT can capitalise on temporary disequilibium within order processing limitations, but the loss offset resulting from this still needs to be transferred to another party......how?
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