What do trading algorithms do for the markets? Walter and Darren discuss various opinions and how it affects your trades.

http://media.blubrry.com/2traders/content.blubrry.com/2traders/2_Traders_-_EP05_The_Boogey_Algos.mp3

Download (Duration: 15:53 / 14.5 MB)

In this episode:

01:38 – the hedge fund everyone loved

02:07 – the insane “mother of all losses”

03:26 – the dinosaur asteroid & the markets

04:12 – how calculating risk is comforting

06:29 – technology = the easy way out?

08:30 – the good things about algorithms

09:08 – scalpers & trading algos

10:25 – tried and tested approach

11:08 – the markets before & after algos

13:08 – reports on the effect of algos on the markets

13:37 – Doctors warn of the danger of trains

14:25 – should we worry?

Tweetables:

What makes the market move are human decisions. [click to tweet]

You cannot remove uncertainty in the market by trying to quantify it. [click to tweet]

Download The Full Episode 5 Transcript Here

Walter: I don’t know, I mean there’s a lot of good things about the liquidity, the fact that, you know, you’re able to get in on tighter spreads because there’s so many more trades. I saw a stat the other day that in one year, the amount of trades in the stock market, I think it was-

INTRODUCTION:     Two traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the two traders podcast.

Walter: Welcome back, it’s Walter and I’m here with Darren, and Darren today we’re going to talk about the trading algorithms. These trading algorithms usually make the news every time there’s a big move in the markets, and we’re just wondering Darren if we can get your opinion on what do trading algorithms do for the markets, have they changed the markets, do they make it more difficult on the little guy, what’s going on? and what are your opinions about these algorithms?

Darren: Yeah, I mean I’m not really an expert on algo-trading, Walter. But it’s like a few little stories that I sort of latched onto that make sense to me and the way that I trade. For me the big one is the Black-Scholes model. Which was Myron Scholes who won a Nobel Prize for his kind of work that a way you could eliminate risk in the markets by some sort of dynamic hedging. And basically it was like some intense mathematics, like some really clever stuff. And, then he went on to start this hedge fund and obviously everybody wanted to invest in it, and make a use of this model. And of course they made loads of money, absolutely loads of money, everything’s brilliant, and there’s no risk at all.

And then there was like an unexpected event, and they lost a load of money. But you know they redid their calculations and it’s okay let’s keep going, and it’ll all come out in the wash and it’ll be fine. And then there was like another unexpected event. And then, within I think it was like four months, the lost like fifty billion, or something insane. And they nearly brought the whole bloody financial system in the world crashing down. And,