I work with many traders who aspire to turn their passion for the markets into a serious trading business. And I think this aspiration is entirely appropriate – it’s critical to approach the trading problem as seriously as you would any business venture.
A question that always comes up is, “Where do I start?”
In this article, I’ll discuss what to focus on when you’re starting out.
Where am I?
It’s worth taking stock of where you are right now versus where you want to be in the future.
You have some ideas of what you want to trade and the things you need to run a well-oiled trading operation:
- Alphas/edges
- Analytics and research
- Technology – databases, broker connections, reporting, etc
- Processes and management
I’ve noticed that people tend to have a decent understanding that they’ll need this stuff.
But the mistake I see people making is that they immediately put their heads down and get to work making it.
The problem with that is that you don’t actually know what you want!
Things move fast and won’t look the same in the future as when you started building. And without some actual experience in the market, you don’t really know what you need.
And the whole time you’ve got your head down building stuff, you’re not interacting with the market. You’re not making trades. You’re not getting feedback.
You’re not solving real problems; you’re solving future problems that you assume you’ll have at some point.
And not only were you not learning market lessons, you weren’t making any money because you weren’t trading!
The problem is that if you’re focused on building for the future – akin to an entrepreneur assuming “if I build it they will come” – a whole lot of things change while you’re building, and you simply aren’t aware until you’ve finished building. The thing you thought you needed to do isn’t necessarily relevant anymore, and you find that you need to switch to something else, and you’ve wasted a bunch of time.
So what’s the solution?
The Solution
In trading, by far the most important thing is making money today.
Do everything you can to make money today, using the tools and skills that you have today.
And then, iteratively, move towards improving your setup and capabilities. Work on technical problems that are as close to what you’re trading as you possibly can. That way, you’re building things that support your trading today and gradually moving yourself closer to where you want to end up.
Here’s a real-world example:
When we started trading crypto back in 2021, we started working on low-latency execution to trade basis spreads and arbitrage on the centralised exchanges, but it soon became clear that that wasn’t the best place for us to compete. So we ended up moving over to Defi and doing something similar on Solana smart contracts, because it was much easier to compete.
We certainly didn’t envisage doing that at the outset. When we first started, I didn’t even know that Solana was a thing! But because we prioritised trading from the outset, we quickly learned enough to figure out what we actually needed, which was completely different to what we initially thought we needed.
In practical terms, how do you do this if you are literally starting with nothing?
Simply, you need to trade today, as best you can.
Ask yourself, What can I be doing right now:
- with my non-existent technology
- that is likely to make money
- and won’t take up all my time so that I can work on building the business and push myself towards where I want to be
- and is somewhat aligned with where I think I want to be in the future?
It’s an iterative process, not a linear one. You’re doing the best you can to make money today (this is the highest priority) with one eye on where you think you need to be in the future.
It’s iterative because as you trade, your vision for where you think you need to be in the future will evolve. You feed your experiences and your learnings in the market into your vision of the future and gradually work towards it.
Let’s make this a bit more real.
At the start, you should prioritise trading simple and obvious edges. Ideally, they would be mostly systematic trades that you can execute manually because that will reduce the operational overhead required and won’t take up all of your time.
So what are these simple and obvious edges that are forgiving to trade?
Great question! There are surprisingly many, and we share loads of examples in Trade Like a Quant Bootcamp, but here are a few:
The basis trade on crypto perpetual futures
Many crypto perpetual futures tend to trade at a premium to spot for structural reasons and the (fluctuating) appetite for leveraged long exposure.
You’ll find that this premium is sticky enough that you can make money after execution costs by trading into a perpetual position hedged with spot.
This edge won’t shoot the lights out anymore (none of the super obvious stuff does on its own), and the trade tends to do worse when crypto fever comes off, as it has recently. But it’s an obvious trade and is relatively easy to manage.
You can potentially juice it a little by doing it on Defi, but the trade-off is heightened counter-party risk and additional operational overhead.
To give you an idea of the size of the edge, we’ve done this trade on Defi in 2024 for an annualised return of about 30% for not much effort.
Importantly, in addition to being likely to make money, this trade will move you towards your goal by:
- Forcing you to understand idiosyncratic supply/demand patterns for leveraged crypto exposure.
- Teaching you how to execute spreads with minimum cost and impact – which is difficult and an important lesson that you’ll use all the time.
- Building tools to support the trade:
- Tools for risk management and exposure reporting.
- Execution tools for executing spreads with minimum impact (getting you on the path to algorithmic trading).
Pair trading
Where you can find similar assets (possibly trading on different venues), you can sometimes find reasonably forgiving statistical arbitrage opportunities.
This trade still works reasonably well in crypto, particularly if you trade the legs on different venues.
An interesting place to look for this trade is in crypto perpetual futures contracts trading on different venues. You can sometimes find opportunities to short the one paying the higher funding, and long the one paying the lower funding, and you can profit on both the funding differential and the convergence of the two contracts.
Admittedly this one has become less lucrative as time has gone on, but it’s still likely to make money, be amenable to trading by hand, and not take up a heap of time.
It’s a little harder in US equities, but if you can come up with a universe of pairs to trade (harder than it sounds), it is still possible to make it work, even trading end of day. I haven’t tried, but it’s probably a more forgiving trade in less developed markets, although you’ll get less size on – which probably doesn’t matter when you’re starting out.
This trade moves you towards your goal by:
- Helping you understand idiosyncratic supply/demand imbalances between exchanges.
- Forcing you to learn how to manage cross-exchange risk.
- Building tools and processes to support the trade:
- Tools for cross-venue risk management and consolidated exposure reporting.
- Processes and contingency plans (for example, for maintaining margin as the trade moves).
Risk premia harvesting in equities and bonds
This is probably the most obvious edge of them all. It’s literally just buying things that tend to be priced cheaper than their expected value because of the inherent risk in holding them.
We’ve written extensively about risk premia harvesting in the past – go here for the low down.
This one takes almost no effort to manage, is extremely forgiving to execute because you can access very liquid markets, and has been a strong performer.
Below is a simulation of the risk premia harvesting implementation we share in Trade Like a Quant Bootcamp (the coloured areas represent the exposures of the assets held in the strategy):
This trade moves you towards your goal by:
- Helping you understand the nature of risk and reward in the markets (no risk, no premia).
- Teaching you about rebalancing and position sizing.
- Building tools and processes to support the trade:
- Tools for calculating rebalance trades.
- Processes for rebalancing and tools for pnl attribution.
Harvesting the volatility risk premium and, later, timing it
VX futures tend to trade at a different price, usually higher, than the VIX index. This discrepancy is called the basis.
We think that at least some of the basis represents a risk premium due to the asymmetrical nature of VIX moves, and it manifests in the observed negative returns to being long volatility:
This suggests that being short volatility is a good idea, on average (in reality, being short volatility will make a little money most of the time but lose a lot of money occasionally and must therefore be managed very carefully).
A simple trade is to assume that the volatility risk premium is always the same and always positive (or at least, very difficult to predict) and to therefore maintain a constant dollar short volatility position:
This is a simple trade that can be managed end of day. You can even do it by getting long a short volatility ETF, which makes it more forgiving to manage.
Later, as you learn more about VIX dynamics, you’ll realise that the volatility risk premium is somewhat amenable to timing (at least, much more so than the equity risk premium). This will lead to more sophisticated trades.
This trade moves you towards your goal by:
- Forcing you to learn about VIX dynamics, basis effects, and the volatility risk premium.
- Forcing you to learn about position sizing and asymmetrical risk.
- Teaching you a healthy respect for volatility.
- Building tools and processes to support the trade:
- Processes for rebalancing and reporting pnl.
Summary
When you’re starting your trading business, be careful not to look to the future and start building things for a future that might never come. Your learnings and knowledge will develop so quickly that you’ll likely need entirely different things than those you originally assumed.
Instead, focus on making money right now and iteratively move towards the place you want to be long term.
Be flexible, open minded and prepared to change.
Focus more on trading and less on building.
