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The Art of market making -part 1

Posted 02-12-2009 at 07:16 PM by Cableboy
Working as a market maker in TraderMetrics teaches you many lessons. Whether you are a forex trader or not. It teaches you to be patient for one thing and not to panic.

I am sitting through a session at the moment where at the moment I am up. I have been down and have even been over the limit one or two times. My strategy has been to trade my average rate down, when faced with a loss. It was clear, from the way I was accumulating pounds, that the market was selling off, but with the absence of other players to offload my position, I had to hold on to a rather large position. Instead of being frozen into inaction, I continued taking in trades from my customers, selling the surplus position when I could. This meant I was always near my maximum limit, but I figured that the market would stabilize at some stage, then the clients would help me to reduce my position.

Sure enough, my average rate was getting lower, and eventually I was long just a handful, when the market finally turned.

Now, perhaps you are saying that I should not have gotten myself into the situation in the first place, but in the absence of other market makers, you soon start to accumulate other people's position. Call it gut-feeling or whatever, but it is true to say that you start to get a feel for what is going on and with concentration, it is possible to make some order out of randomness.

It is much easier to make money when you have profit on the book. This is not because you are more cock-sure, but once you get into a rhythm, you will find that you get the measure of the market and earn accordingly. This assumes that you can see the danger signs building up, and this is normally when you can't find anyone to offload your position at a profit.

In a market with many players, it is important that you don't panic, because I think there is an animal instinct that we share with carnivores - we can smell blood! At the same time, you have an obligation to abide by your position and risk limits.

If you are not sure what your risk limits are, as opposed to your position limit which is found in the profit/loss tab of the position statistics, you can find your immediate RAROC position size in the real-time risk/performance analysis.

Incidentally, the great thing about Tradermetrics is the number of statistics that are generated. Did you know that at the end of every session, you can add your trading statistics to a database? This is called the dealer evaluation. You will find it in the TraderMetrics start menu. When you open it, you should save it as a new database.

When you have completed a trading session, from the Dealer evaluation window of the statistics viewer, you can click the 'Write Dealer Evaluation File' button. Then, in the Dealer Evaluation, click on "Read from File", and your data will be entered in the database. Click on your dealer name to view it. In subsequent sessions, you just have to remember to use the same dealer name each time. Then, over time, you will be able to track your performance!
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