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  #31 (permalink)  
Old 07-30-2009, 10:02 PM
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Default So what?

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Originally Posted by vin13 View Post
This is not related in any way to Immigration.
Not related, correct! - That's why he posted under 'Interesting topics' where many other non-immi topics are discussed. Those who are not interested will choose not to visit the thread by looking at the subject line.
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  #32 (permalink)  
Old 07-31-2009, 12:12 AM
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I replied but it did not get posted so here it goes again.

By asking me to recommend books you are signing up for trouble.

I will list in the order of mathematical knowledge to stat arb and high frequency trading and building your own model based trading platforms.

A good starting point for any financial engineer are these two books from my Professors.

Principles of Financial Engineering- Neftci

Benchmark approach to quantitative finance- Platen - this is very academic.

For practical quant knowledge:

Paul Wilmott on Quantitative Finance
Tools for Incomplete Markets, 2nd Edition Ales Cerny
Quantitative Financial Economics, 2nd Edition Cuthbertson

Now for High frequency and stat arb:

High Frequency trading- Aldridge
The econometrics of sequential trade models- kokot
Staticall arbitrage- pole
Building Automated Trading Systems: With an Introduction to Visual C++.NET - I have personally not red this one as I am not a code writer/programmer but programmers I know say this is very good.

Applied quantitave methods for trading and investments- Dunis

I also recommend reading Volatility trading- Sinclair. Good book for options

I can go on and on but I thing this should keep you busy for a couple of years

Quote:
Originally Posted by wantgc23 View Post
smisachu,

Where can one learn about high frequency trading ? Can you suggest books that mathematically model various instruments price movements such as stocks, options and futures ?

Thanks in Advance!
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  #33 (permalink)  
Old 07-31-2009, 02:53 AM
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Default system development

smisachu and other gursus,

wonder if you guys have found any good trading strategy using options.

having you tried doing system development.

something as simple as buying etfs when rsi2 is below 2 or in other words its beaten down and you are expecting a turnaround.

would like to know if playing options on such short term( 1to 5 days) would generate profitabloe results or not.

do you guys mind sharing some ideas
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  #34 (permalink)  
Old 07-31-2009, 11:42 AM
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smisachu and all other gurus above -
how do you guys manage to do options/commodities/fx trading without missing prod release? you all seem to have lot of knowledge about all this stuff and its good to learn something new (although one like me need to google to understand what smisachu is saying )
I invest in stocks and etfs but am very impatient when it comes to maximize profits.. i like to take small small profits (5% to 7%) instead of one big kill.. btw, can someone suggest good REIT etfs? (sorry, not related to original commodities topic)
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  #35 (permalink)  
Old 07-31-2009, 01:39 PM
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For all the non-financial enginners who are trying to make sense of financial jargons (like myself - no financial enginnering degree for me but I have worked as a quant for some time in between):

Any time you are trading something - you are betting on the direction of "something". Smisachu - with his statistical arbitrage background - would probably like to vehemently disagree at this point. But please hear me out first.

If you are buying a stock - you are betting that the price of the stock will increase. If you are not sure whether prices will increase or decrease - but still sense some bubble forming, then you know that at the top of the bubble and duing the bust phase - the volatility goes through the roof. Maybe it is time for some option trading to trade on the volatility. So you are now trading on the volatility instead of the price.

If you become even more of a pro option trader - and you think that the market always undervalues out of money options (because human brain is not capable of anticipating the "black swan" events) - then you will buy out of the money options for pennies and will hope that you "poo like a chicken and eat like an elephant". The directional bet you are taking in this case is again on the vol increasing over a longer period of time.

If you are into statistical arbitrage - you have your own gold standard, usually some mathematical model, of how a specific market should be priced. If the market price differs from this - then you enter into a trade to make money when eventually this anomaly reverses.

Volatility is the second order "statistical moment" of the price. These, and other derived quantities (are usually termed as greeks in the trading perlance) - but if you are good in statistics - then you could think of all of them as statistical moments and formulate your whole mathematical model on that. There are ways you can formulate strateties to trade even higher order derivatives.

The basic fact that you are betting on the direction of "something" is often lost on even some professional traders - leading to some wonderful illusions of risk free return (like perpetual motion machine).

To be fair - there are some trading strategies which appear very simple and intuitively appealing - yet produce extremely complex mathematical results when you try to find out exactly which "something" you are taking a directional bet on.

So if you want to trade - I think a good idea is to first find out what is this "something" that you will like to bet on. Alternatively, if you have any strategy - please first understand what kind of direction bet you are taking - and the risks associated with it.

Any thoughts?

P.S.: "Directional bet" is a dirty work in trading perlance. I used it intentionally for effect.
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  #36 (permalink)  
Old 07-31-2009, 01:54 PM
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bitu72
I quite do not get what you are asking. You want to know if buying a call on an ETF that has had a drawdown with an expiration of less than 15 days will be profitable?

There are various option strategies and I usually trade spreads as the most basic strategy. I rarely if ever buy just calls that too with such low theta (<15 days). I usually trade 4 legged spreads like the butterfly, iron condor or at least bull/bear calls/puts.
Most of the time I am long vol (vega) with a strip strap or straddle. Sometimes I am short vega but hedge it with an exotic like a digital, or binary on the vix. I always go for optimal delta hedge and often construct synthetics. Never plain vanilla calls and puts unless I am hedging something else in a different universe with an option.

If you can explain better what your strategy is I can make comments. If possible clearly state the greeks on the strategy so I can visualize it.


Quote:
Originally Posted by bitu72 View Post
smisachu and other gursus,

wonder if you guys have found any good trading strategy using options.

having you tried doing system development.

something as simple as buying etfs when rsi2 is below 2 or in other words its beaten down and you are expecting a turnaround.

would like to know if playing options on such short term( 1to 5 days) would generate profitabloe results or not.

do you guys mind sharing some ideas
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  #37 (permalink)  
Old 07-31-2009, 01:58 PM
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LOL, Sorry about the jargon but it is derivatives, high freq, stat arb and options we are talking about. We can talk about stocks all day and I promise not to use math.

I partially work in the field plus studying too. And I am not in IT so I dont have to worry about product releases etc

Quote:
Originally Posted by geesee View Post
smisachu and all other gurus above -
how do you guys manage to do options/commodities/fx trading without missing prod release? you all seem to have lot of knowledge about all this stuff and its good to learn something new (although one like me need to google to understand what smisachu is saying )
I invest in stocks and etfs but am very impatient when it comes to maximize profits.. i like to take small small profits (5% to 7%) instead of one big kill.. btw, can someone suggest good REIT etfs? (sorry, not related to original commodities topic)
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  #38 (permalink)  
Old 07-31-2009, 03:13 PM
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smisachu,

here is what i have figured out in last 4 year and i have been to various blogs.

1. i have read various blogs all are saying trading options with all good stuff you can hardly make any money. Most of the term you have used i have some idea what its is , but havent studied it properly.

2. trading is gambling- you can have some edge by stastical analysis what have performed well over a long time. so backtest u r system over 10 years.

3. would like to know what kind returns are you targeting with options

4. spreads can be an way to go ..but has to be directional bet or else difficult. I have seen lot of iron condor guys breaking down in recent melt down and up.

5. so i kind of believe in hit and run and momentum play - what else can make you money where nothing is certain

6. buying when rsi2 is depressed and selling quickly - can be spread havent back tested it.
i backtest using stockfetcher. but u cant backtest options, you have to manually do it. itried some using think or swim platform.

so i am trying to see if anybody else has any good strategy to share.
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  #39 (permalink)  
Old 07-31-2009, 03:31 PM
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Thumbs up

Very well said!!

[quote=puddonhead;577704]For all the non-financial enginners who are trying to make sense of financial jargons (like myself - no financial enginnering degree for me but I have worked as a quant for some time in between):

Again sorry for the jargon but the topic is such that it requires some technical terms. Although I dont think these are jargons; they are in fact the only terms out there. Jargon is what BA's use.

Any time you are trading something - you are betting on the direction of "something". Smisachu - with his statistical arbitrage background - would probably like to vehemently disagree at this point. But please hear me out first.

I wandered into stat-arb by chance, not married to the concept. I think high frequency stat arb is high tech front running. This will be the next biggest blow out according to me.

If you become even more of a pro option trader - and you think that the market always undervalues out of money options (because human brain is not capable of anticipating the "black swan" events) - then you will buy out of the money options for pennies and will hope that you "poo like a chicken and eat like an elephant". The directional bet you are taking in this case is again on the vol increasing over a longer period of time.

I read Nassim Taleb here. His hedge fund bled for 20 years buying deep out of the money options and finally in 2008 made 156% or so.

If you are into statistical arbitrage - you have your own gold standard, usually some mathematical model, of how a specific market should be priced. If the market price differs from this - then you enter into a trade to make money when eventually this anomaly reverses.

If anyone can withstand the terminology I can post some stat arb ideas. I gave it to another member who had PM'd me.

Nice post
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  #40 (permalink)  
Old 07-31-2009, 06:00 PM
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Quote:
Originally Posted by bitu72 View Post
smisachu,

here is what i have figured out in last 4 year and i have been to various blogs.

1. i have read various blogs all are saying trading options with all good stuff you can hardly make any money. Most of the term you have used i have some idea what its is , but havent studied it properly.

There is no silver bullet that will make money all the time. If some one says so he is lying. Options can give you a chance to minimize risk but also cap profits. And you can be wiped out in options routinely. However in stocks it is a rare event when your stock goes to zero.

2. trading is gambling- you can have some edge by stastical analysis what have performed well over a long time. so backtest u r system over 10 years.

Trading is most certainly gambling, even fixed income. You can build a model and hedge to reduce risk and make it a calculated gamble but still a gamble..

3. would like to know what kind returns are you targeting with options

Most professional option traders generate income by writing options. Writing options are very risky as you have a theoretical loss probability reaching infinity. Forming synthetic positions will minimize risk but you might bleed hedging the position. A seller of option is long theta and short delta; a buyer of options is short theta and long delta. Think of theta as the time factor and delta as the hedge factor to put simply. If you sell a call option you have to hedge the option by buying delta units of the underlying stock. And when the call is at the money or near you will end up buying the stock high and selling the stock low, thus loosing money. Black and Scholes famously showed that in an option trade you can delta hedge the risk away. This is not possible and their model is flawed. But it is simple and intuitive and every one serious in trading options NEEDS to learn the model. You don’t have to know the derivation but just the model, and the partial differential equation. I can talk about the flaw and the smile and smile dynamics but many of these concepts need to be drawn out and very hard to explain with out drawing.


4. spreads can be an way to go ..but has to be directional bet or else difficult. I have seen lot of iron condor guys breaking down in recent melt down and up.

Any model will work only for certain duration. That is why you need to keep running it and that is why quants have jobs. In stat arb sometimes you run models 3 times or more a day. I mean complicated mathematical models getting data from a provider and running large data sets to find the mean. And then trade when the stock diverges from the mean.
Each strategy or model has shelf life, so you need to keep researching and running new models.

Spreads are a good way of limiting down side while also capping upside. Volatility spreads are the most profitable ones and again short straddle makes money almost 95% of times but the 5% when they loose they will loose big. You need to have a certain limiting conditions and then hedge the spread with in this range. Usually you will make a little or loose a little. Sometimes you will hit a home run. It is easy to show this on a graph


5. so i kind of believe in hit and run and momentum play - what else can make you money where nothing is certain

I don’t trade momentum, swing or technical indicators. But there are profitable traders who do this.


6. buying when rsi2 is depressed and selling quickly - can be spread havent back tested it.
i backtest using stockfetcher. but u cant backtest options, you have to manually do it. itried some using think or swim platform.

Relative strength Index, McClellan RSI(2) and Oscillators can be an indicator of stock movement. Relating it to the option market is abstract but I think possible. But I feel the options will already be priced in for such potential movements in the underlying. A very good quant I know always says any new strategy will first manifest itself in the derivatives market before equity as the players there are much more sophisticated.

I am not sure which retail trading platform has good back testing, try options first with scottrade. I use Bloomberg which has loads of functions like OVME-GO where you can back test , simulate and see the volatility surface
.


so i am trying to see if anybody else has any good strategy to share.
There are many good strategies but I have no idea on sophistication of each individual. For example right now you can sell credit default swaps on Goldman sachs medium senior secured notes and hedge it with delta units of binary in-the-money call options on the VIX. This will give you synthetic exposure to the notes with steady cash flow and the binaries are cheap. If goldman defaults the VIX will sky rocket giving you a handsome payout better than what you will have to pay on the senior secured notes because of high recovery rate if all the default climbs up to the senior tranche. Actually this would be equal to the end of the world in today’s market.

Or better yet just buy SPX and sit, the market is doing all the work for you.

The US natural gas market is in contango (I swear this is not jargon, there is no other term). So buy long dated/leap calls at the money now. In 2 years you will be so deep in the money you wont know what to do. But average retail investor cannot hedge this as he cannot trade spot.

So I guess my point is there are sophisticated ways to make money for which the average retail investor has no access to. If there is a simple way then it has already been exploited under the no-arbitrage clause of free markets.

If you have 2-5 year horizon. Go long the market and sit on it would be my best advice. If people want to meet and share ideas I am open to it. I live in NJ so NY/NJ is fine spot to meet.
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  #41 (permalink)  
Old 08-01-2009, 12:39 PM
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Hi smisachu,
Quote:
I think high frequency stat arb is high tech front running. This will be the next biggest blow out according to me.
Could you explain what you mean by this? Are you referring to "Flash Trading"
or the whole of HFT?

Last edited by Euclid; 08-01-2009 at 01:02 PM.
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  #42 (permalink)  
Old 08-01-2009, 06:34 PM
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Quote:
Originally Posted by Euclid View Post
Hi smisachu,

Could you explain what you mean by this? Are you referring to "Flash Trading"
or the whole of HFT?
Yes Flash trading, ELP (enhanced liquidity program), direct access trading and even other program trading. The programs seek out discreet blocks that are being routed into the market and front run them. The main culprit according to many is GS. And to acheive a significant alpha the size and leverage are huge. Some program with a bug will dump a lot of shares on the market some day and before any one can react. Here is an article on some info that was made available only to bloomberg users.

"Lime Brokerage: "The Next 'Long Term Capital' Meltdown Will Happen In
A Five-Minute Time Period."

Posted by Tyler Durden at 11:25 AM
A recent Bloomberg piece that for some reason was made available only
to terminal subscribers, provides a very interesting discussion on the
dangers of sponsored access, how the associated pre-trade vs post-
trade monitoring deliberations by "regulators" will influence short
selling curbs, and not surprisingly, the desire by Goldman to not only
dominate this yet another aspect of high-frequency trading, but to
dictate market policy at will.
What is sponsored access:

In sponsored access, a broker-dealer lends its market participation
identification (MPID) number to clients for them to trade on exchanges
without going through the broker's trading system, to avoid slowing
down the execution. That places responsibility on the broker-dealer to
make sure the participant abides by securities regulations, and that
its trading, which can involve hundreds or thousands of orders a
second, does not run amok.

Is it thus surprising, that none other than Goldman Sachs is muscling
its way into providing not only a sponsored access platform to its
clients, but a new form of sponsored access that needs the blessing of
regulators:

Wall Street heavyweight Goldman Sachs, now launching its own sponsored-
access service to lend clients its identification to access securities
exchanges directly, said last week it favors monitoring client orders
prior to execution.


"Our view is that there is a real need for pre-trade checks in the use
of sponsored access to fulfill [broker-dealers'] regulatory
responsibilities," said Greg Tusar, managing director at Goldman.


Goldman's stand in favor of pre-trade instead of post-trade monitoring
of sponsored clients' activity is one side of a debate in which
regulators may choose a middle ground. The regulators' decision on how
to monitor sponsored access may also influence their deliberations on
restricting short sales.

What is the difference between pre-trade and post-trade monitoring? In
brief:

Pre-trade

Compliant with Reg SHO
Nip problems before they happen
View activity across exchanges

Post-trade

Faster order executions
Pre-trade systems still fallible
And another tidbit:

In traditional sponsored-access arrangements, a broker-dealer
determines a client's suitability to access market centers directly
and then allows the client to trade without monitoring its individual
orders prior to execution.

In other words, the Goldman endorsed pre-trade approach will allow
"monitoring of individual orders prior to execution." Whether or not
pre-trade checks provide the capacity to observe not just wholesale
exchange activity in the context of sponsored access but from a much
broader market angle is a discussion for another time, although this
could be one place where Sergey Aleynikov could shed an infinite
amount of light, especially as pertains to Goldman's sponsored-access
service. Conveniently, his gag order will prevent him from saying much
if anything until such time as there is an appetizing settlement to
keep him gagged in perpetuity. The bottom line is that with a pre-
trade environment, the sponsored access providers will be able to have
the potential to front run all those who use their platforms. The
residual question of how far they go to comply with regulations to
prevent this from happening, and remain true to their ethics standards
is also a topic for another day.

Going back to the topic at hand. Here is why sponsored access could
easily be quite a bother to capital markets sooner rather than later:

Unchecked errors or unintended repeat orders could deplete broker-
dealers' capital, and potentially wreak havoc in the broader market.
Concerns have arisen, however, about whether all broker-dealers are
able to fulfill that duty in today's electronic trading environment,
and according to which standards.

And here Goldman chimes in to not only promote their proposed
architecture but to expound on the virtues of pre-trade checking.

"In the case of high-frequency trading, in particular guarding against
technology failures, oversized orders and other situations where
there's potentially systemic market impact, we believe strongly that
pre-trade checks are a prerequisite," Tusar says.

Nasdaq's proposal as well as Securities and Exchange Commission
officials' speeches a few months ago appeared to lean toward
bolstering the traditional approach.


"We don't believe that's strong enough or what the regulators want
now, because of the potentially dire consequences, and because we-as
broker-dealers-bear much of that risk," Tusar says.


Now the reason why this is very relevant in the context of not just
potential front running, but also market structure is that Regulation
SHO, which is the primary regulatory framework for short selling (and
the purvey of potential Uptick Rule reinstatement, which will happen
once the market is allowed to hit a bid) is a post-trade
architecture.

Wedbush [Morgan] routinely tests clients' systems to ensure they are
compliant with Reg SHO. In addition, he says, the brokerage sets
limits on clients available locates-as well as credit and trading
limits--before the start of each trading day that its system tracks,
prohibiting shorts without locates and providing a type of pre-trade
check.

Or as has recently become the case, seeing rolling buy ins in the
middle of the day as borrowable shares in even the most liquid stocks
mysteriously disappear (look at today's market action for yet another
blatant example of this practice).

Anticipating the regulators' likely response, one should not be
surprised to see them siding with Goldman and against shorters:

As the SEC also seeks to appease investor concerns over rampant short
selling, especially naked short selling, new sponsored-access
standards may provide part of the solution. Given that day-traders may
be the last remaining culprits of such activity,, increasing and
standardizing scrutiny over their trading may reduce uncovered (and
illegal) shorts even further.

How about appeasing concerns over rampant, unjustified buying? When
will the downtick buy rule be implemented? But we jest.

And I digress again. Why should all this be concerning to advocates of
stability of high-frequency trading:

The mother of all concerns is a sponsored firm's algorithm going awry
and executing thousands of problematic trades across a range of
securities and market centers.

Well, this is not really a problem when it happens to the upside as
has been the case for months now - it is only a threat when Joe
Sixpack's 401(k) may be impacted, i.e., to the downside.

And here is where a SEC Comment submitted by broker Lime Brokerage is
a very troubling must read by all who naively claim that High-
frequency trading is a boon to an efficient market (which doesn't
provide . Well, yes and no - it is, until such moment that it causes
the market to, literally, break. I will post a critical excerpt from
the Lime submission, and leave the rest to our readers' independent
analysis:

Lime's familiarity with high speed trading allows us to benchmark some
of the fastest computer traders on the planet, and we have seen CDT
(Computerized Day Trading) order placement rates easily exceed 1,000
orders per second. Should a CDT algorithm go awry, where a large
amount of orders are placed erroneously or where the orders should not
have passed order validation, the Sponsor will incur a substantial
timelag in addressing the issue. From the moment the Sponsor’s
representative detects the problem until the time the problematic
orders can be addressed by the Sponsor, at least two mintues will have
passed. The Sponsor’s only tools to control Sponsored Access flow are
to log into the Trading Center’s website (if available), place a phone
call to the Trading Center, or call the Sponsee to disable trading and
cancel these erroneous orders – all sub-optimal processes which
require human intervention. With a two minute delay to cancel these
erroneous orders, 120,000 orders could have gone into the market and
been executed, even though an order validation problem was detected
previously. At 1,000 shares per order and an average price of $20 per
share, $2.4 billion of improper trades could be executed in this short
timeframe. The sheer volume of activity in a concentrated period of
time is extremely disruptive to the process of maintaining a “fair and
orderly” market. This shortcoming needs to be addressed if the
practice of Naked Access is going to be permitted to continue;
otherwise, the next “Long Term Capital” meltdown will happen in a five-
minute time period.
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  #43 (permalink)  
Old 08-04-2009, 05:42 PM
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Default SEC Moving towards banning Flash Trading

See what I mean. More than stat-arb, the HFT programs keep looking for pattrens in order flow and front run them. Thats why you have lattice trading and when a fund wants to sell a big block, they dont even go to the exchanges. they pick up the phone and call someone "upstairs"


SEC moving toward banning flash orders - Yahoo! Finance
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  #44 (permalink)  
Old 01-21-2011, 02:58 PM
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Originally Posted by smisachu View Post
See what I mean. More than stat-arb, the HFT programs keep looking for pattrens in order flow and front run them. Thats why you have lattice trading and when a fund wants to sell a big block, they dont even go to the exchanges. they pick up the phone and call someone "upstairs"


SEC moving toward banning flash orders - Yahoo! Finance
smisachu,
You seemed to be a Pro with so much of information.
I know this is a pretty old thread, but interested to find out if you give some tips on starting this business on a H1B and how i can withdraw profits from that?
Any help is appreciated.
Thanks
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Old 01-21-2011, 05:25 PM
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Originally Posted by hope4gc View Post
smisachu,
You seemed to be a Pro with so much of information.
I know this is a pretty old thread, but interested to find out if you give some tips on starting this business on a H1B and how i can withdraw profits from that?
Any help is appreciated.
Thanks
What exactly do you mean when you say starting this business? Do you want to open a trading account on your own and trade? Join a day trading firm? Or open a Fund? Each one will have different implications on H1. You can open your own investment account with a brokerage firm and trade your own money, no problem with H1 what so ever.
If you join a day trading firm you will have to be on H1 with them. Very few ones do but I know of a couple who will do it. In fact a classmate of mine is working as a Trader/Analyst with a small trading firm in NYC. They have sponsored his H1.
Starting a fund, (if you can get the seed money ), you open a LLC and sponsor yourself. You will be an employee of the company and draw a salary. You tell me what you have in mind and I will tell you what to do or what I did.
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