Good Read on the Rise of Automated Systemized Trading/Investing Vs Humans

We can see the effects of automation all around us and how it is impacting the job market. The advent of self driving cars will soon be upending the taxi industry. What many people may not be aware of is automation is moving into many job categories previously thought to be “robot proof”. There are inroads being made in law with automated systems replacing the tasks done by paralegals. Robots can now perform complex surgeries that most thought could only be done by a human doctor. Some news articles are now being generated by computer, and the list goes on…

The trading and investment industry has certainly not escaped this phenomenon. Discretionary traders and portfolio managers are under pressure from automated index funds and system trading programs that are proving to be superior, at least under current market conditions over the last few years.

Here’s an interesting read on the rise of automated systems squeezing out human traders:

https://www.linkedin.com/pulse/revenge-humans-how-discretionary-managers-can-crush-leigh-drogen

 

 

Ingenious Day Trader Scam

This is a crime where you have to think for a bit to figure out who the “victim” is…

A day trading firm who also ran a “virtual trading” platform where folks could practice trade on a market that mirrored the real thing, must have gone through the following thought process:

“Hmmm, we know that greater than 90% of all day traders fail and lose their money. Therefore if we trick them into trading in our virtual account and make them think it’s the real one- we will also have a greater than 90% chance to make money- as in 100% of the losses the traders make will be ours”.

Of course this breaks all kinds of security and ethics laws, but on the surface, it sounds like it could work as long as they didn’t get good traders on board who actually made money. However, they had a plan for this possibility too- any trader that turned out to be good, they then moved them over to the real account to continue.

So their goal was to recruit inexperienced traders with the lure of “getting rich quick”, and have them lose their money, never realizing that they were in a simulated account.

They wound up making over a million dollars in gains before the SEC caught up with them and put an end to their virtual gravy train.

Here’s the story link:  http://dealbreaker.com/2016/12/day-trading-ponzi-adventure/

 

So who is the true victim here?

The easy guess is the trader who is on the virtual account, but the virtual account mirrors the real market so their losses would have been real regardless. A true victim would have been a trader who made a profit and then tried to withdraw their money from a fake account- but so far there’s no report of any such victims, as the firm moved the few “winners” to real accounts and payed them with the money from those losing.

The actual victims turn out to be the exchanges and market makers that buy and sell the actual stocks and investment products. They make money on the difference between the bid and asking price.

A trading firm typically makes money on order flow and trading commissions per transaction. Since the firm wasn’t actually buying the stock, they were at risk and having to pay out any profits out of pocket- but they were counting on the high probability of traders losing to minimize that risk.

If not for the SEC, this could have gone on indefinitely as long as they didn’t wind up with a bunch of good traders to break the bank.

 

Voting Day in Cali – Sample Ballot Blues

Kodos

 

I dreaded looking over the sample ballot book for California- there are so many pages! It’s like a mini book! The numerous pages led to me continuing to put off completing by ballot until time was about to run out.

I wonder how many folks got scared off from voting seeing that huge sample ballot book… =:-0

It boiled down to just facing the music and going over it this past weekend. Fortunately a big chunk of the propositions were just city charter updates with no changes to ponder.

Normally I mail my ballot off ahead of time, but this time around, I just took it to my polling center and dropped it off there.

Better late than never!

While driving there I heard an ad on the radio asking people how would they like to make easy money working just a couple hours a day. They were talking about trading!

I’m not going to call the company out who was advertising, but to portray trading as something easy to excel in and with just a couple of hours per day of effort is grossly misleading at best, fraud at worst.

They may as well advertise making a living being a pro sports star with just a couple hours a day of effort. It’s been my constant observation that outside of inheritance and lotteries, lots of effort is required to achieve most worthwhile things.

 

Trading 101: The Key Ingredient to Sustained Success is Failure

My trading style uses fairly tight stop loss settings, which demands that my entries be pretty accurate with a small margin of error. In some trading circles, this would be seen as being “amateurish” for not allowing your trade to have breathing room to deal with the range of market volatility. Of course, most of those same trading circles view the market as mostly random in the short term that must be met with a ball park entry with a wide stop loss.

I used to trade with wide stop loss settings, or threw caution to the wind with “mental stops” rather than actual programmed stops. The market can gyrate so much that it’s an easy habit to get into. The market rarely moves in a straight line and can drift back and forth before making a definitive move in a particular direction. When stops are tight, it’s easy for price to move just enough against you to trip the stop loss before moving in the anticipated direction. This often happens enough to be a common frustrating experience among traders.

Using wide stops gives you more leeway when in a trade, but that also means your losses will be greater when they are tripped. Of course some traders don’t use stops at all- as that guarantees you will never be whipsawed out of a trade, but that also leaves you without protection if the market makes a big move against your position.

Not using stops is high risk, yet most traders including myself have engaged in such behavior due to the frustrations of getting whipsawed out of trades that would have eventually worked. But eventually the Grim “Stopless” Reaper cometh and will make you pay for not using stops. Eventually one learns to incorporate hard exits via stops, or the market will do it for you with severe losses that can blow out your account.

Over time I’ve learned that while using stops can be frustrating, and using tight stops VERY frustrating, it forces you to really focus on your trading system to find ways of improvement. Typically when a trade is entered that doesn’t work out, it’s one of three things:

  1. System is correct, but market had a random spike/dip due to some late breaking news.
  2. System is correct but the application of system was wrong.
  3. System has flaws that need to be worked out.

Out of most events encountered, #1, is VERY rare, while #2 is more common and #3 is typically the most common. One could say that #2 is a subset of #3 since proper execution is also part of the system.

I’ve been working on precision trading, where one can trade the daily battle between resistance and support with a fair amount of accuracy so as to not need to use wide area stops. Using tight stops and the ensuing failed trades and frustrations that resulted were actually great motivation in improving my trading system.

I find that my post trade analysis of failed trades have been responsible for the bulk of my trading system evolution. Preparation and planning can only go so far but I seem to be able to pick up so many more fine details of what went right and wrong when the analysis is done right after the trade is finished- likely because my plan is fresh in memory so it’s easier to pinpoint the aberrations. It’s a great feeling to spot a problem that was previous missed that when fixed, improves the accuracy of my system.

It’s a lesson I like to forget – that failure is a part of progress, since it opens the window for improvement. To get the best out of failing, it helps tremendously to have a clear and concise system trading plan that you can back track step by step to see what went wrong as well as what went right. A big mistake I’ve seen other traders make is “winging” trade entries in real time without a clear plan of specific entry and exit strategy. The point of system trading is the eliminating of seat of your pants “ad lib” style trading.

 

 

 

Entrepreneurship vs Workaholism vs Obsession

 

I was reading an article today on a woman who was putting in 100+ hour weeks by working at both her corporate and entrepreneurial job she is developing.  What I found highly surprising was what was being said by so many in the comments section.

Many were highly dubious of anyone working those kinds of hours. Others were critical of anyone putting in so much time for work as opposed to a better work-life balance. It was clear that a big segment of the population is unaware of what it normally takes to successfully start a business.

I never realized so many people have no idea of what it can take to achieve financial independence via self employment. There is a saying that entrepreneurs are folks who would rather work 100 hours/week for themselves rather than 40 hours/week for someone else. Now that saying taken literally may appear to make these folks seem like workaholics or just obsessed, but for the vast majority of entrepreneurs, the plan isn’t to continue at that level indefinitely. New businesses typically require lots of front end time to get them to a level where one can live off the profits. People forget that the self employed have no admin support staff to take care of the mundane tasks in addition to all the major work required to move forward. They are a one stop shop of having to take care of everything which includes business planning, meeting with prospective clients, advertising, networking, handling all associated business/regulatory paperwork, budgeting, etc…, and all this alongside producing their main product or service.

Now factor in the reality that new businesses operate in the red for the first few years until they grow to be self sustaining (if ever), and that you have a limited budget. You now have a deadline to get the business to a net positive self sustaining cash flow before you run out of funds. This is the prime driver/motivation behind putting in all those hours to move the business along.

Of course the long term goal is to be able to scale back on hours needed once the business reaches a certain profit level, and the financial freedom that comes with it. The potential of having a world of financial options open up as well as self-empowerment/fulfillment are some of the rewards that make the initial work-crush worthwhile.

Many of the self employed wealthy who started from modest means have a backstory of having to work “insane” hours at the start of their business. It’s not about being a workaholic, or being obsessed with work or money, although it may be for some.  A successful business can provide a level of personal as well as financial independence and security that can be extremely hard to obtain in a salaried job. This is even more true in the current economic environment of high paying jobs being lost to overseas labor as well as advances in automation technology.

 

2016 Already? New Year Delayed Updates

There’s a reason for a absence of blog activity. Shortly after the year started, I managed to catch some “bug” that’s been going around the area. This caught me off guard since it’s been years since I’ve caught a cold in Cali.

This put a monkey wrench in activity this month with having little energy for anything – although I did muster the strength to get some lottery tix for that $1.6 billion jackpot.

Thanks to the new tech advancements of special cameras and time lapse photography I was able to capture the area of initial infection as the virus entered the body, and the corresponding battle with a the body’s fighter cells:

 

Now I’m in catch-up mode, but blogging will be resuming shortly.

 

Man Engages in High Risk Shorting, Loses His Shirt, makes a “Go Fund Me” Page to Recoup Loss

A tale of woe and caution against excessive risk taking.

Most traders/investors are well acquainted with the warnings against shorting stocks, and many choose not to do so. Those that do, should obviously employ judicious risk management, which seems to be MIA in this case.

Before I provide the link to the story- here’s a primer of some of the dos and don’ts of short selling that were not heeded:

  1. Avoid penny stocks
  2. Don’t short in the hole
  3. Don’t over leverage
  4. Overnight positions carry much more risk
  5. Respect the market

 

Explanations:

 

  1. Penny stocks- stocks that are very low in value such as a few bucks or less are typically pretty volatile as they are avoided by institutional buyers and therefore typically lack volume and is subject to being manipulated by buying/selling spikes. Risky to be long, but much risker to be short since gains are limited as the stock is already near the floor.
  2. This refers to shorting a stock after it has already dropped precipitously. Much higher risk of a reversal move at this point.
  3. One can typically buy on margin, meaning the brokerage will loan you money based on the amount in your account. In order to short you must be on margin as you are selling stock you don’t own and must repurchase. As such, taking on too many shares can result in being over leveraged and at risk for bigger losses. People sometimes forget that leverage works two ways, but they only focus on the potential  gains rather than losses.
  4. Once the market closes, anything can happen news wise that can affect the price of the stock. Day trading minimizes risk of exposure by having positions closed at the end of the day. A good rule of thumb is market = risk, so shorting overnight = more risk.
  5. The market has more firepower than your account by a wide margin and can vaporize it if you allow it to. As such, you have to manage risk.

 

So what did this guy do:

He shorted over 5700 shares of a penny stock at $2, thinking it would go to $0, and left it on past the market trading session.

……and this is what ensued:

 

http://www.marketwatch.com/story/help-my-short-position-got-crushed-and-now-i-owe-e-trade-10644556-2015-11-19

 

 

Trading Chart Analysis Enlightenment – Achievement Unlocked!

enlightenment

 

I’ve once again fallen behind providing updates on my trading, but events that occurred this week provided my most significant milestone to date.

When it comes to investments and trading, my main tool of the trade is chart analysis, that is analyzing price and volume movements over time as an indicator of future market moves. As prices tend to be pretty volatile and jumpy, trying to see the order in the seeming chaos is no easy task. Like looking at cloud formations, it’s easy to see what you “want” to see rather than what is actually happening.

So my focus over the months and years was to develop a system approach to interpreting prices moves, which are a collection of reactions of support (buying) and resistance (selling).

Going back in time to my banner year in 2012, I had a great intuitive feel for market price movement using trendline analysis, but over time lost that intuitive focus the following year. This is the problem with just using intuition or gut instincts- they come from the sub conscious and as such can be elusive to hold on to since you can’t evaluate on a conscious level. One is basically doing things without knowing the details of how and why certain actions are taking place.  My focus then shifted into making that intuitive subconscious knowledge into conscious knowledge.

Last year I made a big discovery that helped me lock in some conscious mapping of resistance and support price action and improved trendline drawing and analysis. This helped immensely with helping to refine my system to make it a better predictor of future price action. My last posted performance results were the fruit of that work.

Despite the major progress, there was still one significant problem- while I had developed a system of chart trendline analysis to predict moves, I couldn’t explain the action it was doing. I could tell where the price was going to go by chart constructs, buy it didn’t make sense to me logically. So I would place trades that my analysis told me would succeed, but I felt would fail, because the movement didn’t “look” right. The trades succeeded, but that disconnect between my trendline analysis and intuition eventually led to problems and my search for more clarity.

More grind work and chart analysis R&D ensued with a healthy amount of trial and error over the next several weeks which culminated in yet a new breakthrough discovery this week.

The discovery came as I was analyzing my failed trades after market – which is where most of my big breakthroughs occur. I realized that my assumptions made for constructing trendlines were not all correct. In some cases the rules of behavior I had made were incorrect. In other cases, the rules were correct, but my application of them was off.

I did some recalibrating, refining, and adjusting of my trendlines and price behavior assumptions when a new level of enlightenment started seeping in. I was now able to do chart analysis that perfectly captured price moves based on support and resistance. The key difference with this new modified analysis was that I now understood the market movement and there was no longer a disconnect between my intuition and analysis.

I could now look back on the market moves of 2012 and understand the behavior by both intuition and reason, which is what I did when I tested my new understanding on past years data to verify consistency.

Long story short, I’m as about as close to achieving the holy grail of creating a system of both high precision and high probability trades as I think I will get.

Now as usual, I write this ahead of fully implementing my system as this discovery is hot off the press. I also know that seasoned traders would take what I said with a grain of salt as we’ve all heard bold claims before on trading forums that came up short. Performance results going forward will show the reality. But I’m stating my discovery and assessment now because that’s how confident I am based on back testing and preliminary results.

 

 

 

Trading Update: July Performance Stats – The Ugly, The Bad, and The Good Part 4 of 4

good-bad-ugly

 

After what seemed like uncountable days of being in the loop of getting stopped out of trades, analyzing what went wrong, making adjustments to my trading system and placing new trades, I experienced new illumination on how to fit the pieces of the puzzle together.

My newfound enlightenment helped me make the necessary adjustments to correctly capture the action/reaction moves I had been focusing on. I’ve said before that understanding market moves is all about correctly reading its nuances. The problem is these “nuanced” moves can be extremely difficult to detect even when you’ve managed to narrow down the area of focus. It’s at the point of being non intuitive so it comes down to being able to figure out the action/reaction by recognizing the repeating pattern that doesn’t “repeat” identically in terms of extent or frequency, but in behavior of sequence of events. Even using the best analytical methods, making the leap to finding a true solution may not be possible via just direct application/brute force in trying varied adjustments until you meet with success- this is what makes finding the holy grail of consistent trading so difficult.

My solution didn’t come from “brute force” analysis, but rather a mental subconscious to conscious leap in interpreting the data. The brain is a great computing device that can work on processing problems even when we are not consciously focused on them. This is why it’s recommended that you should break up concentrated study with less strenuous mental endeavors/pastimes. Blogging is one such activity for me. Taking breaks gives your mind a chance to regroup and process data. Since trading solutions are mostly non intuitive, you’re far more likely to find solutions from your subconscious mind processing data than a direct conscious approach because of built in “past data” contamination- we try to apply what we already know rather than learn and understand things from new perspectives.

Once I made the connection, I was able to employ a method of precise entries and targets with a level of consistency and accuracy not experienced before (The Good).

 

July 2015 Performance

July 2015 Perf

This is easily my best monthly return since my banner year in 2012, but a key difference is 2012 was by intuition and general approximation versus much more exacting methods used today.

Trading for the month seemed surreal in its consistent accuracy. I would place trade entries that my gut would scream as being absolutely wrong but would wind up matching the plan and being correct. My conscious mind did not trust the solution provided by my unconscious and it made me doubt trade after trade, and market drift prior to the move had me feel sure I would get stopped out time and time again, but successful results proved my conscious mind wrong.

 

July 2015 Performance Vs Indices

 

I’m happy to see that all my research efforts and time commitment into learning to trade are continuing to progress and show highly promising results. Once fully mastered, my methods should be able to be applied to any type of market, ranging or trending with the same consistent results.

 

Mathematics and Sex

Dr Clio Cresswell provides a Tedx Talk on how complex mathematics can be used to describe all facets of our lives and isn’t just relegated to the hard sciences like math or physics. It really comes down to innate pattern recognition, and then coming up with equations that can explain that type of behavior.

What I find surprising is that in our modern age of mathematics branching out into more and more areas, when it comes to  short term trading, the prevailing consensus is the short term market is random with no discernible order and therefore can’t be “timed”, or “predicted”. The irony is a good portion of these folks who say the market isn’t predictable in the short term will then try to make the case that the market becomes predictable in the long term, which is contradictory when you think about it. The whole is comprised of the sum of its parts, so if the market has a structure for the long term, it should have one for the short term. Conversely, if the market is random in the short term, extending it out won’t change anything and it will remain random in the long term as well.

The key to successful Day Trading lies in finding these elusive complex market patterns and understanding them so one can project future movement, which is the essence of market timing.