Thursday, April 29, 2010

Why trading eminis may be a better alternative than trading stocks, part 2

If your stock trading is not going well, and you are falling short of your expectations, SP500 emini trading may be a good alternative choice. This article discusses some reasons why emini trading may be better for you.

When I first began to trade as a teenager, I began with stocks. Over the years I had my share of success and failure. Over time, however, I began to realize that stocks had many different risks associated with them. I realized if I changed my perspective, and looked at the market as a “whole,” that I may be able to avoid some stock specific risks. By moving to the emini market I was able to avoid many of the risks that are specific to individual stocks.

Any type of trading involves uncertainty and risk taking, but understanding the types of risk you are taking can help. Stock trading, in my opinion, requires a trader to undertake some risks that are unacceptable. Most stock investors have probably been burned in the past when a company announced its earnings. Expectations concerning earnings are created and manipulated by analysts, executives of the company, and the press. Lower earnings than expected can lead to trading losses for stock investors. The problem for a stock trader is to define what the expectations are, who is creating them, what the reality is, and how great the differences are between expectations and reality. This belongs in a philosophy class, not trading. (There is nothing like this in trading futures, except, perhaps, for trading economic data releases and Fed rate decisions).

The earnings of a company can also be manufactured. If you have some understanding of financial statements, you will know how easy it is for a company to play around with their numbers. There are many tricks a company can use to change how their earnings are represented. Some examples include: the choice of depreciation schedules, using LIFO or FIFO, loan loss provisions, or moving items off the balance sheet. Moving items off-balance sheet has been one of the main reasons many stock investors were badly burned in the financial sector in the past two years. These examples are the kinds of risks that I find unacceptable to take as a trader. They are incalculable and no one has any idea of what the probabilities of their occurrence are. They are complete unknowns which are very difficult to predict, understand, or avoid when trading stocks.

In addition to undertaking significant risks from changing expectations and financial statement accounting, an investor also faces the possibility of manipulation in the trading of the stock. We have all heard that it is very difficult to manipulate the price of a stock. The general argument goes along the lines that the large number of competing traders and investors create a “fair price.” This may be true to some extent, but nonetheless, the fact remains that large institutional trading firms, particularly hedge funds, account for a significant percentage of the overall trading of stocks. It only takes a few, well- capitalized traders, with the same opinion, to trade large blocks of stock and move a stock’s price. No one trading firm, or group of firms, can manipulate or move the US stock market like they can an individual stock of a company.

Another reason why emini trading is preferable is that it is an extremely liquid market. Most of the Dow or SP500 stocks have excellent liquidity, but, smaller stocks may or may not. The amount of liquidity in a stock is important because it can affect your entry and exit prices. The amount of slippage is important to your bottom line. I am not stating that there is no slippage in the eminis; all trading involves slippage. But what I am stressing is that a trader undertakes greater risks in the amount of slippage when trading less liquid stocks. Liquidity is never an issue with the SP500 emini market.

Next, I would like to address shorting. Futures traders generally play both sides of the market. This is not necessarily true with stock traders. In my opinion, most small time investors and traders are only taking long positions. Not shorting a market, or a stock, is similar to playing half the game. Shorting stock, however, is more difficult for the smaller trader. Brokers place a variety of restrictions on smaller traders, such as their net worth and larger margin requirements. In addition, newer trading rules, such as being defined a “daytrader,” place additional limits and restrictions on smaller traders. If a trader is permitted to short stocks, they also may face additional limitations in finding the stock to short. All of these requirements, risks, and limitations can be avoided with futures trading. Trading futures from the short side is much easier than shorting stocks.

Lastly, capital gains on futures are taxed more favorably than capital gains on stocks. Relative commission rates may also be lower for futures. In conclusion, there are many reasons why emini trading can be a better alternative to stocks, and I would recommend that stock traders consider the possibility of trading emini futures.

Wednesday, April 28, 2010

Emini trading may be a better alternative than stock trading, part 1

If your stock trading is not going well, and you are falling short of your expectations, emini trading may be a good alternative choice. This article discusses one reason why emini trading may be better for you.

Why is trading the emini better than trading stocks? There are many reasons, in my opinion, but I will discuss one of them here, and other reasons in future articles. I prefer eminis to stocks because they avoid certain types of exogenous shocks. In economics the term exogenous is used to refer to an event that occurs “from outside” the system, model, or idea you are considering. It usually is an unexpected event that creates a shock to the system. For some traders, exogenous shocks can result in a windfall of profits, but for most traders, exogenous shocks result in losses in their brokerage accounts—which leaves them shocked.

There are many types of exogenous shocks, however, to keep things simple I will look at two specific kinds of exogenous shocks. I like to call these verbal exogenous shocks. They usually occur from the mouths of hotshots, and they also have the tendency to occur right after you have bought the stock. The first type of verbal exogenous shock occurs when some hotshot analyst downgrades the stock, sector, or industry you are invested in. The second type of verbal exogenous shock occurs when some hotshot CEO or CFO tells the investing community, “we will be making one penny less than you expected.” WHAM! and OUCH!

Just like earthquakes, verbal exogenous shocks lead to verbal exogenous aftershocks. One type of aftershock occurs to the other stocks in your portfolio that are in the same industry. Another type of aftershock occurs from what is called herding. Herding refers to analysts having a tendency to hold similar views. What usually occurs after one analyst is brave enough to create a verbal exogenous shock, is that the others quickly follow—this leads to additional verbal exogenous aftershocks to your stock or portfolio.

Verbal exogenous shocks do not occur in the market as a whole. The market does not give a damn what some analyst thinks about a company, or what a CEO said, or stated about their upcoming earnings report. This is one of the major reasons why trading the market, on the whole, is better than trading its components. One may argue that the market also experiences exogenous shocks. Of course it does. As traders we already face so many risks each day. I, for one, do not care to add on verbal exogenous risks.

Tuesday, April 27, 2010

Some tips on building winning trading systems and trading models, Part 2

This article is the second in a series of three articles providing some tips on building successful trading models and systems. This article will discuss: simplicity vs. complexity, the importance of backtesting, and putting your strategy into action.

The general overview you should take towards building your trading models is to keep things simple. The less variables, indicators, or conditions you impose, the more flexible your trading models will be. Many traders make the mistake of adding more and more variables to their trading models, believing that it makes their models better. But the irony is that strategies that have many variables, and are very complex, tend to give poor trading signals, especially as the underlying market conditions change. We know the market is like the ocean, constantly moving and changing. If your models are not flexible, they will break when the market changes. Keeping things simple gives trading models more flexibility, it makes them more robust, and better able to handle the ever-changing market.

The next step is to backtest your trading strategies and models. There are many ways to backtest, but here are some things to keep in mind. First, do some small, random, sample backtesting, Monte Carlo style, and look at your results. If they look positive, then expand the backtesting as much as possible. It is very important to test your trading models across a variety of time periods, market conditions, and market directions. You need to make sure that your trading strategy is robust; it must be able to handle up, down, and sideways markets, and low, middle, and high volatility situations.

Sample size will also matter when you backtest your strategy. In general, the larger your sample size, the more confidence you can have in the results. Never trade a strategy that is based on small sample sizes. One rule of thumb that can be used, statistically, is that the sample size should contain at least 30 observations in order to have some confidence in the results of the study. My general feeling is that 30 observations is still small. Another concept I have come across is that it may be useful to have 30 observations for each variable in your trading model. This can still be misleading; ultimately you must use your own judgement about sample sizes and testing in order to have confidence trading your models. For example, even though you have a large sample size, if it is only from one time period, or from one year, then you probably should not have too much confidence in those results. It is not only the size of the sample that matters, but the variety of periods it is drawn from. Keep these ideas in mind when backtesting your strategies.

Once you feel comfortable with your backtesting you can begin to paper trade. My feeling towards paper trading is that it is ok to do, but only for a little while. Do not spend too much time paper trading. Paper trading results can be misleading because you may be misinterpreting entry and exit prices due to slippage, etc. It is much better to trade with real dollars. My suggestion with real dollar trading is to initially trade small position sizes. You do not need to begin trading a new strategy with maximum dollars and maximum position size. The reason you want to trade real dollars is because when there is money on the line you will focus better and learn quicker. In addition, having real money in a trade teaches you about your own personality and what you are like when you trade. In general, the information you will pick up trading with money is better than the information you will gather from paper trading.

In closing, by applying some of the ideas presented in this article you will significantly increase your chances of building successful and winning trading models and systems. Keep an eye out for the last article in this series.

Monday, April 26, 2010

Some tips on building winning trading systems and trading models, Part 1

This is the first of a series of three articles I am writing to help you with some tips on creating a successful trading system and/or winning trading models. The articles will start off with general suggestions and will increasingly become more specific. In this piece I would first like to discuss the emotional and personal qualities you will need. These are in no particular order, but all are necessary to succeed; optimism, patience, knowing who you are, perseverance, hard work, and discipline.

Let’s begin with optimism. I may not be the first to tell you this, but if you have not heard it before, then here it is…MOST TRADERS FAIL. This is true and you really need to understand that the odds are stacked against you. This does not mean that you should not try, or that trading is impossible, but it helps to know this ahead of time. Why? Because you need to understand upfront that trading for a living is a very, very difficult thing to do. Being optimistic will help you when times get tough.

The second quality is to have patience. Many people falsely assume that they can trade and wind up blowing up their accounts in a short amount of time. Do not assume that success will come quickly. It will take time to build a successful trading system. Some traders may do it quicker than others, nonetheless, go at your own pace and learn to think in terms that it may take a few years, rather than days, weeks, or months. All good things in all good time.

Third, because trading is such a difficult thing to do, you will need to know who you are and what your personality is like BEFORE starting to build your trading models. I have written other articles on this, but I will touch on this briefly. Understanding what type of personality you have will help you design trading models and systems that suit your temperament and personality. For example, some people want a lot of action; they should trade models that trade frequently. Other traders may be mellower; they should create models that do not trade as frequently. In addition, how patient are you? Can you hold a position for more than a few minutes? Can you hold it for days? This too is part of the process of building a successful trading system. The point is to seriously analyze who you are and what you are like first, and then start to build your trading models and systems with this knowledge in mind.

Most traders believe they will be able to create a trading model and start making money right away. I am not sure why most traders make this false assumption. Being a successful trader is no different than being a successful surgeon, or succeeding in any other profession. It takes many years of hard work and perseverance to be successful in any profession; why would it be any different with being a successful trader?

The last quality that a trader needs is to be disciplined. If you build your trading models and systems with a disciplined attitude, and trade with discipline, you will slowly, but surely, increase your chances of succeeding.

Saturday, April 24, 2010

What buildings and bamboo can teach us about creating successful and winning trading models and trading systems

Buildings and bamboo provide some useful analogies that can help a trader build reliable and profitable trading systems and models. Buildings are extremely strong structures, but they have to be flexible enough to move with strong winds, or storms, or else they face a greater possibility of falling over. Bamboo is similar to buildings. Bamboo is a very strong material; however, it too is flexible. Both buildings and bamboo teach us that the qualities of strength and flexibility need to be incorporated into our trading systems and models.

Trading models have to be strong enough to give good and reliable trading signals, but they also must be flexible enough to handle a variety of market conditions. When I first started building trading models I assumed that the more indicators or variables I added to my models, the “stronger” or better the models would be. What a bad idea that was! One of the lessons I eventually learned was that the more and more conditions, indicators, or variables I added to my models, the more and more inflexible the models became. The models were not flexible enough to handle the changes in market conditions. This led to breakdowns in the models, which subsequently resulted in bad signals, missed trades, and the occasional F*** bomb out of my mouth.

Traders use the term robust. A robust trading system or model is: flexible, strong, and able to handle a variety of market conditions. A robust model does not breakdown. It may have periods where it underperforms, but a robust model always comes back from underperforming periods. By the way, do not believe anyone who tells you that their model always performs well. All models have up and down performance. The point is, however, to make sure that your trading model or system is robust.

All trading platforms provide hundreds of indicators and the ability to program and customize indicators. This is all good--but only up to a point. Traders have a tendency to become “indicator happy.” The irony is that the more indicator happy a trader becomes, the more inflexible the model will be. My general rule with trading is to keep things simple when building trading models. Simplicity leads to robust models and profits.

EMINI INDEX FUTURES TRADES THIS WEEK

One Y Sell for -5.50.

The drawdown and drawout continues. Nonetheless, it's part of the game of being a systematic trader.

Friday, April 23, 2010

Be Skeptical and Test, Test, Test

Victor Niederhoffer wrote a couple of books on speculation, trading, and markets. One of the points he stressed was that we must observe, count, and always test our trading ideas. This may seem obvious to some, but I really wonder how many traders actually test their own trading strategies or strategies they may have read about.

I have read many books on trading and I am never surprised when an author, who may or may not be a real trader, just states a trading rule, or idea, in their book and never backs it up with data. Here is my advice to all traders. BE SKEPTICAL. NEVER TRUST UNSUPPORTED IDEAS. And DO YOUR OWN TESTING. I do not know how many times I have read something in a book and initially would say to myself, “Wow, this sounds great.” Being a skeptic, I would quickly open an Excel spreadsheet, or my Metastock software, and test the idea. I cannot tell you how many times I was left dumbfounded. I would just look at the picture of the person in the book and say to myself, “Are you kidding me?” “What bull****!”

Do your homework. Test your ideas. Then go for it.

Thursday, April 22, 2010

EMINI TRADING - THREE LESSONS THAT CAN BE LEARNED FROM THE DISPOSITION EFFECT

Two pioneers in the field of behavioral finance, Amos Tversky and Daniel Kahneman, studied the decision making of individuals under uncertainty. One of Tversky and Kahneman’s many conclusions was that investors have an aversion to risk and an inability to realize losses. Hersh Shefrin and Meir Statman used these theories to explain what they called the disposition effect.

What is the disposition effect and what can be learned from it? The disposition effect, quite simply, describes how traders will quickly sell their winners but will hold on to their losers. The disposition effect also helps to explain why individual investors and traders have difficulty succeeding.

The inability to sell losers is cancerous to trading performance. Huge losses that come about from the inability to sell a loser are like digging a deep hole for yourself. The longer you hold a losing trade, the deeper and harder it will be to get out of that hole. The first lesson a trader can gain from the disposition effect is to use Stops. Stops will help make your losses more manageable which, in turn, will give you a chance to make back your losses. I use two types of stops, a Price Stop and a Time Stop. These Stops are my defense against “hole digging.” If the price goes against me, I exit the trade at a pre-determined, hard stop, point. In addition, if the trade has not reached my objective within a certain amount of time, I also will exit the trade. Both of these stops are not mental stops. They are real orders entered into the system. Using Price and Time Stops is the most important lesson that can be learned from the disposition effect.

The second lesson that can be learned from the disposition effect is to leave your ego out of trading. A big ego will contribute to the depth of the hole you are digging. Keep it out of your trading if you really want to succeed. You must come to terms with yourself and understand that it is okay to be wrong on a trade. You must learn this. Trading has a way of making you humble very quickly. The market will usually make you humble the first time you look up from the bottom of that hole you just dug and are viewing the sunlight of being even. Do yourself, and maybe others, a favor, GET RID OF YOUR EGO. It is only then that you stand a chance of succeeding in trading.

The third lesson that traders and investors can gain from understanding the disposition effect is to have patience. Most people have difficulty being patient, but it is, in my opinion, critical to trading success. Although I am a short time frame daytrader, I still am very patient in waiting for my trade setups. I also use patience to allow my trade to reach my price objective. I give my trades time to work out. You will significantly improve your chances of trading successfully if you really understand these three lessons. Smart people learn from the mistakes of others.

Wednesday, April 21, 2010

STOCKS

SHORT

ABC AmerisourceBergen Corp

DUK Duke Energy Corp

Tuesday, April 20, 2010

THE SECRET TO DAYTRADING HAPPINESS

Psychologists have studied what makes people happy. They have found that when it comes to winning and losing money, or positive and negative events, that people prefer to have positive, or winning events, on a constant basis, and negative, or losing events, in “one shot,” rather than spread out.

For example, more happiness is derived from winning $1, one hundred times, then winning $100, one time. Constant winnings matter. Interestingly, it has also been found that the size of our winnings generally does not matter. The frequency of our wins is more important in creating overall happiness. Conversely, people also prefer to have negative events occur in one shot, rather than spreading them out over time. So it is better to lose $100 one time, than to lose $1, one hundred times.

How does this relate to trading? The answer is that these concepts need to be considered BEFORE we build trading models. I find the psychologists’ results interesting because some traders do not think about what makes them happy before they build their trading models. We know that the frequency of our wins and losses will affect our happiness. Nonetheless, daytraders research and calculate their historical statistics, and if the model is profitable, they go ahead and trade it without considering how frequently the profits occur. Some daytraders use models that lose a majority of the time and rely upon large, and less frequent wins. Others build models that win more frequently and lose less frequently.

The trading models I use fit my personality. I, for one, do not like to lose frequently, thus my models’ historical statistics show a larger percentage of wins to losses. The drawback to this is that my average losses are larger than my average wins, but my losses occur less frequently. These results fit well with the findings of psychologists. My big losers tend to occur in one shot, and less frequently, than my winning trades. Losing trades is part of the game of trading, but how we lose, and the frequency of our losses is even more important to our general happiness.

In conclusion, my suggestion is that it is very important to know what makes you happy before building your trading models. Daytrading is very difficult and traders would do better if they consider what psychologists have understood about happiness. The frequency of positive and negative events matter in our lives, and in our level of happiness in regards to trading.

Saturday, April 17, 2010

EMINI TRADING - THE #3 REASON TRADERS FAIL

The third biggest reason why traders fail is that they do not know themselves. One could even argue that this is the first, and best, reason why traders fail. Nonetheless, this is not surprising. Of course a person will fail at something if they do not know themselves or their limitations, and this most certainly includes trading. Not knowing who you are, or what you are, or what you are good at or not, or how you act, or may act, in certain situations, etc. are all completely intertwined in trading. The ancient Greeks stressed the philosophy of "Gnosin Se Auton." Knowledge of yourself. You better have it, or you better get it, if you want to have any chance of becoming a successful trader.

Looking back over the trading years I have come to realize, and appreciate even more, how difficult trading really is. Not only that, but how invaluable it was in teaching and revealing to me who and what I really am and what my qualities are. I am not sure how many professions allow you to hold a mirror up to yourself and show you quite clearly, and sometimes painfully, who and what you are. Trading most certainly did this for me and it will help you too in getting to know yourself. Enjoy the process!

All traders try to create a trading model, plan, or strategy that works. They start putting indicators on their charts, tweaking them, combining them, etc. to come up with something. I have done this too. As time went by, however, I realized that what I really needed to do was to "take a step back." I realized that in order for me to be "successful" I would need good answers to this question, "Do my models fit my personality?" Trading successfully is not only about making money. It is also about living a higher quality of life. If, for example, you need an adrenaline rush, like hummingbird needs nectar, then you better create a trading model that trades frequently, and gives you ample doses. What is more important, however, is to know that you are like a hummingbird, up front, before you build your trading model(s). I, for one, am no hummingbird. I like to enjoy my life and the time I have on this earth. I do not like to be glued to a computer each and every day waiting for some lines to cross, or whatever. That is why I built my models to fit my personality. They work for me and maybe they can work for you too.

EMINI FUTURES TRADES THIS WEEK

One X trade, gain of .25.

Friday, April 16, 2010

EMINI TRADING - THE #2 REASON TRADERS FAIL

The second biggest reason why traders fail is because they do not have an edge in the market they are trading. The definition of edge is that the odds are in your favor. Any experienced gambler will tell you that understanding the odds before placing a bet is crucial. If you have ever watched a poker game or been in one, then you can surely appreciate what it means to feel that you have an edge. This usually leads to a poker player going for it, or pushing all those colorful chips into the pot and stating,"All in." It is no different with trading.

No one can predict the future. The best a trader can do is understand the probability of a situation occurring. Quantum mechanics also states the same thing. Having a better feel for the underlying probability of a certain situation occurring is crucial to a traders’ success. This is called positive expectancy. Positive expectancy comes from solid, historical research. We never know what will happen on any given trade, but we can trade with an edge because we know there is positive expectancy in the system or model(s) that we are trading. This also gives a trader confidence to play an uncertain game with the odds in their favor. So, how does a trader get an edge and succeed in trading?

The answer to this goes back to some plain, old fashioned, values and ideas your parents should have taught you, or that you have learned along the way. If not, please allow me to teach you these ideas right now. They come in no particular order but they include: hard work, patience, discipline, optimism, and persistence. With these a trader will not only succeed in the game of trading, but he or she will also succeed in the game of life. These qualities are necessary because they will be required of you as you do your homework and research and study the market you are interested in. In my case, I specialize in emini trading on the SP500 index. Do not fool yourself and think this will come easily. It will probably take years for you to develop an edge. Maybe we can help you get it a little faster...

Thursday, April 15, 2010

EMINI TRADING - #1 REASON WHY TRADERS FAIL

One of the biggest problems daytraders face is how to manage their money. Most daytraders manage their stock or emini futures positions by the seat of their pants, that is, they do not have a strategy or a plan. This usually increases their risk and can lead to losses.

So what is a trader to do? The answer is simple. YOU MUST HAVE A SOLID AND DISCIPLINED MONEY MANAGEMENT STRATEGY to trade successfully. Many trading system vendors offer buy and sell signals, but the problem is that they do not offer a money management system. They freely sell their signals, but they will not tell a trader how many contracts or the number of shares to put on for the next trade. How can a trader succeed with a service like that? They may put on a large trade just as they get a bad signal. Then, in order to make back their money, they increase their position size on the next trade and get burned again on the next signal. This is no way to daytrade and is surely one of the major reasons why traders fail.

No matter how good a system or a model is, traders inevitably fail because of the poor money management they apply to their trades. Here is an example. If you should get a streak of winners, does your money management strategy allow you to maximize your profits? How about the reverse idea…when you get a streak of losers, does your money management plan become more defensive and conservative, to minimize your losses? If you are not maximizing profits and minimizing losses you will fail. It’s as simple as that. It is easy to trade buy and sell signals, but the difficult part is what position size you should have on for the next trade.

Disciplined money management is essential for successful daytrading. I cannot stress this enough. All successful traders have a money management plan and you should too. We help traders take the guesswork out of position sizing. We offer a complete solution to trading. By using our disciplined money management program we will help you maximize your profits when things are going well and minimize your losses when things do not go as well.

Tuesday, April 13, 2010

CAGR AND RISK OF STOCKS VS BONDS

I recently came across this site, which allows the user to calculate long run returns and risk in the SP500. As I calculated the data I also decided to to run my own calculations on the 10 Year Treasury to get an idea of comparable risks and returns. I was quite surprised by what I found.

If we look at the time period from Jan 1, 1871 to Dec.31, 2009, we see that the SP500 had a compound annual growth rate (CAGR) of 8.89% and a risk of 18.94%. From Jan.1, 1962 to Dec. 31, 2009, the CAGR for the SP500 was 9.32% with risk of 17.56%.

Now for the Treasuries; from Jan. 1, 1962 to Dec. 31, 2009, the 10 yr note returned 6.47% with risk of 2.55%. Data for treasuries was not available for the 1871 to 2009 period.

This means that if an investor put his or her cash into stocks rather than bonds, they would have gained 2.85% more on their stocks relative to bonds, from 1962 to 2009. The risk in stocks, however, was approximately 7 times more than bonds. Mandelbrot and Taleb would surely argue that the risk in stocks was probably even greater than these calculations suggest. Here is the point, was the 2-3% extra return in stocks worth it when we look at how much more risk was taken in order to achieve that extra return?

One last point, if we look at the “real,” inflation adjusted returns, the returns were even smaller, but the question remains. What do you think?

Monday, April 12, 2010

STOCKS

SHORTS

FO Fortune Brands Inc
NKE NIKE Inc B
NYT New York Times Co A
DTV DIRECTV Class A
M Macy's Inc

SYMC Symantec Corp
APH Amphenol Corp A
LXK Lexmark International Inc

DOV Dover Corp
JEC Jacobs Engineering Group Inc
PWR Quanta Services Inc

Sunday, April 11, 2010

Keynes and Hayek

Two famous ecomomists, Hayek and Keynes, had philosophical differences. This video is both ridiculous and on point. Check it out...


KEYNES AND HAYEK


We offer FREE TRIALS to our three, intraday trading models.

http://www.TRADINGXYZ.com

Saturday, April 10, 2010

TRADES

One X trade this week for a -.75 loss.

Friday, April 9, 2010

H STATISTIC, AKA HURST STATISTIC

Benoit Mandelbrot discussed Harold Edwin Hurst in his book The(Mis)behavior of Markets. Hurst had analyzed flooding patterns of the Nile in Egypt. Hurst's work was eventually modified by Mandelbrot and led to the creation of the H statistic. The H statistic is used to test if long term-dependence is present in a series of data. In general, if the H value is greater than .50, then prices are showing persistence, or what traders call "trending behavior." If the H value is less than .5, then prices are anti-persistent, or "non-trending behavior." I will use this page to publish calculations of H. I will try to post on Fridays. Let's see if there is any value to it...

Thursday, April 8, 2010

VIX AND MOVE INDICES



Volatility in both the stock and bond markets has declined since 2008. This is “normal” and expected given that volatility tends to be mean reverting and cyclical. The overall decline in volatility has also led to investor complacency in both markets. This can best be seen by the lower levels of the VIX index in stocks and lower levels in the MOVE index for bonds (the attached charts are from Yahoo and The Macro Trader.com).

The main question, for traders and investors, is have we now entered a period where volatility stays lower for an extended period of time, such as 2004-2006, or are both markets sending a signal that the probability of something “big” occurring has increased. A very thought provoking analysis of the MOVE index, done by The Macro Trader.com, states that significant economic events occur more frequently than expected, which is classic Mandelbrot analysis (see some of my earlier posts), and that the MOVE index is at levels where historically significant events have occurred in the past, such as the LTCM debacle, the .COM tech crash, and others.

As intraday traders we look at the market from shorter term time perspectives, nonetheless, this does not mean we should ignore longer-term time frame analysis. The bigger picture analysis seems to suggest that we are entering, or have entered, a period where either: 1.) things are just “calming” down from a unique, crazy, and tumultuous economic period, and its business as usual, or 2.) this is the calm before the storm, there is a higher probability of a shock on the horizon, and being defensive and cautious is preferable. What do you think?

Wednesday, April 7, 2010

GOOGLE SPREADSHEETS; SPDR's & SP500



On the top this site you will see a "STUFF" tab. This is something I am developing and will continue to update and improve. Let me know your suggestions as I go along.

I have developed two Google spreadsheets for the top 10 SP500 constituents, such as Exxon, Microsoft, etc., and for SPDR's. Let me know what you think. Hopefully we can get some indicators or perspective on the market from these. Be sure to check back frequently because they will continue to improve as I get new ideas and Google provides more functionality.

Copper as an indicator


Some years ago a trading friend of mine mentioned that an old wise trader had told him to watch the copper market. He felt that the copper market would be helpful for trading bonds. Here is a chart of the copper market from FINVIZ. The copper market can be viewed as a leading indicator of the economy. By the looks of the copper chart things look pretty good going forward.

Tuesday, April 6, 2010

EMINI FUTURES TRADING




Trading the Emini sp500 futures contract without a strategy or plan is a recipe for disaster. DON'T BE LAZY. Do your homework, research your ideas, and be disciplined and persistent. Then you might have a chance. If success is still eluding you, then we invite you to take a look at what we have to offer.

Monday, April 5, 2010

EMINI TRADING VIDEO

WHAT WE ARE AND DO IN ONE MINUTE...

video

RELATIVE VOLATILITY OF STOCKS & BONDS


This post concerns the volatility in the US Bond Market relative to the US stock market. In particular, why is it that volatility is currently higher in bonds than in stocks? Does this mean anything? To be honest, I am not sure, but I can lay out some possibilities.

First, the “flight to quality” as economic armageddon approached was significant, unique, and had never been seen before. Worldwide money flows initially went into US bonds and dollars, but I still think the level of uncertainty is high regarding credit conditions in the US. Given all the money that was pumped into the system the fear of higher inflation lingers. Others feel that anemic economic conditions will dampen inflation and inflationary expectations. My opinion is that most people do not understand or appreciate the magnitude and reality of what has really happened over the past few years. The bond market is also trying to figure everything out, thus the higher volatility.

Second, very little to nothing has been done. America just borrowed more money, threw it at the problem, and continued as if nothing has happened. America may have trouble financing its problems into the future. The bond market has noticed this and I believe it is another reason for its higher relative volatility.

Third, America needs to get its fiscal house in order. How we are perceived by the rest of the world is reflected in our markets. How we handle our economic problems matters. Markets are affected by many variables, but two of the most significant factors are confidence and perceptions. These are human emotions driven by many things, nonetheless, they can easily change. Lower confidence is a result of higher uncertainty. In my opinion, lower confidence and negative perceptions of the US have also contributed to the higher relative volatility of bonds to stocks.

Sunday, April 4, 2010

TRADING XYZ

Trading xyz is a blog that complements our website. The name and title is not about something abstract. XYZ trading is about system trading three intraday models on the SP500 on the CME Globex network. The XYZ models have been backtested and proven since 1998. The strategies are fully automated. We invite our readers to check out our historical performance and to also look at our money management program. We offer a complete solution to trading.

Institutional trading firms, CTA's, and hedge funds are also welcome. Our systems can be programmed against yours to fully automate all the strategies.

Victor's Junto

Last Thursday night I had the pleasure of attending Victor Niederhoffer's Junto. Although the debate and conversation drifted, and was sometimes hard to follow, I was having a good time. I listened and absorbed intellectual ideas regarding morality, evolution, psychology, etc. It was also great to meet some of the various people and characters after the lecture. I also briefly met Victor and think I may try it again some time in the future.

Saturday, April 3, 2010

MARCH 2010 MONTHLY POINT SUMMARY


The net trading results for the month of March was 2.75 points. Attached please see our historical and current trading results. This monthly point summary can always be viewed on our website. The three models are currently in a drawdown and drawout phase.

Thursday, April 1, 2010

ENTROPY ANALYSIS OF US BONDS AND STOCKS

In general, since WWII, whenever the feeling of uncertainty or fear arises, money flows into US dollars, US bonds, and gold. As uncertainty decreases, money flows out of these assets and into other assets, such as stocks. A look back at the two charts I created yesterday shows how the level of volatility in both the US stock market and the US bond market went up and came down over the last few years. How can we analyze this in terms of entropy and dissipative systems?

In terms of entropy, the entropy of each individual market participant increased as the news and reality of the economic collapse spread. This resulted in a higher individual level of entropy, and consequently, a higher level of entropy for all market participants viewed as a group. For purposes of this analysis, and in terms of open and dissipative systems, each market, and all market participants together as a group, can be considered as three open and dissipative systems all interacting with one another.

Mr. Prigogine suggested that open and dissipative systems import matter, mass, energy, or information into their systems in order to reduce the increased entropy within the system. These systems then process whatever it is that was imported and export entropy into their surroundings. Entropy that is exported is also called negentropy. It is not a big step to state that after individuals imported information and processed it, they exported entropy back into stock and bond prices. This higher level of entropy in the markets was reflected in the higher standard deviation of prices. So how do the markets reduce higher levels of entropy? I would argue that both markets used money to reduce their heightened levels of entropy. Once the money was “churned” and the process played itself out, the markets exported negentropy to some other system. The exporting of entropy by the markets is reflected by the lower calculations of volatility.

Obviously this is a simplified example, but it may help one appreciate the enormous complexity of many open and dissipative systems working out their entropic differences.