I have recently finished reading Mr. Brian Greene’s book, The Elegant Universe. It is a fascinating book about string theory. One of the concepts Mr. Greene discusses is how physicists use perturbation theory to advance their knowledge and theoretical ideas.
Mr. Greene says that the mathematical framework of string theory is so complicated that physicists have to use approximate solutions and calculations, while initially ignoring some details. Later, these solutions and calculations are further refined as more details and knowledge are systematically included. The perturbative process can also be used to build trading models.
I had no idea of perturbation theory before reading this book, but I now feel it describes the process of how I created trading models. The stock market is also complicated and difficult to understand (probably more so then string theory). Initially, I began to systematically organize some variables, ideas, and concepts, while leaving others out. I began to create some general ideas, theories, and approximate solutions to trading. Later, with further testing, experimentation, and pain (the great teacher), I was able to increase my knowledge of how the market works, and I began to systematically include more details and concepts. This led to further refined ideas and theories which eventually became my trading models.
But here is some advice and a word of warning to traders out there—the key is to use a perturbative approach up to a point. The irony is that the more variables added to “refine” and “improve” a model, the more likely it is that the model will breakdown.
Showing posts with label trading systems. Show all posts
Showing posts with label trading systems. Show all posts
Friday, March 30, 2012
Monday, May 10, 2010
S&P 500 EMINI TRADING - MAY 6, 2010 - 4 HISTORICAL MINUTES AND 1 HISTORICAL HOUR
This past week has been a wild one. Taleb's Black Swan event on Thursday, May 6, 2010 was fascinating for students of market history. What a fiasco! I was looking at a one minute and hourly chart of the S&P 500 emini market. On a minute basis, the 2:42 pm est. bar opened at 1114. In the next four minutes it dropped 58 points, or -5.21%. On an hourly basis, the 2;00 pm est bar opened at 1142.25 and reached the low of 1056 for an 86.25 point loss, or -7.55%. Put those moves in the record books.
Now everyone is trying to figure out what occurred. There are reports of fat fingers, blaming of high frequency trading strategies, electronic trading glitches, fault with the exchanges, and strange individual stock behavior. Let me also point out that the blue line you see on the charts was the S&P 500 Cash opening price for the year, 1116.56.
Sunday, May 9, 2010
FREE TRIAL - EMINI TRADING - TRADING STRATEGIES - AUTOMATED DAY TRADING - ONLINE STOCK FUTURES
Free trials to our emini daytrading systems will help you understand how we do business before investing in US and our programs. We are very different from other online trading firms and we would like the opportunity to show you why.
First, we offer automated buy and sell signals in the SP500 emini market (ES contract on the CME) with three historically backtested and proven intraday trading models. The historical data begins in 1998. Each trading day that passes adds to our historical study.
Our models are highly accurate, with very high win rates, and they generate positive expectancy.
We also take the guesswork out of position sizing for the next trade by providing you with a disciplined money management system. Our money management program will optimize the number of contracts you should be trading on the next trade according to the risk level you have selected. In general, the program will help you maximize profits, minimize losses, and manage drawdowns.
Our general philosophy is to minimize all our risks as best as we can. We put a big emphasis on controlling risk. Some of the ways we do this are by using a money management system, using price and time stops and disciplined entries and exits, trading infrequently, and not holding overnight positions.
For institutional trading firms we also offer the ability to program into our systems through our web service. In addition, we can black box our trading systems for your futures trading customers.
Our trading methodology is not a get rich quick scheme. We are very patient daytraders that follow a disciplined and quantitative trading system. We trade very infrequently, approximately 35-45 times a year.
We also realize there is more to life than trading. We have purposely designed our systems with living a higher quality of life. Some of the ways that we achieve a higher a quality of life are by:
1. Not trading frequently,
2. Not trading in August and December,
3. Knowing if we have the possibility of trades from the day before. If there is nothing for tomorrow than the day is yours.
4. When we do trade it is not for the whole day. A majority of our trading takes place in the morning and is completed by midday.
We invite you to a FREE TRIAL. You will get access to all our programs and services, in addition to receiving five real-time trading signals. You will also have access to our brokerage confirmations which back up everything we say. We invite you to take a test drive today. http://www.TRADINGXYZ.com
First, we offer automated buy and sell signals in the SP500 emini market (ES contract on the CME) with three historically backtested and proven intraday trading models. The historical data begins in 1998. Each trading day that passes adds to our historical study.
Our models are highly accurate, with very high win rates, and they generate positive expectancy.
We also take the guesswork out of position sizing for the next trade by providing you with a disciplined money management system. Our money management program will optimize the number of contracts you should be trading on the next trade according to the risk level you have selected. In general, the program will help you maximize profits, minimize losses, and manage drawdowns.
Our general philosophy is to minimize all our risks as best as we can. We put a big emphasis on controlling risk. Some of the ways we do this are by using a money management system, using price and time stops and disciplined entries and exits, trading infrequently, and not holding overnight positions.
For institutional trading firms we also offer the ability to program into our systems through our web service. In addition, we can black box our trading systems for your futures trading customers.
Our trading methodology is not a get rich quick scheme. We are very patient daytraders that follow a disciplined and quantitative trading system. We trade very infrequently, approximately 35-45 times a year.
We also realize there is more to life than trading. We have purposely designed our systems with living a higher quality of life. Some of the ways that we achieve a higher a quality of life are by:
1. Not trading frequently,
2. Not trading in August and December,
3. Knowing if we have the possibility of trades from the day before. If there is nothing for tomorrow than the day is yours.
4. When we do trade it is not for the whole day. A majority of our trading takes place in the morning and is completed by midday.
We invite you to a FREE TRIAL. You will get access to all our programs and services, in addition to receiving five real-time trading signals. You will also have access to our brokerage confirmations which back up everything we say. We invite you to take a test drive today. http://www.TRADINGXYZ.com
Thursday, May 6, 2010
FREE TRIALS - FUTURES TRADING SYSTEMS - EMINI TRADING SYSTEMS
Take a test drive of our systems before investing in US...
Wednesday, May 5, 2010
Tuesday, May 4, 2010
14 ways to reduce daytrading stress
Do you stress too much when you day trade? Here are 14 ways you can relieve and lower the stress that occurs while day trading. They are in no particular order of importance.
1. Reduce the number of trades you make in a day. Are you overtrading? Studies have shown that more trading does not necessarily lead to more profits. It usually leads to more risk and losses. More risk is equal to more stress.
2. Trade on a higher time frame. There is noise in market prices. The lower the time frame, the more noise that exists. Noise to me is similar to uncertainty. More uncertainty leads to more stress. Perhaps you should consider trading on a higher time frame where there is less noise in prices; less noise, less uncertainty, less stress.
3. Use stop loss orders and limit orders. One mistake traders make is that they do not minimize their losses. By using stop loss orders and limit orders you will reduce the stress that comes from taking large losses and making real-time trading decisions.
4. Have predetermined exit points, and ACT on them. Not only should a trader know what the profit objective is BEFORE the trade is placed, they need to ACT on it when prices get there.
5. Have predetermined entry points, and ACT on them. Not only should a trader know what the entry price is BEFORE the trade is placed, they need to ACT on it when prices get there.
6. Are you a discretionary trader or a systems trader? My opinion is that discretionary traders have to handle more stress in trading markets. This is because they have to make a decision. Making decisions in real-time trading creates a certain amount of stress. Systems traders, however, usually do not have to make a decision about entry or exit. It has already been programmed into the system.
7. Your position size on the next trade will also create stress. How do you make the decision on what size to trade? Understanding volatility, and having a way to quantify it, will allow you to adjust position sizes accordingly. For example, if the market’s volatility has increased, it may be reasonable to decrease position sizes, and vice versa.
8. Do not trade news releases. I trade the SP500 emini market. This market is considered more volatile relative to other markets. Nonetheless, when news items are released, the market will react. You may think the market will react in a certain way, and you may be right, but the problem is that the market can overreact to news. This can lead to losses because your stops will be hit; just before you are right. It is very difficult and stressful to trade news.
9. How many markets do you trade? Perhaps you are trading too many markets and creating unnecessary stress. Sometimes it is better to specialize than generalize. Reducing the number of markets you are trading will certainly reduce the amount of stress you are experiencing. Perhaps an analysis of your trades will reveal that you are more profitable in one market than another. Use the information to reduce your stress.
10. Similar to how many markets you trade is how many securities do you trade? Are you watching too many stocks? Do you have too many positions on at once? Reconsider these ideas.
11. Do you have a disciplined money management plan or money management system that you are using? If not, how are you determining position sizes? Perhaps using a disciplined money management system will decrease the stress that comes from position size uncertainty.
12. Have you done your homework? Are you trading a proven and historically backtested system? If so, then it is easier to trade the probabilities, and easier to handle losses when they occur.
13. Eat well, sleep well, and exercise. Stress comes from a variety of sources and can be reduced by eating well, sleeping well, and exercising. Perhaps meditating can be helpful.
14. Take a deep look at yourself and realize if you have any dependencies or problems. Drugs and alcohol can affect your stress levels. Perhaps you have some internal situations, or areas of your life that need attention. These need to be worked out. Seek help if you need it.
Thanks for reading this. I hope it helps. Feel free to contact me.
1. Reduce the number of trades you make in a day. Are you overtrading? Studies have shown that more trading does not necessarily lead to more profits. It usually leads to more risk and losses. More risk is equal to more stress.
2. Trade on a higher time frame. There is noise in market prices. The lower the time frame, the more noise that exists. Noise to me is similar to uncertainty. More uncertainty leads to more stress. Perhaps you should consider trading on a higher time frame where there is less noise in prices; less noise, less uncertainty, less stress.
3. Use stop loss orders and limit orders. One mistake traders make is that they do not minimize their losses. By using stop loss orders and limit orders you will reduce the stress that comes from taking large losses and making real-time trading decisions.
4. Have predetermined exit points, and ACT on them. Not only should a trader know what the profit objective is BEFORE the trade is placed, they need to ACT on it when prices get there.
5. Have predetermined entry points, and ACT on them. Not only should a trader know what the entry price is BEFORE the trade is placed, they need to ACT on it when prices get there.
6. Are you a discretionary trader or a systems trader? My opinion is that discretionary traders have to handle more stress in trading markets. This is because they have to make a decision. Making decisions in real-time trading creates a certain amount of stress. Systems traders, however, usually do not have to make a decision about entry or exit. It has already been programmed into the system.
7. Your position size on the next trade will also create stress. How do you make the decision on what size to trade? Understanding volatility, and having a way to quantify it, will allow you to adjust position sizes accordingly. For example, if the market’s volatility has increased, it may be reasonable to decrease position sizes, and vice versa.
8. Do not trade news releases. I trade the SP500 emini market. This market is considered more volatile relative to other markets. Nonetheless, when news items are released, the market will react. You may think the market will react in a certain way, and you may be right, but the problem is that the market can overreact to news. This can lead to losses because your stops will be hit; just before you are right. It is very difficult and stressful to trade news.
9. How many markets do you trade? Perhaps you are trading too many markets and creating unnecessary stress. Sometimes it is better to specialize than generalize. Reducing the number of markets you are trading will certainly reduce the amount of stress you are experiencing. Perhaps an analysis of your trades will reveal that you are more profitable in one market than another. Use the information to reduce your stress.
10. Similar to how many markets you trade is how many securities do you trade? Are you watching too many stocks? Do you have too many positions on at once? Reconsider these ideas.
11. Do you have a disciplined money management plan or money management system that you are using? If not, how are you determining position sizes? Perhaps using a disciplined money management system will decrease the stress that comes from position size uncertainty.
12. Have you done your homework? Are you trading a proven and historically backtested system? If so, then it is easier to trade the probabilities, and easier to handle losses when they occur.
13. Eat well, sleep well, and exercise. Stress comes from a variety of sources and can be reduced by eating well, sleeping well, and exercising. Perhaps meditating can be helpful.
14. Take a deep look at yourself and realize if you have any dependencies or problems. Drugs and alcohol can affect your stress levels. Perhaps you have some internal situations, or areas of your life that need attention. These need to be worked out. Seek help if you need it.
Thanks for reading this. I hope it helps. Feel free to contact me.
Monday, May 3, 2010
Some tips on building winning trading models and trading systems, part 3
This is the third article in a series on how to build profitable and winning trading models and trading systems. The topics to be discussed include: drawdowns, the number of models used, correlations, hedging, and money management.
Let us begin with the negative and inevitable; drawdowns. In my opinion, no system trader uses models that do not experience drawdowns. All trading models have drawdowns. Nonetheless, what is important to consider is the length and depth of the drawdowns, in relation to the type of trading model they occur in. For example, models that trade very frequently may have a larger number of occurrences of drawdowns, than models that trade less frequently. One should also have a good understanding of how long drawdown periods last. Answering the following questions when building trading models will help you understand the risks that exist. What was the longest drawdown? The shortest drawdown? How deep did it go? How long does it take to come out of a drawdown?
My best advice in regards to understanding drawdowns is to completely analyze each and every drawdown period that has occurred in your system. It is also very important to understand what the underlying conditions of the market were when the drawdowns occurred. In this regard, I like to look at the drawdowns in relation to a mix of direction and volatility of the market. For example, try to understand if your drawdowns occurred in bearish, volatile markets, or bullish, quiet markets, etc.
The next topic I would like to address is the trading system. When we say trading system we may define it as only one trading model, or the system can be comprised of a number of different trading models. What is important with trading systems is to analyze the combined effects of adding more trading models to the overall system. It is not necessarily true that adding another profitable model will make you more money. The risks, drawdowns, gains, and losses have to be analyzed of all the models together. This can become very complicated if one keeps adding more and more models to trade. I believe there is an optimal point and number of models to trade, and once a trader crosses that point, the utility of adding another model can drop off significantly.
Adding more trading models to your system can, however, be of value from the perspective of understanding and minimizing overall risk. This is where correlation and hedging need to be considered. For example, if a trader is using two trading models, it is very important to understand how the returns from those models are correlated. Not only is the general correlation important, but the correlation in relation to the general underlying conditions of the market. For example, how do the correlations of your models’ returns change in relation to a bullish, volatile market or a bearish, less volatile market? Understanding these kinds of risks can be useful.
Adding more models to your trading system can also be useful in terms of hedging your returns. Hedging, in general, is a two edged sword. Hedging can help minimize losses, but it can also reduce gains. Nonetheless, by trading multiple models, one can hedge themselves if one model is performing poorly, assuming the other models are performing well.
I saved the best, and most important topic for last; money management. I figure if the reader does not remember anything I wrote above, then maybe he or she will remember the last point I make. No matter how good your trading models or trading systems are, you will never succeed in trading if you have poor money management. A good trading system must include a disciplined, money management system. Disciplined money management is even more important than the trading models you are using.
Good luck in your endeavors, and if you have any questions please feel free to contact me. Thanks for taking the time to read my article.
Let us begin with the negative and inevitable; drawdowns. In my opinion, no system trader uses models that do not experience drawdowns. All trading models have drawdowns. Nonetheless, what is important to consider is the length and depth of the drawdowns, in relation to the type of trading model they occur in. For example, models that trade very frequently may have a larger number of occurrences of drawdowns, than models that trade less frequently. One should also have a good understanding of how long drawdown periods last. Answering the following questions when building trading models will help you understand the risks that exist. What was the longest drawdown? The shortest drawdown? How deep did it go? How long does it take to come out of a drawdown?
My best advice in regards to understanding drawdowns is to completely analyze each and every drawdown period that has occurred in your system. It is also very important to understand what the underlying conditions of the market were when the drawdowns occurred. In this regard, I like to look at the drawdowns in relation to a mix of direction and volatility of the market. For example, try to understand if your drawdowns occurred in bearish, volatile markets, or bullish, quiet markets, etc.
The next topic I would like to address is the trading system. When we say trading system we may define it as only one trading model, or the system can be comprised of a number of different trading models. What is important with trading systems is to analyze the combined effects of adding more trading models to the overall system. It is not necessarily true that adding another profitable model will make you more money. The risks, drawdowns, gains, and losses have to be analyzed of all the models together. This can become very complicated if one keeps adding more and more models to trade. I believe there is an optimal point and number of models to trade, and once a trader crosses that point, the utility of adding another model can drop off significantly.
Adding more trading models to your system can, however, be of value from the perspective of understanding and minimizing overall risk. This is where correlation and hedging need to be considered. For example, if a trader is using two trading models, it is very important to understand how the returns from those models are correlated. Not only is the general correlation important, but the correlation in relation to the general underlying conditions of the market. For example, how do the correlations of your models’ returns change in relation to a bullish, volatile market or a bearish, less volatile market? Understanding these kinds of risks can be useful.
Adding more models to your trading system can also be useful in terms of hedging your returns. Hedging, in general, is a two edged sword. Hedging can help minimize losses, but it can also reduce gains. Nonetheless, by trading multiple models, one can hedge themselves if one model is performing poorly, assuming the other models are performing well.
I saved the best, and most important topic for last; money management. I figure if the reader does not remember anything I wrote above, then maybe he or she will remember the last point I make. No matter how good your trading models or trading systems are, you will never succeed in trading if you have poor money management. A good trading system must include a disciplined, money management system. Disciplined money management is even more important than the trading models you are using.
Good luck in your endeavors, and if you have any questions please feel free to contact me. Thanks for taking the time to read my article.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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...
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.
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?
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?
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?
Subscribe to:
Posts (Atom)