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.

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.

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...

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.

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?

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

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

TRADES

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

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...

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?

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.

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.

EMINI TRADING VIDEO

WHAT WE ARE AND DO IN ONE MINUTE...

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.

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.

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.

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.