MR. NIEDERHOFFER AND MR. TALEB - TWO OPPOSITE STYLES OF TRADING

Mr. Victor Niederhoffer and Mr. Nassim Nicholas Taleb are two traders whom I admire for a variety of reasons. This article is a great story and synopsis of how different and opposite they both are in their respective trading strategies.

I have read that traders who write options generally tend to make more consistent money than those who buy options; but when an unexpected event comes along they blow it all away. Mr. Niederhoffer writes them, and Mr. Taleb buys them. Mr. Niederhoffer makes money up until the unexpected event. Mr. Taleb loses money until the rare, unexpected, black swan event occurs.

Mr. George Soros Speech - Germany is the Key

Here is the text of a recent speech given by Mr. Soros...no one knows what will happen in the future, and although I usually am optimistic, I do worry that this overleveraged world of our has to structurally reform itself. I think I hear the sound of a piper in the distance...

High Frequency Trading Creates an Uneven Playing Field

Here is a link to a video about high frequency trading. High frequency trading (HFT) has become an issue lately. According to the Tabb Group, HFT accounts for 61% of the volume in U.S. equity markets. I am not against it or for it. But I believe the SEC has the obligation to step in and make the playing field level for all traders. Having the opportunity to see bid and ask orders split seconds ahead of others, which is called flash trading, is similar to having inside information. Under exchange rules, stock orders are supposed to be routed to the exchange that offers the best price. This means that exchanges can lose the fee that they charge if the order is executed on a different exchange. By flashing that order for a few milliseconds, they can try to keep the order and gain the fees. This is not a level playing field for investors and traders.

Firms that use high frequency trading claim they are providing liquidity to the market. This is simply not true. High frequency trading may be providing liquidity, but not when the markets need it. Markets need liquidity when an event or crises occurs. High frequency programs are stopped if data feeds and prices are becoming abnormal. This is what happened on May 6, 2010. It reminds me of the stories of the specialists on the Street who simply stopped picking up their phones during the crash of 1987.

The firms who are using HFT are probably doing well with it and will continue to fight anyone who threatens to change the rules. In my opinion, however, HFT needs to be better regulated and the rules need to be changed to make the playing field more level for all traders.

EMINI TRADING PERFORMANCE

No trades last week. The trading models are still in a drawdown phase.

SOROS VIDEO - ACT TWO

Bloomberg posted a video of a speech given by George Soros. It is worth watching. Soros believes that we are now in Act Two of the financial crisis. The sovereign debt problem has not gone away, has not been dealt with, and will come back to haunt us. It makes me shiver thinking about the amount of leverage in this world. America is swimming in debt and has pushed its problems under the rug by borrowing even more in order to solve its problems. The European sovereign debt problem has also not been adequately addressed. Although I have not been involved with credit markets in my life, I still wonder why anyone would buy the debt of countries that will not be able to pay back their debts.

That being said, here's the link to the video...

SP500 EMINI TRADING PERFORMANCE

There were two trades this week...

Y sell = 3.25

X buy = -7.0

Creativity and Uncertainty, Synchronicities and Trading

We should pay attention to synchronicities that occur in our lives. They may be happening for reasons that we may not currently understand. A synchronicity is what we sometimes call a coincidence, or when two chance events occur at the same time.

Last week I was flipping through the TV channels and caught a few moments of an interview with Mr. Deepak Chopra. All I briefly heard was that creativity tends to occur within uncertainty. I wish I had seen the whole broadcast. Nonetheless, this fragment of information was something I thought about all through the week. As traders, we deal with uncertainty in a variety of ways, so naturally, uncertainty linked with creativity peaked my interest.

Last night, I was looking for a book to read, and began to look at some old books on our shelves. I came across the book, “The Act of Creation,” by Mr. Arthur Koestler. I do not know if you believe that the universe sends messages to us, but I sometimes think it does. This book is about creation and creativity, and how all creative activities have the same basic pattern. I have just begun to read it and I will post my thoughts as I go along over the next period of time.

SP500 Emini Trades This Week

No trades this week.

Pictures of Traders on Down Days

I always enjoy the silly pictures that newspapers tend to print of traders on the floor whenever the market has had a huge down day. This has always been the case since I started to trade as teenager. The market has a huge down move, the next morning there is a picture of a trader, or traders, all looking at horror at the screens, or praying, or holding their hands over their mouths in astonishment. I find it humorous.

May gave us some nice pictures...

May SP500 Emini Futures Trading Performance

May was a wild month in the SP500 futures market. Although we continue to be in a drawdown, we posted a positive 3.25 points for the month. In addition, the number of trades taken during the first five months of 2010 is below average.

Although this drawdown has been long, it is still similar to any historical drawdown observed historically. It may last a while longer, or things could turn better in the near future. Nonetheless, as systematic traders, we continue to trade our models as signals occur. Trading always involves uncertainty about the future, but if you think about it, so does life.

Derek Jeter and Successful Trading

Derek Jeter, of the New York Yankees, does a commercial for Ford. In it he says that you need an edge in order to get ahead in life. Well, I don’t think I need a Ford Edge, but it does bring to mind that I need a trading edge. Without a trading edge one can never succeed.

An edge is not only the win-loss percentage of a system, but its expectation. Successful trading requires positive expectancy. That is where the edge lies--and how you can get ahead in life.

World in turmoil and the Flight to "Quality"

With uncertainty rising, and confidence falling around the world, we see world markets in currencies, stocks, gold, and bonds in chaos. Increased tensions in Korea, financial reform bills pending in Congress, environmental disaster in the Gulf, and the European debt situation turning worse by the minute, has led to higher volatility and increased uncertainty in all types of markets.

When uncertainty rises this usually leads to the "flight to quality" syndrome seen in 10 year U.S, notes. The rally in the notes has been impressive, but it is all a question of perceptions and confidence. The U.S. is still viewed positively in the markets. This is ironic, given that the U.S. financial position is no better than many bass-ackwards countries in Europe. Investors still perceive U.S. government debt as "safe." I have my doubts. My concern is what happens when and if world perceptions and confidence change about the U.S. financial position and its securities.

Nouriel Roubini's New Book

Mr. Nouriel Roubini is a professor and economist from my grad school alma mater, Stern-NYU, who is fondly known as Dr. Doom. You probably have heard of him by now, given that he is regularly quoted and interviewed by all the major news organizations.

Mr. Roubini has just published a new book with Mr. Stephen Mihm, “Crisis Economics – A Crash Course in the Future of Finance.” This is what economists do when they become famous; they hurry up and publish a book, while their popularity stock is rising.

I have not yet read the book, but I have read a quote from it that I would like to share with you regarding the financial crisis,

“the crisis was less a function of subprime mortgages than of a subprime financial system. Thanks to everything from warped compensation structures to corrupt ratings agencies, the global financial system rotted from the inside out. The financial crisis merely ripped the sleek and shiny skin off what had become, over the years, a gangrenous mess.”

The only thing I would like to add is that it still is still a mess--and even more rotten than when this was written…

Emini Trades

No trades this week.

SP500 Emini Trading - Why Understanding Time Can Make You Money Daytrading

As traders we analyze price action, but we tend to forget how important time is to our overall trading success. This article will discuss some perspectives of time which can be used to trade successfully.

The saying “patience is a virtue” is very true in regards to trading. Time is closely related to patience, and patience is essential to successful trading. Patience is required for entries, exits, length of time in a trade, and for allowing trading opportunities to unfold.

The time frame a trader chooses is also important. This will reflect the personality of the trader. Traders who need a lot of action will usually trade lower time frames. Those who trade less, usually move up the time scale. In general, the lower the time frame, the more trading; the higher the time frame, the less trading.

Traders can use multiple time frames to set-up a trade. Trade setups that involve two, or even three, time frames can be useful. I prefer two time frames because I think it keeps things simpler and a little less complicated. Better trading decisions can be made by analyzing the market with multiple time frame perspectives.

Time frames also contain a mix of information and noise. The lower the time frame, the more noise that exists in the data. Trying to separate the noise from the actual information, or the signals that the market is sending, is another key to trading successfully. My own opinion is that it is easier to analyze the market on higher time frames, because there is less noise in market prices. Once I have a directional understanding from a higher time frame perspective, I use a lower time frame for my actual entries and exits.

Time is also useful to consider as a stop. I use both a price and a time stop. Most traders use a price stop, but I wonder how many actually use a time stop? If a trade does not work out within a certain amount of time, I get out of it--no questions asked. Why? Because as traders we need to minimize risks. When we are in a trade we are exposed to market risk. The less time we spend in the trade, the less risk we are taking.

In addition, winning trades generally work out right away and within a certain period of time. In general, the longer a trade takes to reach its objective, the less the chance of a winner. This is my general opinion; others may disagree. My suggestion to you is to analyze your winning and losing trades. Time stamp your entries and exits and go back and look at how much time you were in your winning trades compared to the amount of time in the losers? You may be surprised by what you discover.

Time and hope are also closely related. Many traders when they are in a losing trade begin to “hope.” By analyzing your trading statistics you may notice how much hope you had as your loss was growing. Get rid of the ego and hope, and get out of the trade if it is not working out within a certain amount of time. It is as simple as that if you want to have a chance at trading successfully.

The last concept I would like to discuss is the frequency of trades within negative time periods. All system traders rely on their trading strategies and trading models. All system traders also have drawdown periods. Traders who trade frequently, though, can incur many losses in a very short amount of time; especially if they are trading during market conditions that are unfavorable to their style or strategy of trading.

I too have drawdowns. These can last a long time and are painful. But I also avoid many losses that can occur when the market is not favoring my style of trading by trading infrequently and letting time pass. Markets are ever-changing and have cyclical qualities. As I allow time to pass, I know the market’s condition will change, and once again become more favorable to my bottom line.

I hope this article helped you better understand how time is closely related to trading successfully and if you have any questions please feel free to contact me.

HUBRIS AND GOLDMAN SACHS

The ancient Greeks used the term hubris to describe the quality or aspect of someone who challenged the gods and their laws. Hubris would lead to the downfall of the person or persons and it usually occurred in Greek tragic plays.

Well, nowadays, a modern tragedy is taking place. I am not sure which side to favor, or which argument is more or less correct, but I do know that quotes like these…

“Doing God’s work.”

Mr. Lloyd Blankfein, of Goldman Sachs

“Well, what if we created a thing, which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?"

Mr. Fabrice Tourre, of Goldman Sachs


…are the stuff of hubris. Is the downfall of these gentlemen next?

BOND RATINGS - A BROKEN AND CORRUPT SYSTEM

I cannot understand the rating agency game. Standard and Poor’s and Moody’s executives and analysts need to be questioned, just as much as the people in the investment banks. Although these firms supposedly provide independent opinions, they are anything but independent. These are dependent opinions. The rating agencies depend on the income that the investment banks provide to them for their blessed ratings. The term “junk” not only refer to bonds, but to the opinions that these firms provide.

For example, in the past few weeks I have read that more than 93% of the sub-prime bonds rated AAA in 2006 are now junk. More than 75% of the securities in the Goldman Abacus fiasco were also given AAA ratings. Greek bonds, and bonds of other European countries, are downgraded when the crisis occurs-- not before the problems arise. What is truly scary is that these are just a few examples. Imagine the bigger picture...

These agencies are supposed to provide independent opinions on the securities they evaluate. The problem is that they are paid by the parties who create these securities. This creates a conflict of interest. Solving this conflict of interest problem would help create a better system. The problem, however, is that there are no good solutions at the present time. Meanwhile, investors in securities rated by these agencies should heed the rule, CAVEAT EMPTOR.

EMINI FUTURES TRADES THIS WEEK

One X trade sell this week for 3.25.

BASTIAT AND THE BIG PICTURE

Frederic Bastiat believed in looking at the big picture. Bastiat was a French economist in the middle 1800’s who promoted the idea that the role of government is to defend life, liberty, and property. He is also considered to be one of the forerunners to the Austrian school of thought. All decision-makers, economists, and government policy makers would be well-served to consider some of his ideas right now, or perhaps it is already too late.

I have become more and more skeptical and much more cynical in regards to recent economic decisions. The policies that are being adopted, and the decisions that have been made here and in Europe, will affect us forever. Have policy makers really considered the big picture? Are they looking at the long run effects of their decisions? And whom they are affecting and in what way?

Bastiat also believed that there are the seen and unseen effects of decisions;

"In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause - it is seen. The others unfold in succession - they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil."

-That Which is Seen, and That Which is Not Seen, the Introduction

This quote makes me shiver. What do you think?

The VIX and MOVE ORACLE

In the beginning of April I discussed the VIX and MOVE indices and the complacency that was evident in both the US stock and bond markets. Read my earlier post. Since then, the Greek debt crisis unfolded into a confidence crisis in other Eurozone countries, and led to the May 6 crash of the US stock market. The situation has been temporarily calmed with the announcement to throw more money at the situation. The Europeans have decided to do what the Americans have already done. Handling debt problems by borrowing more is not only ironic, but moronic. In my opinion the piper is waiting to get paid.