Price Feed Success

Success! I have implemented a proper notification failure system as well as solved the disconnection issues I have been having with my price feed. It seems my request was a bit malformed, and overall everything is running much snappier now. I am retaining the idea of a backup fail-over feed "just in case" it is needed, and the coding is done on that as well. However, I did shy away from having automatic fail-over, so for now, this will be a manual thing if needed. I hope the days of endless disconnections are gone now.

Some manual trading down the euro

While the breakout bot has been holding a ~1.33 EUR/USD short for almost a month now, I decided to get in on the action with a little manual trading of my own. I was inspired by my visit to Hungary and being on the ground in Europe again, I felt the urge to get in on the action. My trading coincided with the large downtrend starting right after the new year and ending only a few days ago. Oanda's new trailing stop feature came in very handy, and I must admit it was nice to trade from the UTC+1 timezone. The euro is now counter rallying and we'll see if indeed this short play is over and we'll tread water again, or if the 1.2X's are here to stay this year for the euro. Time will tell.

Why exits are more important than entries

Often when looking at trading strategies you find yourself looking for keys to figure out the start of a breakout or trend. Jumping on-board when a trend is starting ensures you have a good ride on the trend for healthy profits. But focusing on the entry point is flawed logic. It is the exit point that determines your profit, and ultimately, your success.

Exits are much harder to get right. Whenever you start something you have to think about your exit strategy. It's so easy in the beginning to get into a trade; think about the end. I find the end of something is far more interesting and telling than the beginning. This applies not only to trading, but life as well. Look over your trades for the last week. When did you exit the trade? Why? Don't get caught up on the P/L, or attempt to optimize the exit based on hindsight. You need to understand the raw thought process behind your exit. Study yourself, watch yourself. You'll find your logic may or may not hold when examined after the situation.

A wise sailor once told me, better to be on land wishing you were sailing, than sailing wishing you were on land. It sounds cliched, I know; but think before you trade. Not about profits, entries, or leverage, rather focus on how you're going to get out of the trade.

For myself, I think it's time I changed my exit strategies to be more focused for success, instead of minimizing damage. I guess one should play to the outcome you wish to see, and not the outcome you're trying to avoid.

Got change for a euro?

Since my last post on speculating the euro's direction, it has taken a huge down and now up swing. As I mentioned I rode the downward trend and have been sitting on the sidelines since watching it regain its strength. I am not sure what the future holds for the euro, which is why I'm sitting on the sidelines. I'm hesitant to go long, but the market action clearly doesn't leave room to short the currency.

The MSM seems to have moved on, and most of the bad news seems priced in paving the way for the bull market to keep on roaring along. It's kind of an eerie midsummer sleep₁. I am not enthusiastic about jumping in to any market at this point. Things can turn on you in a hurry.


1. Don't wake the bear!

Forex Market Participants

Many traders are interested in the big players actions. They assume the big players represent the 'smart' money or that perhaps they are more informed. This may be true in the case of the stock market. However, in the case of forex I don't believe it to be true.

Take the classic example of George Soros and others versus the Bank of England. Or the Tokyo housewives of Japan shorting the yen despite the governments large scale interventions. Clearly the big players paid dearly in these cases. Nevertheless, the commitment of traders report acts as a weekly guide of big players for currencies. Since forex has no central exchange, it's impossible to get any such report directly for the forex market₁. However the futures and options markets for currencies do have a central exchange and therefore a report. It is published weekly by the CFTC and cane be found here:

http://www.cftc.gov/dea/options/deacmelof.htm


1. Even if trading forex on an ECN, we're really only interacting with a subset of the overall market.

Thank you Mr. Trichet

So the past month has seen me busy with manual trading again. Since my last post about shorting the Euro, it has dropped 15 cents or so. I've been along for the ride at several points. This past week we finally saw the first real response from euro bulls to support the currency and keep it in the 1.2x range.

With that, I can say my account grew over 40% during the month of May. This is simply unbelievable, given my low leverage employed (typically 2:1 or 3:1). My post on profit and the mob seems to fit well here. The market participants agreed with my thoughts on the euro and became net sellers for the entire month.

By the way, my thoughts on the euro are less certain moving forward from here. Although I don't believe the sentiment has changed, it may very well have all been priced in at this point. If you'd like to venture a guess, open a position :-)

The stock market: or how I learned to stop fearing different and love free markets

A quick note: I've avoided writing this column since the start of the blog. This topic will likely bring heat and controversy. I welcome it. In many ways my own position on this simply isn't thought out enough. It requires more debate; some point and counterpoint to see it developed fully. In that spirit, I present to you what is really my rough opinion.

"Why 99% of savers should avoid the stock market
Over the past several decades, the stock market has become an enormously popular vehicle for retirement savings.
I rest my case." -- Jacob, Early Retirement Extreme

I've long held the view the stock market = wealth = retirement vehicle was flawed. I suppose I would be lying if I said I don't experience any pleasure in watching the DOW drop -- I have nothing to gain or lose whether it goes up or down. However, seeing it drop does make me smile a little inside. My hope is that it would alert others to the inherent issues the stock market has. It's a national game of scandal, taxation, and false information.

Many people may be flabbergasted at this view. Myself being a capitalist (or at least attempting to become one :-) ) should love the idea of trading. And I do! I often still dream of a romanticized view of the 1800's; myself a successful goods trader, perhaps a ship merchant. In my later years having acquired wealth perhaps I'm an early investor/venture capitalist funding trips to faraway places and new ideas. Back in the present, I still like the idea. That's why I'm a trader and will likely remain so. However, I don't trade stocks. Too many people, too much power, and too much politics involved to be a free market. Heck -- just look at this news article for last week. NYSE and NASDAQ are reversing trades! You heard me right. Who wants to trade in an environment where trustees, politicians, regulators, and governments will reverse trades or otherwise try and manipulate price? It's this type of news that almost doesn't shock me. After all,

stocks always go up
put X% of each paycheck into stocks, retire a millionaire

Or so I'm told. The examples of this manipulation and lies are prevalent everywhere. From the mutual fund ads claiming 8% returns, to the CFA in the corner office, to the president himself₁!

As a capitalist I am drawn to free markets. In a free market, I can pit myself against others; I can analyze; I can use my brain. In my quest to find such a market, I found forex₂. It's size and lack of regulation help prevent against long term manipulation -- even at a government level. Right now the Euroland countries are openly crying foul of the fall the euro has taken. It's to no avail. Whatever they desire for the currency, they cannot change it's price over the long term. Just ask George Soros and the Bank of England₃.

The quote that I began this article with is perhaps the short answer to the question: Why not invest in the stock market? Because everyone else is! It's a classic mob question. The only ones making money as part of the mob are what I've termed the mob leaders. In his expanded post, Jacob goes on to talk about when stocks might be a good idea. My thoughts coincide with his -- when you can actually invest in a company, receive dividends, and buy and sell in a fair market it can be a good idea. Unfortunately, it's my view that todays market represents no such thing. And as such I cannot recommend to anyone to play the stock market game.

1. Barrack Obama gives his infamous advice to buy stocks
http://www.bloomberg.com/apps/news?pid=20601110&sid=aBndLi5PmOvc
2. If there are other free markets, please enlighten me. I do not wish to say I believe forex to be the only free market -- merely the one I participate in
3. Soros famously shorted the pound in the summer of 1992, recording a huge profit when the Bank of England was forced to abandon it's artificial rate.
http://www.investopedia.com/ask/answers/08/george-soros-bank-of-england.asp

Slow ride down the Euro

So recently the Euro has been on a downward slide; perhaps spiral is the better term. Given the relative cost of holding short positions, it's been easier for me to open and close manual trades on the way down. It's unclear how long this new trend will last in EUR/USD, but in alot of ways it seems to be only building steam. The news of Europe being potentially bankrupt is just starting to float onto the forefront of news; something which folks like Mish have been pointing out for some time.

In other news, is the Australian dollar next on the list for falling out of favor with traders? Critics point to a still yet to pop housing bubble and the high interest rates in the wake of the endless deflation states of the United States and Japan. For now it seems, the commodity bubble is in full swing and that bodes well for the Aussie. It's rebounded nicely from the spring lows. I'll keep my eyes on the dollar, but if you curious at staying more in tune with AUD, check out Rookie Forex. He's been trading the currency for sometime and has strong longterm views and outlooks towards it.

Bugs be gone!

The past few days have had me chasing down framework bugs. Since I've decided to expand a little on my brokers functionality in order to suite my trading style, I've introduced a bit of an issue. Normally, when you place a long order for lets say EUR/USD, any pre-existing short orders will be closed, up to the available units. For example, if I place a short order for 1000 units EUR/USD and then subsequently place a long order for 1200 units EUR/USD, my new position will be a long order of 200 units EUR/USD. This means that my short order has been closed by my long order.

Anyways, this obviously causes issues when attempting to trade multiple timeframes, strategies, or hedge in a single account. I've gotten around that by using sub accounts, and seamlessly tying them together. Now then, calculating an average position and price is easy when all the positions are in the same direction. It's not quite so easy when you want an average position of your portfolio of positions! My objective here is too avoid calculating the PL of the portfolio on every iteration. I posted about my work earlier. Getting the average position consists of adding up and dividing out the long and short positions to arrive at a net price, units and directions. The trouble comes in when you then try and utilize this "net" position to calculate your PL to exchange rate ratio. In other words, how much profit do I see with each pip? From there it would seem easy enough to predict your profit based on price movements. This is were the trouble seems to be occurring. Given enough positions this profit calculation seems to no longer work. If the math is right, blame the client! I guess my bug hunting will be focused on the client side now.

Investing like Nassim Taleb

George @ OnlineInvestingAI recently finished Taleb's first book called Fooled by Randomness. I was once again reminded of Taleb's trading strategies, and reminded myself to continue my own contrarian bent. I'm going to assume you know who Nassim Taleb is, and instead are curious how one might invest given this new strategy.

First a quick note. You need to look at all of you liquid assets as investable. Meaning, ideally you will want to calculate the percentages below against your total net worth -- not just simply money you can afford to lose.

The basic idea is to take 10%-20% of funds and buy out of the money options for pennies, and reap big when crazy events happen. Since you don't know when (and no one does) "Black Swans" will happen, you will slowly bleed money to the sellers of these options. The other 80% of your money place into the safest investments you can think of. Don't be so naive as to think US government debt is the way to go here. I would recommend (as would Taleb) buying government debt from several large and "safe" countries of your own choosing. You could try and diversify here, but if you've read Taleb's book(s), you'd simply be fooling yourself. If the US defaulted on there debt, who or what would be left in good shape? Don't misread me here. A US default is only a black swan away from occurring :-) The key is to try and minimize the risk on most of your money, while maximizing the risk on the invested 10-20%. When (not if) a black swan strikes again, you'll profit very nicely.

Trader Personalities

Are the best traders the ones that are independent? Perhaps they are those who can find and exploit an edge₁? I suppose the typical answer for someone who makes a good trader is a middle or right brained person₂ who is good at math, buries emotions, and doesn't get stressed. And odd combination to be sure.

1. An advantage; real, perceived or otherwise.
2. Someone who is entirely logically oriented will not find success in trading IMHO. They would seek to find an answer where there is none. People are unpredictable; tis the only predictable thing about them!

Timeframes

Does long term trading really work? I struggled for a long time during my first trading attempts wondering this question. It seemed to me longer term trading was inherently more risky than short term₁. After all, I can't know what will happen 5 mins from now, let alone 5 days or weeks. However, stats geeks would tell me I can predict with greater certainty what will happen in 5 mins than 5 weeks₂. And thus it seemed to me that short term was the way to go.

I had a good run for some time manual trading short term; however automated trading short term setups seemed to be an on-again, off-again sort of feeling. One week, I would win 90%. The next week, I could lose 90%. Plus, the concept behind why I would be entering positions in such a short term way was non-existent and flawed. I was simply guessing, hoping perhaps, and I had a risk/reward ratio that required a high win rate to succeed. Needless to say, the effect on my account was a slow drain, with nice profit spikes during those weeks where everything just clicked.

My current philosophy I suppose is that long term trading can and does work. However, I believe my initial analysis about higher risk was correct. If I trade long term with a poor risk reward ratio and with a short term viewpoint, then I have simply increased my risk. What I was missing initially was an entirely different way of trading. I suppose the "happy" way to think about longer term trading is that it gives you more possibilities of taking profit. In theory, if we can wait long enough, everything eventually comes around to profit. Or as price over time approaches infinity my win ratio becomes 100%₃.

1. Without going crazy on definitions, I'm simply going to say "long-term" is anything more than a couple days
2. And they would be wrong. People's actions aren't a Gaussian distribution.
3. If your buying that idea, let me tell you about a system I would sell you. You see if you simply double up your bet each time, eventually you win. It's called a martingale, and ...

Profit and the Mob

Profiting from a trade doesn't mean you are/were right; don't buy into this fallacy. It simply means others also traded the same way as you, during the same time you were vested. This brings up an odd perspective on the manual trader. There are traders who put in long₁ hours manually trading the news, or fundamentals. Many of these folks are your classic stock market gurus who form an opinion on a company or sector as a whole and trade that opinion in those instruments. Yet it appears their ability to generate a profit from these activities is simply because they think the same way as others do; aka they are part of the mob.

In other words, if we view an instrument in the market at any time, we can think of the price as a representation of a random₂ slice of people's opinions. The best traders are the ones who simply align themselves closest to the opinions of there peers within that instrument. Make sense?

Your paradox for the day - How can following the mob make you a profitable trader, when 95% of the mob loses money? It would seem the key to success in manual trading is to follow the mob, but be a mob leader.

1. If you trade the non-farm payrolls announcement exclusively, you only work 1 hour a month!
2. This is perhaps a topic for another post. However, market participants are not random. They certainly are not constant, but I think statistics are valid here for who is participating. For this reason, we can gain insight into who is making up our market, and according to my theory presented above, adopt their style of thinking for profit.

Behavioral Analysis Trading

An idea has popped into my head regarding the other factor at work in a market. Until now, I had thought of price only as a function of time. I failed to really appreciate the human side of the equation. Ultimately human emotion drives the market. Right? After all, the decision to buy or sell is made by a human, and collectively those decisions become price movements. I've never taken the time to study human behavior in markets. Perhaps, just perhaps, there is an edge to be gained in doing so.

I can admit, I am not the typical consumer. I've realized I wouldn't have done well in the entrepreneurial world - merely because of my inability to understand people. Pick on anything you like; myself having been in IT for the dot com boom, I thought I might have a chance at starting something. Code it and they will come! However having seen sites like Myspace and Facebook do well, I realize how out of touch I am. Who would post all there personal details on some random companies site? And why communicate inside such a black box? Evidently there is a reason, since so many are doing it₂.

Which brings us back to trading. Have you ever thought about why someone would take the flip side of your trade? How does TraderX₁ make his trading decisions? Even a machine must be programmed. How does he trade? And does it matter to me? His decision, just like my own, moves the market! Given my choice to be proactive or reactive in my trading I have often sought to be reactive. Try and let the price set itself, and attempt to profit accordingly. I think being proactive is possible, and thinking about behavior could help that.

If your convinced at this point that this could play a role in your trading, I'll attempt to leave you with something. When this idea popped into my head, I immediately thought of Google Trends. It's sometimes shocking to see what the latest thing is on peoples minds (at least viewed thru google). The top searches and hot topics list are ever changing as the news disseminates what people should be thinking about today. Presumably this critical mass googles the sound bites, and thus you can "rank" the news on importance to the general populace. I would bet you the marketed media of the day is always in the top 5. Of course if you take that bet, I wouldn't have to worry about trading anymore. I'd be rich! Now, we simply need the same polling of currency traders.

1. Ok, I couldn't resist a Nick Leeson reference.
2. I suppose marketing to "con"-vince enough people into using the site until you reach a critical mass was the game plan here. Now people signup and use social networks simply because everyone else is. Amazing.

Look Ma, I called a top!

While working on writing my robots, I decided to start playing with a long term concept of position building with a directional bias. Say that three times fast. Suffice to say my initial position did so well I closed it for a solid 3% gain. Whoops! There goes the long term experiment. Nothing like calling a top, and getting out on the intra-day bottom as well. My robot to trade this strategy is still in the testing phase, so I decided to take the profits off the table for today and let the robot do its job when the time comes.

Of Systems

Creating a trading strategy isn't something to be taken lightly. It's important to remember we're running a business here. For practical purposes, I'm going to codify my thoughts on trading into trading robots. I have several in various stages of development. The concept behind having multiple robots is simply to target and profit from several different trading environments. Running them concurrently should in theory allow me to profit in any environment. Hehe. Any known environment ₁.

1. You don't know what you don't know -- hence I cannot trade the unknown. But, if Nassim Taleb has shown anything, I can profit from it.

Step 3 - Becoming Capitalist

So, we've cleared our time, and discussed our needs. Now we can begin to spend our time as desired. To meet our needs however, we're going to utilize trading. Times have changed, but the art of the buy and sell hasn't. Trading evokes the most basic of human emotion and thought. It pits one versus everyone with direct and real consequences. Like heros, we cheer and admire those that can seemingly do the impossible.

For our purposes I am not going to use "The Stock Market". I won't be messing with Wall St here. At least directly. I am not so naive as to think one can escape the grasps of the elite corporations and those with money. I won't seek to defeat them at there own game. However, working for change and revealing the evils that lie in this upper echelon of society is a worthwhile, and indeed necessary pursuit.

So, what sort of trading shall I be attempting? One can trade anything -- even in modern day it is possible to make a living buying and selling physical goods ₁. I will take the luxury of having virtual markets buying and selling paper; or really exchanging bytes between computer systems ₂.

Forex. This fringe market, so liquid, secretive, and largely unregulated is where I shall participate. In many ways, this wild west of trading markets suits the personality of the transition. But the freedom given in such an unregulated market is too wonderful to give up ₃.

We will take advantage of this freedom in many ways. For one, the retail investor such as ourselves is now allowed to "play" with the big boys. This was not always the case. Neither was the ability to trade instantly. And perhaps the biggest draw is that anyone can play. With as little as a dollar, you can take a position ₄. Despite all the traps and costs lined up against you, it is definitely possible to make money in this market.

1. See "Around the world in 80 trades" book and BBC special as an example of this
2. Many modern exchanges are now simply the transfer and flow of information. Nothing becomes real until it is settled and withdrawn into the "real" world so to speak. In these days of continual rollover, the line between the "real" world and the digital one continues to thin.
3. Don't be naive here. This freedom means those who would take advantage of others, or cheat, etc, etc both can and will. The protections afforded by more regulated markets simply aren't here.
4. This is one of the reasons why Forex is full of brokers catering to the gambling type. Easy access, no upfront costs, and 400:1+ leverage makes it easy to rob from the unsuspecting "investor".