Becoming Capitalist

Price Feed Failures

2012-01-28T08:00:00.000-05:00

Lately, I have been having trouble keeping a connection to Oanda's pricefeed. I keep getting disconnected and then eventually my programs tolerance level is exceeded and it times out and dies. If you will recall, last year I migrated everything to the cloud. Sadly when I did that migration I failed to replace my fail-over system which alerted me when failures like this occurred so I could take action. Since my desktop was my trading server until that point, it was simple enough to have alerts be generated on it to awaken me even from sleep if necessary.

Due to programming changes I made in separating out the individual bots from the price feeds, the bots themselves are completely unaffected by the price feed failure, at least from a technical standpoint. From a practical standpoint, they will not be getting any updated pricing information, and will therefore not be able to properly manage trades. I think the next step here is to implement some more automatic failovers to potentially other datafeeds if necessary. I have found a couple potential feeds that can work as a failover in a pinch -- the question is would you rather have data that is potentially 10 pips or more off your brokers feed, or no data at all?

In most cases (depending on the strategy) I think having a general idea of where the price is, even if it's a bit off, is better than sitting blind. If we execute trades on the prices generated from the failover feed, we'll chalk up the execution price against the opening price as slippage anyway.

Automatically failing over, and then rotating back to the real feed at some point will be a technical brain teaser to solve. The most interesting piece will be making the transitions transparent to the strategies using the feed. However, I also need to bulk up my alerting system so I am aware of what's going on as needed. This will likely consist of getting email alerts sent to my phone again. As it stands, if I can get the email, I can login and respond to whatever issue may be occurring. Last but not least, I need to figure out why the feed is failing and if possible fix it.

I started what is now a half finished debugging session almost a week ago. There has been with no movement on my end to finish it. The potential for some better trading should hopefully be motivation enough to take a serious look and overhaul the alerting, failover and reporting systems I'm currently using. The importance of this infrastructure can't be understated. Now to find the time to implement.

Still watching the euro

2012-01-26T00:59:00.000-05:00

Since my last post, the euro has indeed put on an impressive rally back. People are doubling down on there shorts and just getting crushed. This momentum was really easy to feel in the ticks before the event. Still, I like to sit out counter rallies as a matter of safety -- it's way to easy to get caught in reversals and whipsaws. So what is the new trend for the euro this year? That anyone's guess -- as for me I'll just being watching and waiting for new trends. With statements like "low rates through 2014" from the Fed and Bernanke, the euro might not be the worst of the failing currencies in 2012 and could instead see us rally back towards 1.4X.

Some manual trading down the euro

2012-01-21T15:00:00.000-05:00

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.

Visiting a currency crisis

2012-01-20T00:10:00.001-05:00

In my time trading forex, I never really stopped to consider the physicality of it all. We're dealing with real money here. Most of it is paper mind you, but it's physical nonetheless. And it's being exchanged for goods and services. People are collecting it, spending it, or simply wishing for it. In general more people understand and are involved in the stock markets, but honestly the currency markets play a much more vital role in there lives.

Now despite the dollar gloom and doom, we're in luck that our currency is one of many fiat currencies trending to zero. Since the rates change at any time, we're not always winning that race (here's to hoping the dollar comes in last, cheers). We can look to our European friends to find several examples of failed currencies, not only within my lifetime, but also my trading lifetime. The Turkish lira, and the Icelandic krona to name a couple. I remember watching the bid price on kronas blow up live. What a crazy day that was! However, I was not in Iceland at the time, nor invested in the currency. What happened on the ground when the paper became worthless? What did people do?

This past week I got to experience the fragile beginnings of such an event. Visiting Hungary let me see and touch the bills that may one day be worthless or otherwise replace. Hungary has never quite recovered from the 2008 financial crisis and the pain is getting worse. Having accepted one IMF bailout, they find themselves asking for another.

So what did the country look like? The bars certainly seemed full. The streets still busy and the restaurants still serving food. Yet there were rallies and protests in front of the parliament building, and whispers on the streets. Currency was leaving the country and locals talked of moving money to nearby Austria and other foreign banks. The feeling in the air was a nervous laughter, ripe with anticipation of knowing what must come, while still hoping it won't.

How does the collapse of the dollar look? What will history say? I can imagine a similar story when the time comes.

Trading engine update

2011-11-17T00:58:00.001-05:00

Sucess! As of this evening I have a live version of the new strategy engine running a breakout strategy in demo. Porting the old strategies over and refining the engine will likely continue for several weeks. I'm quite happy with how things turned out, but there is always more to do. I'm sure this will not be the last update to the strategy engine.
For the technical minded, let's just say hashes are really neat data structures, and without them this consolidation would not have been possible. ;-)

Updating the trading framework

2011-11-10T08:30:00.000-05:00

It's been some time since I spoke about the engine behind the robots and strategies I trade. I had a wonderful coding marathon last weekend the result of which is many new improvements in the trading framework I am using. Although I solved several issues and cleaned up many things, there remains a piece I haven't quite been able to clean up.

I have the dilemma of writing code that is clean and maintainable, while having client side strategies that are really one-off programs. The server side backend pieces are abstracted away and objectified nicely, but that doesn't help with the client side implementations. Simply stated, I have a template I wish to use for all new strategies. This is easy to do. The trouble comes when I update the template (fixing a bug, adding new cool stuff, etc), the strategies of course don't get this update without me manually merging it across. This is not scalable as the number of strategies grows. The trouble with creating a generic class and having each strategy extend it is that each strategy has unique pieces and I don't believe I can abstract anymore pieces away. This is of course despite the fact each has a common workflow. Creating a generic client class is the answer (unless a programmer out there can shed some light). Regardless this is a wall that is slowing progress on new trading ideas.

Jesse Livermore, speculation, and people

2011-11-08T08:30:00.000-05:00

I just finished re-reading Jesse Livermore's auto-biography,Reminiscences of a Stock Operator. What a wonderful read. In this post besides advocating anyone who hasn't yet read the text do so (you can find it FREELY available here: http://www.archive.org/details/ReminiscencesOfAStockOperator), I wanted to highlight a couple quotes from the book on people:

"I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations. This is because markets are driven by humans and human nature never changes"

"On the other hand there is profit in studying the human factors, the ease with which human beings believe what it pleases them to believe; and how they allow themselves indeed, urge themselves to be influenced by their cupidity or by the dollar-cost of the average man's carelessness. Fear and hope remain the same; therefore the study of the psychology of speculators is as valuable as it ever was. Weapons change, but strategy remains strategy, on the New York Stock exchange as on the battlefield. I think the clearest summing up of the whole thing was expressed by Thomas F. Woodlock when he declared: "The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes that they have made in the past.""

"The message of the tape is the same. That will be perfectly plain to anyone who will take the trouble to think. He will find if he asks himself questions and considers conditions, that the answers will supply themselves directly. But people never take the trouble to ask questions, leave alone seeking answers. The average American is from Missouri everywhere and at all times except when he goes to the brokers' offices and looks at the tape, whether it is stocks or commodities. The one game of all games that really requires study before making a play is the one he goes into without his usual highly intelligent preliminary and precautionary doubts. He will risk half his fortune in the stock market with less reflection than he devotes to the selection of a medium-priced automobile."

On the surface, Livermore traded in a completely different world. Insider trading was rampant, stock manipulation and tip buy/selling was popular, bank runs were common... Hah, see not so different after all? In truth however, humans are the same. The same emotions that drove and controlled the market in Livermore's time do so today. We simply need to accept and understand this. I'll include a few more highlighting the inherent laziness and gullibility of man.

"The average man doesn't wish to be told that it is a bull or bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn't even wish to have to think. It is too much bother to have to count the money that he picks up from the ground."

"At first, when I listened to the accounts of old-time deals and devices I used to think that people were more gullible in the 1860's and 70's than in the 1900's. But I was sure to read in the newspapers that very day or the next something about the latest Ponzi or the bust-up of some bucketing broker and about the millions of sucker money gone to join the silent majority of vanished savings."

How true! There is nothing new under the sun₁! Re-reading Livermore's observations brings to mind the recent EVE Online ponzi scheme that rather successfully executed it's mission, netting a cool ~50k USD for its creators₂.

All said, I will be continuing to study people. In understanding people, I will understand markets.

1. Ecclesiastes 1:9
2. http://www.evenews24.com/2011/08/14/the-1-trillion-isk-ponzi-phaser-inc-speaks/

Gaming and Trading

2011-11-05T19:24:00.002-04:00

I have been undertaking further study of people. The analytic mind is constantly amazed at what others will do. Indeed, when time and abstraction from the situation allow, my own actions are utterly confusing for me to understand.

To this end, I got into online gaming. Specifically, online PVP or player versus player gaming. Obviously while exciting to play, playing against a computer has no comparison in dealing with a human opponent. While I did chose a game I enjoyed playing, I also made sure to chose something which required team play. That's right, while the game was PVP, it required playing as a team with 2, 3, or 4 other people you may or may not know. Success came to those who understood how people work, how to be a leader, how to motivate; indeed how to succeed at a common goal when given a random selection of people. Alexander the Great's success can be attributed to his mastery of this skill.

This gaming binge culminated in me running a semi-professional team, entering contests for real money (who knew people would pay to watch this?) and competing with other teams. I must tell you from the start that this ended as one can expect. We had some great early successes, but slowly and surely personalities began to outshine our success. Being human, mistakes are inevitable. As the fearless leader, I ultimately saw the team disband after an especially egregious series of mistakes and loses. It's almost like a bad dream. In just 2 short hours we went from a successful, united team to splintered and disbanded.

So what happened? In short, people. I had lessons yet to be learned on understanding people's actions and taking control. While this spectacular defeat is meaningless in the grand scheme of life, it's lessons are not. I experienced all portions of the emotional spectrum while undertaking play. I have raged, confronted my own disappointment and fears, and accomplished my own goals through what can only be called undying perseverance and study. It must be said I am not a gamer. This PC upon which I type is not a "gaming rig". I didn't have all the best tools, nor the natural skill that would allow me to succeed. But succeed I did. Before I ended the experiment a few weeks ago, I rose to the top 15% of players, the small percentage who can say they have a > 55% winning percentage₁.

So what does this have to do with trading? Well, the untold story above is what it cost me. I said I accomplished my goals, but it was a year long struggle. My devotion and study was immense. I had to learn many lessons the hard way, and not unlike trading, had to pay my dues. Digging myself into a hole only made my eventual rise that much more difficult, but it also allowed it to be more rewarding.

Trading is about people. People make markets. To pit your brain and might against another is the greatest thrill in the world. To walk away successful is to know no greater joy. So many lessons have been learned about people, about leadership, and about anticipating other actions. I hope to apply these thoughts into my future strategies and having learned these lessons in a virtual world I trust I can carry at least some of the answers into the real world.

1. It's interesting to note a vast majority of people never rise above a 50% win ratio, many never even coming close. This corresponds extremely well to what we find in trading. It's the top 5% in trading who are truly successful, perhaps 10% more who manage to scrape by with minor success. The overwhelmingly majority hardly break even, with most losing much more than they win.

Maximum Achievable Skill

2011-04-25T22:07:00.000-04:00

I realized today I enjoy competing mentally against others. The statement seems silly. Many people enjoy competing against others in various ways. For my part, being unwilling / unable to compete in many phsyical events (I'm happy to race you in cycling or sailing), I've found mental competitions more suiting. It would seem logical then to assume I am "smart". I can assure you, I am not ;-) I have a terrible memory, ontop of a split brain which excels neither at the creative and abstract nor the logical.

This desire however does explain my attraction towards trading. It's a player versus player game with real life stakes and consequences. In addition, some of the brightest minds in the world have been tasked with outplaying each other; but the playerbase itself and potential payoff is huge. Perfect for the obsessive, the game doesn't end until you quit or lose₁.

Now, I like to think of myself as a capable learner. Given enough time, I should be able to achieve success and become competitive in whatever area I apply myself to. However, the real world is a harsh reality for such a fragile mind as myself :-) Experience has shown I am unable to do well in things that are player versus player, such as PC or board gaming. Sure, I may find some limited success in a small audience, but normally I find myself outplayed and not quick to pick up the tricks to winning.

Let's consider an example. Consider a chessmaster. I understand the basic rules of chess enough to be able to move all of the pieces properly, as well as pursue the objective of taking the opposing king to win. However, the chessmaster will continually beat me at games. We play several times daily for months, and yet I find myself unable to beat him. This brings us to an interesting question. At some point, will I be able to compete against the master? Eventually thru the games I play, our knowledge should equalize -- or can I never catch up to his level of knowledge? By definition he is my teacher, and has a headstart on his knowledgebase, all the while expanding it with every game he plays. Assuming the master never allows his human error to make a wrong move, it would seem impossible for me to ever beat him, save for him making a mistake.

To fully understand the problem, we must look at how someone can become skilled at something like chess. In my example, I am assuming my skill comes from me emulating the chessmaster and learning his moves. If I am capable only of emulation of skill, aside from human error I should not ever beat him. I may indeed find success against other players, assuming my mentor was more skilled than those I play against, I by extension will also find success. However, there is another way. I could apply new thought and originality to the problem. In theory, I could best the chessmaster in my first game with him.

It is this second method of successfully competing against others that the thinker is driven to. It would seem for most who wish to do well, simply emulate someone who has had success. For the thinker, your task is so much greater. You are compelled to see beyond the skill of your opponent; to understand them, and then compete above and beyond them. For the thinker, there can be no other path. Suffice to say I'm a thinker (or someone hopelessly wishing himself to be one).

1. Humorously, you can't really "win". You can only stop playing. Any definition of winning or losing when you stop is up to you.

Why exits are more important than entries

2011-04-17T21:46:00.001-04:00

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.

On being away

2011-04-04T08:04:00.010-04:00

I've been way undertaking a study of man. Of his creations, the cities and their history. There is something that you can take away from a place. Seeing to the extent possible those places and things that others before you have seen and walked. Who can understand the birth of Wall Street, or the spirit of the same place in the 1950's without seeing it?

Who would say "no" to visiting the Bahamas in the 1960's? How about the same place in the 1920's? I think Jesse Livermore had the proper idea in his "Reminiscences of a Stock Operator". Taking a month to fish in the Bahamas -- being totally removed from any knowledge of something as simple as the price of wheat or the latest quote on GOOG. Those sorts of disconnected experiences are hard to come by now.

Time and place are a unique combination in life. They can't be recreated. We all have unique opportunities to experience during our allotted time here on earth. While hindsight is 20/20, we can still seek out those times and places that others may one day speak of and think about. It is a worthwhile endeavor to see not only the birth, but also the life and death of a thing.

An english gentlemen

2011-04-01T08:25:00.000-04:00

On my recent tour I was pleased to discover not only the stories of those magnates from the golden age of capitalism, but I was treated to a step back in time. Seeing their possessions and the cities they helped grow and thrive within was an invigorating experience.

Wikipedia describes an english gentlemen as follows:

To a degree, "gentleman" signified a man with an income derived from property, a legacy or some other source, and was thus independently wealthy and did not need to work. The term was particularly used of those who could not claim nobility or even the rank of esquire.

It's a romantic dream, but a dream nonetheless. To have been one of those gentlemen during the birth of a nation; rather not just a nation, but an Empire. Does such a chance still exist elsewhere in the world? The time for the gentlemen has occurred in both European and North American history₁. Perhaps, there is indeed room for it to occur elsewhere.

1. Likely someone else can point to this occurring in central and southern Americas as well

Living in the cloud

2011-03-29T23:35:00.001-04:00

Mobility and moving around often has it's downsides. As I prep for yet another move, (I guess I just like change, or is it that I enjoy new experiences?) I decided to fix my current server instability.

Up until this point I have been self-hosted. I kept and maintained my own subversion server, in addition to the development workstation and application server for the bots to run on. And I had to keep those boxes plugged in and connected to the internet at all times. I remember coding the extensive disconnect logic for the (almost) daily disconnects that occurred at the one location I had the server running. Moving really threw a wrench into those plans. I had trouble keeping them plugged in and powered on, let alone connected to a high speed and stable connection.

When the time came for an extended trip, it was an easy decision to also give the bots a break. I did this mostly for myself, to allow my brain to focus on other tasks, but also to avoid having to deal with the server management while physically located thousands of miles away. They really have always belonged on a managed server. As of this past weekend, that's been corrected. I went with amazon ec2 -- it's completely scalable (and priced accordingly). The uptime, bandwidth and price cannot be beat. In fact, combined with wireless data on my android phone, I can admin the bots from anywhere. Having them running somewhere else and happily churning along is actually quite freeing. I check in once a day and look at the P/L's. So far, so good. I'm in love with the cloud. Now I need to move the subversion server also and everything will be migrated from my box.

My awakening

2011-03-24T23:31:00.001-04:00

I am awake again. I've re-entered the world of the trader. Sometimes your brain simply needs time away. In this case, I took quite a hiatus. I was not only physically away, but I left mentally as well. My absence was dominated by my own mind's need for data. I have need to understand people and places. My trip(s) placed me directly into the individual world's of others.
For example, standing on the street corner in New York, you will see many people. Some will be standing, others walking, perhaps some working and some sitting. If you force yourself to look closer you will see more than this.

There are several little worlds going on in that picture. Each one represents a person, a life, and a world all to themselves. The fascinating thing is that so many people can live so close, and be so physically close together and yet live in such separate worlds.

A summer away

2011-02-01T20:25:00.010-05:00

So I've been away fro a bit -- on a long summer if you will. It started out as a summer trip in August I never returned from. I went to view the America of old and to find the great cities and the people that lived there. Driving through sleepy New York towns founded hundreds of years ago. In many ways the towns are unchanged from there humble beginnings. The main crossroad still contains only a stop sign, and the town square is still a hub of activity. In a land of rolling hills, why did the founders stop in this valley? Or on this hill? I can see no reason to stop, yet they stopped there and settled. I admire this desire to strike out on your own, to have potential to become great, despite the costs.

In the coming posts I'll try and reflect on my thoughts gained from this trip and the trading hiatus. It's strange how you find yourself back thinking about the same problems after such an absence. The only thing I find funny is that the "solutions" are still the same -- even if you wish they weren't.

How to deal with a financial planner (CFP)

2010-08-06T23:20:00.000-04:00

Let's cut to the chase here -- I've been given "free" money. Not really, it's free! FREE! You just have to . . .

So started my newest conversation with a CFP / sales representative with a major bank / insurance company / mortgage lender / broker. No conflicts of interest here right? So a typical engagement involving what to do with the "free money" I'd been given. First, though my employeer had been oh so generous in providing matching funds when I contribute I still felt conned and shackled. Indeed, after a couple years of recieving the contributions, I ultimately stopped contributing anything to my 401k. Despite the matching funds and my foresight (or luck) to get out of the market before the big finacial fallout I still lost money. This was due to me being unable to chose the broker or investments to invest in. Sadly, this is steadily becoming worse as pension plans (and the impending bailout) are increasing displaced by lackluster retirement accounts. The laws can change at any time (and they will), but most are being misled into staking there life and work on a single number. It's a fools' game and I want no part.

So back to the CFP, what to do with him? I'm now being shown some boxes and asked to chose which one I like the best. Perhaps color plays a part here, or commissions, or just the person's current attitude and emotion₁. The boxes of course are some sort of rehash of the MorningStar boxes which attempt to define risk and performance. A pretty graph of course shows you how the whole procedure will work. You contribute $X a week for XX years, and at the end of the rainbow *poof!* you retire a millionaire. Nonetheless, a choice is made and money starts to funnel. Into the acount, into the CFP's company coffers, and to those manipulating the investments.

I shake his hand, thank him for his time and in a flash he's gone. I feel ill and internally lash out against myself for not striving harder to take control.

How else can I deal with a CFP? I don't believe him. I don't want what he is selling. At the end of the day, he knows I'll sign the paper anyway. And so do I.

1. Seriously, I'm sure it would make a fascinating study of how the box is actually chosen. Assigning logic to the choice would only make explaining the choice worse. Human actions can be controlled, but not predicted :-)

In the end there is only socialism

2010-07-16T08:00:00.002-04:00

Really, at the end of time, power will be so consolidated there will be only one world leader₁. And the "greater" good of mankind will be the primary focus of that government. When those days come I don't think the free thinkers will find any happiness in saying "I told you say".

1. http://en.wikipedia.org/wiki/Antichrist

A timber baron

2010-07-15T08:00:00.003-04:00

There's something about trees; and something attractive about being able to touch, taste₁, and smell my investment. While thinking about non-traditional investments₂ the thought of timber came up. Sure sure, the idea of being a baron hearkens to the good ole days of capitalism during the turn of the century. You know, when a couple rich folks controlled huge population sections of our country. They set living standards, manipulated others actions, and even told them how to spend their free time (at a baron owned attraction naturally!). Not a pleasant experience for most in our country; nor one that should be repeated. Indeed, I think capitalism's best years are still ahead of it. A time when it's true vision of free markets, independent people and ideas, will be more fully realized. It will (as things always seem to) come of necessity and not by active choice.

As for the trees, they represent an investment into raw land. Growing trees for a paperless world! I think there will always be some demand for wood, especially slow growing dense wood. Have you seen those Japanese coffee tables? The earth's old growth forests have long since been logged. It saddens me thinking of all the wasteful practices that have led us to this state of affairs. Still it represents a *possible* investment opportunity. A list of reasons for investing include:

1) Good quality hardwood is expensive
2) Timber is a long-term investment (read risk!)
3) Land is a finite resource and *hopefully* will always be > 0
4) Trees don't need constant attention, so this can be a more passive investment
5) Finally, I want to own some land

The reasons not to invest can be just as numerous. Ongoing costs and liabilities of physical ownership, potential disaster risk (disease, drought, storm, fire, etc), and lack of ROI.

So while I am still on the fence (a wooden fence) about investing or not the broader idea of land ownership does spark more ideas than just timber. Anyone wanna buy some rental houses? Beachfront speculation property? How about farmland? All of these have the potential for being a good investment because they could all yield income without losing their principal value.

1. I won't be eating the leaves or bark, but maple syrup is GOOD!
2. Now I sound like a CFP!

Got change for a euro?

2010-07-13T22:10:00.002-04:00

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!

6 months of living

2010-06-29T22:44:00.000-04:00

Having now been pursing my chosen lifestyle for almost 6 months, I'd like to offer a bit of self reflection. What has this pursuit enabled me to do, and by consequence, not do?

Having freed my time, I still find myself quite busy with the pursuit of hobbies. I now cycle over 100 miles every week and ride my bicycle every day. Bicycling more has been a desire of mine for sometime and indeed was a huge motivator for moving to a warmer climate. In addition, I was able to "accidentally" experience the joys of going "car-free" for over a month. My car broke down, and I resolved to fix it, but had to wait for the part to arrive. The car is now fixed but the lesson remains. Unless I'm going on a long distance trip, the car sits. All my day to day activities, errands, shopping, etc are now done by bicycle. I'm much happier for it. Of course if my plans for doing some long-distance bicycle touring come to fruition I wouldn't need the car for the trip across North America.

In a similar vein, I have begun spending time with family, finally growing my own food via a garden, and pursing my goal of contributing to open source projects! The interesting thing to note is that none of these actually involve trading. It seems my lack of focus on trading has made me a better trader. I've had my first profitable months ever manual trading. I attribute this to most of all dumb luck (haha), but also to being patient and in some ways trading on less information thereby filtering out the noise. Shockingly these last few weeks have seen me really busy on non-trading things and I must confess to not knowing what the euro or other currencies are doing everyday. It's freeing to think I don't have to worry about how my trading is doing every moment of the day. I am no longer living or dying by my NAV. Further because I trade at a sane leverage (2:1 or 3:1) I literally am not making or losing fortunes on an interday move. This is a stark contrast to my first week as a trader. I had huge NAV gains (and losses!) on as little as 10 pips.

Forex Market Participants

2010-06-16T08:00:00.000-04:00

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.

Move #2 Complete

2010-06-14T08:00:00.001-04:00

On a personal note, my second move in 6 months is now completed. Same state, still beautiful and trader friendly. However, I am now closer to family who I've begun spending more time with. Paradise is meaningless if experienced alone.

Thank you Mr. Trichet

2010-06-12T20:54:00.001-04:00

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

2010-05-19T00:26:00.001-04:00

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

2010-05-04T23:04:00.000-04:00

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!

2010-04-14T19:56:00.000-04:00

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

2010-04-09T11:21:00.000-04:00

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

2010-04-02T19:11:00.000-04:00

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!

We're all self-employed

2010-04-01T18:36:00.001-04:00

I was reminded today of that simple little fact. Yes we are all self-employed. Before someone balks at this notion, I would say the majority of people trade there time (finite resource) for money (infinite resource) directly. If they ever cease trading there time, the money also ceases. This can be a real problem when you can no longer trade your time, but still require money. I evaluated this thought of exchanging my time for money, and in a true traders perspective, found it a poor return on assets. This blog was founded on the idea that there had to be a better way of providing for my needs than a direct exchange of my time for money₁.I think anyone who has ever resold the same piece of “time”, aka work, would agree. Artists, writers, musicians, etc all understand the idea of reselling the same time block. The idea here is to create something that you can utilize for income, without having to spend the same amount of time as the initial outlay. Sounds a lot like passive income, and to a large extent it is. These folks are multiplying there monetary returns on there time by reselling that same time block again and again. Sometimes this resale requires no more time input, resulting in a truly passive income stream. Generally however, I would guess a small amount of time is required to continue to see the return. All said, we should seek to do the same as traders.

Whether your on an automated or manual setup, it's likely your seeing a better than 1 to 1 return on your time spent versus money earned. Trading in general requires upfront commitment, but the returns on that time spent allow you achieve a similar enhanced monetary return in exchange for your time. Unfortunately, even in this digital world I don't have the "dream" job of reselling my work again and again, a la a musician or writer. At least not yet. Happy trading.

1. Read steps 1, 2, and 3; especially step 2.

Timeframes

2010-03-31T21:59:00.000-04:00

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 ...

Framework Optimizations Complete

2010-03-31T15:57:00.004-04:00

The framework optimizations I mentioned in my previous post are now complete. Backtesting my current in progress strategy has been reduced from about 5 mins per month of simulation to ~30 seconds. Quite an increase. I think anything to increase speed from here on out will most likely be minor tweaks. At this point, I can increase the polling frequency if I chose and still keep the processing demand extremely low.

I would now in fact be focusing on testing and vetting the strategy for use, except for the fact my main machine is down for the count. This fact wouldn't be a huge issue if my SVN server didn't also happen to be running on it during this interim period. Right, I know what your thinking. Git is SO much cooler than SVN. I agree. However, there is little reason to migrate at this point, given the other pressing issues. After all, I don't have easy access to the code; let alone migrate it.

Profit and the Mob

2010-03-28T16:46:00.006-04:00

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.

Strategy Verification

2010-03-26T15:46:00.005-04:00

How do I know my backtesting is sound? How can I verify a strategy is ready for live execution? I employ several techniques to ensure my backtesting results are sound and represent₁ what would have actually occurred. Strategies won't be run in live mode with real money until I can check these off. A quick list:

1) Live test and observe
This is more of a general catch all. But running the strategy in live mode will find bugs you won't otherwise find. And sometimes, those could affect backtesting. Any math errors that the server also calculates will show up here.

2) Use debug statements
Dump stack traces during each state change. Be careful of information overload, but the more you dump the more you can verify.

3) Check for logic errors
Make sure your not "cheating" with any of your math. And also verify your boolean and conditionals are executing as you think they should

4) Manually step through data and match output with strategy
This one requires you to trade your own strategy. step by step, on the test dataset. This can reveal coding errors, or strategy errors on your part.

5) Re-run data from live mode in backtesting and compare results
This has to be my favorite. I consider it the ultimate test so to speak, when the strategy will give the same results on the same data, whether run in live mode or backtesting mode. Simply collect data from live mode execution, and rerun in backtesting mode.

1. To the extent that is possible -- backtesting will never account for runtime differences such as slippage, spreads, etc.

Of Execution

2010-03-26T15:43:00.002-04:00

Since I touched very briefly on process separation in my last post, I thought I would quickly mention what actually is running and it's purpose on my auto-trading sever. I suppose setup will have to wait for another day. The first three I mention are always running, while the fourth is manually triggered by myself.

Pricefeed
This process grabs and stores realtime forex price data from Oanda. Currently, I don't have the disk space nor huge desire for long term storage, so I'm writing to csv files on a weekly basis for now. Given the data is available from Oanda with a 2 month rolling delay, there's little need for collection when dealing with the major pair, outside of verifying strategy execution.

Monitor
I monitor all strategies to ensure they are running, and have alerts based upon there actions. I will be alerted if a strategy dies, or if the PL encounters a drastic change, etc. These alerts are sent via email and SMS to my cell phone.

Strategy
Finally, each strategy itself will be running inside it's own process.

Analysis
This I will run from time to time to perform analysis on any strategy log; whether running in live mode or backtesting mode. Essentially it does things like produce statistics of trades, and graphs things like balance, PL, trade timespan, etc.

Framework Optimizations

2010-03-26T15:15:00.005-04:00

During this downtime I'm working on coding the new strategies, and have found it beneficial and necessary in some cases to recode some of the old strategies for quicker backtesting. After all, when one can't be actually trading, what better to do than paper trade eh?

My typical strategy shell as it were has certainly evolved over the course of coding. It never seems to stay up to date, a I continue to add to the framework, and realign my thinking and strategy code. The latest set of optimizations are basic in thought, but slightly harder than first realized to implement. Up until this point laziness combined with several other factors has led to an abuse of running a calcPL() command₁. Because of design overlap and poor coding, sometimes this was being calculated 2 or even 3 times per iteration. Obviously this is burning CPU cycles, but more importantly, it's taking valuable time away from strategy analysis and price feed updates. And of course, it's also why backtesting has slowed from "instantaneous" results to taking 10 minutes.

Despite knowing the issue, I decided to take the opportunity to profile my code for the first time. Profiling₂ quickly pointed out the problem as well. Several hundred million calcPL() calls made for only a few hundred trades.

Rectifying this CPU waste has been a challenge. The ultimate goal is to completely remove any redundant calls to calcPL(), and instead allow the strategy to "know" when it needs to execute something. Obviously this means more upfront calculation and tracking, as well as storing the data. To the extent it makes sense, the objects have gained additional attributes that will store much of the data. Some of it will remain inside the client. Of course, this is only a first pass, and will likely see its own enhancements as time goes on.

The end result should create very fast iterations while running the strategy. Essentially the new processing order for each iteration will be as follows:

Get the exchange rate
Simple check to see if we need to act

Currently there is both a calcPL() layer and an analysis layer sandwiched in-between those steps. If your strategy can be re-written to fit the simple check model as above, even your smartphone could run it :-)

1. I also wanted to have realtime data of my PL. Instead of pursuing the proper solution, until now I've optimized the calcPL() call. To get this realtime PL data under the new model, there are several approaches one could take. Before coding much of the framework, I had a separate monitor process that also tracked PL. Separation is an easy and wise solution, as you can both monitor and perform additional analysis with it, and gain the separate process stability.
2. I used Devel::NYTProf and got a cool html graph output. CPAN makes things easy, so don't put off profiling for as long as I did.

Behavioral Analysis Trading

2010-03-20T23:59:00.003-04:00

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.

Voidness of space and time

2010-03-20T19:27:00.002-04:00

This time spent inbetween my previous residence and my new office has to yield something right? Is there a grandiose strategy lurking inside my brain? I hope so. Meanwhile, I am stuck waiting on my stuff to arrive. I feel like a writer without paper. Since I am both a visual and straightforward thinker, I am almost lost without my workspace. I had assumed to be setup this weekend, but that reality has slipped away.

In Transition

2010-03-18T15:29:00.001-04:00

As I've been transitioning to a more climate friendly location, trading and in many ways life has come to a standstill. The prospects of gathering and packing everything you own is a healthy exercise. Its a time for simplification, and of purging. A good friend of mine once noted that if he was rich, he would seek to own nothing. The lesson learned is stark. If money is no object, given our services based economies, simply pay for everything. Why pack? Simply buy clothes there (or pay someone to). Why not rent different houses and move at whim? Without stuff, you are free. One can go too far here and quickly become a pure consumer, which runs contrary to our purpose in life. See Step 2.

All this to say it's been the better part of the month with no access to my code, systems, or trading in general. Losing your internet connection can be like dying. However, nothing is forever. And so, tomorrow my stuff should finally arrive. I should be back in business for next weeks session. Albeit, with no dedicated internet, running bots in live mode will have to remain postponed.

Of Capital

2010-03-05T06:36:00.004-05:00

A couple of manual trades closed successfully shows me up a modest 4% this past month. Seems hard to justify the cash sitting in the bank with that kind of return.

At this point I suspect most readers are crunching the numbers and seeing a >50% annualized return as unobtainable, risky and foolish. However, I will kindly remind them (and myself!) of a few insights they may not realize.

In this case, it may very well be said investing such capital into any market, let alone forex is a huge risk, and is only attempted to the investors own peril. One does well to listen and think for themselves after receiving such a warning. The concept that money (in this case US dollars) sitting in a bank is safer than vested in the forex market. After all, banks have guarantees, known returns, etc. This is all well and good. Indeed, those telling me such things would never dream of investing in anything, barring perhaps the stock market ₁. To anyone in this position, I would challenge that they are invested, and in my opinion, invested poorly in the forex market! They are (and presumably have been for some time) sitting on a giant dollar long position. To anyone holding this position (myself included) the long term returns have been quite negative. Your getting poorer, even if the digits in the account are higher than 10 years ago. Trading in the forex market merely allows you to diversify and choose where to put your chips. Having such a huge (albeit unleveraged bet) is not a wise investment choice at all times.

Now to the original claim that a double digit return is risky, unobtainable and foolish. I am certainly not so foolish as to count on nor expect that kind of return. However, the market has given, and will likely continue to do so ₂, opportunities to achieve such returns. I can make informed investments, manage risk, and do everything "right" ₃ and still lose money. Oddly enough, the converse is also true. I can do everything "wrong" and still make money.

1. The stock market shall have to be dealt with in another post. For now, suffice to say there is reason why I call it the magical money tree. Not matter what the brochure the salesman shows you says, we're not all going to be millionaires in 30 years.

2. As long as humans are the source of the market, volatility will know no bounds.

3. The definitions of right and wrong here are dubious and relative. However, the arguments hold no matter the readers definition of proper investing.

Of Backtesting

2010-02-25T12:09:00.000-05:00

The joys of backtesting. In my last post I described the framework I am utilizing for autotrading. Once the strategy is coded inside the framework, I can choose to run it in live mode, or I can choose to run it thru previous price quotes in order to get a historical perspective on it's performance. This is helpful to reveal bugs more than anything else. People will often "tweak" there strategies in order to gain good backwards testing performance. Unfortunately, this is also how many are scammed with the inevitable forex bots, and pretty graphs showing beautiful equity curves. Suffice to say, tweaking for the past is an exercise in futility, and borders on dangerous. While it is enjoyable to see a strategy perform on an unknown dataset, I have successfully run robots that don't backtest well. The reason of course is that the past is different from the future; which is of course different from today. The only thing that matters is how the robot is performing now, in realtime.

That's not to say backtesting has no place. As I said, it helps to reveal bugs, and can identify or disprove your thesis on the core of the strategy. For example, if I code a trend following system, I would want to backtest it on a dataset containing trends. This will help me to see if my idea on how to idenitfy a trend is correct (and correctly coded). The performance of the robot on this dataset is a secondary indicator, but again is most useful for determining proper code. If a robot wipes the account of otherwise experiences severe drawdown my strategy doesn't call for, it usually means there is a bug somewhere. Typically you can no more always be wrong, than always be right. Either one is a cause for investigation. Or you found the grail. Heh. My money is on a bug!

Of Frameworks

2010-02-25T11:09:00.005-05:00

When one considers how to approach trading there are alot of upfront choices to be made. Which market to trade? Shall I trade or have someone or something do it for me? What philosophy or strategy will I employ with trading -- aka what edge am I seeking to profit on? My goal is to use fundamental and technical analysis to determine where edges may lie and attempt to profit from them. Since I am human, I am delegating the grunt execution to a machine, and instead employing my time to analysis. This is otherwise known as autotrading.

While there are many packages of there to support such endeavors, I have written my own framework to accomplish this. In a nutshell, I have separated out the execution layer, data layer and logic layers of a trading program. The execution layer takes care of the communication and physical trade execution at my broker. The data layer is separated out to render feeds of price and other information for use by any particular strategy I am running. Finally the logic layer is separated out into individual strategies running within the framework.

It sounds much more complicated than it really is. But having this proper framework allows me to code strategies easily; and then run them thru backtesting or live mode. I suppose I would be remiss if I didn't also mention I did this all in PERL.

Look Ma, I called a top!

2010-02-18T01:04:00.002-05:00

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

2010-02-18T00:54:00.005-05:00

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

2010-02-13T13:36:00.010-05:00

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".

Really, what is money?

2010-02-08T03:00:00.001-05:00

So we've talked about money, attempted a definition, and left ourselves still wondering and asking questions. After all, what is it really? Does it represent stuff, or happiness perhaps? I am going to attempt a broader view of money here. Simply put,

$ = Δt

Money is a derivative of time. "Time is money". Indeed. Defined as such, money then is simply a resource.

What is money?

2010-02-08T02:57:00.002-05:00

Given all this talk about meeting needs and becoming a capitalist, I would be remiss if we didn't attempt at least a cursory definition of money.

Money at it's heart is a store of value. In our perfect world, one could suppose it represented a stable store of value. Reality tells us otherwise. In our world today, most would pick up a dollar or euro and consider it money. This is fiat currency - meaning it's value has been declared by some authority. In the case of the dollar or euro, it's been declared by the central government. These bills represents debt. US Dollars are really IOU's - not by the US government, but by you. Promises that you will (or more specifically your children) pay back what has been borrowed. Modern finance revolves around a world of so-called experts, central banks, and government authority. It's really a fragile and thin system based ultimately on trust. You do trust your government don't you? Remember the power is always from the people. Someday, the US Dollar will be worthless. It will go the way of all the fiat currencies have gone before. I don't think I've unearthed any big surprises here for most readers.

Step 2 - Meeting your needs

2010-02-08T02:04:00.003-05:00

Ok, so our time is all our own now. Hurray! There is nothing like the feeling of quitting your job. Suddenly you are free to do as you wish, at least for the moment. The world lies before you, and the feelings of youth and invincibility overwhelm you again. Being afraid of commitment had its upsides. Who wants to exchange 30 years of there life for a shelter, aka home? I think I missed the memo on that one. But I'm getting ahead of myself.

I still have needs to be met. My body will need food soon, and water for that matter. It will also need shelter; clothing and a place to sleep. This are but the most basic of needs. And like most Americans I'm paying someone to meet those needs for me. As I enjoy living, I still need a way to meet those needs without being a wage slave.

Meeting them myself is a feasible option. Indeed, my choice is simply the method I chose. I was already meeting my needs. Thus far I have been exchanging my time for money. I then exchanged this money for my needs. Becoming a capitalist would mean I value my time. Exchanging such a valuable resource for what indirectly results in my most basic needs isn't a good return on my assets.

Let us reconsider how to meet those needs. I could chose to exchange my time for food, and shelter directly. This would seem to be a better exchange, although it would still utilize my finite resource of time. The pitfall here is placing myself in a situation not unlike slavery. If I am unable to give my time (aka work), I don't eat. For example, say I pursued this strategy by buying a bit of land and building a garden upon it. That garden will not bring forth a harvest without work. That investment of time needs to be considered.

Indeed, if time was to be valued most I could cease 'working' now; in the sense of the modern day, 9-5 job. Living in a field with a tent and dependent on nature for food would meet all my needs and cost me very little of my time to setup. However, this is not a desirable arrangement ₁. Freeing up all of one's time is futile.

1. Ecc. 2:24 There is nothing better for people than to eat and drink, and to find enjoyment in their work.

Step 1 - Quit your job

2010-02-08T01:34:00.001-05:00

Quit your job. Really. Without warning, much thought or regard for consequences. I did. I'm becoming a capitalist. Be in control of your time, your money; your life. This will chronicle the journey of transitioning. From trading my finite time and my brainpower for money of dubious and relative value, to spending my time as I see fit.

I suppose some introduction is in order. I am a typical 20's male. Married, but unwilling to commit. Smart, energetic, talented; and burned in by corporate America. I've spent my life till now making the assumed societal choices. I pursued schooling with vigor, noting it had merit and value whereas sports did not. (Seeing some professional player salaries, perhaps I missed the mark on this one) I left high school for college early, a move spurred on by my desire to begin life. My summers were spent working for money. The jobs were chosen of course purely by how much it might pay. College was a disaster that did manage to only last 3.5 years. All said and done, society had birthed another upstanding citizen. No debt, young, fit, and eager to work. It had all the images of an American dream. I got lucky after all. I landed a job square in corporate America working in IT for a fledgling company. In exchange for 5 years of my life, they gave me money. It wasn't a fair trade. So I ended it. Which leads us to step 2.