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Apr 022014
 

I’m not a HFT guy but in case you are feeling angry/scared/sick from hearing about Virtu HFT firm having only one losing trade per four years of trading, then consider this simple model of a market maker from MC Notes.


A simple model for the P&L of a Market Maker (how many losing days in a year?)

  1. Say that there’s a probability p of making one unit of P&L (e.g. 1 tick = 1 cent) and a probability 1-p of losing the same amount of money
  2. Draw n samples of a Bernoulli distribution with probability p, subtract 1 and multiply by 2 to get a coin toss mapped into the P&L distribution above
  3. Let’s have n equal to something like 7*60*x, where we have x trades every minute over 7 hours of trading
  4. We then accumulate the P&L (assuming no further risk measures that would stop trading if the accrued loss was too high) for each run.
  5. We look at the distribution of accumulated P&L to estimate how many losing days such a trader would have

If we have p equal to approximately 52.5%, and 10 trades per minute, it looks like this trader would have one losing day every 8 years.

Check out the download link below the blog post for more on this author’s Mathematica model.

Quite simply, if you have an edge and you exploit his edge over many, many times per day, your probability of losing is not very great over a day. Don’t be mad, model bro.

Don't be mad, bro

Don’t be mad, bro

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 Posted by at 2:49 am
Mar 302014
 

1. The Wantrepreneur. Noah Kagan of AppSumo coined this term, so props to him. He works with entrepreneurs every day. In his dealings he noticed that a lot of people actually want to play business (form an LLC, print and design business cards to hand out, create a logo, change their LinkedIn title to “CEO”, write business plans, etc..). Real entrepreneurs want to do what real businesses do: sell products, serve customers and grow the bottom line. Sure you want to own a coffee shop one day but what is stopping you from right now from getting clients in your local area with no shop at all? You could deliver the coffee to them. You wouldn’t be playing business, you would be running one with little startup costs. Eventually, you might have some clients, know your market and the consumers better and open up a store. But before pumping $100k minimum and hoping customers show up, this is a viable alternative. Be aware how much of your time is focused on getting real business done and how much is the pretty fascia.

2. The Engineer. I want to build a really cool product and see people use it. I want to share something that I build and it’s going to be fruitful. Well, is that really an entrepreneur or isn’t that just an engineer, or really an engineer who has the freedom to work on what they are interested in? Either way, you don’t need to form a business to build and distribute a product. This person might not be all that interested in the full spectrum of expertise that an entrepreneur might need: marketing, sales, talking with investors, accounting etc… They are usually good at breaking problems down and systematizing processes.

3. The Hustler. Probably the best chance for success. “The natural,” if there is such a thing in business. Maybe they have been selling since they were 8. They sometimes come from less and are all about the Dollar. Hustlers know how to put in the hours and perspiration. He/she is not one to over think things and they are not afraid of failing. This is a great advantage. As the name implies, they are able to push through, grind and hustle.

Hustler Entrepreneur

Hustler

 

4. The Intellectual. Oh no, this is the worst type of entrepreneur. I would have to consider myself in this category. Since generally people around you have never doubted your capabilities you don’t have anything to prove. You have a ton of ideas and over think things to death without trying to get the minimum product out and test it. You most likely inundate your friends and family with ideas of businesses. You enjoy the thinking process behind the business. It’s ok, eventually you will find the right opportunity to put all of your resources in or you will not. In which case you will be the guy that likes to tell stories of his great ideas, as if that means something. Also, beware of the Perils of Perfectionism.

The Intellectual Thinker

The Intellectual, The Thinker

5. The Dreamer. The  dreamer doesn’t even get far enough into a business to play business like the Wantrepreneur does. He has great visions but needs help from an executor. It also helps this person to break down their great ideas into actionable steps. They need to stay focused on these individual steps or partner with people that can.

What type of entrepreneur are you? We all have strengths and weaknesses. Identifying weaknesses and staying on top of our own plan to help navigate through them can help you succeed.

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 Posted by at 6:29 pm
Mar 282014
 

Stefan Molyneaux is an internet philosopher, author and anarcho – capitalist (look it up or watch a video, it’s not as scary as it sounds) with a very successful and interesting YouTube channel that is well worth your time to explore. Here, in this video on the Perils of Perfectionism, he shares a great view on the downfall of  being a perfectionist. I self identify as a perfectionist and always have been. I can say that it has stopped me from entering certain endeavors, has inflicted anxiety and certainly has prevented me from learning more about myself.

Perfection in business, life, relationships, trading etc. does not exist. What was Newton or Einstein’s success rate (major breakthroughs)? Not as high as you might think. Embrace failure, cut losses. Get better.

As my friend and author Richard Weissman says, in trading, you must, “Pay the ante.” If you no longer take on risk you are not a trader anymore, you are a spectator. Beating yourself up for not selling the top or buying the bottom or missing trades altogether is not productive means of time or emotional capital. Embrace not being perfect.

” It is incredible how rich you can get by not being perfect. .” -Larry Hite

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 Posted by at 6:05 am
Mar 272014
 

How to Backtest Strategies for Stocks and Futures
So you want to backtest some strategies? Here are some ideas to get going.

Ninjatrader is free end of day (daily) and you can customize, create your own strategies and play around with it a bit more. Ninjatrader has an extensive support community, videos online and you can use their strategy creator tool which is designed for the non-programmer or write your own code.
This way you are not limited to the stocks/strategies that the backtesting sites offer up.

I know guys that use Excel (download free EOD data from yahoo finance, google finance or other sites) and have heard good things about Amibroker and Multicharts if going the paid route. These two should offer more portfolio level options, that are more complicated to execute without custom code. It’s worth mentioning R(see my post about how I plan on learning R), STATA, Matlab are also options but require much more time to get started.
Free Data or Quality Data?
You get what you pay for and quality of data is extremely important. It’s worth paying a bit to avoid mistakes and/or having to clean and go through the data. It might make sense to test using the best free data and then again before you put real money to work. I have heard even Yahoo has messed up data, it’s not worth it if you are really putting money at risk to save a few hundred bucks to get great data.
With stocks, the things to look out for with data are dividends, splits and survivorship bias (you want to have the data on stocks that aren’t around to see how that effects your strategies), depending on what you are looking to test.
Futures
For futures I have heard professionals recommend Unfair Advantage from CSI data. With futures it’s a whole other assortment of problems relating to the roll (front month). Make sure you understand how this works with your data you are working with.

Hopefully this gives you some ideas to start, now get to work and find the holy grail of trading! ;]

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 Posted by at 7:47 am
Mar 202014
 

I have wanted to learn a programming language for some time now. It’s great to test some ideas you have about the market and hopefully serves to ease some of the mental anguish that comes along with discretionary trading. There are software programs such as Ninjatrader, Amibroker and MutliCharts that offer great data analysis for portfolios and backtesting as well. TradeStation has it’s own language and Interactive Brokers (my preferred broker) has an API that you can plug into.

Quantitative finance is all the rage. As computing and the scientific study of the markets has progressed, so has the ability for even a newcomer to be able to design and customize their own strategies. “Ok, I know this pattern repeats, but is it only this market? What is the optimal point to take profits from a larger sample set of trades? What strategies are doing well recently?”

These are only a few of the questions I hope to answer with learning a programming language such as R that handles time series financial data so well. I also hope to run some economic data analysis but I hardly expect this to help at all in my trading. QuanDl is a great site that can host your data and allows for easy download of a ton of data from FRED to census data that is all very interesting to me.

My Plan: 1. YouTube Tutorials  There are several Tutorial series on YouTube (just search) dealing with downloading and setting up R studio to teaching the basics of the language, using and manipulating data. These are great ways to get going. I just follow along and do as the instructor does. If you are new to programming just repeat and don’t expect it to all make sense the first go through. I think the repetition helps even if you don’t connect all of the dots immediately.

R for Data Mining

2. Coursera There are more specific classes on R for finance on Coursera. I originally signed up and the lectures and material are still online for me but I’m not sure they are still public since the same class is not offered. It’s OK, there are a lot of online classes now. And only a matter of time before a new one starts.

3. Finally, there are some texts and blogs for that are oriented towards financial time series data in R. This will bring me all the way there. R for finance, Cran for Finance

4. But what if you get stuck? In addition to just searching YouTube and Google for your specific problem, Quora and StackExchange are great resources. There are some great R resources on Twitter as well that I will share in a future article.

First impressions: Getting R setup was fast and I am impressed with all of the packages that are so simple to install from R. You simply type in the function and it installs whatever package you want very quickly. It’s great to have a whole bunch of smart programmers and statisticians who have used and developed these tools and packages. Unless you have a background in statistics you might also install R and go through some exercises and say to yourself, “Now what?” Actually, I am still in that stage and just keep pressing on, brushing up on my statistics and also reading more about the capabilities of R.

This is just my first foray into the quantitative side and I do not expect to go full algo/quantitative with my trading. If you are interested in doing that, check out this link which walks you through becoming a quantitative analyst or financial engineer.

*Thanks to my friend for sharing some of the links above with me.

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 Posted by at 10:26 pm
Mar 062014
 

Classical Trend Following versus Other Applications
Trend following is an investment strategy that is usually associated with diversified, managed futures strategies that CTA’s and now, some mutual funds utilize. You pick a wide selection of diversified markets (equities, bonds, commodities, currencies). These markets have different characteristics in relation to each other: non correlated, correlated and uncorrelated markets. You apply entry and exit strategies and risk management to limit total risk and sector risk and run the system with total conviction, taking every trade good or bad. At the end of a substantial time period (5-10 years), you should expect to come out on top.

This “classical” method of trend following can require a lot of capital. Just do the math on 40-60 different futures markets and only one contract per each market. It’s a lot.  Although you could give up a lot of diversification and run a more simplistic model with less markets and thus, less capital.

However, some are taking the same types of trend following models and applying it to stocks. Why is this a good idea? Because over time, stocks are expected to rise ( just read, Triumph of the Optimists: 101 Years of Global Investment Returns).

You make a lot of money in a bull market following the trend and then give back 25 % or so in a bear market if you can manage risk and size down positions when volatility increases (as an example of one type of model on equities that I have in mind).

Trend Following Wave

Classical Trend Following vs. Trend Following applied to stocks.

Both work and both have positive Expected Value over time. It might be easier for some investors to be comfortable with being long stocks instead of short pork bellies or long lean cattle. In this way, the classical trend following methods applied to stocks can make a lot of sense to those newer to trend following.
Classical Trend Following is generally non correlated to the stock market over a long enough time. So, its great when 2008 comes around and during that time period, trend following strategies actually made a lot of money, while stocks lost money. This saved your overall portfolio in a lot of cases. Obviously, Trend following applied to stocks, is correlated to the stock market.

Just being in the stock market for the past 15 years hasn’t been that great. 2 separate ~50 % drawdowns kicked some buy and holders in the face while generally trend following in the diversified managed futures space had less substantial drawdowns.

Further Research 
If you are interested in Trend Following I would recommend Trend Following by Michael Covel and Following the Trend by Andreas Clenow. Both are excellent books and there are even more great books on this still under invested strategy.

For those that are interested, right now is a great time to consider investing in Diversified Managed Futures strategies that use trend following methods. Why? Because they generally are in a significant drawdowns across the board from all time highs. It has been a tough road for Trend Following  since the windfall- esque profits of 2008 (40% + for some funds). Buying these drawdowns has been a great strategy historically. If you need any direction on who to look at, feel free to send me an email and I can share my list with you on who I look at in the space.

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Mar 042014
 

Financially, bitcoin for me is a series of trades. My methodology has been based on swing/Elliot wave and sometimes trend following the big waves. However, this is a great presentation on the #StateofBitcoin. I believe there is huge optionality present in bitcoin at current valuations and am hopeful that bitcoin can dramatically transform into something huge. As always, do your own due diligence and most importantly, manage risk.

If you are just listening to mainstream media, it might be easy to dismiss bitcoin as a pure speculative bubble with dumb money. However, the technology has already been invented (the Genie is out!) and clearly there is a lot of demand for alternatives to paper fiat currencies. The potential of a worldwide network to connect those without access to financial markets is immense. The ability to transact across the world instantaneously with anyone without fees or control by central banks is revolutionary.

I just funded an account with an online brokerage. Guess how long it takes them to clear a check and deposit the funds and make them available for trading? Almost 3 weeks! If it was bitcoin, it would have been the same day. If you had to use some of the old computers you used in the 1990′s you would think, “This is ridiculous, where’s my 27′ WQHD monitors with my i7 processor, 16 GB RAM and SSD! I cant stand this sloth like speed.” You might be saying the same thing 10 years from now about checks and other old technology that banks use. How irrelevant are walk in banks? Who has time to find one, drive there, park, stand in line just for a simple transaction? It is a waste.

“Eventually mainstream products, companies and industries emerge to commercialize it; its effects become more profound; and later, many people wonder why its powerful promise wasn’t more obvious from the start.
What technology am I talking about? Personal Computers in 1975, the internet in 1993, and- I believe-Bitcoin in 2014.” -Marc Andreessen

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 Posted by at 12:08 pm
Feb 042014
 

“Wiseguy” just sounds cool. Maybe I have been watching too many Martin Scorsese films. At first, you don’t know if I am talking about an Italian gangster, a person with a lot of smarts and sense or a savvy bettor who lives off their edge in the markets.

What is a Wiseguy?
A professional sports gambler said “A Wiseguy is just terminology for someone who bets with positive expectations. Wiseguys are called ‘Sharps.’ We’re called ‘professional bettors.’ The slang term is ‘Wiseguy’. It’s been floating around Vegas for who knows how long. The concept is that for Wiseguys, or shark bettors or professional bettors it’s not about the action, it’s about making positive expectation wagers. We have a positive ROI when we make them long term. And that is the single biggest difference between a square bettor or a ‘Joe’ or a recreational player (they all mean the same thing) versus the Wiseguys.”

So, whether you are a wiseguy, a sharp or for our purposes a master trader, being a savvy bettor is something we want to do.

Wiseguy Casino

In the financial markets, wiseguys have a similar positive expectancy system or methodology that allows for skewed risk:reward. Big winners and small losers. Over time, they exploit their edge and end up compounding their money-which is the goal of any investor/trader or gambler.

Qualities of a Wiseguy

-In the market, they place their bets (trades) and live with the results, never betting too much at one time (variance drain, risk of ruin).
-Never gets too high or too low (emotion).
- When you have an edge and positive expectancy there are times to go heavier on the throttle (In card counting game of Blackjack, when the count, or measure of probability for face cards is heavily in your favor).
-There are times to sit out the market (An advantage of the speculator vs. those professional money managers that always have to be invested).
-Constant tinkering and deep study of their craft.
-Objective analysis on past trades. What could I have done better?
-They don’t doubt their own abilities. Many say it’s impossible to obtain the types of returns they have achieved. Academics say it’s impossible. The Wiseguy sits back and laughs having confidence in his own methods.

Be a wiseguy. Study different methods that offer an edge: whether it’s Blackjack Card counting strategies, high frequency trading (making a lot of small bets and time arbitrage, exploiting technology by having better co-located equipment), Study methods like Gann, Elliot Wave Theory that can predict turning points in markets that offer hugely favorable reward:risk ratios, backtest ideas and look at new or proprietary indicators to gain an edge. Have a look at Trend Following across many non correlated instruments as a strategy to exploit directional volatility (Full Disclosure I used to work for a Trend Following Fund).

Most importantly, do your own research. Lots of people will tell you, “That method just doesn’t work,” or “Only a fool would try that.” The truth is that many of those opining just means that they were told that many years ago and dismissed the idea. Or they had a novice understanding and couldn’t make money for X period of time and they gave up.

Eventually you too will become the wiseguy the casinos fear.

The above quote came from this article from BI:
http://www.businessinsider.com/sports-betting-on-the-super-bowl-2014-1#ixzz2sPNwGOtT

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Dec 312013
 

This is a great video on Garrett McNamara, a big wave surfer who travels the world looking for gigantic waves. That is exactly the job of the speculator or trend follower. In the past year there has been a wide array of opportunities from a trend following perspective as momentum led to more momentum to the upside in stocks.

If you were able to ride that huge wave up in either the stock market indices or some monster individual stocks(TSLA, NFLX,- bitcoin, etc…) you did very well this year.

Keep following the waves, wherever they may be. Follow the trend, manage risk. Here’s to a great 2014!

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