As I mentioned here last week, I am going to start daytrading again. I’ve gotten to the point where I’d be more comfortable generating some income while I continue to work on my automatic systems.

Why the shift? In essense, I have decided that I have been fooled by books and magazines about purely objective trading systems. I looked at them, and I saw how simple their rules are, and I saw the pretty 45 degree equity curves. I thought “I can do this!” And I could, and I did. But, my systems to date do not work well enough to be my only trading vehicle, and neither do theirs. I’ve coded up and tested several published systems now, and none of them hold up under my tests.

The moral of the story is, be careful! If you read the honest magazines and books closely, you’ll spot signs that things are not as rosy as they appear. For instance, they’ll mention as an aside that they only tested on stocks that were listed for the entire test period. This is called the survivorship bias, and means that you don’t see all the losing trades the system would have made on companies that blew up and died. Assuming you can buy at the closing price on signal days is another mistake I see alot. Optimizing a parameter for a particular stock, and then backtesting that stock for the same time frame is bad (although, say, optimizing against 1980 - 2000, and then testing 2001 through 2006 is acceptable). And on and on.

I’m not ready to give up on the concept, though. I’m reading a quantitative finance textbook, and will start trying to incorporate more complicated and rigorous methods into my systems. If that fails, I’ll find another approach and try that. I don’t give up easily!

I have a couple setups that seem to do okay over the last few years, and I plan to continue to use and improve them. In the last couple weeks, I’ve taken losses on their picks, though, and at this point I’d be more comfortable splitting my time with day trading to counteract those losses.

The Trades

I’ll discuss the trades I made today in a separate post later. I wanted to ease back into it, so I only made two. One winner on PW Eagle (Nasdaq: PWEI) and one small loss on Cisco Systems (Nasdaq: CSCO).

Stocks Mentioned In This Article
Stock	Links
PWEI	| |
CSCO	| |

Readers of my past and present market blogs know that I try new services often. I’ve joined millennium traders live trading room (and quit due to their very high price tag). I’ve been a thestreet.com subscriber (and quit because they don’t say much that you can’t see on all of Cramer’s other free outlets). I’ve recently joined stocktickr (and so far am impressed by their service). And on and on… I always let you know what’s worth it and what isn’t. I hope you benefit from that.

Why do I join all these things? Can’t I come up with trading ideas on my own? Of course I can, and if you read this site you know that I do. But, I think it pays to always be vigilant in this game. What works today may not work so well tomorrow, and wouldn’t it be nice to have a few fresh ideas on hand that are in use, and promising? I think so. As such, I read quite a few market sites and blogs every day, to see what kinds of ideas are working out there. I devour market-related books like candy, and post my thoughts on them here. I post my trades, and occassionally write my own views on the market, and plan to start doing a lot more of that in the future.

My goal is to make a timely source of trading-related information that lots of people will want to visit daily. I like the companionship, and I like helping people. Hopefully, as readership grows, I will be able to subsidize the work I put into my site via advertising. If you are interested in advertising on this site, please contact me.

Highchartpatterns.com
The newest service I’m trying is highchartpatterns.com. They are a daily e-mail watchlist for intra-day/swing stock moves. How have they performed? Hard to say, as they are brand new. They’ve been running one week, and that week was profitable. Their website looks like it was from 1994, but when you notice how fast their pages load, you’ll be wishing more sites were like that! I admit, I miss the old days when web pages served more information and less flash animation.

I’ve gotten my first mailing from them today, and I was pleased to see–in addition to the watchlist for tomorrow–a fair amount of commentary on the previous week, as well as the outlook for the days ahead. I hope that’s not just new-company enthusiasm, and they keep it up. The mail has charts for their picks, annotated with the technical analysis that they did, and with a description of the conditions to look for on entry. One of those conditions is a price target it should pass prior to entry. They also suggest explicit stops for some, but not all, of their picks. Their site has general stop-choosing advice, but on first sight I wish they would give explicit stops (with analysis) for all of their picks. I’ll reserve judgement on that until I’ve tried them out for a couple weeks, though.

They have a generous three-week trial (many sites only give 1 week), and are one of the few services that don’t require a credit card to participate in the trial. I think that’s a sign of a group that believes in their service. When I have to give payment information to sites for a FREE trial, I feel like they are hoping I’ll forget to cancel the trial on time, which to me is just as sleazy as complicated mail-in rebates.

I’ll let you know how it goes… but there’s also no reason you can’t try the trial as well. All you have to do is send them an email. If you do, please mention that you heard about them at my site. It helps businesses to know where good places to advertise are, and they will also extend my trial period as referrals come in. This will allow me to spend more time reviewing the site, and providing you with feedback, without incurring overhead.

You know by now that most of my posts about services slant negative, as there are a lot of bad sites, and a lot that are okay but overpriced. Example 1, Example 2, Example 3. It’s hard for full-time traders, especially new ones (I should know… I’ve been at it full time for less than a year, after years of part-time trading). I want to help people find the best places for information, so I can’t pull punches.

hmmm… Cramer’s radio show yesterday was talking about how the market was a coiled spring, and good news caused two days of rally behavior. Others, too… lots of talk about upgrades and conference calls and oil/gold prices.

Well, I’m not the seasoned expert that some market commentators are, but I was expecting the markets to rally at the end of this week, due to options expiration, and nothing more. I came to this conclusion by asking myself: “how can the markets act to screw over the most people?”

I had to imagine lots of puts being bought, and lots of short sales, since we’ve been falling hard for the last two weeks. Everybody knows the markets are declining, right? So a little rally now will screw them out of a lot of money.

I should point out that I’m not just putting an evil anthropomorphic face on the markets. Whenever a lot of small traders take one side of a trade, a lot fewer bigger traders are taking the other side. Those more sophisticated, better capitalized traders (and specialists and market makers) are going to do whatever they can to make sure they end up on the winning end of the transaction. And, they have the money, the influence, and the savvy to do it. This is why, whenever a lot of smaller investors and traders are doing the same thing, the markets are almost certain to turn against them. A lot of times it’ll just be a temporary reversal, just long enough, and just big enough, to shake all the little guys and gals out.

Could I be right? Makes sense to me, anyway…

Well, I’m down to one swing position now… the other four were stopped out. All five trades were entered about a week and a half ago. It’s unfortunate that I started trading long systems right when everything started plummeting!

As I need income, I was going to start day trading again on the side, but today’s market didn’t look good for that. Maybe I’m just out of practice after a few weeks away from day trading, but once I saw confirmation from other sources, I decided to stay out of it today. It’s no surprise I’ve used today’s downtime to read about market-neutral strategies! The suddenly sound pretty attractive! :-)

Mini-Reviews
Well, I finally finished Fooled by Randomness : The Hidden Role of Chance in Life and in the Markets. While I thought it was eye-opening in places, it never really got around to giving much advice on what could be done to profit from random effects. He says he personally tries to profit when he knows others will be fooled by randomness. Just doesn’t say how. The most practical advice I noted was: 1) Use stops, and 2) be aware that you might have a successful strategy, or you might just be lucky. All that just boils down to “be careful.” I don’t want to put the book down too much, though, as the book is only tangentially about the markets (because that’s his profession, so he draws a lot of examples from them).

Now, I’m several chapters into Paul Wilmott Introduces Quantitative Finance. I’m fairly new to the deep quant stuff, so it’s very interesting to me. Of course, a lot of the early examples make use of interest earned on proceeds from short sales. I don’t know of any individual brokerage account that actually passes those benefits on to you (although I’m more aware than ever that they probably make interest on my short sales–or at least they would if I held ‘em more than a day!). As an aside, while grabbing the amazon links, I was shocked to note that amazon sells it for $44, when I bought my copy from a Borders for $60+! In the spirit of quantitative finance, I can’t help but think there’s some sort of arbitrage opportunity in there somewhere.

I stumbled across digstock today, which appears to be a digg clone with a stock market theme. Not overly exciting, but I looked around. I saw that they appear to automatically index lots of stock market blogs so users can browse and digg them (oops, I mean “tagg” them, in digstock parlance–come on, if you’re calling it digstock, just call it “digg”ing).

Anyway, I noticed my blog did not appear to be indexed. I thought, okay, I’ll register and maybe I can find a way to get it listed. So, I registered, and they sent me a confirmation email, after which I was unable to log on. Hmmm. Well, some sites (like fxpansion) choke on special characters in passwords, and I like to make strong passwords. Maybe that’s it. Their confirmation email said to contact “support@digstock.com” with any problems. So, I sent them an email, and their mailhost bounced it:

This address no longer accepts mail.

So, on their site, I click their “contact” link, which is a mailto:admin@digstock.com. I explain the login issue, and also point out that their own email pointed me to a bad contact address.

This address no longer accepts mail.

I see. Well, that’s not promising. Clicking around some more, I see that a few of their internal hyperlinks are malformed. In other words, NOT a good user experience so far. I would still like to try their site out, but I apparently have no way of contacting them to work out the login issue.

As a last ditch attempt, I made a second account with a different username, and I made sure I used the extremely simple password “blahblah” just in case the special characters were the issue. Same result–could not log in.

In contrast, a good experience with stocktickr
I don’t just sit around complaining about things, though. I am also capable of praise, when sites are run well. A good recent example is stocktickr. I was so pleased with the way they addressed my feedback that I signed up for their paid “pro” service. They continue to make enhancements and add features (sometimes it seems like something new arrives daily). Plus, they are a bit more imaginative than a digg-derivative. :-)

There’s a hypothetical scam that I’ve seen outlined in two trading books now, and I think it’s clever so I want to share it. A book I’m reading right now kind of turns its idea inside-out, with scary implications.

Anyway, the scam goes like this: Say you want to grow your investment advisory business. One way to do it would be to mail out 10,000 newsletters predicting next month’s market direction. In 5,000 of the letters, predict up. In the other 5,000, predict down. At the end of the month, 5,000 people will think you understood something about the markets. So, next month, mail those 5,000 people another prediction (2,500 up, 2,500 down). Repeat, and after five months, about 300 people will think you have been right about the markets every month. Of course they will want to subscribe to your service to get your stock picks.

Cute, right? The book I was reading today, though, turned that scam inside out, and presented it like this: Say 10,000 traders commit their money via coin toss, either bullish or bearish on the markets. After 5 months, one would expect that as many as 300 of them will have made money every single month. Two or three will make money every month for a year. You can see by extension, with a large enough population of traders, some will be multi-year market superstars. Articles will get written about them, explaining how their superior methods led to their great success. Others will start following their trades, and seek their advice. Then one day, their luck will run out, but people will forget about that pretty quickly, replacing them with the next two or three lucky traders.

This book I’m reading, Fooled By Randomness, is slowly making me sick. I’m a fast reader, but I’ve had inordinate trouble finishing it–it’s taking a lot of willpower to pick it up. I think it’s because I don’t want to hear what it has to say. He’s making a pretty good case for a lot of so-called success in the markets being plain luck. And it’s not the run-of-the-mill efficient market crap, either. Being long in the market these last couple weeks hasn’t done a lot for my dispositon, as well! :-) I’d rather not read about luck when I have two positions hovering near their stops!

On the bright side, the author is a trader by profession, so he must not think it’s all hopeless. But, I’m 2/3 of the way through, and I’m still waiting for the part of the book that explains why there is some hope for us. It’s demoralizing!

The last couple days have been rough, but I wear them like a badge of honor, because I’ve done exactly what (I think) I should. And it hasn’t been easy. Here’s a summary:

If you’ve been following this blog, you know that I’ve taken a bit of a detour from day trading proper. I’ve been trying to develop and backtest automated trading systems. Two weeks ago I started using those systems more or less exclusively, to try them out on a real account. That means, for the time being, I’ve essentially become a swing trader. But, for those same last two weeks, the intraday volatility has been nuts. Ironically, that’s ideal for the day trading I did before! But, I’ve kept out of it, and traded to my plan, even though I guessed that most of my long positions would be hurting. And they are–two were stopped out this week.

That brings up the question, if I could guess that they’d be hurting, why on earth did I take the trades? This is where the badge of honor comes in… (or the dunce cap, depending on your point of view). It was hard to do, lemme tell ya! But, I thought, surely in the last 20 years, there have been other whippy bearish days, and these systems were still profitable overall. Either you trust the backtesting, or you don’t. I’m still in 3 of the 5 stocks those systems picked, and one of them was even briefly profitable today. Maybe they will turn green, or maybe they’ll get stopped out, too. Clearly I have a preference as to which outcome I get, but I’m not hung up on the outcome of these three trades. In the long run, they are statistically meaningless.

Of course, if this continues, and every trade I make gets stopped out, I will eventually go broke. I am confident this won’t happen. If 2000 and 2001 didn’t break me, 2006 probably won’t. At the same time, I spend effort every day examining and testing new systems. I need to be more diligent about posting the details here… sorry about that! Maybe tomorrow I’ll find one that blows away all the ones I’ve used to date. Wish me luck…

my stocktickr page

My dsl connection isn’t well this morning, so I had to enter my system trades on my broker’s web interface via my blackberry. It was painful, but it worked! I wish more websites were mobile-friendly, but thankfully the blackberry browser is pretty good at rendering complicated pages so that they are usable. AJAX-type stuff doesn’t work, but most other things do.

It’s good to have a backup internet connection! Happy trading, everyone.

At the risk of this blog becoming idempotent’s gambling journal, I wanted to mention that in the last week I have become infatuated with poker (limit hold ‘em in particular). I’ve read somewhere that lots of traders are also avid poker players, and now I know why! It’s an uncannily familiar feeling when judging when to wager and how much! Cutting losses when a hand turns against you, winning big when it doesn’t… poker’s got it all for people with trading in their blood!

Mini-Review
I got interested when I read The Professor, the Banker, and the Suicide King: Inside the Richest Poker Game of All Time just on an impulse. It’s not a poker how-to book, but rather it’s about a Dallas banker who took up poker and played several extremely high-stakes games over the past few years. His name is Andy Beal, and from the description of him, he’s like my new hero. He’s done a little bit of everything in his career, from real-estate, to banking, to mathematics, to aerospace engineering, and now poker.

The book has a lot of colorful history of big gamblers, and their lifestyles. They acknowledge that their money-management is pretty reckless, and they all seem to balance that by taking money out of the casinos as often as possible, and doing their best to leave it out, for good.

So, I looked up how to play on-line, and started playing in fake-money games on yahoo. Just like in the stock markets, the whole key seems to be to wait for good opportunities. I think my trading experience really paid off here . By simply folding about 70% of the hands I got, I doubled my first fake $1000 stake in just 4 hours. I am hooked! It seems that the legal status of real-money poker in America is iffy, so I have so far resisted it. But, it’s tempting!

That got me thinking… what does poker have going for it that the markets don’t? Probabilities are easy to compute, and reliable. That is, I can get a reliable probabilistic lower bound on the expected value of my hand at any point. In fact, just quickly calculating, there are only about 2 trillion unique games with two players–less if you consider that lots of hands are equivalent, differing only by suit. Technology’s getting close to the point where you could just precompute them all on a large workstation. If you wait til after the flop, there are only 1.2 million possible outcomes with two players. On the other hand, in the markets, it’s not clear to what extent past behavior implies future behavior (some say, not at all!), so any probabilities you have calculated based on past events could be useless. So poker hands are a ton more predictable.

A downside of poker compared to the markets is the binary result–you can have an awesome hand, and still lose. And, you can have the a royal flush, but still only win a small amount of money. In the markets, everyone who is right, wins, and the amount they win is proportional to how right they are.

More directly related to the stock markets, I’ve started reading Fooled by Randomness : The Hidden Role of Chance in Life and in the Markets, and it seems promising, if a little long-winded. I will write more about it when I’ve finished it.