This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I just got off the phone with my cousin. He’s several years younger, and he normally doesn’t listen to my advice (for good reason).

He just told me he has a huge bet on the Super Bowl. It doesn’t really matter at this point who he bet on, or the spread. He’s also in on a few of the prop bets. Each year he gambles heavily on the playoffs, the Super Bowl, March Madness, and college football. The only sport he does well on is the college games.

I’m going to send him the comments that MtM’s readers leave. I will not respond to anything that is said, but believe that I will be reading them for sure. Gambling and trading are comparable in many ways.

Can you help me out by giving your honest advice?

Btw, he has taken out loans, and his wife doesn’t realize how much money he owes already.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

Kevin left this comment on someone’s blog. I thought it was funny, and there is probably some truth to it. The blog writer is a self described “gambler.”

You need to laminate your trading plan and tape a copy to your slot machine…woops I mean monitor.

I’ve always liked reading blogs that post results. I’m not sure why some producer hasn’t picked up on this idea. Real traders, trading real money!

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I started out today like yesterday, trading well and making my little bits of money. Then I did something dumb and it all went to hell after that. First my good trades:

AMZN Short. After the big upper tail, I thought it would fall back to the 5-ema, and it worked out as I expected:

Here’s a Heikin-Ashi Tick Chart. I thought it did a good job of showing trends and I watched a 100-tick chart alongside my 15 min today to help me see trend changes. I’ll keep watching them in the future:

MA Long. This set up as a good Trader-X “beyond the fib extension” trade, though I got stopped out at breakeven and scratched the trade:

Then, I got the bright idea to go long RIMM and hold into the Fed. WTF was I thinking? I thought I could get out quick if I was wrong. Think again:

A quick -4R. So much for my good trading these last few days!

I scalped AAPL long after that and made about a third of that loss back. We bounced, printed a green candle, and I went long when the tape started to surge at 191.50:

Then I took a shot on scalping GS Long, small position, but top-ticked it and lost -1R:

Then I went crazy! I went long VMW for a swing overnight at 96.01, got scared and sold it at 95.60 when SPY broke support. Then I went absolutely out of my skull and bought FXP at 73.85 and I’m holding it overnight.

All in all, I was down about -2.5R on the day. It was so easy to trade AAPL after the Fed, when people were dumping shares! I think it was Teresa Lo who said it’s less risky to trade in crazy circumstances like this than in calm markets, and I think that’s true. I just had to walk in and pick up the money. People getting out at all costs (like I did in RIMM) created an opportunity. There is a huge edge there–it’s like waiting until all the cards are out on the table before deciding whether or not to bet! This is the best way to play the Fed, and the only way I will play it from now on. It makes no sense to gamble on the news like I did. When you have no idea how the coin toss will come out, you might as well just flip the coin and give the money to someone else if it falls against you. There is no edge there, and it shouldn’t be traded. This is a new rule for me now. I will always be flat going into Fed announcements or other big news events.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

You know, when I wrote Friday’s article, I wasn’t planning at all to get into a discussion about artificial intelligence in trading. I was just pleased with the notion that institutional program trading would either (1) never lock out the little guys and gals, or (2) trading would cease to serve its economic function, and would be replaced by something else. Other than an offhand statement that amateurs may be using super-fast AI agents one day, that part of the topic just wasn’t on my mind.

But, Ugly came out almost right away to remind me about the likelihood of eventual computer trading agents that surpass humans in trading ability. The way software tends to go, once that’s anywhere, it will be everywhere soon after. When the bar for the amateur trader is raised, you need to make sure you’re still on the right side of that bar!

Current program trading, to the best of my understanding, is mostly filling complex orders on behalf of humans, at the behest of humans. Then there are the quant funds, which at present occasionally still spaz out. I would expect both of these to continue to get more sophisticated, but they really aren’t in direct competition with the small daytrader.

Look around, though, and you’ll see that more and more scalping black-boxes are coming on-line. They are not too impressive right now (though they at least make a profit, which is admittedly better than most human traders manage to do). These mechanical trading systems will also improve over time, but they still aren’t quite what I think of when I picture the trading agent of the future.

AI Trading Agents

I don’t know what you picture when you think of these hypothetical advanced trading agents. I can tell you what I imagine. I imagine a discretionary trader just like myself, with notable exceptions:

• it spots opportunities faster
• it acts upon those opportunities faster
• it does so across multiple markets, simultaneously, 24 hours a day
• it never trades out of boredom, or revenge, or desperation
• it has a perfect memory of past events and performance, which it can use to continually learn and improve
• …you get the picture by now, I hope

In short, it has more of every quality that I think makes me a good trader. I would kill to have these qualities. As the percentage of traders with these qualities increases, I would expect my trading expectancy to decrease. At some point, my expectancy would drop to 0.

Is it really so hard to see why that is? You can readily see it in today’s markets. If you press the buy/sell button too late (or are too far back in the order queue), you either get filled at a worse price than you wanted or you don’t get filled at all. When you are filled at a worse price, your potential profit decreases, while the risk you take on increases. Your expectancy drops. And that’s assuming all of your analysis was correct, and the order wasn’t fat-fingered, etc. etc. Every time I try to trade while groggy or sick, I make less money. Hell, every time my internet connection gets a little laggy, I make less money. There’s not much room for error, even today.

There are people who conjecture that as a group of faster, smarter traders eats up the opportunities you have now, they will create new opportunities for profit in the process. Do you know who I would expect to find and exploit those new opportunities first? The smarter, faster traders, that’s who. Leaving me in the dust yet again.

There’s nothing special about the fact that we are talking about computer programs… I would expect the same result if I were slower and dumber than most other human traders. Since I don’t seem to fall into that category, based on my performance to date, I don’t fear human traders. But look at the progress of computers in cognitive and creative areas, though… something would have to stop the trend they’re on to keep them from catching up with me and then surpassing me.

I don’t know what that barrier would be, that can stop the progress of technology. I feel it’s safest to assume the trend will continue.

It Only Gets Harder

Up to now, we are mainly talking about computerized trading agents that are somewhat better than good human traders. If you fast-forward a bit, it gets much worse for the poor unassisted human. You see, as computers continue to gain speed and cognitive ability, the divide between them and plain old humans will continue to widen. So maybe earlier you felt like a high school basketball player playing in an NBA game. If you are one of the few very talented, you could probably still compete. Eventually, though, you will feel like my cat playing in an NBA game…. fearful of all the strange action and unable to comprehend what’s really going on.

I can imagine a future market where the only exploitable edges left have more features to consider than the human brain can easily process at once (see any cognitive psychology textbook for more about these limitations). At this point, the unassisted human literally cannot identify the opportunities in time to take advantage of them.

Doesn’t this raise computers into some sort of Magical/Mystical object?

I was really surprised when I saw this claim on Ugly’s comment section. The AI perspective is that there is nothing unique or special about human intelligence, and that its underlying mechanisms can be emulated and improved upon. To claim computers cannot duplicate human intelligence raises the human brain into some sort of magical/mystical object, as far as I’m concerned.

But Unlike Current AI Conquests, the Markets Are Always Changing…

Yeah, and chess is harder than checkers. And poker has more human elements than chess. The next step is always more complicated than the last step, every step of the way. And yet, progress is still accelerating. I mean, the software credibly challenging poker experts today runs on a cheap Apple laptop…

To me, wars and other news events are elements that make the markets hard for everyone to navigate. I guess, the people harping on this are coming from the perspective that humans currently have the advantage when adapting to unforseen elements. If you believe that intelligence on par with humanity can be duplicated, then it must be obvious to you that this will not always be the case.

But, The Markets Aren’t a Problem with a Solution

They don’t have to be. Software exists that is beyond problem solving via pre-set recipe. It has been around for a long time, in the ivory towers. In my opinion, it will become more mainstream relatively quickly. As cognitive and creative capability in software increases, computers will dynamically find and exploit opportunities based on the simple goal to make a profit. Just like I do. To claim that this is impossible makes my intelligence into something mystical and magical, and I just do not believe in that theory.

So, What Can We Do?

Keep up, that’s what. Like I said in Friday’s article, your goal is to stay at least one step ahead of most amateurs. The technology available to the small trader is getting more sophisticated all the time. Take advantage of it. Look at tools like trade-ideas, which help you spot all kinds of conditions in real-time, and their associated features to quantify which strategies seem to be working right now. Look at platforms like tradestation or multicharts that allow you to test and identify all kinds of complicated, cross-market cross-timeframe conditions. And on and on.

Learn some programming basics, so that you can offload as much of your analysis as you can onto your computer. Do this because more and more of your neighbors are doing it, and it’s making them faster and more accurate than you are. Slowly but surely, you will start to lose if you don’t.

Extrapolate far enough, and when most small players are autotrading, in my opinion it’s fairly easy to see that you had better be on board.

Where’s Your Proof?

There is no proof for any of this. I can’t prove that the sun will come up tomorrow, either. Like the magic 8-ball, I just know that all signs point to ‘yes.’ When you think about the future, you usually extrapolate from the present. In the recent threads, Ugly’s been kind enough to provide links to various current activities in this space. Even a little undergraduate work in AI will open up your eyes to what is possible, given time and processing power. This post is just my conjecture. You are free to reach your own conclusions.

Also feel free to leave either agreeing or disagreeing comments below. I certainly don’t have a lock on the future. The more the merrier. It’s fun to imagine the future of technology when the discussion is genuine and light-hearted. Last time, it got to the point that I sat through comments deconstructing my word choices. I will try my best not to participate in that level of discussion again–it frustrates and brings out the worst in me. Let’s try to be civil, and intelligent, this time. Thanks.

You know, ugly was probably the first one to point out to me this argument that computers will soon make human traders obsolete. But, lately I have been thinking that there’s no reason to be concerned.

Ever since I read The Poker Face of Wall Street, I’ve found it enlightening to look at all the various markets as gambling arenas. The book is very compelling in this regard. After all, if the stock market were really primarily for facilitating investment at fair prices, they could just collect all the buy and sell orders and process them once or twice a day at the fair market price (and that’s just one example from the book).

You know, they have a computer program that’s solved checkers (it plays perfectly). Would you bet money that you could beat that program? Neither would I. Would you buy a computer chess game if it didn’t have a crippled mode that you can actually compete with? Neither would I. You don’t hustle someone at a pool table by crushing them right away. Do you see where I’m going with this?

Any gambling establishment will tell you that they need a steady stream of amateurs coming through to keep the pros (and the house) fed. The book has a demographic breakdown of a poker house in one chapter, and it looks exactly like what I imagine the trading demographic is. A large number of people take money from their jobs and mostly lose it at the tables part time. Exponentially smaller groups play professionally at a subsistence level, and a tiny group gets wealthy. A system like that just doesn’t work without a steady stream of amateurs who think they have a chance of winning.

So, that tells me that the big players probably like the game just fine the way it is. They don’t want to collude to crush the amateurs in an obvious and spectacular fashion (and thankfully, I think there are enough big players that they would pretty much have to collude)… they would much rather bleed them dry slowly over time. And, they sure as hell don’t want to speed up/gap everything until it resembles the fabled “efficient” market, because no one can beat that game.

To me, this means that the trading game will always be easy enough for most amateurs to win sometimes. Specifically, they’ll be able to win often enough to keep them hooked. And that means I will always be able to make consistent money by making sure I’m better at it than most amateurs. That doesn’t mean that the game won’t change dramatically going forward. That also doesn’t mean that most amateurs won’t be trading with super-fast, artificially intelligent computer agents one day… but I have a feeling I’ll still be one step ahead of them, when it happens. :-)

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I was in a meeting almost all day today, and started to bleed out of my eyes, it was so bad. Thankfully, I had my trusty Palm, so I decided to read “Reminiscences of a Stock Operator” again. I was thinking about it after the discussion at Ugly’s. In my reading, I came across this passage that spoke directly to my “action” trading yesterday:

I was twenty when I made my first ten thousand, and I lost that. But I knew how and why, because I traded out of season all the time; because when I couldn’t play according to my system, which was based on study and experience, I went in and gambled. I hoped to win, instead of knowing that I ought to win on form.

That’s exactly what I did yesterday. That kind of sloppiness removes any edge you have as a trader, and puts you squarely in the class of blind gamblers. Might as well play powerball. My ego likes to tell me that I’m an experienced trader–even without a defined setup, I’m smart enough to play the movements. Ego is deadly to a trader. The only thing that is worthwhile in trading is fact. Bravado, things that “should” happen, hope, none of these have any place in the business of a successful trader. I read this before in “Reminiscences”, but it didn’t mean anything to me then. I think it’s valuable to re-read the classics from time to time because you’ll learn more as you progress as a trader.

Thanks, Jesse, I owe you one.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com