I didn’t take any trades today. I woke up about an hour after the markets opened, and looked at the narrow range, and checked in with the eotpro folks, and said “nah.”

I am still exhausted from my trip to NYC. It was a lot of fun, but I only just got back at 1 AM today and I got very little sleep during the trip to start with. So, I have been more-or-less a vegetable today, and of course I’ve been trying to get my cats to forgive me for leaving them. :-)

Anyway, today’s lesson is one of my old favorites… Keep Swinging! Check out the chart for the afternoon. There are three potential trades on it according to my signals.

Let’s say I traded with 2 contracts. I would definitely have taken the first trade. We had a signal and we were at least riding along Alla’s Average, if not quite trending with it. I would have bailed when Bonnie’s Bars turned red, for a 1.5 point loss per contract. It had come within 1 tick of my first profit target, but didn’t get there. So, on two contracts I’d be down a total of 3 points.

Then the second signal comes. I would not take this signal, since price is chopping through Alla’s Average. But, if I did take it for some reason, I’d take one contract off at the first math line, and bail on the rest to bring the total trade to break-even. After I take a partial profit, I don’t like to let the overall trade become a loser. So, whether I took the trade or not, it wouldn’t affect todays bottom line.

Pretty depressing, no? We have to wait for freaking ever between trades, and they have been disappointments. Check out the rank sum histogram showing WIDE stretches of statistical indecision in the trend, too. Well, at least at this point the math lines are still about 2 points apart. So, the risk:reward on many trades still wouldn’t be too bad. Therefore, keep swinging!

The third trade makes the afternoon. It wasn’t my favorite looking action, but it was coming down from a double-top, and did poke through Alla’s Average, tap it, and then fall again. I’d wait for it to make a new low at 1400.25 to get in. So, you get in with 2 contracts, and bail on 1 for 2 points of profit, and the other for 4 points of profit. That’s a total of 6 points, giving you a net profit of 3 points for the afternoon.

$150 isn’t great for three hours of work, but the action was really sucky today, and I’m proud that we came out ahead in a pretty easy and methodical fashion. I’m still brainstorming ways to code “trending against alla’s average” so that my entry will pretty much be entirely mechanical. But, so far, no dice. It’s a complicated concept to turn into an algorithm, in my opinion.

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

Poker and Trading.

Mr White, I think John has a good point. I would also like to add as an ex-pro poker player from vegas that I wouldnt give up trading for poker for anything. Why? Because when you finally become good enough at trading, you can go “all in” and get called all the time!!!!! Wouldnt Doyle Brunson love that! Also, in poker, you know what your max win is in 90% of situations WHICH MAKES IT EASIER to lay down a hand. But in trading, its always a fantasy that you are going to be short near the top of the day or long at the bottom. Also in poker you know the player on the other side of the bet. In trading come to think of it, wouldnt it be nice if as in poker if we could see ther faces of the guys on the opposite sides of our trade! Bet you could make a huge living just fading the weak traders, period. Its nice to dream.

As an aside, all poker players think they are better than they really are. In trading, reality comes home to roost much quicker, dont yuh think, mr. white?
Marc V

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

Tyro has a great post on society and trading. Specifically, he asks how you deal with family and friends when it comes to what you are trying to accomplish. Prospectus recently revealed the tough spot he is in, and I imagine we all have to deal with people who don’t automatically support our dream.

As Dr. Brett says, many of us are probably delusional.

Its definitely an interesting topic, and I can’t wait to see how different traders cope with this dilemma.

Btw, for those who aren’t used to the new name, its all in good fun. If you click the link for Mr. White Folks, I’m paying tribute to the original White Pimp. Its not racial, and I can see how the name may come across that way. Its a name that I have called myself around close friends ever since I first saw it on HBO years ago. We joke around about being pimps and players, and this dude is the real deal. Of course I wouldn’t actually run HOs with everything it entails — although I won’t tolerate reckless eyeballs! :-)

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

Tyro wrote an interesting post comparing driving to trading. Cell phones weren’t around when I learned to drive, but I bet my parents wouldn’t have allowed me to talk on the phone as I was learning to shift gears, and react properly to different situations. Learning to even get the car to drive 10 feet without stalling was a task in and of itself. After I became familiar with the rules of the road, and my own vehicle, driving became second nature. Like most people, I now find myself talking on the cell phone, sending text messages, eating, and driving with my knees. I’ve done a few other things while driving, but this is a family site. :-)

During the course of the trading day, I find myself reading blogs, Wallstreak, and surfing the net for inappropriate material. After giving this a lot of thought, I need to cut out the distractions.

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

This weekend I saw my Dad, and the first thing out of his mouth was regarding the new highs on the Dow.

Then last night a friend of mine who has been reading trading books for quite awhile now (without actually ever making a single trade) let me know that he is putting a rather large sum in the market — specifically the Dow. Since he has been a TA proponent for so long, I asked him what was his reason for entry. He got very defensive. Basically, his reason is that he has been missing out, and this money could have gained much better interest than a money market account.

When I asked about the possibility of actually losing money in the short term, he gave me a long term forecast based upon a book he read regarding the aging of the population, and what that may mean.

I could make the obvious point about fading the crowd, but instead I want to bring up another point that plagues many of us.

We have two people here. One (my Dad) has no interest in the market, and no desire to trade. The other person owns at least seven or eight books on trading. They both reached the same conclusion. I’m not disputing that conclusion. Plenty of tops have been called as the market powered higher. By my previous post, I believe the market will continue to rise over the long term. However, I am not betting either way. When the correction finally comes, it will be painful for those who bought the most recent top. As they are shaken out, the market will resume its trend.

Even after reading all the trading books, and even a few blogs, my friend’s main focus is a fear of missing out. Personally, that same feeling has caused me to take many a bad entry. A fast moving market doesn’t always allow a safe entry with a defined risk. Some times that works. More often than not you will lose money jumping in without any regard for risk. He did say that he would put a stop in place. When asked where, he answered 5%. Remember, he has read quite a few trading books. I asked him if it was possible for the market to have a 5%, or even 10% correction while still being in an uptrend. He agreed that it could, but was unwilling to wait until he had a plan. He wasn’t goint to look at the first chart. When pressed, he said he had a feeling it was going up. Eight trading books later, he had a feeling.

There are a few questions that each of us need to answer before putting our money at risk. Where will I get out if the trade moves against me? What is my target? Is it defined by price, or the way market is acting? All of these factors have much more to do with our profitability than identifying a trend. Without ever making a trade, he has no idea how hard it is to hold onto a winner. Likewise, he doesn’t really understand how hard it is to get in the habit of cutting losses quickly. As his irritation grew, I backed off. I changed the subject to an Escalade I saw on Unique Whips — specifically the sound system. The conversation went back to trading. We were talking about the probability of success. My belief is that my success or failure at trading has absolutely no impact on his ability to be successful or otherwise. His thought was that within about three years he should be a millionaire. I’m not making fun of him. I used to think the same thing. When I asked him why, his answer was that most traders don’t understand the psychology of trading. After all, he read Trading in the Zone. I laughed. Almost everyone has. In fact I recommend Mark Douglas other book, The Disciplined Trader, even more.

This was a long way to get to my main point. We all read the same books on TA, psychology, business plans, strategy, or whatever. However, we also are all plagued with the same emotions that are at the core of our being. I think perserverance is probably the one essential trait for an aspiring trader to be successful. Along the way, you will be beat down, lose money, kick yourself for not sticking to your plan, and maybe even make some money. You have to retain enough trading and mental capital to make it long enough to find a system that fits you. There are a ton of strategies that make money, but a successful strategy won’t work for everyone. Its my belief that if you continue to violate your own rules, you probably are trading a system that’s not right for you.

Btw, he went to a free seminar where they showed drawdowns for different trading systems. He wanted the system that doubled your money every year with only a 5% drawdown. Where do I sign up?

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