Why I Got Rid of My Real Time Futures Feed

741 views

For years the laptop would sit beside my chair, always on, always with the futures feed charted in 5 minute candlesticks. During the Armageddon trade of 2008 the laptop with the futures feed running would sit on my nightstand, beside my alarm clock. It felt good to be plugged in and up-to-date to the very last tick of the markets. I was watching the implosion of the financial capital of the world, in real time. I would tell my grand children about it.

As I look back on those years of frightful sleep and stomach-churning days and evenings, Macbeth’s soliloquy speaks to me:

“Tomorrow and tomorrow and tomorrow,
Creeps in this petty pace from day to day
To the last syllable of recorded time,
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life’s but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.”

What good is it to have a futures feed running all night if you don’t trade futures? It is like seeing a car wreck in progress. Except you can’t do anything to stop the wreck or help anyone until after the crash. What’s the point of watching the progress of it, living in it, if you are not going to use the information while it is happening? What’s the point of the day-to-day and night-to-night hand-wringing?

All good questions, for sure.

The truth is that I got rid of my real-time futures feed because I got rid of Tradestation. Tradestation, with its .01/share commissions and $100 bucks/month fee for trading less than 5K shares and its counter-intuitive “Easy Language” code was simply too expensive. I also had an account with Interactive Brokers, and at .005/share commissions and no platform fees, it just made sense (cents) to close down the Tradestation account and move everything over to IB.

While Interactive Brokers does offer a futures feed, their charting does not compare to Tradestation’s, and it was a hassle to pull up the feed on IB. Without really thinking about it–more or less just being lazy– I went without, for a few days. And then a week passed without the futures. I had missed it not at all. Two months later I realized that weaning myself from the futures feed has made a positive impact on my life and my trading.

Not only am I better able to tune out and off from the markets and focus on other important areas of my life such as my family, exercise, and sleep–I am able to execute mechanical system trades with much greater ease and much less nagging doubt.

Since I do not daytrade and typically trade the open or close via orders placed the prior evening, having a futures feed was significantly affecting my psychology and ability to mechanically place trades. Waking up at 3 a.m. to see what the futures were doing was allowing me to fast-forward in my own mind to the trades scheduled to be executed the next day. Many times I would second-guess these trades. My self-talk would often revolve around delaying the trade or setting a limit order rather than using a market-on-open or market-on-close. While the majority of time I did not override the systems I trade, sometimes I did. How much time did I waste trying to out-smart my own system? How much mental capital did I spend attempting to assimilate information that was unnecessary for my success? How much real capital was lost from deviating from a strict trade plan?

Traders these days are easily overwhelmed by the hundreds of indicators, platforms, experts, pundits, amateurs, tweets, bloggers, etc. Information overload is a very real threat and can be a detriment to trading success. At some point, the various bells and whistles just end up making a lot of noise. I highly recommend focusing on the factors most necessary for trading success and dumping everything else. Without a doubt, it has improved my quality of life and made me a better trader.

 

Confessions of a System Trader 10/5/09

37 views

It has been four months since my last confession. Life has been out-of-control busy, and as soon as I get home from work, I’m punching stuff into spreadsheets, blogging, working on my coding skills, and backtesting. It seems I have little time to do anything other than work. When I’m home, if I’m not in front of a computer, then it feels like time is being wasted that could be spent on the next formula, the next system, or the next blog post. Then, there are my children, and my wife. Life is just go go go right now, every day, including the weekends.

But it almost HAS to be that way, if you ask me. How can I expect to do well trading, when I am competing against people who have 8+ hours a day to do this as their day job? It just happens that my 8 hours a day often come at night or on the weekends.

I am so sick of writing about the Power Dip system. I have sliced and diced and chopped and shredded that system six ways from Sunday. I have tried to spare the readers from most of the process. A woman once said, “I just wanted to hold the baby, not birth it,” and I figure that is how many of my readers are feeling about now. (Although my traffic has not really suffered…Maybe it hasn’t been too awful?)

I hope watching 5 months of real-time trading and tracking of a system has been a helpful exercise. There is a lot to consider when trying to get actual results to come close to matching backtested results, and I have not even mentioned some of the more mundane issues such as order routing or using the best order types for the situation. I wanted to write more about percent-risk position sizing, and how that can be combined with limiting the max number of positions to increase profits and decrease drawdowns. I intend to move these specific discussions onto the Power Dip forum. That way, only those who are interested will be subjected to these esoteric issues.

So I haven’t had time to write as many in-depth blog posts as I used to. My experience is that life moves in cycles, just like everything else does. I’m hoping that I will soon be entering a cycle where I will have more time for writing about a variety of different ideas, systems, etc. Part of gaining more time is learning to do things more efficiently, and as I’m becoming more proficient at coding, theoretically I should have more time to write about what I uncover in my testing.

I have recently quit trading the best short-only system known to man. No one knows about it, except for me and a good friend (who happens to have co-developed the Power Dip). The damn system has returned over 100% a year, consistently, over the past 10 years. I quit trading it after a 5% drawdown persisted for a month. Feel free to call me a pansy, or insert your “P word” of choice. As much as I want to be able to trade it, it just didn’t fit my personality. The damn thing made me nervous as hell, every day. Anyway, that is a good topic for an upcoming blog post. The system must fit one’s personality, goals, routines, and lifestyle.

Okay, this is all for now. I have wasted enough time on this confession and have orders that need to be entered for tomorrow.

Confessions of a System Trader: 6/7/09

28 views

I am happy to note that since my last confession, my account has recovered from the drawdown. Were it not for platform fees, I would be positive on the year.

Since I trade mean reversion strategies, I’m not sure if this means that the markets are slowly returning to a more “normal” (whatever that is) environment where there will be dips to be bought and spikes to be sold. I sure hope it is. This slow motion melt up has been very difficult to adapt to, mentally. Since I have not changed anything about my systems or trading, I can only assume that it is the market environment that is shifting.

There is something about trading through a drawdown that I found surprising. At some point, I quit caring that I was losing money. Honestly, I just became numb to the whole thing. Whether it was coincident, or not, who knows, but when I quit caring about losing, my account began to recover from the drawdown, almost to the day.

It is also worthy of noting how my capacity for consumerism changes depending on whether or not my systems are working well. When everything is firing on all cylinders, I notice that I start scoping out new LCD televisions and other things that I do not need.

Having the AmiBroker platform to work on has catapulted my system development in many new directions. I like it much more than Tradestation, mainly due to the coding being much easier. I find many parts of AmiBroker to be much more intuitive to use than Tradestation.

Anyway, when my account value surpasses the influence of platform fees, I’ll post a YTD equity curve. That is, as long as mean reversion continues to gain some traction in this market.

Confessions of a System Trader: 5/6/09

26 views

If I’m honest with myself, I’m officially pissed off about missing this rally. I’ve been telling myself for weeks not to worry about missing out, that I’m executing my plan. And I have been, faithfully, but it turns out that maybe it has been the wrong plan for the current conditions.

Mean reversion systems have been my development focus, since they have been working really well for the better part of a decade. Knowing full-well that MR systems tend to under-perform in a strongly trending market, a system based on momentum has been very high on my systems-to-develop list. I erroneously figured that there was no real rush though as 2009 would see continued volatility and would likely be characterized by mostly rolling, sideways action. Rolling, sideways action and volatility is excellent for MR systems.

As we all know, the first four months of 2009 have been very strongly trending, with very few spikes or pullbacks. The first two months were characterized by a steadily downtrending market which offered some shorting opportunities (if you didn’t mind shorting into oversold conditions), but any long-biased trades were killed.  From March to the present the market has been just the opposite: strongly uptrending, offering many long trades (if you don’t mind buying into overbought conditions). And of course, shorting since the March lows has been brutal.

Simply put, 2009 has been the year of Momentum. 20% straight down, and now 30% straight up. I have been sticking with my MR systems, and it has been the worst possible environment for these systems. My account is in a drawdown for the year. Not an awful drawdown, but negative for the year, nonetheless.

Regardless of the pain and account-envy I’ve endured over the last couple of months, I am going to continue to execute my plan, and that plan is to only trade when I understand the edge. In hopes of finding some balance before the year is lost to me, I am working to crank out a good momo system. By the time it is finished, I’m sure the market will be right back in reversion mode. That is just how things seem to go.

I am 25% short the SPY, as of Tuesday’s open. I have been desperate to pick up long exposure, and while I have a great system for picking up trending stocks, it was not designed for a market that does not pullback. I have no idea how much longer this trending will continue, but I know that it will certainly reverse as soon as I give up mean-reversion. Therefore, the beatings for me have to continue.

Confessions of a System Trader: 4/22/2009

23 views

I have to say that I am thoroughly $%^#!@# bored. This market is not fit to short or go long, at least from my vantage point. So here I sit, in cash.

I do not, however, feel anymore that I have missed the party. Now it has become obvious that the beer, liquor, and wine are running low. A massive hangover is being fought off with Ibuprofen and a few loose joints, but like all hangovers, it must run its course.

One of my systems narrowly missed entering short last Friday, and it has been making me think more and more about the inherent faults of a binary entry and exit signal. Perhaps future systems will be designed without a binary entry and exit signal, but until I give up my full-time work, or hire a trader-servant, I will have to stick with my occasional entries at the market open and my even less occasional entries at the close.

I’m in full-on system development mode (especially so since trading has been light) with plenty of systems in development, several of which show great promise. One system is finished entirely and is being traded (with third-party auditing). It is my favorite system. It is currently under-performing but that has a lot to do with an awful first trade and a market environment that is dislocated from reality. I fully expect it to overtake the indices over the next few months.

Another system that I have traded sporadically for almost a year is in the final stages of development. It looks very very good. It will trade stocks and should trade often enough to keep boredom at bay. As most good systems are, it is very simple. The finished product will have a stop-loss and a position-sizing component which will accommodate a variable risk-appetite. Because the system seems appropriate for the level of traders who frequent this blog and the others here on iBC, it will likely become available for subscription. If the final version is robust as I believe it will be, this system should allow the average retail trader to make consistent profits from high-probability trades.

So while my account has stagnated while waiting to trade any sort of movement besides a 45 degree uptrend, there is great progress being made towards my goal of developing a quiver of non-corellated systems.

In terms of my vantage point, I’m seeing a market that is overbought. I am still looking for some oversold conditions to get long, for a trade, although I have a feeling that when these conditions arrive, I’m not going to want to buy. You can be assured that I will anyway.

Confessions of a System Trader 3/20/2009

20 views

Discretionary alpha is a term I’m rather enamored with right now. It is a derivative of “incremental alpha attributable to discretion,” which is described here by Henry Carstens, who attributes the phrase to Dr. Brett Steenbarger.

Due to discretionary alpha, short positions in my personal account are just a smidge in the green as of Friday’s close. The audited system account will not have this benefit as discretion is forbidden, and as a result, it will likely record a loss on its first trade. Ahhh…the beauty of incremental alpha attributable to discretion.

Truly, this week was difficult for me as I was focused on working through the painful feelings associated with a developing drawdown. I was reminded of Chart Addict’s post Trader’s Mindset and Common Psychological Issues as I knew that if this latest trade ever turned in my favor that the good feeling would not be stronger than the pain of having it go hard against me. As the trade is now in my favor, I polled the voices in my head, and they assure me the pain was worse than the relief. I think that pain will always be stronger than relief, and that the trade would have to go in my favor from the beginning and earn 2-3x the expected profit to feel joy equally as strong. Even then, it may not be as powerful of an emotional response as the pain of a deepening drawdown.

To understand that the pain of losing will always be stronger than the joy brought from winning is very very important. The realization of this forces into focus that the most important reason for trading is not to feel intense joy or pain but to make money. It is easy to get addicted to the rush of winning and losing, but since winning is never as powerful as losing, one is much more likely to intervene and over-ride during a losing trade. This intervention by the trader will likely occur at the worst possible time.

I don’t know what it was about this week that made it so hard to stay short. Maybe it was the cheerleading by CNBC, or the constant jawboning by Obama and the Feds. Everywhere I looked, listened, and read, it was as if the markets would never pull back, ever again. As crazy as everyone was, it was difficult not to jump on the bandwagon filled with crazies and ride off into the sunset.

But I resisted, stuck with my models, and will have a smaller loss to show for it. And that is what I’m focusing on…not the emotional highs and lows, but instead on the satisfaction of following the system, and by default, gaining a degree of control over emotional responses to trading. This is not a game, or gambling. It feels more like how I imagine a Restaurateur may feel after a slow week….

Confessions of a System Trader 3/17/09

42 views

Some time ago I wrote a post where I repented for the sins I committed as a system trader. This prompted Gio to title the post “Confession of a System Trader.” I liked the sound of it and so here is the first installment of Confessions of a System Trader.

3/17/09

The last three weeks have been very difficult. The market is stretching itself first to the downside and now to the upside in a way that makes it challenging to profit from being a contrarian. Independent auditing began on the primary system last week with the first tracked trade being on the short side. The system has a 60% success rate with short trades, over the past 15 years. That’s not a colossal winning percentage but I was hoping to be on the right side of it for the first real-time tracked trade.

The past 5 days of the market have made me really miss my early days of discretionary trading, when I would trade breakouts and chase momentum. Oh, to just place a bunch of trades, never keeping good records, just looking only at the profit/loss column. Not having studied much about market history, it was easy to throw money into trades, with nary a thought of an exit strategy, with outsized positions. I made money. It was fun. If something didn’t seem to be working, I just didn’t do it anymore. I did more of what worked. With system trading, even if something does not seem to be working, I have to keep doing it. Over, and over, and over.

Bloody hell it is so hard to just sit here and do nothing while everyone gets drunk and buys stocks. I feel like one man alone on a deserted and windy patch of earth, who can hear faint sounds of glasses clinking, laughter, and celebration. He wants to find the celebration, seek fellowship, and join the fold, but never sets out to find it as he knows that he will arrive too late to enjoy the festivities. Instead, he sits alone, listening to the sounds, thinking, “all this time has passed. Had I left earlier, I would probably already be there, celebrating.”

What are the chances, after working with a partner for many months on a system, that as soon as we feel it is ready and we are ready for it, it just quits working? I mean, traders are forever buying at highs and selling at lows. What if it is no different with system trading? What if my primary system peaked two trades before I began trading it by the book?

Just like Tuesday of last week (March 10th), when the Citibank news shocked the markets out of an awfully persistent 3-week downtrend, there is surely some news out there that will reverse this current rally, at least for a pullback, right? Right?

One thing I have learned about trading systems is that when the trade finally moves from a rather large loss to a small loss, or from a loss to a profit, it seems almost like magic, even though I may have spent half-a-year studying the system inside and out.

Maybe it will be a good thing to hit a good 10-20% drawdown right away, in the same way that chemotherapy can eliminate the cancer while simultaneously sickening the patient. What doesn’t kill me will make me stronger.

Why I Got Rid of My Real Time Futures Feed

741 views

For years the laptop would sit beside my chair, always on, always with the futures feed charted in 5 minute candlesticks. During the Armageddon trade of 2008 the laptop with the futures feed running would sit on my nightstand, beside my alarm clock. It felt good to be plugged in and up-to-date to the very last tick of the markets. I was watching the implosion of the financial capital of the world, in real time. I would tell my grand children about it.

As I look back on those years of frightful sleep and stomach-churning days and evenings, Macbeth’s soliloquy speaks to me:

“Tomorrow and tomorrow and tomorrow,
Creeps in this petty pace from day to day
To the last syllable of recorded time,
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life’s but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.”

What good is it to have a futures feed running all night if you don’t trade futures? It is like seeing a car wreck in progress. Except you can’t do anything to stop the wreck or help anyone until after the crash. What’s the point of watching the progress of it, living in it, if you are not going to use the information while it is happening? What’s the point of the day-to-day and night-to-night hand-wringing?

All good questions, for sure.

The truth is that I got rid of my real-time futures feed because I got rid of Tradestation. Tradestation, with its .01/share commissions and $100 bucks/month fee for trading less than 5K shares and its counter-intuitive “Easy Language” code was simply too expensive. I also had an account with Interactive Brokers, and at .005/share commissions and no platform fees, it just made sense (cents) to close down the Tradestation account and move everything over to IB.

While Interactive Brokers does offer a futures feed, their charting does not compare to Tradestation’s, and it was a hassle to pull up the feed on IB. Without really thinking about it–more or less just being lazy– I went without, for a few days. And then a week passed without the futures. I had missed it not at all. Two months later I realized that weaning myself from the futures feed has made a positive impact on my life and my trading.

Not only am I better able to tune out and off from the markets and focus on other important areas of my life such as my family, exercise, and sleep–I am able to execute mechanical system trades with much greater ease and much less nagging doubt.

Since I do not daytrade and typically trade the open or close via orders placed the prior evening, having a futures feed was significantly affecting my psychology and ability to mechanically place trades. Waking up at 3 a.m. to see what the futures were doing was allowing me to fast-forward in my own mind to the trades scheduled to be executed the next day. Many times I would second-guess these trades. My self-talk would often revolve around delaying the trade or setting a limit order rather than using a market-on-open or market-on-close. While the majority of time I did not override the systems I trade, sometimes I did. How much time did I waste trying to out-smart my own system? How much mental capital did I spend attempting to assimilate information that was unnecessary for my success? How much real capital was lost from deviating from a strict trade plan?

Traders these days are easily overwhelmed by the hundreds of indicators, platforms, experts, pundits, amateurs, tweets, bloggers, etc. Information overload is a very real threat and can be a detriment to trading success. At some point, the various bells and whistles just end up making a lot of noise. I highly recommend focusing on the factors most necessary for trading success and dumping everything else. Without a doubt, it has improved my quality of life and made me a better trader.

 

Confessions of a System Trader 10/5/09

37 views

It has been four months since my last confession. Life has been out-of-control busy, and as soon as I get home from work, I’m punching stuff into spreadsheets, blogging, working on my coding skills, and backtesting. It seems I have little time to do anything other than work. When I’m home, if I’m not in front of a computer, then it feels like time is being wasted that could be spent on the next formula, the next system, or the next blog post. Then, there are my children, and my wife. Life is just go go go right now, every day, including the weekends.

But it almost HAS to be that way, if you ask me. How can I expect to do well trading, when I am competing against people who have 8+ hours a day to do this as their day job? It just happens that my 8 hours a day often come at night or on the weekends.

I am so sick of writing about the Power Dip system. I have sliced and diced and chopped and shredded that system six ways from Sunday. I have tried to spare the readers from most of the process. A woman once said, “I just wanted to hold the baby, not birth it,” and I figure that is how many of my readers are feeling about now. (Although my traffic has not really suffered…Maybe it hasn’t been too awful?)

I hope watching 5 months of real-time trading and tracking of a system has been a helpful exercise. There is a lot to consider when trying to get actual results to come close to matching backtested results, and I have not even mentioned some of the more mundane issues such as order routing or using the best order types for the situation. I wanted to write more about percent-risk position sizing, and how that can be combined with limiting the max number of positions to increase profits and decrease drawdowns. I intend to move these specific discussions onto the Power Dip forum. That way, only those who are interested will be subjected to these esoteric issues.

So I haven’t had time to write as many in-depth blog posts as I used to. My experience is that life moves in cycles, just like everything else does. I’m hoping that I will soon be entering a cycle where I will have more time for writing about a variety of different ideas, systems, etc. Part of gaining more time is learning to do things more efficiently, and as I’m becoming more proficient at coding, theoretically I should have more time to write about what I uncover in my testing.

I have recently quit trading the best short-only system known to man. No one knows about it, except for me and a good friend (who happens to have co-developed the Power Dip). The damn system has returned over 100% a year, consistently, over the past 10 years. I quit trading it after a 5% drawdown persisted for a month. Feel free to call me a pansy, or insert your “P word” of choice. As much as I want to be able to trade it, it just didn’t fit my personality. The damn thing made me nervous as hell, every day. Anyway, that is a good topic for an upcoming blog post. The system must fit one’s personality, goals, routines, and lifestyle.

Okay, this is all for now. I have wasted enough time on this confession and have orders that need to be entered for tomorrow.

Confessions of a System Trader: 6/7/09

28 views

I am happy to note that since my last confession, my account has recovered from the drawdown. Were it not for platform fees, I would be positive on the year.

Since I trade mean reversion strategies, I’m not sure if this means that the markets are slowly returning to a more “normal” (whatever that is) environment where there will be dips to be bought and spikes to be sold. I sure hope it is. This slow motion melt up has been very difficult to adapt to, mentally. Since I have not changed anything about my systems or trading, I can only assume that it is the market environment that is shifting.

There is something about trading through a drawdown that I found surprising. At some point, I quit caring that I was losing money. Honestly, I just became numb to the whole thing. Whether it was coincident, or not, who knows, but when I quit caring about losing, my account began to recover from the drawdown, almost to the day.

It is also worthy of noting how my capacity for consumerism changes depending on whether or not my systems are working well. When everything is firing on all cylinders, I notice that I start scoping out new LCD televisions and other things that I do not need.

Having the AmiBroker platform to work on has catapulted my system development in many new directions. I like it much more than Tradestation, mainly due to the coding being much easier. I find many parts of AmiBroker to be much more intuitive to use than Tradestation.

Anyway, when my account value surpasses the influence of platform fees, I’ll post a YTD equity curve. That is, as long as mean reversion continues to gain some traction in this market.

Confessions of a System Trader: 5/6/09

26 views

If I’m honest with myself, I’m officially pissed off about missing this rally. I’ve been telling myself for weeks not to worry about missing out, that I’m executing my plan. And I have been, faithfully, but it turns out that maybe it has been the wrong plan for the current conditions.

Mean reversion systems have been my development focus, since they have been working really well for the better part of a decade. Knowing full-well that MR systems tend to under-perform in a strongly trending market, a system based on momentum has been very high on my systems-to-develop list. I erroneously figured that there was no real rush though as 2009 would see continued volatility and would likely be characterized by mostly rolling, sideways action. Rolling, sideways action and volatility is excellent for MR systems.

As we all know, the first four months of 2009 have been very strongly trending, with very few spikes or pullbacks. The first two months were characterized by a steadily downtrending market which offered some shorting opportunities (if you didn’t mind shorting into oversold conditions), but any long-biased trades were killed.  From March to the present the market has been just the opposite: strongly uptrending, offering many long trades (if you don’t mind buying into overbought conditions). And of course, shorting since the March lows has been brutal.

Simply put, 2009 has been the year of Momentum. 20% straight down, and now 30% straight up. I have been sticking with my MR systems, and it has been the worst possible environment for these systems. My account is in a drawdown for the year. Not an awful drawdown, but negative for the year, nonetheless.

Regardless of the pain and account-envy I’ve endured over the last couple of months, I am going to continue to execute my plan, and that plan is to only trade when I understand the edge. In hopes of finding some balance before the year is lost to me, I am working to crank out a good momo system. By the time it is finished, I’m sure the market will be right back in reversion mode. That is just how things seem to go.

I am 25% short the SPY, as of Tuesday’s open. I have been desperate to pick up long exposure, and while I have a great system for picking up trending stocks, it was not designed for a market that does not pullback. I have no idea how much longer this trending will continue, but I know that it will certainly reverse as soon as I give up mean-reversion. Therefore, the beatings for me have to continue.

Confessions of a System Trader: 4/22/2009

23 views

I have to say that I am thoroughly $%^#!@# bored. This market is not fit to short or go long, at least from my vantage point. So here I sit, in cash.

I do not, however, feel anymore that I have missed the party. Now it has become obvious that the beer, liquor, and wine are running low. A massive hangover is being fought off with Ibuprofen and a few loose joints, but like all hangovers, it must run its course.

One of my systems narrowly missed entering short last Friday, and it has been making me think more and more about the inherent faults of a binary entry and exit signal. Perhaps future systems will be designed without a binary entry and exit signal, but until I give up my full-time work, or hire a trader-servant, I will have to stick with my occasional entries at the market open and my even less occasional entries at the close.

I’m in full-on system development mode (especially so since trading has been light) with plenty of systems in development, several of which show great promise. One system is finished entirely and is being traded (with third-party auditing). It is my favorite system. It is currently under-performing but that has a lot to do with an awful first trade and a market environment that is dislocated from reality. I fully expect it to overtake the indices over the next few months.

Another system that I have traded sporadically for almost a year is in the final stages of development. It looks very very good. It will trade stocks and should trade often enough to keep boredom at bay. As most good systems are, it is very simple. The finished product will have a stop-loss and a position-sizing component which will accommodate a variable risk-appetite. Because the system seems appropriate for the level of traders who frequent this blog and the others here on iBC, it will likely become available for subscription. If the final version is robust as I believe it will be, this system should allow the average retail trader to make consistent profits from high-probability trades.

So while my account has stagnated while waiting to trade any sort of movement besides a 45 degree uptrend, there is great progress being made towards my goal of developing a quiver of non-corellated systems.

In terms of my vantage point, I’m seeing a market that is overbought. I am still looking for some oversold conditions to get long, for a trade, although I have a feeling that when these conditions arrive, I’m not going to want to buy. You can be assured that I will anyway.

Confessions of a System Trader 3/20/2009

20 views

Discretionary alpha is a term I’m rather enamored with right now. It is a derivative of “incremental alpha attributable to discretion,” which is described here by Henry Carstens, who attributes the phrase to Dr. Brett Steenbarger.

Due to discretionary alpha, short positions in my personal account are just a smidge in the green as of Friday’s close. The audited system account will not have this benefit as discretion is forbidden, and as a result, it will likely record a loss on its first trade. Ahhh…the beauty of incremental alpha attributable to discretion.

Truly, this week was difficult for me as I was focused on working through the painful feelings associated with a developing drawdown. I was reminded of Chart Addict’s post Trader’s Mindset and Common Psychological Issues as I knew that if this latest trade ever turned in my favor that the good feeling would not be stronger than the pain of having it go hard against me. As the trade is now in my favor, I polled the voices in my head, and they assure me the pain was worse than the relief. I think that pain will always be stronger than relief, and that the trade would have to go in my favor from the beginning and earn 2-3x the expected profit to feel joy equally as strong. Even then, it may not be as powerful of an emotional response as the pain of a deepening drawdown.

To understand that the pain of losing will always be stronger than the joy brought from winning is very very important. The realization of this forces into focus that the most important reason for trading is not to feel intense joy or pain but to make money. It is easy to get addicted to the rush of winning and losing, but since winning is never as powerful as losing, one is much more likely to intervene and over-ride during a losing trade. This intervention by the trader will likely occur at the worst possible time.

I don’t know what it was about this week that made it so hard to stay short. Maybe it was the cheerleading by CNBC, or the constant jawboning by Obama and the Feds. Everywhere I looked, listened, and read, it was as if the markets would never pull back, ever again. As crazy as everyone was, it was difficult not to jump on the bandwagon filled with crazies and ride off into the sunset.

But I resisted, stuck with my models, and will have a smaller loss to show for it. And that is what I’m focusing on…not the emotional highs and lows, but instead on the satisfaction of following the system, and by default, gaining a degree of control over emotional responses to trading. This is not a game, or gambling. It feels more like how I imagine a Restaurateur may feel after a slow week….

Confessions of a System Trader 3/17/09

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Some time ago I wrote a post where I repented for the sins I committed as a system trader. This prompted Gio to title the post “Confession of a System Trader.” I liked the sound of it and so here is the first installment of Confessions of a System Trader.

3/17/09

The last three weeks have been very difficult. The market is stretching itself first to the downside and now to the upside in a way that makes it challenging to profit from being a contrarian. Independent auditing began on the primary system last week with the first tracked trade being on the short side. The system has a 60% success rate with short trades, over the past 15 years. That’s not a colossal winning percentage but I was hoping to be on the right side of it for the first real-time tracked trade.

The past 5 days of the market have made me really miss my early days of discretionary trading, when I would trade breakouts and chase momentum. Oh, to just place a bunch of trades, never keeping good records, just looking only at the profit/loss column. Not having studied much about market history, it was easy to throw money into trades, with nary a thought of an exit strategy, with outsized positions. I made money. It was fun. If something didn’t seem to be working, I just didn’t do it anymore. I did more of what worked. With system trading, even if something does not seem to be working, I have to keep doing it. Over, and over, and over.

Bloody hell it is so hard to just sit here and do nothing while everyone gets drunk and buys stocks. I feel like one man alone on a deserted and windy patch of earth, who can hear faint sounds of glasses clinking, laughter, and celebration. He wants to find the celebration, seek fellowship, and join the fold, but never sets out to find it as he knows that he will arrive too late to enjoy the festivities. Instead, he sits alone, listening to the sounds, thinking, “all this time has passed. Had I left earlier, I would probably already be there, celebrating.”

What are the chances, after working with a partner for many months on a system, that as soon as we feel it is ready and we are ready for it, it just quits working? I mean, traders are forever buying at highs and selling at lows. What if it is no different with system trading? What if my primary system peaked two trades before I began trading it by the book?

Just like Tuesday of last week (March 10th), when the Citibank news shocked the markets out of an awfully persistent 3-week downtrend, there is surely some news out there that will reverse this current rally, at least for a pullback, right? Right?

One thing I have learned about trading systems is that when the trade finally moves from a rather large loss to a small loss, or from a loss to a profit, it seems almost like magic, even though I may have spent half-a-year studying the system inside and out.

Maybe it will be a good thing to hit a good 10-20% drawdown right away, in the same way that chemotherapy can eliminate the cancer while simultaneously sickening the patient. What doesn’t kill me will make me stronger.