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Trading Journal: Path to Consistent Profitability + Trading Career - Pt 2
I've been a programmer for many years, and when I originally started trading, I started trading options on a long term position basis (selling OTM options on ETFs and equity indexes). This was obviously quite dangerous …
To recap (for myself - although I don’t think I’ve stated this publically), I’ve been at the futures day trading thing for now over 2 years and the trading thing since September 2016; I originally got interested in money and making more back at the start of 2016 when I started becoming slightly unsatisfied with my job and wondered what else I could do, hoping to have my money compound and make me money instead of needing to work for it (aka “financial freedom”, aka FIRE).
That took me into Real Estate and got me and got me interested in trading + investing.
2016:
I went ahead and used a lot of my cash to buy an investment property; the remaining I used to get educated with (I knew I knew nothing about investing) and also reserved a small amount to trade, and of course kept a healthy buffer for personal expenses / personal emergencies.
The first thing I ran across was actually Anton Kriel - who today appears much more polished but also cheesy (like a Tim Sykes character). I paid a fair amount for his course and tried to internalize it. It actually taught me a lot about how institutions work and what “professional” investors do - which I believe is the polar opposite of what most people who are trying to get rich trading do.
Now that I look back at this, I didn’t have the foundation to really understand what he was saying - both through experience of trying to day trade as well as the background in education (what one typically learns through an MBA program - things like NPV, IRR, Basic Statistics like stdev, kurtosis, etc., Portfolio Management, returns based on diversification, volatility, etc, Accounting - reading balance sheets, income statements, statements of cash flows).
I couldn’t make his system work; it seemed much too slow; I’d never get the gains that I was expecting (on a small account, making 10-20% per year isn’t much), plus - as mentioned, I didn’t have the background to really understand how to pick good stocks (and identify bad ones).
2017:
That eventually led me to backtesting (I’m a programmer, so this comes naturally), indexes, and options. I think my brain is sort of naturally suited to option thinking (although I often find it difficult and all of the options actually cause some analysis paralysis). I educated myself on the basics of options + the greeks, and also started building some very basic option strategies (like vertical spreads and iron condors) based on back tested data against SPY.
I think everyone should learn to first trade through options because you are always thinking in probabilities - and this was one of the first counter-intuitive ideas that I understood about trading - that you could make a good trade and lose money or a bad trade and make money and you shouldn’t necessarily think you did well or poorly based on your P&L (because you might have experienced “beginners luck” or made a good choice that just didn’t happen to work this time).
So I had a simple strategy that worked well in 2017; it was basically (vertically) spreading PUT options on SPY (and later SPX) and other indexes (like RUT, QQQ, etc.) in the direction of the trend at 20-30 deltas (and buying the lower protection at 10-20 deltas). I knew I had potential for big losses although at the time didn’t realize how great the potential really was. Now that I look back I thinkI was very lucky that I didn’t get killed doing it.
Once or twice I had major “oh shit” moments - account going down $1-3k over night as SPX dipped (which is and was a fair amount of money for me); one time I closed it and took the loss, but another I held on it and it recovered. Probability of touch != probability of being OTM; But I understood overall that this was pretty risky - it worked well when there wasn’t huge major news.
I also traded some high momentum stocks like DRYS and GROW and made a few thousand bucks here and there. It was usually a lot of fun and I was trading with nothing except momentum and some very basic TA (MAs). But these stocks were hard to find and didn’t come along that often.
So 2017 ended and I was making OK returns, although I noticed a few things:
I was taking huge amounts of risk
I didn’t beat the S&P (although came close)
If I was going to compound faster I either needed to add more initial capital and trade with more money (hard at the time as I had a 9-5) or compound faster (turns out, even harder, although it looked easier at the time)
2018:
In 2018 I stopped doing my tech job as the company I was working for got acquired; this was a nice break and allowed me to focus more energy on trading.
My initial gut reaction was to trade weekly options - it was basically the same strategy but I could do it much more often.
For several reasons this didn’t work:
Firstly, I position sized too large and had some huge gains and huge losses (up and down 10% in my account over several days). I ended up net positive although damaged psychologically. I had made more in a few days than all of my tenants pay in my investment property (it’s a pretty poor area); I had promptly given most of it back. This drastically changed how I viewed money. I experienced both a sense of detachment from the money (it’s just a bunch of numbers on the screen) BUT also a real appreciation for the money (“I just made in a few hours with almost no effort what others really work hard to make over the course of a month to pay their rent!”)
Also, the market had changed and 2018 wasn’t the steady ride up (stair stepping) that 2017 was characterized by.
So I took some time to regroup both personally (to figure out how I’d make an income, get in shape, and also take some time off from work - first real time in 5 years), and also to reformulate a trading strategy / focus.
I realized trading weekly options that vega was highly elevated - basically those weekly options - despite having very steep theta (time) decay, they also have huge vega risk (price change risk). Essentially, I’d be successful only if the price moved in my direction. If that was the case, why not just trade directionally with the underlying (/ES)?
I understood the idea of being “product indifferent” - SPY basically moves the same way as ES as does cash SPX as do short term weekly options. So a backtesting strategy on one should work on the other.
I decided to go off and try to back test a series of elementary indicators on short term SPY (both the underlying and the options) and even built my own backtesting framework in Ruby (which was a lot of work but was a lot of fun), unfortunately, I noticed that I didn’t have a whole lot of edge anywhere when trading directionally (or even delta neutral if I was on a short enough trading time frame).
I also spent several months reading Van Tharp’s Position Sizing book; I realized that trading a good strategy can live or die based on good or bad position sizing.
So that’s what led me into futures - I figured the futures market was a small universe of possible assets; it seemed like it had a lot of leverage, plus, I could trade frequently which would allow me to compound my capital more quickly than say once a week (with weekly options).
The futures market, despite on the surface appearing very similar, actually seemed to operate quite differently, with DOMs, hard to understand and non-unified contracts, and lots of leverage. ES definitely seemed like it was too big for me to trade with without unreasonably tight stops.
So I decided to once again try to get educated.
I looked around and it was pretty clear there were a lot of bogus vendors and stuff being sold. I eventually landed on TradePro Academy which was recommended next to Jack Schweiger on an investopedia page. Investopedia seemed to be a trusted source - as is Jack Schweiger (everyone seems to recommend two books: Market Wizards and Reminiscences) so this must be a quality educator, right?
I signed up for that and took all of the courses; course ranged in everything from elementary TA (lots of stuff I already knew) - Dow theory, MA, simple indicators, to Elliot Wave, fibs, DOM and reading order flow through CQG / Market Delta and course on trading psychology.
Conveniently, this also got me to sign up for $200 / mo MD subscription. (Now I see why…).
I tried for several months trading through the DOM but I must say over all of that time, I just couldn’t get it and had zero edge. I mostly traded demo but tried trading live a few times. To be totally honest, I was totally too leveraged trading live in a small account and had no business trading a product like ES.
I realized that if there was any edge that I could acquire, it would either be swing trading or trading on the DOM.
I researched and eventually ran into John Grady and Jigsaw.
I bought Jigsaw + went through their institutional courses but couldn’t find any principles at play; Peter Davis was very helpful at various times, but I was never able to get order flow principles out of him that would consistently work; the best I could figure out was that order flow was the “icing” not “cake” aka - order flow might help you precisely time entries, but wouldn’t give you a general strategy. He did however teach the importance of journaling (which is essentially self reflection). I think he’s really on to something with that which is why I’m doing this today). He eventually directed me to John Grady.
I bought some of Grady’s material and talked to him once or twice on skype. It occured to me that he wasn’t a charlatan, but I do wonder how many people out there are like him. We talked briefly on skype and he basically confirmed my suspicion that it would be very hard to trade with order flow during my time frame.
I’m in San Francisco and the early mornings here are the early afternoons on the east coast. I’m not much of a morning person so getting up at 4:30 in the morning doesn’t work well for me and kills my day (note: I’m doing consulting work so I have a semi-regular part time job after trading).
I went and tried to read + figure out how most active day traders were trading in the futures market - the best I could find came down to: 1) using order flow / tape reading to precisely time entries 2) market profile 3) ACD variant systems of market profile. 4) pivot points
(BTW: There were plenty of other ways to trade - algorithmically, swing trading, spreading, using arbitrage methods, Niderhoffer’s statistical style, etc but none of these were active, intraday day trading).
I honestly do believe market profile can provide an edge; but the last few months in bonds have shown me that you need a volatile asset to day trade; 5 year bonds haven’t been that.
There are a host of other reasons which were debated in the last few posts of the tread; I won’t rehash them here. Suffice it to say that I think day trading both isn’t what I’m cut out for (I make better decisions slowly vs. quickly + intuitively), doesn’t match my schedule (being on the west coast) and 3) doesn’t fit the capital I have (small amount that I want to risk). I also think that 4) it’s probably very hard to make money regularly when things are not volatile (aka quiet days). I know this because I’ve gone through it the last several months - not much you can do but put a buy order at the bottom of the range, a sell order at the top, and hope that they get hit and only a bit of vol comes into the market to get a fill, and then a move back into value (but not so much that you get stopped out).
I also have thought a bit about who has staying power in this industry - who burns out fast and who stays around? Also who is obviously doing well? And it seems to me intuitively that the day traders who are really doing well are the ones in very volatile stocks/commodities (look at SMB who chases the “in play” stocks - their futures desk mostly trades /CL - the most volatile of commodities). OTOH, the other guys are do the best can compound capital every year and almost never lose money - Druckenmiller, Buffet/Munger, PTJ, etc. These guys aren’t “swinging for the fences” because they can’t - they have too much capital and would move markets. They don’t day trade. They position trade or buy and hold.
I’ve always believed that the way to get good at something is to (AKA the formula for success) 1) find someone who is already good at that thing 2) imitate them and 3) work like mad towards that end. Usually #2 imples #3.
-----
As background, and in review of 2018, I was asked by a friend the other day: “What was your overall return in 2019 across asset classes?” (not specifically trading).
[BTW: I view my trading account as just one asset in a portfolio of all of my assets in terms of net worth, so I’m approaching things from that lense. I also view trading as a continuum that involves portfolios + portfolio management; it’s all managing money and compounding money at the end of the day.]
That seemed a simple question but one that wasn’t very easy to answer as different investments in my portfolio have cash inflows and outflows from various assets, the assets are weighted different (so you’d want to account for a higher return if you had more invested in an asset) - plus, the amount invested might change over time (as funds would flow from one investment to another). This means that you can’t apply a simple geometric average (time weighted return) or IRR to the equation.
I came up with something simple that both 1) weights capital (so a bigger investment is worth more) and 2) also accounts for cash inflows / outflows.
My overall conclusion: if I had just put my money in a passive index fund (even one 80% weighted with bonds, etc) I would have done significantly better - making nearly 8-10% per year. OTOH, despite it being on small amounts of capital, huge losses in those accounts can really impact the total performance of the portfolio (aka my net worth).
These big losses weren’t just in my main futures account but in my other subpartitioned futures account used to implement an all weather strategy, AND, a more active real estate account. Basically, I was taking on way too much leverage in two of the three cases; in the other one (my active trading exploration) I had zero edge and saw slow grind down.
----
Where does all of that leave me?
Well, for one, it’s to be very careful with capital. (I’m reminded of Buffet’s rules for investing.) Also, to focus on portfolio management over active trading strategies.
This doesn’t mean that I’m just going to give up though and not try to “beat the index”. Not only is that boring, it’s demoralizing. BUT: I don’t plan to do it with much to any capital until after I’ve proven to myself that I can do it. I’m planning on limiting this capital to a small percentage of my net worth.
Another thing: I accidentally started looking into portfolio management as a way to understand how hedge funds actually work (based on Kriel’s statement that pro traders are 80% portfolio managers, 20% active day or swing traders). That has led me down a rabbit hole that is the equivalent of getting an MBA.
But it’s interesting that this knowledge about portfolio management not only applies to a more active position style trading, but it also applies across assets to my net worth in general (looking at various Real Estate projects, various passive investments, etc).
A bunch of the knowledge I’m acquiring right now is related to due diligence, portfolio management, and fundamental analysis (mainly accounting). Or another way to think about it: how could I reasonably convince someone to give me their money? Well, I’d need a very detailed plan with an edge that makes logical sense and will last. I’m certainly not going to make decisions based on “this line crosses this line” or “there was ‘unfair’ low at 2950”. Maybe you can do stuff like that with a few thousand bucks and squeak by for a while, but you’d have a hard time doing that with 100k AND it lasting (esp. in the day of algo trading, etc) AND being able to do it daily.
What really amazes me though is how much work is really involved in this research process; it’s more like “do 100 hours of research”, then “click buy”. Basically, by the time you put on a position it should be very reasonable, you could defend it to anyone in the world and even point to a 5 page word doc as to why you put on that position, it’s weighting, it’s risk, etc. And now I’m realizing why everyone in finance works so much!
I can talk a bit more about the process that I’m trying to develop. It’s basically what Kriel talks about in his portfolio management series; I found a much cheaper source on Udemy (for like $10!) that basically gives the same info (happy to share if anyone is curious). It’s basically building a long/short portfolio. Here’s the general framework:
Idea (bottom up / top down) -> Verify with fundamental analysis -> Watchlist / time with TA -> Put on position / risk managed.
The idea generation process really is two phases: 1) getting a general idea, and then 2) doing the hard work to dig into different sectors / industry groups to figure out what would work well and which companies are fundamentally sound. Next, it’s to build a hedge (going short) a company that not only hedges out the risk (because they are in the same sector or industry group) but because they are fundamentally an unsound company.
(Anyone who has followed this from last year might remember my GRMN/FIT trade - that would be an example of such a long/short trade. Unfortunately, I didn’t do any of the hard work to actually analyze the companies - only did the last step of verifying with TA. I had two of the four elements there - idea generation + TA verification - but it was missing both fundamental analysis + serious risk management from a portfolio standpoint).
I plan to update more about this process when I understand more of the mechanics better.
In a lot of ways I’m still teaching myself (mostly through Coursera and Udemy) the basics of portfolio management, accounting, company valuation, and some basic quant stuff. Also, I’m hoping to understand more about sector rotations and market cycles; it’s clear that it’s important to understand cycles or phases in the market to do this well.
With that said, I’m trying to keep up the watchlist + generating ideas, hoping to have a more solid framework in ~ 1 month.
No huge updates this week; sort of slogging through a bunch of finance education and keeping my watchlist.
The main analogy I’ve been using in my brain for trading is one of “hunting” - go out and “kill it”. I often think of aboriginals - a series I saw on Netflix. They show some aboriginals and the men + women - the men go out and actively try to kill animals; the women instead gather berries + nuts. Turns out most of the time the men catch nothing and the tribe has to subsist on what the women pick/find; When the men do catch something they all really enjoy it.
I think there’s a direct parallel to trading there (most of the time it makes sense to be invested - rarely, but occasionally, it makes sense to day trade).
Day trading is an active strategy, one where if you don’t show up, you don’t make money. OTOH, portfolio management is more like investing - make good bets, put your money to work for you vs. you working for your money. Which is why I got interested in trading/investing in the first place.
Right now a lot of what I’m going through is about portfolio management. You put your money to work in different assets / classes / stocks etc. How do you weigh those things even if you don’t know the outcome of the results? How correlated should those bets be? Etc. So the things I learned about this week are the basics of the mean variance frontier. The basic question to answer here is: I’ve got these various stocks or assets. How much should I invest in each and what do I expect the result will be? And how do I weigh these things optimally?
[BTW - I found an excellent resource - “quant101”]
It seems like there are at least three levels of thinking about trading:
I’m going to buy/sell this thing because I think it’s going up/down (intuition = bad results for me)
I’m going to have a plan/system to buy/sell this thing because it tells me that it’s going up/down (OK)
I’m going to improve that plan/system based on data I’m getting in/feedback I’m getting. (Good)
I think what I was doing was a mixture of 1 + 2 previously. I had a basic plan/system but would use intuition as to direction of the market (this was largely based on context). Also rules were hard to formulate because context is always different (and yet in some ways similar to what’s happened in the past). The problem is that it’s very hard to improve on context read because there is no model of the context so it’s hard to improve it systematically.
Now what I’d like to do is to always have a model, and then improve it as time goes on. For me this will mean having projections for future stock prices (I’m hoping to do this through CAPM, Ratio analysis, and DCF projections) and then seeing how those play out over time, and hopefully improving / weighting them over time.
I think also having diversification + spreading will improve my reward to risk odds.
I’ve got a few good trades on there but want to get these things down to a systematic process. This largely means:
Keeping large watchlists of different stock ideas. Possibly even automating this. Right now I have it in excel but since they are pairwise trades, it would be nice to have a matrix of long stock a, b, c and short stock d,e,f and to see daily/weekly returns. But - TBD
Having a process for evaluating these positions. This is actually a few phases:
A one pager summary of the trade
A more in depth word doc/sheets of each company in the spread, with the ideas + risks, largely determined by:
Projections - 1 yr. This would include DCF, some ratio analysis, etc.
Next Week:
Build / create basic writeup for the best spread trade I have on my watchlist. “Perfect is the enemy of done”
Wk 3 of Coursera Course about Portfolio Management
Finish quant101 course
Read Profiting in Bull or Bear Markets
Looking over last week's todo list, I realize that this journal is probably a lot less interesting than my previous one since I essentially have zero positions on.
That’s OK though, I’m doing this to be profitable long term, not to be interesting. “The best investing is boring” as Kiyosaki’s Rich Dad says.
I’m also considering one of Kriel’s statements: most traders want to put risk on right away, but instead they need to step back and learn some things first so they are making good decisions; that resonates with me.
As far as I can tell, Stanley Druckenmiller seems to be probably the best known person I’m trying to emulate. Basically, understand the macro, be positioned appropriately most of the time in a long/short portfolio, but then when things get hot, day or swing trade momentum style. Since futures are basically 24/7 there aren’t too many markets that can respond the way index futures or bonds can overnight.
I’ve also been thinking that the key is instead of trying to hit home runs, just try to compound 10-20% each year no matter, but do it on a larger sum of capital - like 100k+. This is a lot easier to do than trying to day trade your way from a 25k account to 100-250k. The key of course is not so much how much you make, but how much you keep when you lose.
This had led me to be much more focused on risk and specifically understanding how to calculate Sharpe ratio, etc. Some of this stuff is pretty theoretical so it’s nice seeing it integrated into practice.
Another thing I started thinking about last week is about keeping a long/short portfolio, but not necessarily keeping those positions as spreads. For instance, maybe I’m hot on google and not on IBM, so I might go long on google with 10%, short on IBM with 10%, but not trade it as a spread (meaning I’d have stops on each position). So although the portfolio has a net exposure of 0, the portfolio isn’t all spread trades. I’ve not got a seperate sheet of those ideas and I’m simulating have a long + short portfolio on paper only. I’m in day one of that portfolio so we’ll see how that goes. One of the key attributes there is calculating sharpe (although maybe I’ll move to sorentino and learn about jenson’s alpha to get better measures of risk-adjusted returns).
Just to restate my goal: it’s to make 20% per year no matter what. That basically means, never have a losing year. Of course, if I could do that year in and out, I’d be very happy and be a very rich man.
I’m still reading + learning a lot through “Profiting in Bull or Bear Markets” - that has been very informative on inflation, etc. As I see it, and what they point out in the book, is that very low inflation, commodities wont’ do well and neither will real assets (like RE). Bonds won’t do much because there’s no inflation, and with such low interest rates there’s really no reason to hold them (except as a hedge against the market).
Businesses in the market can’t raise prices since inflation is low, so they need to resort to technology + innovation to improve their margins. This makes sense why tech has been outperforming everything else:
Also, note the spreadsheet that can automatically calculate this stuff. Luckily I found =GOOGLEFINANCE()
With that in mind, I’d also like some spreadsheets that automatically update with macro data such as GDP numbers, 10-2 spread, etc. Basicaly, a series of lagging, leading, and coincident indicators. But I’ll leave that on the backburner for now.
I’m also trying to integrate this stuff into some sort of general framework of cycles. Obviously we’re late in the cycle, technology is dominating, as are the newest “themes” (the IPOs of the day) - although are we at an inflection point? Thinks like beyond meat and peloton haven’t been doing so hot and yesterday’s IPOs - thinks like Uber, Lyft, etc have seen tops. So what’s next? I think that’s one thing I remember from a Kriel interview: be 1 step ahead of the market, not two or three. But that also requires understanding what one step, two steps, and three steps are ahead in the market.
For now, it’s continuing to learn + read. There are a ton of coursera course and courses out there in general about finance that I think I could really learn from. The only downside is that sometimes they get too academic and it’s hard to know how much it will apply in the future. I’m trying to continue learning but only do so while it’s practical. I’ve learned for me that when things are too theoretical they are easy to not learn or not care about. It’s only when you need it that it because really a burning desire in yourself to learn it and then it comes easily.
Let me give an example. Portfolio Theory states that mixing in a non correlated asset will give better risk adjusted returns. Ok - so now they try to teach all of these formulas (like w1^2sigma1^2+w2^2sigma2^2+2w1w2sigma) etc. Ok - well, who cares?
And I don’t...until...boom, I lose money and then want to know - but how should I have been weighted here? Clearly I should have had more/less in this non correlated asset, but how could I have known that!? And these are the things the theoretical knowledge of portfolio teaches.
OK - now there’s a burning desire to learn that. And even to go further because I have a series of assets that I want to balance to get the optimal return for a given level of risk. And that leads you into matrix math / linear algebra, and all of this stuff that would seem really theoretical, dry, and pointless until you get to this point.
On another note - related, but highly personal - I’m now at a point where I can start saving up a trading stake that’s reasonable / substantial. This is largely because this month I should meet other personal finance goals of having a year of expenses saved up which is liquid, but in safer instruments (and will be passive - not touched by this account).
For the the trading steak, I would like to save ~ 10k - which is about 5 months of savings for me (saving ~ $2k per month). That will give me a few months to paper trade. After that, I’ll start using real money. If that goes well and I can make 10% - 20% over a year, I’ll do the same in the next year and add to it / compound. I’m trying to remember that this is a long game - I want to be in this game when I’m 60, not burn out like so many traders do in a few years.
Finished reading “Profiting in Bull + Bear Markets”. Very interesting book and definitely worth understanding on a macro level. Basically he talks a lot about leading, lagging and coincident indicators and how inflation, money supply, bond spreads, etc. all factor into this and how everything is interrelated.
My plan is to read several books on this front. That’s sort of how I understand things - I go and read 5-10 books from different authors on the same topic and from that, I can get a composite picture of how the best minds think on the subject; from there, I can factor out the individual differences and pull together the similarities.
I think moving forward I want to read more books on the subject (Right now I’ve started “Unexpected Returns: Understanding Secular Stock Market Cycles”).
Instead of just saying in general “this market is too high” - well, OK, but how do I quantify that? What’s a model that will spit out something useful?
I guess that’s TBD for now, but for now I’m thinking of building some spreadsheet models that can automatically pull data on a monthly basis based on 10Y-2Y spread, BAA vs. AAA bonds, CPI/inflation data, housing data, etc. I suppose first, though, I need to build a list of all of the leading, coincident, and lagging indicators that I want to follow. Then I’ll build some sort of index using month over month change data to make apples to apples comparisons.
On a different front, I received a promotion for a course from a well known trading educator who teaches scalping/market making. This is basically a 180 from what I’m doing on the long term basis, but it’s also something I’ve been considering doing for a while.
I also believe that there is an edge in this style of trading - which is ultra short term, although obviously it will take a fair amount of practice to get it down.
I’m still not sure where this kind of trading fits into my life. It’s obviously super short term so takes a lot of individual attention. I also think that the big moves happen overnight and are more about positioning. I think the big money happens by being invested, not by short holding periods (anything under a day). Of course the smart money does this because it’s simply too large; but I also think that the smart money uses the dumb money’s liquidity.
[Speaking of dumb money - on Friday I got a call from AMP trying to sell me something. I guess the sales rep didn’t realize I had $0 in my account and when I told him I wasn’t trading any more he said “Oh, did you lose too much money or something?”. Yep - I’M THE DUMB MONEY (I felt like screaming).]
So where does that leave scalping? Well, something that might be good as pocket liner. Because of liquidity concerns, I don’t think it makes much sense to scale up where you could make several thousand a day - I think it would probably be limited to a few hundred per day. Ok, that’s still nice, but when I can charge well over $100/hr doing software, does it really make sense to scalp? Well, yes, to be involved with markets; but in terms of long term P&L - no.
But - as I’m realizing - everything comes with it’s own gotchas (“the grass is always greener”).
Also - thinking on the retrospectve of last year - I think going forward that if something doesn’t seem promising after a few months, I need to just give it up and move on. It’s OK to make mistakes and try things out. It’s easy, especially with a journal like this, to want to hyper focus; but that’s actually the wrong thing to do. Instead, I need to sample lots of different styles until I find one that works well for me but also has edge.
I’ve also been thinking about something Kriel said numerous times - one of the big problems with retail is that they try to dictate what works to the market instead of letting the market dictate what works to them. Investment banks (and hedge funds) obviously follow this. If something isn’t working - well, survival of the fittest - they die or they adapt.
So how have they adapted? I see a few centers of obvious edge:
Short term stock trading - trading “in play” names (aka volatility scalping / momentum)
Short term trend trading in very active markets. Unfortunately, this is only “once in a while” where there’s a big move in bonds / major indexes (aka 2 stdev day). Think of 2-3% up or down on day.
Algo trading, in various forms. HFT (which is really just front running) - but I don’t have access to this
An older school style of market making
Longer term position trading with long/short portfolios
Buy + Hold (assuming you buy the right stuff and never sell it ala buffet)
Active Investing / Company Takeovers
Etc. Of course there are more, but the ones that makes sense to me are #3, #5, and #6.
My belief is that inside most institutions, there are only a few profit centers and some aren’t really “trading” per se:
Brokering commission
HFT / front running
But the ones that are applicable to me are:
Algo trading via arbitrage and/or market making. Of course most of this is out of reach for most people who aren’t good with programming + data.
Short term analysis of data - as quants do. This is really finding patterns in data (although often their edge disappears in a few months) which have logical explanations. I think Niderhoffer’s style also fits into this. I have some of the background to do this - the programming + analytical skills, but definitely missing a lot of the statistics + machine learning background.
Long term position trading via mostly fundamentals, with very basic TA keeping you “out of the dumb stuff”. (There’s a lot of portfolio theory here and finance + academic research. I’ve now met many people who have worked at banks, hedge funds, etc. And they basically all say the same thing: “TA is just total bullshit. No one makes money on that”.)
So for now I’m basically quitting TA; I’m going to continue to take courses on longer term stuff (portfolio management), keeping my long/short watchlist (just on paper) while I save up my $10k for live trading (~ 5 mo. away - unfortunately).
Re: short term trading / scalping, I’m going to start taking notes; now that I have a framework. I don’t want to say much about it as I’m still learning so I’m going to keep notes brief on it here.
Get data feed
Do due-diligence on my market
Record screen for 30 minutes every day
Make notes on what I’m doing wrong
Construct spreadsheet with scalping win rates, etc.
Still saving up money and paper trading. I now have $1700 saved up this month so slowly but surely reaching my $10k capital to start live trading.
In regards to paper trading, things have been going really well with a 2x leveraged long/short fund.
Two weeks P&L + up ~3.5%, with S&P basically flat this year.
Regarding short term trading - I also spent a fair amount on a course of a well known short term trader. I’m sure it will provide value for some but for me it both would involve a lot of practice and not a lot of return (think a few hundred dollars a day). Presumably this would also be after months of “practice” every day - probably for several hours a day.
I’m a software consultant and can easily make $150/hr without trying very hard - so the prospect of day trading to make $300 or so a day for a few hours isn’t that exciting to me - especially with the fact that there are liquidity constraints to the technique.
Does it work? Well, I don’t know but I think it would take a lot of effort to find out.
Speaking of which, this also bought up the idea: how do you know what education to actually buy? And I think there’s a lot of misdirection and misinformation here. I’ve been racking my brain as to what would be a good source of such info. I think nexusfi.com is doing a great job here, but I suspect there’s still a lot of BS and misdirection - even here.
As a web developer, I have the ability to change this. I could setup a site of video reviews of vendors - something I’m contemplating. BUT - they key is I don’t want to charge for it as it then becomes a conflict of interest (vendors paying me to review their stuff). OTOH, I know it will take a fair amount of time to set + maintain something like this. So I'm still trying to figure out exactly how to do this.
Otherwise - I’m spending most of my time just learning about markets - from obviously legit sources - namely longer term, academic sources. Presumably, my P&L (in paper trading) should also reflect this (which it is currently).
I’m really impressed with how well this long/short portfolio is working.
Not a lot to report so far. I’m basically long disruptors, short disrupted. I’ve gotten stopped out of two positions.
My plan going forward and so far is to have 10% stop losses and 20% take profit targets, rolling up my stop to b/e at 20% and trailing by 10%.
One problem with this so far is that I’m not accounting for borrowing costs + margin costs. And I’m also assuming that I can short all of these stocks.
Since they are relatively liquid stocks, I’m sure if the shares weren’t available to short that I could buy puts or sell calls on them. Luckily I’ve done my homework with options and know enough on how to delta hedge and actually reduce risk instead of taking on more risk.
As I wait to see how this portfolio does, I’m continuing to get educated on the market. Instead of chasing the “next hot thing” - usually with a large price tag, I’m gravitating more towards the strategies and ideas that hedge funds would use.
I have two qualifications here: 1) is this knowledge that could potentially get me a job in the finance industry? 2) Could I raise a million bucks with this knowledge?
On point #1 - I don’t care about getting a job in finance, but I’m using this as a proxy to strategies that make real money and that institutions use to make real money. For instance, if I learn about portfolio management or fundamental analysis, I could use that knowledge to get a job as a portfolio manager or analysts at a hedge or mutual fund. If I learn about data science, I can use that to (help) get a job a quant hedge fund.
On point #2 - I don’t plan to raise money, but would like to follow a strategy that could. Why? Because at the end of the day, if I’m putting up my own money I want to believe in it so much that I would have no qualms asking someone else for that money.
On both point #1 and #2, I see plenty of stuff in the retail domain that I just can’t imagine ever asking anyone for money or getting a job doing that. Where are all the jobs and hedge funds that trade order flow?
It’s pretty clear to me how the system now works: the prop shops used to make their money on commissions; once technology showed up and made commissions near zero, they had to take a new route; this new route was through education, which is why almost no prop shops are left, plus, all of the prop shops that are left are selling really expensive education packages.
Once again, this is not saying no one makes it at prop shops or trading orderflow, but I do believe the odds are rare. If the odds are 90% against you, why do you think you’ll be the lucky one?
I’m reminded of a story in Think Fast and Slow where Kahnaman talks about a bunch of professors (economists, statisticians, behavioral financialists) sitting around discussing a new textbook that they would each contribute a chapter to. They plan on getting the textbook completed in 3 years. But then someone points out that the average textbook takes 7 years to finish. But - they think they can beat the odds. 3 divorces, 5 cross country moves, 2 parents deaths later, and the textbook gets completed in 8 years. And they are all statisticians and know about behavioral finance!
On another point, I’ve been following the thread about the day trader who has been smashed (
I've been an options ETF trader for the past 5 years and have done quite well.
I developed my own trading systems and it worked.
2016-2018 I've been on a roll.
2019 was a complete turnover for me, especially the second half.
The …
). Another thought from Kriel that I’m reminded of: he makes the point early in his course that institutional traders never (day) trade for an income. That’s why all hedge funds take a % of Assets under management to pay their salaries. His point is that all pros know that returns will be bumpy - because you can’t dictate to the market what you want to happen.
Next week:
Get an IB demo account
Build out current positions in IB demo account
Create non-hedged watchlist of long + short ideas (morph current watchlist)
Finish up Easterling book
Finish https://www.coursera.org/learn/portfolio-risk-management
Modify leading, lagging, coincident script into something usable (import it into google sheets + start making charts)
Things are still going well, not a lot to report back. Portfolio up ~ 7.5% while S&P has risen ~ 4%. Still much better sharpe ratio + smoother equity curve. Of course, it’s all fake money so hard to tell if emotional biases would be getting in the way.
Completed several things from last week; I now have a paper IB trading account that has my paper positions with automated stops; I’ve been rolling/trailing stops up by 10% as they get 10% in profit. Basic formula is equal dollar weighted, 20 positions - 10 long, 10 short, each risking max 10% (or 1% of equity), with max 2x leverage. So basically long/short equity, with most ideas as bottom up.
I still have quite a bit to do on collecting data from various resources for a weekly or monthly automated review.
I must say that with this time frame I feel relatively disconnected from the market. Of course, I haven’t really been analyzing companies as in a lot of ways I’m still building my infrastructure for general market analysis. But I also don’t have real money involved, so it’s hard to stay really focused without it.
I’ve wondered if my emotional biases will get the best of me. If making money is the real reason to trade, why do I feel the need for excitement? Or to do something active every day? At this rate, I could make 50-100% this year. Would doubling my account not be enough? I think these questions can only be answered once i have real money on the line.
I’m also looking down the road at possibly doing something with algo trading. I’m a long way off though, and still consuming a lot of courses on finance / portfolio management.
Since I’m sort of in a holding period (while I save up capital), I’ve also thought of possibly staying involved with the market in ways that aren’t strictly trading. One way I floated in another thread was building a product that was essentially trading reviews of vendors. I thought my Kriel review went well. I’ve read so many books and spent a fair amount on courses, and think others could benefit from my knowledge; I think the trading community needs a source of honest reviews as there’s a lot of BS + conflict of interest out there. No doubt Futures.io is a part of that solution. But I find it unlikely that people (I or others) will produce high quality video content reviewing the things they’ve bought without some sort of incentive.
But, as of right now I have nothing to promote and this certainly isn’t the forum for it, so I’ll leave it at that.
On an unrelated note, I ran across a book I read early in my trading journey which I think would be nice to reread - “how i trade for a living” by gary smith. You just get the idea reading his words that there is very little BS here - a straight shooter. This is what I like.
Still doing well this week vs. the S&P, although the graphs seem to show me tracking the S&P pretty directly.
I now have a virtual paper account running on Interactive Brokers so am able to execute orders and get more realistic prices / fills. I’m still not 100% sure that borrowing fees are being charged. Also worried that I’m not accounting for interest as the paper account has 100k.
I think when I trade with real money I’ll half my position size so that I end up using 0% margin and just treat it as a cash account (never going over my cash balance). That seems much safer than using 2x leverage. If things go very well, I can always increase leverage.
One thing I’ve found in trading is that it’s always better to be safer + paranoid than more courageous and ballsy. Life is actually the opposite way - what you fear the most usually ends up being no big deal. But in trading + investing, what you aren’t watching out for usually really costs you. This is why people primarily learn by losing. Or as dalio says “Every thing you’re concerned about you don’t need to be concerned about and everything you don’t need to be concerned about you should be concerned about”.
Got stopped out of a series of my trades on thursday + friday - the worst of which was a short on DBX. It gapped against me for earnings so I ended up taking a 20% loss on the trade despite having a 10% stop. This might be a good reason to use options in the future for my stops to prevent gap risk (especially near earnings announcements).
Coronavirus fears heating up. Put on shorts on AAL and YUMC. I’m a little bit worried that these fears might be priced in and maybe shorts down the line on the value chain are better trades.
Also I botched my long position in a major gold stock - NEM - twice. I had been staring at my long vs. short equity positions earlier in the week in the trading platform and couldn’t figure out why I was net long an extra $1k vs. in my spreadsheet where I should have been roughly neutral. Turns out I had bought 100 instead of 22 shares on NEM. So closed out my remaining position but botched it and had only 5 left (when I should have had 22) so huge P&L swings that wouldn’t be representative (which worked in my favor on Wednesday and against me on Thursday).
In other news, I met up with a quant friend who worked for a major fund manager. It was interesting to see how the internals of a quant fund worked. He also suggested I reconnect with a trader who used to work that fund and who has made it independently, suggesting some sort of mutually beneficial relationship (with me doing quant sorts of things for him).
I expressed to him how everyone I’ve talked to who is an active trader can’t really tell me how they operate; it’s always in these very vague “you’ll figure it out if you stare at it long enough”. But he suggested that in every firm - instead of creating new strategies, they just take strategies that already worked at other firms and tweaked them. Interesting.
Another thought on this is to go and seek out less liquid markets. Why? Usually trading strategies can be less involved, there’s more possibility of edge and you’re trading against less sophisticated players. Also interesting.
Another one of my friends is also attempting to hook me up with a japanese bond trader who apparently wants to pass down his knowledge. He trades in the afternoons here on the west coast which would fit my schedule perfectly. So hoping to at least meet him.
Overall I’m trying to get a better picture of how the industry operates - what functions + roles do people have in these industries, and how do they actually form the smart money that can consistently make money?
The course I just finished - https://www.coursera.org/learn/investment-management - had some real gold in it re: different roles plus (economists, traders, portfolio managers, analysts, support roles like IT, legal) objectives in how managers are chosen, the difference between absolute vs. relative performance. Mentioned was the MVST method: Macro, Valuation, Sentiment, Technical (yes, this is how people in the industry actually trade aka make decisions on what to buy and sell). Macro factors: NFP, Consumer confidence, Durable Goods, Initial Jobless Claims, ISM, MBA Mortgage, New Home Sales, U Mich Senimtiment; Valuation, Sentiment (VIX), Technicals - Size of free float, supply + demand, seasonality. They also talked about various risk measures - Volatility, Correlation, beta, tracking error, VaR, Stress Tests, Monte Carlo Simulations; and Finall GIPS - Global Investment Performance Standards, which the CFA Institute puts out.
For next week:
Watch Kriel Video 22 re: day trading
Watch Chris Haroon’s Udemy course - hedge + mutual fund careers
Watch Khan academy - the business cycle - The business cycle (video) | Business cycles
(Note: I changed the SPY position to be unlevered - aka 100% cash invested).
What a crazy week.
With my paper portfolio, I moved to all cash on Thusday of last week. I’m now starting to see what Kriel means about transitioning from a portfolio manager to a day trader when volatility picks up.
He has a red light / yellow light / green light sort of system - and although there are no fixed rules, I think it makes the most sense to be a portfolio manager when VIX < 20 and be a day trader when VIX > 25. (With yellow in between).
This doesn’t necessarily mean sell out of all positions, but I think it definitely warrents getting out of a whole bunch of long positions that aren’t working.
I also started trading SPY last week and didn’t do very well. But at least I’m tracking it so that should give me some insight into what is working + what isn’t.
Mid-last week I went to all cash; when I did that, I also reset my paper account on IB to be equal to ~ 10k (actually to ~10,500, roughly what I’ve gained on the account) what I’ll start trading with, so I think this should provide a better estimation of how I’m doing. It will also give realistic margin levels so I shouldn’t see anything surprising when I trade live.
On Thursday (and with the new account) I’m now net short and short those companies that were previously short and making me money. I also reestablished long positions in PALL (paladium etf) and a major gold stock.
I also have a short SPY swing trade on so let’s see how that works on Monday morning. I am exposed to gap risk there, and wish I could trade futures in this account, but even the micro futures are a bit too large for my account. I’m trying to take Kriel’s advice here: he recommends never risking more than 0.25% of your account on a day trade. I take this to mean don’t risk more than 0.25% on a swing trade (< 1 week time horizon). I’m risking ~ 0.5% on this trade.
I put most of my money into short term treasuries at this point. When VIX < 20 I’ll probably reestablish my portfolio, but can’t buy the falling knife at this point.
I’m staying net short (and largely in the SHY etf) because I suspect that there will be a series of escalating coronavirus cases in the next week as the virus spreads through the US. I suspect, though, that this is largely overdone and the market will bounce back in 1 week - 1 month. The estimates show that it’s large killing off the older demographics (the ones who don’t work) and killing very few of the young.
^ (With SHY Position)
^ (Without SHY Position)
Unrelatedly, I’ve got a busy personal schedule for the next few weeks, so won’t be able to update this for the next few weeks. But I do plan to continue reading/consuming industry content.
I’ve started going through Van Tharp’s Peak Performance Course (I just bought the first book but plan to buy the rest). A lot of it makes sense so far and is nothing new. One thing that I note he mentions in this book is that most successful traders have win rates between 35-45% win rates; most higher than 50% usually aren’t successful long term as they let their losers run and take profits early.
Talking to a quant friend, I said that I was really using trading as a means to learn how to be successful at anything. At some level, I’m using trading as a way to make money, but also as a way to tackle a really complex, seemingly difficult subject and master it, and along the way learn the principles behind mastering anything that has a lot of smoke + fog around it.
It’s pretty clear to me how to get good at things that have known methods. For instance, if you wanted to run a marathon, have a better body, speak a foreign language, or learn an instrument - there’s a method for that. (The general method, btw, is to take tiny steps until it becomes a routine/habit and then you are off to the races. Usually there’s an easy + ready made structure based on things/people who are credible - for instance, a marathon schedule or musician).
But how do you get good at something when the path isn’t easily laid out for you? In a lot of ways that is one of the main reasons for me wanting to “learn trading”.
One of the general principles I’m extract here (which Kriel mentions and I noticed my former coworkers do) is to do a general industry overview. Who are the winners + losers? What are they doing to consistently make money? What are the careers in the industry and what skills would you need to have to do well in this industry?
