A Trader Journal

As most readers of this blog know, Wall Street Currents site is my primary source of information to get a pulse on markets and for new ideas, view points & techniques to investigate. Over last week there were multiple changes to WSC site.

The changes were primarily in the following 3 areas of the site:

• Front Page - Front page now includes articles from "Futures Magazine" and "Resource Investor" magazine. The latter is focused more on commodity side. You can find these under the left most column of front page. Few exclusions from the "Institutional Research" section.

• Market Timing Page - Notable are the changes in the right  column. Real estate on any web page is a precious commodity. So though I want, I cannot allocate dedicated space for all blogs. If you feel strongly any particular blog requires its own space in right column over what we have now, then please let me know. Otherwise, I think the page now provides a good balance in providing new techniques/ideas, analysis and view points.

• Quant Currents Page - This page has several exclusions and few inclusions. I notice typically 4 types of quant blogs - (a) blogs that provide interesting ideas, (b) blogs that follow quant herd i.e., running with whatever idea that is popular currently and add couple extra view points,  (c) blogs that are too theoretical  and (d) blogs that focus on quantity instead of quality. So most of the exclusions and inclusions are towards making the page concentrate on (a) and (b) category blogs. I am not yet done fully with pruning on this page. Now no process is perfect. So please feel free to suggest any changes.

Mobile Tip: 
If you are watching WSC site from a mobile (iPhone/iPad etc), double tapping with your finger on any box in WSC pages will cause the display to zoom in and fill the entire screen with that box for easier reading. If you double tap again, the display zooms out to show the entire page on the screen again.  

Last few weeks were quite busy with various activities and journal publishing was less frequent. Next several weeks will be similar with higher priority activities taking up the time. So my current plan is to publish ATJ Digest weekly and optionally publish one post/study during the week. 

The current digest articles fall into 3 broad categories - Trading, Technology and Wellness. Trading section has couple strategy papers and articles. Typically the approach I pursue is to get the core ideas and see if I can enhance/modify to integrate them into my existing methods.

For example, one question I like to investigate is how about using ORB (1st article) on a Weekly/Monthly chart instead of intraday? Similarly another question to investigate is how about combining ideas - Liquidity (article 2) and ETF short selling (article 4)? Similarly I find some of the ideas under technology and wellness sections compliment well with ideas under trading section. Now most ideas don't pan out for me. On other hand, I am quite happy if I can learn and put to use just 1-3 good techniques/ideas per year either in trading or in self development.


Opening range breakout: Past, present and future - The core idea of opening range breakout (ORB) is buying at a given level off of the market open and selling at a given level below. Often the variations in ORB strategies are related to difference in stretch calculations or in price patterns over past 1-7 days. The article discusses in more detail the patterns, code and performance of ORB and likely reasons for lower performance in recent years. On the whole a good article and provides some ideas.

Internet & Personal Computing Trends - This presentation was done last month. Lots of stats and charts like internet user trends, tablets usage, mobile trends, trends in personal computing transformations etc. The link is to a slide deck.


Why Does ETF Short Selling Provide a Different Signal? - The paper claims that in contrast to regular stocks, ETFs with high short interest experience positive abnormal returns. The reason being the creation and redemption of ETF shares influences the level of short selling. The paper also finds that foreign stock ETFs with low short interest have positive abnormal returns. These abnormal returns are typically caused by higher prices in foreign stock markets and not exchange rate changes. I have not read the paper fully but found the idea interesting. Like prior article, felt may be investigating the idea could be worthwhile.

Liquidity-Driven Dynamic Asset Allocation -  I have not read the paper fully but found the idea interesting. The paper proposes a model of portfolio selection that adjusts an investors’ portfolio allocation in accordance with changing market liquidity environments and market conditions. The paper claims that market liquidity provides a useful “leading indicator” in dynamic asset allocation. Specifically, market liquidity risk premium cycles anticipate economic and market cycles. Investors can therefore act to avoid markets with low liquidity premiums, waiting to extract liquidity risk premiums when the likelihood of extracting a liquidity premium improves. The result, meaningfully enhanced portfolio performance through economic and market cycles, and is robust to transactions costs and alternate specifications. 


Leaping Into the Gesture-Control Era - Technology that accurately tracks finger motions could revolutionize desktop and mobile computing.

In Eye Control, A Promise To Let Your Tablet Go Hands-Free - Forget touch screens and voice recognition — what if you could control your computer just by looking at it? Gaze-based interaction has been around for 20 years, used mainly by people with disabilities. But the technology could be available to the masses soon, allowing users to move a cursor with their eyes, or turn the pages of an e-book without lifting a finger. In Denmark, an eye-control research group has just turned itself into a business, hoping to be part of the next wave of usability.

Startup Uses Big Data To Cut Energy Usage - Stem's (a startup in California) hybrid energy system combines predictive analytic, battery storage and grid power to cut business' power bills.

Optical Camouflage Renders The Backseat Of A Car Transparent - The problem with the backseat--really with the whole rear of the car--is that it’s in your way when you’re trying to reverse. So researchers at Keio University in Japan have applied optical camouflage technology to automobiles, making the back seat appear transparent so the driver can see straight through it when backing up.

Two Advances Point Toward a Cheaper Electric-Car Battery - Electric vehicles and plug-in hybrids need cheaper, more energy-dense batteries to compete with conventional cars.

Hot data storage technologies for 2013 - Talks about six data storage technologies that will play pivotal roles in transforming data centers in 2013.



Study: Online User Reviews Influence Us In Ways We Don't Even Realize - Early exposure to glowing reviews about a product or service tend to stick in our minds and shape our opinions--even when later reviews are overwhelmingly negative.  

Getting A Handle On Why Fingers Wrinkle - (7 min audio). Why do your fingers get pruney after a long water bath? I thought it is due to water. It turns out it is not. The audio cast also has an interesting question at the end - Say if you are completely submerged in water except for one hand, would the fingers on that hand still Wrinkle?

The Fallacies Of Fat - (29 mins) Interesting audio cast.

Manage your energy, Not your time - The central thesis is that performance, health and happiness are grounded in the skillful management of energy. Beginning of the article has list of practices to renew four dimensions of our personal energy.


I appreciate your visit to the journal and for reading this digest. I hope the digest is informative, interesting and provided some ideas/actions to investigate further. Please feel free to let me know your suggestions/improvements. Also please feel free to suggest any articles/papers for the next digest.

Fail Forward!

A big part of trading is about making decisions with incomplete information in an ambiguous environment and then managing those decisions towards the best possible favorable outcome. I don't mean just trade entries, exits, money management or trailing stops etc. The above applies to all other aspects of trading like market selection, trading research, setups to explore or employ, retrospective analysis etc.

Given the prevalence of decision making in trading/investing and our great ability to sabotage our decision making with psychological biases, I think having few structured techniques in our toolbox for good decision making is highly useful.
 
The purpose of this post is to put forth the idea of utilizing structured decision making techniques available in other fields in trading and to present an overview of 5 simple and effective decision making techniques.

If your platform is not Ninjatrader then probably you can skip this post. All the quant stuff on this blog are done using Ninjatrader & R. For last few days I was trying to get Ninjatrader software handle following scenario. I feel the scenario is fairly common and the solution will be useful others. So posting it on the blog.

Scenario:
I have couple strategies that works off daily and weekly charts. Now I would like to use the strategies for live trading. But I am NOT comfortable with software placing orders automatically. Also I would like to use some level of discretion. So my desired workflow is:

• Each day wait for US markets to close for the day. Then start Ninjatrader and connect to an EOD data feed (Example: Yahoo/Kinetic etc).
• Select my strategy and run on a pre-defined watch list in Strategy Analyzer.
• The strategy executes on the watchlist and generates list of orders (buy/sell/short/cover) with details. I either take a printout (or save in spreadsheet) to trade manually the following day/week.
• Repeat the above step for other production strategies & watch lists.

Following is a short TED talk (6 mins) on the word origins. Etymologist Mark Forsyth shares a few entertaining word-origin stories from British and American history. For instance, like how did we ended up with the title "President of United States". 

Following are couple of infographs that summarize Fiscal Cliff 2013, its economic consequences and choices.

Following infograph provides a quick summary on what is Quantitative Easing.

What is Quantitative Easing?

A nice infograph that explains Stan Weinstein market stages. I think one is much better off using a structure like this to model market and develop setups to play each phase. Instead the route pursued by majority is to get lost in myriad of patterns, equations and trading knowledge accumulation.

Question to ponder - how effective is my R&D and how is it different from majority?

Understanding Market Structure

Be yourself! Everyone else is already taken.  ~ Oscar Wilde

"We turn to God for help when our foundations are shaking, only to learn that it is God who is shaking them.  For difficulties are divine surgeries to make us better..."

I like reading articles on Psychology and Behavioral Economics. Following are some interesting articles I came across this week. Just FYI - some articles may not be directly relevant to trading.

Articles:

My original plan was to post a study on Time Diversification like the previous study posts. Actually I think this post will provide more value.  I will try to get the study out on next weekend post.

It looks like last couple of posts were not completely included in the email for email based subscribers. For example, "Study: Strategy diversification" has much more content along with graph then what was included in the email. I suspect the problem is with RSS feed settings. I will fix it tonight. Thanks again for subscribing to ATraderJournal blog.

Now a days there is a lot of information available on the net about trading - techniques, psychology, money management etc. Yet most people lose in markets. One can write it off saying it is due to trader psychology or discipline etc. After watching to below presentation (19 mins), it feels may be partly it is a "last mile" problem and a good nudge that influences trader at subconscious level to cross the last mile might make a big difference.

I think one last mile problem for struggling traders is respecting and focusing on risk even though they know intellectually very well that big part of trading is managing risk. Another last mile problem could be having patience while entering or sitting with or exiting positions.

For example when you started trading and came across a new opportunity, what did you used to investigate first? - potential risk or potential reward? Now what do you investigate first? If there is a change in your focus order, what was the nudge?

One nudge that often pushes an individual trader to start respecting & focusing on risk at subconscious level would be blowing up an account. I think this applies to entities as well. For example, would JP Morgan be more prudent with risk for next few years? Is the blowing up multiple billion dollars by London whale be a good nudge? How about other banks? Would recent JP Morgan losses serve as a nudge to them as well? It seems often the nudges come in the form of pain.

This is an interesting topic. Babies and young children are like the R&D division of the human species," says psychologist Alison Gopnik. Her research explores the sophisticated intelligence-gathering and decision-making that babies are really doing when they play. She takes us into the fascinating minds of babies & children, and shows us how much we understand before we even realize we do.

We all know that humans are natural born conformers - we copy each other's dress sense, ways of talking and attitudes, often without a second thought. But exactly how far does this conformity go? Do you think it is possible you would deny unambiguous information from your own senses just to conform with other people? How about when it comes to your trading?

A fascinating presentation (10 minutes) on Mirror neurons by Neuroscientist V Ramachandran. Only recently discovered, these neurons allow us to learn complex social behaviors, some of which formed the foundations of human civilization as we know it.

This is an interesting presentation (20 min) on understanding root of human irrationality and biases. Basically through a clever series of experiments, the researchers teach monkeys the concept of money and using that to get food. Then they create a market place and choices for monkeys similar to what humans face when making financial decisions. These experiments in "monkeynomics" shows that some of the biases like loss aversion and silly choices we make, monkeys make too.

I read an interesting article in Scientific American magazine. Imagine, for example, that you are in a library and you are lost. Are you in the Science Fiction or the Fantasy section?

One approach is you can go around until you find a helpful sign. Let's say you took faster approach and simply looked at the books on the shelf next to you. You see:

Cognitive distortions are simply ways that our mind convinces us of something that isn’t really true. Dr. Aaron Beck, the “father” of cognitive therapy, first proposed the theory behind cognitive distortions. We all may suffer from these occasionally, but when they come to be how we see and interact with the world, they can prevent us from seeing things as they are and limit your growth and success.

Came across an interesting article. This study shows that many of us will deny our own senses just to conform with others. I suspect this scenario plays out often in markets as well. Probably more so as markets are much more ambiguous then the experiments described in the article.