Prophetic

On Wednesday I wrote,

Have a nice break if you are in the US and enjoy flat futures and choppy forex if not.

Little did I realise how strong my prophetic (prophetic, not pathetic) powers are, the FTSE chart for the very next day looked like this…

..as a pancake.

If those 4 hours in the middle of the day aren’t flat then I don’t know what is.  Is it yet more evidence of my incredible ability to forecast the market? Err, not quite, according to the BBC,

Trading on the London Stock Exchange (LSE) was halted for three and a half hours earlier because of technical difficulties.

and yes what actually happened wasn’t especially flat,

The UK’s FTSE 100 index lost 3.2%, its biggest one-day fall since March, after Dubai World asked creditors to postpone upcoming repayments until May 2010.

EUR/USD, 10% Off, 5 Days Only.

The above video (is it just me that finds the music annoying, or am I getting old?) is interesting in itself, but it got me thinking about if our own ideas about the relationship between price and quality affect the way that we trade as well as the way that we shop.

Are those of us who “confuse price and quality” in the real-world more likely to be the kind of trader who goes long when the price is making new highs.  Similarly are we reluctant to buy dips because we get a “negative signal from the discount”?

My next idea was that bottom-pickers are the kind of traders who switch the PC off and head straight out to  shop in  T.K.Maxx (T.J.Maxx in the US, I think), but that was a thought too far.

Have a nice break if you are in the US and enjoy flat futures and choppy forex if not.

A Total Lack of Control

If  you want to test the efficacy of a fertiliser you apply it to only half the field of wheat.  The untreated cereal acts as a control for the experiment.  It allows you to isolate the effect of the chemical from all of the variables that determine the crop yield (temperature, sunlight, water stress etc) as these apply equally to the whole field.

When it comes to a trader’s profit (& loss) it seems that there are three key variables at work –  The strategy you use, the way in which you apply it (this is largely analogous to ‘psychology’) and the market itself.  The problem is that you have no control (of the type described above, not the “I’ll average, it has to go up soon” variety), no way to isolate the contribution of each of these component parts.

When you are highly profitable it may just be due to the market behaving in a way that ‘fits’ with your trades however misplaced they might be.

When you are losing money hand over fist then it may just be that your historically profitable method no longer has positive expectancy. All the waiting for the ’statistics to play out’ or ‘getting your head straight’ is a waste of time, the market has changed.

So we are left in a perpetual state of not knowing.  Confidence might increase as profitable weeks turn into profitable months and years but there is no absolute certainty about either our method or our skill at applying it. Purely mechanical trading systems may remove the effects of psychology but with two variable still remaining any absolute certainty is still a mirage.

In reality it’s probably best not to think about this theoretical inbuilt uncertainty, or the second of those three variables is bound to suffer. It is though yet another argument to be nervous of drawing any conclusions without a lot of data to back them up.

All In A Good Cause

If you are making lots of money through trading (and ‘lots’ is a very relative term) then you may be interested in the following.  If you are making lots of money through trading and paying  no tax then you may be especially interested in the following from the BBC.

An Oxford University academic has pledged to give £1m of his earnings to charity during the course of his life.

Dr Toby Ord, 30, who researches ethics, believes his donations to charities in developing countries could save 500,000 years of healthy life.

He is launching a society to encourage others to follow his example.

Giving What We Can wants others to pledge at least 10% of their earnings to help tackle poverty in the world

I’m not here to preach (well, only about the foolishness of break-even stops) and I daren’t mention politics (amazing though what can be achieved with 10% compared to the 43% (of GDP)  government taxes) so I’ll say no more.

I definitely won’t point you towards Soc Gen tells clients how to prepare for global collapse because reading it certainly made me feel less charitable.

****, but how ****?

You’ve had a bad week; 12 trades in total, only 2 of them winners.  You are trying to decide between drinking half a bottle of fine scotch or kicking the cat. But wait! What you really need is some maths (I know this is going to be a hard sell) and more specifically a Binomial Distribution Calculator.

Knowing you made 12 trades (n=12), knowing (who doesn’t?!) your  historical win rate is 35% (p=0.35) and knowing, but regretting, that you only had 2 winners (“fewer than” 3), you can calculate that the probability is 0.15.  In other words 15% or, more tangibly, 8 weeks out of the year will be this bad.

You learnt it at 14 and forgot it at 30.

So don’t shout at someone who asks you if you have had a bad week, just calmly tell them “that according to a binomial distribution the probability was just 0.1513“.  Then shout at them if you must, drink half a bottle of scotch if you must, but don’t ever kick the cat.

[Thanks to the person who gave me the idea for this post, the data however is all my own creation]

Resistance is Resistance Until…

Resistance is resistance until it isn’t (the fact it is also futile is neither here nor there).

I lost count of the number of times I used to bottle it when I saw price heading back towards resistance and the PnL figure turning from green to  red. Making a cup of tea is a much better idea than closing for a small profit or loss.

Yes I have had added a ‘charts’ category, but I’m not promising anything. Click to zoom, times are GMT (the original timezone and the best!) …

A green bar isn't a reason to close, it may be a reason to make tea.

 

Update: My 3 readers saw this post, sold the resistance again and moved the market lower. Thank you

Thanks for selling to prove my point.

The Best Welly Seller in The West

My name is Walter and I sell wellies. Whilst I quickly eat some lunch (a curled up sandwich I bought  from the petrol station where I have just spent £60 filling the van up with fuel) I’ll tell you about my day.

This morning I had a couple of hours drive to a company that would have been a great new customer for me. I gave a good sales pitch, I’m a good welly seller, but I failed to get an order.  It was out of my control really, a competitor sells wellies exactly the colour they want.

However, once I’ve finished this awful sandwich, I’ve got 3 meetings squeezed into the afternoon and I’m confident that I’ll sell some wellies.  It’s my own company that I started a couple of years ago and it is doing well, my accountant agrees.

Why am I telling stories from the wonderful world of welly wholesaling? Lets imagine for a moment that Walter sold wellies but with the mindset of a trader…

I worked all morning and all I managed to do was lose £60. I am useless at this, why am I always wrong?!

I am so angry about that £60 that I’m just going to sit here, get mad and not even turn up for the first two, potentially lucrative, meetings of the afternoon.

I’ll have recovered in time for the last meeting, but to be honest I haven’t got the energy for it.  They have placed big  orders before but I’d be happy to just make back enough money to cover my petrol for the day.

Trading seems to develop a different mentality to other businesses. So if you lose £60 on the only set-up you see all morning you could try thinking of it as £60 of business overheads  instead and then just get on with the afternoon. Of course it’s not that easy, but then neither is selling wellies out the back of a white van.

The P Word

I was watching a poker tournament on TV the other evening when one player knew that he had to fold.  Everything about the situation (the pot odds, the fact he was out of position etc) meant that the correct decision was to fold.  But rather than just immediately muck his cards, his face was contorted by anguish for at least 30 seconds, the camera zoomed in to catch every nuance of his apparent pain.

One commentator asked “Is he just acting here, to make it look like a difficult lay-down or is he really crazy enough to call?”. The second commentator answered “No, he knows he has to fold but he is just waiting for his emotions to catch up with his analysis“. Then he folded.

Press in the event of leaked NFP Numbers

What a brilliant piece of insight! So my request to the trading-platform designers is for a ‘pause button’, how much easier it would be to trade if we could take time-out to get our heads-straight before having to actually press a button that logic says needs to be pressed.

I know that isn’t possible, the market moves on without us, and often at startling speed, but  I can dream (or use orders).

The Last Resort

I promised something practical (not philosophical) but the idea-gauge is reading ‘empty’.  I’m just going to have to post a chart. I’ll pick EUR/USD for its universal appeal, I know nobody outside this little island cares about December FTSE.

If you can’t decipher my charts/method/madness then the summary is (for a fixed risk per trade ‘R’, not its real name),

-R, 4.5R, 0R, 1.5R, -R, -R, +3.3R = ~6.3R

Yes, I got lucky with ISM. Yes, I failed to exploit it fully.  Yes, that is a break-even trade even though I campaign passionately against them. Those are just three reasons why I won’t be doing this again, but I was desperate for content.

 

My Mantra (2 of 2)

So after much thought I came up with my mantra, “Trade Like Blaise“, but should now explain it a bit.

Blaise Pascal was a French scientist and philosopher born in 1623.  He is perhaps best known for Pascal’s Wager in which he argues that  even though the existence of God cannot be proved, a person should wager as though God exists, because the potential benefits exceed the potential downside.

Pascal used decision theory to build a matrix that summed the ‘pros and cons’ of living as if God exists (for example if you believe in God and he does exist then you will live for eternity in Heaven) or living as if he doesn’t for the two scenarios that God actually does exist or he does not. Summing all the possibilities, he concluded that on balance it is better to live your life as if a supreme creator does exist, even though it is unprovable.

What has this got to do with trading? Well, my belief is that no matter what the prophets on Bloomberg tell you is going to happen, they don’t know and you don’t know either.  The statement ‘major support will hold’  is analogous to Pascal’s unprovable God.

So I construct a matrix (I do this notionally, not for real, that would just be too weird!) and chose the option that provides the best outcome on balance, that provides the  positive expectancy.  I don’t know if a key support level will break or not but I live my trading life, plan my entries and exits, in a way that maximizes expectancy without knowing what will actually happen.

That should now complete my alienation of the ’show us some charts’ crowd. I promise to be more ‘practical and applied next week’.