Long & Wrong

1979, a wet Sunday afternoon, even the thought of Arctic Roll for dinner couldn’t lift the gloom. “Mum, I am so boooored“.

2009, a wet Friday morning, even the thought of Ben & Jerry’s Phish Food can’t lift the gloom. “Reader, I am so boooored“. Some things never change.

To some people trading is ‘exciting’, the excitement has passed me by I am afraid.  If I had to chose why I enjoy it then ‘excitement’ wouldn’t even be on the list (‘challenging’ would).  But it is worse than that, I find trading boring.   The popular image of a day trader is of a man (sorry Jules) surviving solely on a mixture of testosterone and caffeine whilst scanning banks of monitors with bloodshot eyes and who punches the air with each win and punches the mouse with each loss. Well that isn’t me.

And it seems that I am not alone, with some regularity the “I’m bored, what can I do?”  topic is aired on one of the trading forums or amongst participants in chat-rooms.  With almost the same regularity the response ‘download porn’ appears and this is quickly followed by a disturbingly comprehensive selection of the best sites for this activity.

I want to think about this more constructively (although if my traffic dries up I might reproduce one of those lists here!).  I have a set of tasks that I could be getting on with when trading is quiet, both pleasurable (for a start my current novel is over 700 pages long) and less so (how do small children create such a large pile of dirty washing?) but I fail to make much of an impact on either.

I think the problem is two-fold.  Firstly, my brain is forced into such an ‘analytical mode’ by trading that I find it difficult to give other non-analytical activities the attention that they deserve. I can’t seamlessly switch between placing my limit order and reading poetry.

Secondly, although trading is quiet it is not possible to know when that quietness will end, often the end is sudden and profitable. I might literally pay a high price for loading the washing machine (although I often pay a high non-monetary price if I don’t!).

So finding suitable activities to relieve the boredom has these two obstacles to overcome. So I spend an hour (that may surprise you!) writing this post and try and remind myself of all those really boring meetings I used to have to sit through in corporateville. I also remind myself how lucky I am to have the time to devote to learning this profession even if some of that time is less than riveting.

Any porn-free ideas to relieve my boredom then please leave them in the comments. The first person to mention ‘online poker’ gets a virtual-slap as I am a terrible poker player. This is actually next week’s post due to the Bank Holiday on Monday, have a great long weekend.

I know that I go on a lot about probability but it keeps raising its ugly head again and again…

Out of the goodness of my heart I have been coaching  a few struggling traders.  I can’t offer any more than a moderate return after lots of hard work (because that is all that I can manage myself) but there still seems to be interest. You’d have to ask them what they have learnt from me but I do know what I have learnt from them – being comfortable with probabilistic, rather than deterministic, outcomes is key. Two basic scenarios have played out with sufficient frequency to convince me that they are important lessons in themselves.

1. After going through the basics of my approach to trading I invite them to sit on my virtual shoulder and watch me trade.  So I start another dull Monday morning and they think they are about to glimpse the Holy Grail.  My first trade loses, my second trade loses, my third trade does the same but my fourth trade, erm, also loses. It is around losing trade 3 or 4 that there is a sudden family emergency that means they have to leave their PC and I never hear from them again.  They probably consider me to be at best a fantasist and at worst a fraud.

They are not there at 16:30 on the Friday afternoon when 80 trades have returned a decent, and statistically significant, yield. Trading isn’t about Monday morning (either literally or metaphorically) it is about letting the law of large numbers play itself out in your favour.

2. My second lesson from mentoring struggling traders is that they seem to crave certainty.  What set of conditions will lead to a winning trade? The correct question of course is what set of conditions leads to a trade where the probabilities lead to a positive expectancy?  I can show you the perfect trading set-up according to my strategy and it might lose. I have  the proof though that over a sufficient number of trades it will make me good money.

We live in a world where we ‘do X to achieve Y’, well it doesn’t work here.  The best we can hope for is ‘do X to sufficiently increase the probability of Y’.  You do not nudge the win-rate ever closer to 100% by maxing the conditions ever more complex, uncertainty is part of the game, who knows when someone is about to sell a yard of USD/JPY and wipe-out your long?

This is understandably difficult to grasp (and even more difficult to apply).  The worst case of this kind of thinking is when they show me a trade that made them an absolute fortune because (their word) a certain set of conditions were fulfilled. They then go on and apply this same method  (sample size=1) again and again and again and, for those with deeper pockets, again and again and again.

The Doctrine of Chances

I don’t know how to shift people’s thinking into this ‘probability space’, perhaps if I could I would have a better success rate trying to help others.  There is plenty on the web about why we seem to struggle to think in this way, a readable starting point is here but there are no easy answers.

I started off trading a range of European index futures (FTSE, DAX, CAC….) and occasionally, by that late in the day with bloodshot-eyes, US indices as well.

The obvious question then becomes, is it better to trade all these markets – looking for the premium set-ups – or to get to know one market inside out?  This becomes a greater dilemma when trading forex, even restricting yourself to major pairs there is enough choice to fill  a very large monitor with very small charts.

It is also possible to quickly fill a small brain as I am convinced that the complexity increases almost as the square of the number of markets, so 2 markets requires 4 times the effort etc.

"Helpdesk? Remind me again which market I trade..."

When I first started there seemed to be  ‘received wisdom’ that the DAX was the better index. I was told it ‘trended better’ or ‘observed technical levels more reliably’. I’ve seen no evidence of this but perhaps I am just looking in the wrong places.  Less rationally, the debate includes a fondness for the ‘national’ index.  There is something attractive about trading the FTSE100 made up in part by the shops on the high street, the petrol companies that line the roads and the banks that have been turned into wine bars

There is the further consideration that some markets are so closely correlated that they hardly count. If you trade FTSE, S&P and (risk-tracking) USD/JPY then a complex calculation (!) tells me that only counts as 1.63 markets during a London afternoon.

So what do I actually trade? About 70% of my trades are on the FTSE (actually it is 72% in the last quarter but it would be sad to have actually calculated that figure wouldn’t it?!).  I have good reason to believe that I would make just as much money if I traded it exclusively, especially given the 1 point spreads available tax-free spread-betting in the UK.

So why don’t I just trade the FTSE? One reason is because fewer trades leads to a more lumpy equity curve and it doesn’t feel nice to be even more exposed to the misfortunes of statistical noise. But I think the real reason, if I am honest, is that trading one index, on one screen, requiring just 25% of my tiny brain, doesn’t feel enough like hard work.

Footnote: I shouldn’t need to say it BUT the photo above happens to be a woman who happens to be blond.   I only realised that after I uploaded it, this is not a sexist or blondist blog. Am I digging myself a deeper hole?!

Some of you won’t like this post (I don’t even like this post) but sometimes there are things that need to be said, ideas that need to see the light of day.

In recent weeks the topic of ‘trading discipline’ has come up a few times in conversations I have had with real people (yes, they exist) and a couple of times on-line (including the always enjoyable/informative Lord Tedders).  I’m not here to be argumentative, and anyway you don’t know where I live so my good looks are safe from the fists of irate readers, but I do want to suggest something…

Why don’t we stop,

• Reading books about trading discipline.
• Analysing our emotions.
• Listening to that ‘head chatter’.
• Performing endless post-mortems on ‘what went wrong’.

And why don’t we,

• Follow the strategy.

How hard can it be? Try it for an hour and if you manage that try it for another hour, another day, another week, another month.

If following the strategy doesn’t make you more profitable then there is something wrong with the strategy. Being more profitable is strangely addictive and you never know but you may still be following the strategy this time next year.

I can guess what you are thinking, I really can, but I don’t care and you shouldn’t care. Instead just,

• Follow the ******* strategy.

I’ve just deleted 3 paragraphs I had written on how to stick with the strategy, because I realised that was just falling into the same trap of thinking too much. How many ways are there to write ‘Follow the rules. Always‘ ?

You’ve made it this far without throwing a mug at the screen. So try it for an hour. Write down your rules (ones you have already proven, as much as anyone can, make money), print them out within sight of your trading desk and don’t hit buy or sell until you are certain you have followed them.

I can’t guarantee you will make money but I can be fairly certain that it will help your trading.   Stepping off the emotional roller coaster is good for the soul as well.

It’s that easy and, I know, that difficult.

Slightly off topic and slightly offensive, but sufficiently funny to excuse both.

The man pictured below protested inside the Liverpool branch of Halifax Bank.   He objected to the £16M pension pay-out received by Royal Bank of Scotland Chief, Fred ‘the shred’ Goodwin.

Streaker protests at RBS Pension pay-out

I’m not sure what is more offensive, this photograph or the fact that the guy couldn’t even manage to go to the right bank. Halifax is part of HBOS not RBS, the clue is in the name.

I said in my last post that I was worried that this blog was getting too ‘preachy’.  So for a change, let me tell you about something I am increasingly sure that I am wrong about.

When introducing this blog I wrote,

I believe in logic. Your gut feel counts for very little, mine for even less.

But now I am not so sure, and my recent reading has forced me to confront something that I would rather ignore...

1. I was skimming through a book about chess (I am aware that statement does not paint a favourable picture of my exciting life outside of trading!) and it was explaining that, contrary to popular belief, great chess players are not supercomputers capable of analysing millions of possible moves. Intuition, refined by playing many thousands of hours of the game, plays a significant role in their decision making.

2. I have also been reading ‘Supercrunchers : How Anything Can Be Predicted‘.  This argues, using examples ranging from forecasting the best wine vintages to rulings made by Supreme Court judges, how much better a job numerical analysis does compared to  expert opinion/intuition.

The other 3 faces read 'Swear', 'Kick PC' and 'Blame Broker'

These two books have reignited an internal conflict when it comes to trading. I started off convinced that rational analysis was all that mattered but increasingly I now feel that intuition has a part to play as well (and to be clear I mean intuition, the ability to sense or know immediately without reasoning,  not emotion).

There seems to be a subconscious process that learns from the few thousand hours of price action that my brain has absorbed and is then able to apply this in real-time to that tricky right-hand side of the chart.  I’m starting to trust this sixth sense even though it goes against a lot of what I believe in (It’s not difficult to find examples to demonstrate how unreliable our brains are, here is just one of my favourites. As sad as it may sound, I trust my spreadsheet more than my own grey matter!).

This may help explain why I am so rubbish at trading FX, I have done all the analysis but I haven’t yet spent many thousands of hours training my sub-conscious.  Who could think of a better way to spend this summer?!