Long & Wrong

I have been busy this week losing lots of money trading.  I have also been busy this week losing a little money playing poker.  I have been less busy thinking about this post, it probably shows.

You can’t play poker without realising that for some people gambling is an addiction.  The internet poker rooms display links to people who are there to help if you have a problem.  The forums are full of sorry tales of life-destroying losses.

I have ‘played’ trading for much longer that I have played poker but I am not aware of a similar problem.  If there is one then the  definition is less clear.

I think many of us display elements of addictive behaviour in our pursuit of a trading edge.  Where though do you draw the line between ‘necessary dedication’ and addiction? Frankly, if you aren’t totally obsessed with the markets then you would be a fool to turn on the PC each morning.

If you lost money at roulette in 2009 then only improbable luck will make you a winner  in 2010.  But losing traders generally do so because they believe these losses are the price you pay to learn (there are exceptions, some people pursue losses to confirm their own negative self-image). But generally losses are viewed as temporary and necessary. It isn’t forever and the light at the end of the tunnel is the glow of a flexible and  lucrative career.

(I know this post contains a lot of text.  Trust me though, visually if not intellectually, it’s worth making it to the end)

Trading also seems to lack the quick potential reward that is available through gambling. In poker it doesn’t take long to turn over those 5 cards, in horse racing the result is just a few furlongs away. This immediacy seems a large part of the addictive quality.  At the periphery of trading there now seem to be some products that look to fill that gap.  Spread-betting firms offer 5 minute binaries on the FTSE and DAX. Why wait for USD/JPY to wallow in a 15 pip range for hours (it usually does) when pleasure or pain are just a few minutes away? It is telling that these trades are regulated by the gambling authorities rather than the financial ones.

But someone must be losing at trading so that some people can consistently profit.  Some of this will be a supply of trading-fish who blow their accounts and never trade again.  My intuition though is that there must be consistent losers out there and I am almost certain they don’t feel life is that great. They may, in some sense, be addicted.

This isn’t a complete argument, I have no conclusion, I have been too busy losing money to reach one. If anything,learning to trade is the massive gamble, with hefty rewards but they only become available over years rather than minutes. Our attention spans may be too short to find that addictive in the traditional meaning of the word.

If you replace the word “gambling” with “trading” then the following self-assessment questionnaire probably applies. Perhaps gamblers are just smarter than traders, they look at the theoretically unlimited losses (when short) and realise the risk is too great!

It’s a serious topic, I can’t though resist a less serious video. As a teenager I loved this, not my kind of music though.

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…

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.

As reported by the BBC yesterday,

The FTSE 100 index of leading shares has enjoyed the best three months in its 25-year history.  The index, which has just closed at 5133.9 points, gained 21% between July and September.

This is why I only worry about the next couple of hours, at most, when it comes to trading.  I’ve lost count of the number of times I have finished for the day, zoomed out to the daily chart and thought ‘This can’t go on’.  If position trading were my thing then by now I would have had to rename this blog ‘Short & Wrong & Bankrupt’.

So I’ll stick to the 5 minute charts, those repeating patterns of human behaviour and fickle sentiment, and leave the longer term view to those who know something about it.  It really does look like a great short from 5,450 though doesn’t it?!

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?!