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A Losing Thesis

At the end of last week, someone posted the following in a trading forum I follow:

> Where r all the SMART traders when the market is going down ???

I think they’re either losing money or not trading.

If they are not trading then I would guess they are not making consistent money overall. The market goes up and down and I have to trade in both environments. Only in Fantasyland would I ever be able to choose just one because I would always make money. My guess is traders like this are losing money overall because finding the perfect trading system is very, very difficult. If these traders are net positive then they are probably not making a whole lot.

If these traders are losing money then hopefully they haven’t been trading too large and are soon (or already have) to be knocked out of the game altogether.

I think part of the market cycle is that people win for extended periods and get “fooled by randomness:” we think we have great skill, we become overconfident, and we ratchet up our position size. When the market eventually acts nasty as it periodically does, we get beaten down hard. The losses are such a blow to our egos that we walk quietly into the night never to speak of it again.

This is my explanation for why I hear so many people talking about winning trades but very few talking about losing ones.

I’m categorizing this under Wisdom but please take it with a grain of salt. I don’t think any definitive answers are knowable here. This is my thesis based on psychology teachings and my subjective history of observations over the years.

Meetup Update (Part 3)

As previously discussed, the Tuesday Meetup included some boisterous, opinionated discussion along with a “professional quant” in attendance. Nothing there was actionable.

While I enjoy and recommend the Wednesday Meetup, I did not find that content actionable, either. While the title includes the words “investment academy,” this Meetup is an order of magnitude less specific than helping people to trade profitably. I do not fault the organizers since they cater to beginners. They did say on Wednesday one directive is to foster collaboration among the group, however. That is a meaningful promise and I will keep my eyes open over the next few events to see if we move any closer to fulfilling this actionable promise.

I have organized a small option trading group that meets every week. We have roughly six regular participants and a Yahoo! Group. I posted extensively about my losing weekly calendar and one other member posted about a losing monthly trade. Nobody else mentioned any losing trades. I thought back over the last few weeks and realized that while I post about my losing trades often, rarely does anybody else.

At the Wednesday Meetup, Mr. Know It All said he lost money that day in response to my direct questioning. Thinking such a wide-ranging market day would be good for day trading, I asked for details. He spoke for a couple minutes and then quickly changed the subject. Why he lost could have been precisely the kind of actionable information I seek but alas, that was not to be forthcoming.

On Tuesday night, I didn’t hear any meaningful discussion about losses aside from the Forex guy who is on a crusade. Contrary to my thesis, this might not be a reflection of inflated egos but it does make me wonder whether anybody is actually trading. The woman in attendance who I found to be extremely amusing said she was flat right now awaiting further direction by the market.

I will continue with my thesis on losses in the next post.

Meetup Update (Part 2)

In the last post I mentioned that neither Meetup I attended this week provided any actionable ideas.

A discussion awaits about what “actionable” really means. For now, consider it “capable of generating trading profits.”

Tuesday evening involved a number of attendees sitting around at a bar eating and drinking. My beer was outstanding but neither that nor the buzz that followed were actionable.

Perhaps the closest thing to actionable was one guy’s experience about losing money trading Forex. He is now on a crusade to make sure everyone knows what a scam Forex is for the retail trader. His experienced mirrored what I have studied about Forex so I think his advice to avoid Forex is indirectly actionable. By avoiding Forex we may avoid losses, which is akin to making money.

Much unactionable debate was had about the state of the economy, future direction of markets, and other fundamental information. I would argue that none of this provides market edge. Predictions are uncertain bets or wagers that belong in the gambling domain. People can be right if lady luck chooses to shine on them. If you believe otherwise then I would refer you to any number of intelligent minds who make incorrect predictions daily on CNBC.

Like fundamental analysis, most black box trading systems are not actionable. One attendee on Tuesday talked about a trading model he develops and sells. Since I have yet to write on this topic, I’ll reference this article as a reason to steer clear. On Tuesday I asked my new friend how his model has been validated (that’s a financial engineering term).

“By the testimonials of our customers,” he said.


In the con-artistry game, most testimonials are confederates of the bad guy. Welcome to the world of finance. Personally, I would not consider his product actionable unless I tested it myself. That would require more available resources than I have at this time.

I will continue in the next post.

Meetup Update (Part 1)

I attended two trader Meetups this week. Combined with a wacky market over the first three days, I walked away with some interesting impressions.

For the fourth time out of five weeks, I realized a loss Wednesday on my weekly calendar trade. The market was way down in the morning but rebounded to close almost flat. Had I simply checked in at EOD, I would have been fine! Unfortunately, on a weekly trade I can’t do that. The weekly trades force me to pay close attention to the market intraday and I expect to have days like Wednesday where the ride will feel like a Cedar Point roller coaster. I had one beer at the Meetup on Tuesday evening.  By the close on Wednesday, I felt like I needed two more.

I actually recommend one of the two Meetups I attended this week. This was the third event and I wrote about it a couple months ago. If only to give them props, here is the comment I posted on their site yesterday:

> The organizers provide free refreshments and a free raffle,
> they are polished presenters, they field difficult audience
> members/questions… they’re not annoying with any sort of
> hard sell… after three Meetups so far, I’m flat-out
> impressed. Keep up the good work, guys! I’ll continue to
> make the 50-minute drive.

Having said all that, the Meetup does share something in common with the one I attended on Tuesday: I found nothing actionable at either one.

This is very unfortunate. Common sense may be to say if I am attending a trading Meetup then I hope to take away some trading ideas. Because I go for other reasons (e.g. social, networking), I’m really okay either way. I’m quite sure the Meetup organizers would consider the inclusion of actionable information an improvement to their programs, though, and for that reason I believe this is something worth further discussion.

RUT Weekly Calendar Trade #15

On July 21, I bought a JulWk5 1255 calendar for $7.37.

With the market trading lower near the expiration breakeven, I rolled half to 1230 on July 24 for a $0.50 debit. This cut NPD from 18 to 3-4.

Less than four hours later, the market was at 1227 so I rolled the other 1255 calendar down to 1235. This was a mistake: I should have rolled to 1230 but it really did not make a difference. I now had a 1235/1230 double calendar to be closed either at 15% loss or if an expiration breakeven was hit.

Shortly after the open on expiration Monday, the market traded under 1213. I closed the double calendar for a max loss of 19.4%.

They say in trading, one has to be able to accept losses. This is now three in a row.

From a few who are now supposedly in their second year doing this trade, I hear it’s not out of the ordinary to have three consecutive losses once or twice per year. I’m trying to give this trade a fair shot so while now bordering on apathetic (not good) with regard to my outlook for this trade, I will keep plugging away.

RUT Weekly Calendar Trade #14 (Part 2)

Today I conclude discussion of weekly trade #14.

Around 11:05 AM ET on expiration Tuesday, the market dropped quickly from 1255.80 to just under 1255. I did not really want to roll the second 1270 calendar to 1255. Because the trade had only 2+ more days and because I might be down over $100 on expiration Tuesday with a max potential profit at expiration of $400 or less (usually closer to $1000 at trade inception), I did not want to roll the other 1270 to 1255. I was guestimating on post-adjustment max potential profit. I find it difficult to model these positions and track the PnL. It was the heat of the moment too.

A couple minutes later, RUT sank below 1253 and I placed an order to close (not roll) the 1270 for $6.70. By 11:10 I had caved $0.50 and still was not filled. I wondered whether I should even be trying to chase at this point because: RUT had breached the lower BB (I’ve really learned this is a bad time to trade but it’s when my emotions run hottest compelling me to trade). Also, I noticed the bid/ask on the calendar was close to $3.60. If I waited then the market would calm down, bid/ask spreads would narrow, and I’d get a better fill. I therefore canceled the trade.

As the market drifted a bit lower, I felt I just had to get the damn thing off. I put in a 4-legged order for the remaining double calendar and caved $0.40 over 2+ minutes. I got filled 0.10 off the then mark for a loss of $74 (4.71%) with the market at 1252.37.

At 10:00 ET on expiration Thursday, the JulWk4 1255 put calendar was trading at 8.40/9.60 at 10:00 ET. By 11:30, it was 9.36/10.27 as of 11:30 ET. I would have gotten the full 10% profit had I rolled the second 1270 calendar to 1255.

Once again, I failed to follow the trading plan. The trading plan says nothing about how I feel about a trade, where the BBs are, how wide the bid/ask is, etc. This time, as previously discussed, what should have been a winner was closed at a loss.

This trade was a big confidence zapper.

RUT Weekly Calendar Trade #14 (Part 1)

On July 14 with the market at 1269.25, I bought a 1270 calendar for $7.35. I got filled $0.10 off the mark.

Adjustment points were 1258 and 1283. While I felt it was not fun being back to narrower breakevens, last week’s trade with wider breakevens lost!

The market traded sideways for a few days but trading down to 1260 on July 20, I had to roll to 1255. I did not like only getting an additional five points but modeling the 1250 showed significant sag that would make the trade implausible. In retrospect, now with only a 15-point range, this trade itself may have been too narrow and implausible. A slight breeze is all it would have taken to force a second adjustment.

When I looked at the risk graph before market open on Tuesday (July 21), the expiration curve was much lower. That held after the open, too. I think this was more a subjective perception than anything else, though. I had a bad attitude about this trade from the very beginning because of the relatively narrow breakevens. TOS also makes it hard to determine exactly where the red [expiration] curve is at times on the risk graphs because they can vary from moment to moment. In retrospect, I noticed the 10:30 graph looked more pumped up than those earlier in the day. Unfortunately, I feel this negative attitude factored into my trade management.

I’ll conclude discussion of this trade in my next post.

RUT Weekly Calendar Trade #13 (Part 2)

Yesterday I reviewed weekly trade #13, which ended up losing money.

I reluctantly consider this trade a failure. With the market never under my control, the one thing I do control is adherence to my trading plan. I am not unique in tweaking my trading plan based on a news announcement. If this constitutes the majority of traders then I want to be different. I have no reason to think anybody is any better off because they listen to news. I think it’s just a matter of luck when such positions work out profitably.

I’m here to be serious and disciplined. I need to work harder at sticking to the plan.

I strayed from my plan by taking off risk earlier than usual. That doesn’t seem like such a horrible thing on the surface. I still left myself a good chance to hit the profit target were the market to move lower but I did leave it as a directional trade. Had I followed the plan, the trade would not have been directional and would have still been vulnerable (perhaps more so) to a big move either way.

Equally important but less frequently understood, I believe, is the fact that risk may come from missing out on potential profits as much as from taking big losses. If this trading plan wins 75% of the time then it may be a worthwhile endeavor despite a poor average win/loss ratio. If I do not adhere to the plan and I realize some periodic losses in place of winners then the overall average return may be much worse or even negative: not a strategy that makes good business sense.

Trade #13 would have lost whether I stuck to the plan or not. Should I stray again in the future, I may not be so fortunate.

One other note: this trade has wide breakevens and a positive horizontal skew at inception. Unlike last week’s trade, however, this one lost.

RUT Weekly Calendar Trade #13 (Part 1)

This trade was placed on July 7 around 11:10 ET for $8.40 with the market around 1230. This is the most expensive calendar I had bought to date. That could be viewed as a sign to keep out of the trade in case elevated IV were to subsequently mean revert. A positive horizontal skew was poised to benefit this trade, though, as was seen with trade #12.

I found myself in a quandary on Friday with the market four points from the upside BE at 1254.

According to plan, on a continued move higher I should have adjusted to a double calendar. With real money on the line and facing the reality that a big upside move could land this trade down $250 or more at Monday’s open, I ended up closing half the trade.

This is why trading is difficult. Given the Greece referendum/vote on their financial crisis, I felt I had to act defensively. I figured if the market pulled back in such a way that I could have taken full profit but then couldn’t because I already closed half the trade at a big loss, I would be frustrated. It almost seemed irresponsible to leave on the entire risk or even to try centering the trade as a double calendar given a “market-related earnings announcement” being due over the weekend.

The market did indeed move higher on Monday and I closed the rest of the position at 9:45 with the market around 1261. This trade lost 16.2% in seven days.

RUT Weekly Calendar Trade #12

On June 30, 2015, I bought a 1250 calendar with the market right around that level. I placed the order $0.05 off the midprice and caved $0.10 over two minutes.

My contingent order to close triggered around 1 PM the very next day with the market at 1251.67. The trade made 10.2%.

This is the first time I have seen such a positive skew on the trade. Simply reverting to a normal horizontal skew would have probably hit the profit target; that may have been precisely what happened.

As testament to the horizontal skew, the breakevens were over 55 points apart at trade inception!