Option FanaticOptions, stock, futures, and system trading, backtesting, money management, and much more!

Recycling of Market Participants (Part 2)

Today I continue with a July 2015 thread about relative quiet in the forum.

On Jul 14, 2015, at 12:51 am (PDT) . Posted by CM:

I went back to the States for a couple of months for our annual fishing trip and to help my brother-in-law put up hay for his horses for the winter… When I return to a normal life in a few weeks I will be able to start posting again. My portfolio is currently flat, because of depressed stock prices, but the option trades are positive. Yes, trading plan is working…

I felt inspired to refresh the thread over two years later.

On Sep 26, 2017, at 4:08 am (PDT) . Posted by Mark:

I’m here with one follow-up post because I think many of you are missing the point. Please feel free to disagree; my words are hardly set in stone.

Over the years, I have found traders to be a very fickle lot. The oft-quoted statistic that 90% fail within five [1-2?] years supports this. I don’t know who [if?] did the original study but it is consistent with what I’ve seen of human nature from attending trading groups. Ego fulfillment means bragging when correct and/or making money. And Mr. Market lets us do that—sometimes with gradual profits over a long period of time. At some point he gets crabby and catastrophic losses await for many who have become smug and started to trade position sizes that are too large.

These washouts are when the fickle traders disappear. First they feel stress and lose sleep. Then they are forced out at big losses feeling lucky [hopefully] to have escaped with something. After a period of reflection, they finally walk away—head down and tail between their legs—possibly never to talk about or discuss this with anybody. After the grieving is complete they pull themselves up by the bootstraps and move onto the next big thing.

On multiple occasions I have seen people present impressive performance records punctuated by pauses during sudden market pullbacks/corrections. How lucky they were to have been vacationing at the worst times! I wouldn’t call any particular individual a blatant liar but they certainly are out there.

I think a good strategy meets profit goals within risk tolerance levels net losses—and there will always be losses! Anyone presenting a large sample size of trades without losses is a liar and someone to avoid because that is not reality.

The takeaway here is nothing new: THERE WILL ALWAYS BE LOSSES! As a trader I need to accept this before I begin the journey and strive to always size my positions accordingly. Failure to do this can potentially end my trading career, which on a larger scale, results in the recycling of market participants.

Recycling of Market Participants (Part 1)

On the heels of this post, I recently stumbled upon the following July 2015 thread from a covered calls forum that I saved.

Sun Jul 12, 2015 12:22 pm (PDT) . Posted by AS:

Where is everyone???

Sun Jul 12, 2015 12:55 pm (PDT) . Posted by SP:

Probably vacationing.

Sun Jul 12, 2015 3:21 pm (PDT) . Posted by SB:

People like talking when they make money, remain silent when they lose it. How have covered calls in general done over the last few weeks?

Sun Jul 12, 2015 9:48 pm (PDT) . Posted by JW:

I am thinking SP has if correct, a lot of folks are away for the summer break. This is traditionally a very slow time of year. One member states on the bottom of his posts that “boring is better.” That is certainly the case with myself. There are periods when I feel like I am on a perpetual vacation here… My “job” truly is like watching paint dry. Most of this group will not want to read about each time I pull the trigger on my boring income trades.

Mon Jul 13, 2015 5:03 am (PDT) . Posted by Mark:

On this point I very much disagree with you. Yes, “boring is better” but people are usually losing money when these type of trades are not boring.

I think SB is right on: “people like talking when they make money, remain silent when they lose it.”

This is just my opinion because it’s not something we can ever know for certain.

On Jul 13, 2015, at 3:10 pm (PDT) . Posted by MM:

Or some people aren’t participating.

I’ve been in cash for some months with only a few selective trades which aren’t in options. It’s been a time to be very, very selective in my opinion.

On Jul 13, 2015, at 4:37 pm (PDT) . Posted by MA:

I, for one, have been very busy at work and haven’t had the time it takes to do this right, so I’ve been on the sidelines for the past few months, which appears to be a good place to be with all the turmoil going on with Greece and the market’s reaction.

On Jul 13, 2015, at 4:44 pm (PDT) . Posted by JW:

Many new traders think they are not trading when they are in cash. I think those who have been in the battle for a while know well that cash is a position you chose and there are times that it is the best position.

One thing I have grown very cautious about is posting our bragging rights trades. For example, we did a series of trades on JRJC… [and] nailed returns as high as 13% per monthly cycle selling put options…

I dislike posting these positions for two reasons. I have had a few folks call me a liar when they could not replicate the trade a few days later because the stock took off and they did not have the patience to wait for the right entry opportunity. The other reason is I do not like encouraging newbies to work with volatile issues like JRJC until they have experience and a good plan of how to handle the trade if the tide turns against them.

To be continued next time.

Ego and Trading Do Not Mix

I do not believe ego has any place in trading or in trading-related discussion.

It occurred to me that I may sound overly confident and opinionated at times when talking about financial topics. I could talk passionately when discussing many topics covered in this blog, for example. These would include option fundamentals, tenets of trading system development, financial chicanery and fraud, etc. Conviction, in general, can probably be mistaken for ego even though it may only be the manifestation of passion.

I hope I never sound too proud of my track record because past performance is no guarantee of future returns. Bill Miller epitomizes this lesson. While at the helm of Legg Mason (LM) Value Trust, Miller is credited with beating the S&P 500 every year from 1991 through 2005. For this longevity, Miller was a legend—and then the wheels came off. Miller led the smaller LM Opportunity Trust to big losses from 2007 through 2011 with a $10,000 initial investment shrinking to $4,815 (vs. $8,565 for an identical S&P 500 investment). Miller went on to trounce the benchmark in 2012 and 2013 before underperforming in 2014, 2015, and the first half of 2016 [after which he was no longer retained by LM].

Remembering that it can happen to Bill Miller should be motivation for me to maintain a large dose of humility at all times. Miller teaches us that a brilliant record yesterday does not justify inflated ego today. I feel strongly that historical trading volume and historical performance don’t make a damn bit of difference because tomorrow can be altogether different. And yes: I would pound the table passionately in support of this argument.

A corollary to this is that historical performance should not be a criterion for someone looking to hire an investment adviser.

I disagree with said corollary and that puts me in a catch-22 situation. Some have told me that promoting a strong track record is the most critical requirement for raising assets. This brings me full-circle to posts such as this, this, this, and this.

I guess it all comes down to modesty and gratitude: two things I think traders should never be without. I truly believe that how good I am as a trader will only be revealed after I click the “place order” button for the final time. Representing as if I know the answer to this any sooner through ego symptoms like arrogance or condescension would be deception at its finest.

Day Trader Meetup Review (Part 3)

Today I will conclude my review of the first day trader Meetup.

Once we finally got around the table and through the introductions, the organizer took 15 minutes to present one strategy and a few other slides. We then got to eating and talking among ourselves. It seems like a good group of people. Being filled with newbies, I think the group could benefit from some basic presentation about trading. This would include some teaching on trading system development, countering heuristic thinking tendencies, and general tenets of optionScam.com.

Later that evening, WM posted a comment on the website:

> I came to a day trading group with undesired long term ideas. I
> then tried to force them on the group. SORRY won’t happen again.

My intent was not to make this guy feel bad but rather to teach him something. I figured that unfortunately, he would just go on studying Hurst and continuing to get nowhere. WM is like the occasional entrepreneur we see on Shark Tank who has spent a huge amount of money [and time] trying to develop a product/business. Without revenue the Sharks often shake their heads and say things like “this is just a bad idea,” or “cut your losses already and move onto something else.”

The Holy Grail is advertised and marketed in many places. I firmly believe it is myth and only capable of impeding my progress by draining resources. One way I avoid this trap is to steer clear of anything too complex. In WM’s case, the advanced theoretical math is literally way over his head. Anything “proprietary” is also too complex for me because by definition, I will never know what it is.

A second Meetup was held a few weeks later on a Wednesday evening and only three of us (WM, the organizer, and myself) showed up. Yes, WM was still trying to preach Hurst theories and he eventually stood up and said “thanks guys but this group just isn’t for me.” I think he’s too brainwashed to contribute but I do hope others attend future Meetups.

Day Trader Meetup Review (Part 1)

A couple months ago I went to a new Meetup for day traders. This is only the second such group I have seen in the state. The other one has a few hundred members but has been inactive for years. The organizers are franchisees of a well-known national trading school that I believe to be a spam-filled money pit. I had met the organizer of the current Meetup twice in the past so I was interested to see what he put together.

I made my way through the wintery cold on a Saturday afternoon to a quaint, Italian restaurant close to downtown. Eight attendees sat around a table with a TV monitor in the room. Two out of the eight seemed to trade stocks regularly but only the organizer was a consistent day trader.

I give props to the organizer for his humility. He claims to make some money day trading but does not profess to make a lot. He said last year he made $30K but lost $10-20K. He’s looking to become more consistent and to that end he started this group as a means to exchange ideas with others. With a smile, he describes himself as lazy: he wakes up in the morning, sets his entries/exits, and then goes back to sleep. He once told me he hits the bars most nights.

Yes, I am giving props to a guy who doesn’t make much because he prefers to be out late drinking on weeknights!

To me this represents something more insidious about the whole lot of retail traders: we aren’t perfect! Nobody is. So why do I get the marketing/advertising face of positivity, of triumph, and of ego all too often when hearing other traders talk? People sound like they’ve expertly got things all figured out. People try to sell others or to garner a following. You’ve seen me write about this time and time and time again.

No, there’s nothing particular about this organizer. He seemed to be a typical, John Doe type of guy.

If only the story would end right there…

The Lemming Effect (Part 3)

The Lemming Effect dovetails nicely with my previous posts on discretionary trading.

The “lemmings” are, after all, getting information about a discretionary trade from the trading log whether they realize it or not. Other thoughts from the trading landscape now come to mind:

Like a detective trying to make sense of a case, I am now starting to discern a positive feedback failure loop or a vicious cycle possibly taking place with discretionary trading playing an integral role.

As an aside, asking the trader why he initially volunteered to share the trading log might prove to be interesting. Is he selling something? In some cases I suspect ulterior motives. Here, my guess would be that he just wanted to “give back” by contributing to the group. Whether he is actually helping or not is another discussion entirely.

I struggled to categorize the posts in this mini-series. “Financial Literacy” makes sense because I feel it’s good information for developing traders and consumers of the financial industry to understand. “optionScam.com” makes sense because I believe the points about credibility and authority are inoculation against potential fraudsters. I chose “Trader Ego” because I believe this along with greed are what make us susceptible to barking down the wrong path.

The Lemming Effect (Part 2)

Today I want to address two questions that come to mind about the Lemming Effect.

First, what established said trader as a sought-after authority? In fields like medicine, law, or education, regarded experts have diplomas, documented work experience, patents, sometimes high-profile clients, published manuscripts or books, etc. In finance it seems to be more about simple persuasion, which comes with a tailwind given the promise of making money. This is what underlies the Lemming Effect. People saw trades listed in a spreadsheet and never mind whether they were real, to the lemming brain that was enough to crown him “genius.”

Unfortunately in trading, strategies can work for a long period of time until they don’t and catastrophic loss is incurred. Traders get blinded to this by the greed inherent in making lots of money. This is precisely why I believe it is important we do our own work using a complete system development methodology.

The second question I wonder about is what are people hoping to gain by studying that trading log? Without taking a survey I really don’t know. I know it can’t help me and therefore I don’t look at it. This makes me think others are heading down the wrong path since they are rushing to look at it.

I briefly communicated with one member of the group about the Lemming Effect and he totally agreed. He did say something interesting in their defense. He would read a 400-page trading book with the expectation that 99.9% would be useless. If even one tidbit positively influences him in the future, though, then the read would be worthwhile.

That sounds like a huge investment of time for very little, if any, potential return. Is there no better way?

The Lemming Effect (Part 1)

Google defines lemming as “a person who unthinkingly joins a mass movement, especially a headlong rush to destruction.” Coincidentally, the example it gives is “the flailings of the lemmings on Wall Street.”

I have found finance to be a curious endeavor because unlike other disciplines where educational degrees or verifiable experience are regarded to establish credibility, financial credibility is more about being outspoken and visible to others.

I belong to a trading mailing list where some members post their trades every day. They occasionally give some commentary about these trades to help explain the strategy.

Recently, one of the members posted his trading log to the list. He wrote that he would be happy to send this log to anyone who provided him with an e-mail address. Over the next two weeks, I am not exaggerating when I say tens upon hundreds of people I had never seen post before responded with “can I get a copy? Thanks!”

I could speculate and say in the absence of anything, maybe people look to others for a starting point. Unfortunately no Holy Grail exists and even seeing what works for someone else is not necessarily going to work for them. It takes a lot of hard work to develop a personal strategy that will work consistently over the long-term and that work does not include copying others. No free lunch exists. One way or another, the hard work must be done.

Despite my speculation about why, the phenomenon seems quite repeatable. Over the years I have associated with many other traders and participated in many trading groups. Whenever beginners get so much as the tiniest whiff of something that could potentially make them money, they appear to trip over each other to get it no matter how meaningless it might be. This is the Lemming Effect.

Who Can You Trust? (Part 3)

As I said in Part 1, trading/finance is an industry rife with liars, cheaters, and fraudsters. Don’t believe me? Look back at every blog post I have categorized under “optionScam.com.” The the nonprofit organization Fraud Aid is an excellent source of relevant information and today I want to quote more highlights from their website for the sake of raising awareness:

      “…con artists look for ways to manipulate strengths
      and weaknesses. They will either paint a picture of
      wealth and ease, or increase your darkest fears, or
      a combination of both.

      In order to do this, a con artist will:

          play on your sympathies;

          instill in you a sense of security in
          dealing with him or her;

          separate you from your friends and
          family by placing extreme secrecy on
          all facets of the deal;

          convince you to depend only on the
          scammer and to believe only in the
          scammer; convince you that your
          friends and family, banks and law
          enforcement, are all lying and that
          only the scammer is telling the truth;

          and distract you from what is really
          going on using lies laced with enough
          truth to make the matter believable.

      Their goal is to make you completely dependent
      on them.

      Part of instilling complete dependency is to make
      you feel that your world may not be safe without
      their guidance. Once you realize that none of the
      promises are forthcoming as you expected, the
      con artist uses that dependency as a threat. He or
      she will yank the leash they have wrapped around
      your survival instincts, using either subtle
      scare tactics or outright threats of physical
      harm to you and your family.

      The first step is for the con artist to determine
      your personality profile and identify your needs.
      He or she might zero in on your pride, your ego,
      your fears, your dreams, visions of riches,
      religious conviction, an illness, or your desire
      to get a special deal, or a combination of
      several traits. Whatever works best for the
      given situation.”

I will finish up with Fraud Aid in the next post.

The Stealthy Sisters of Spin and Speculation (Part 5)

I highly recommend the book Practical Speculation by Laurel Kenner and Victor Niederhoffer (2003).

Part 1 [no need to waste your time reading Part 2] talks about a variety of ways people in trading/investing circles spin things. Kenner and Niederhoffer discuss unfounded claims, bogus statistics, and an overall lack of science that exists in the financial industry. I believe this is mandatory information for anybody aiming to make a serious go at trading/investing. Understanding the dangers/limits of speculation can help keep traders safe.

Speaking of making a “serious go,” remember my “forest for the trees” analogy that suggests many people think they are doing the right thing when in fact they are merely speculating. I regard speculation as gambling and one reason so many traders [allegedly] fail. To satisfy the ego, people may wager on things and boast loudly when they win. Like the slot machines at a casino, the loud boasting is an advertisement to others that they, too, can be right at sometime in the future and win big. The boasting therefore serves to sustain the speculative enterprise.

The losers will probably exit the spotlight quietly with tail between their legs. All the better if nobody notices them slinking out the side door to save embarrassment and ego insult.

Speculation is not the way to make consistent income in the markets. Speculation is the only thing many people know, however. These folks have not learned any “responsible trading/investing” strategies. They haven’t studied the markets enough to understand what risk is really about. Some think they know to varying degrees but they land far short. For them, the intermittent trade or investment and the occasional winner produce a feeling of mastery. That will likely come tumbling down with tragic consequences later if they have been “fooled by randomness” for far too long.