Posted by Mark on September 17, 2013 at 14:04 | Last modified: January 24, 2014 08:42
Having lain the foundation for critical thinking, I will now begin to analyze the trader “wisdom” as presented in part 1.
The trader begins:
“I think one of the most important things X teaches is trading the same market over and over and over again.”
This suggests I should not trade multiple markets sporadically. I find this interesting because I have often debated whether I should have a watch list approach to trading where I limit myself to a specific group of markets to be analyzed and traded all the time or whether I should use a scanning approach to trade any markets that meet a specified set of criteria. People line both sides of the aisle on this issue. There is no right answer.
“You get to the point where you don’t need any indicators. You really understand how the market breathes.”
That sounds encouraging! This also sounds very meaningful and even, dare I say, intimate. Good persuasive technique.
“You get really comfortable [and really start to think] ‘okay, I know what I’m doing today.’ It’s not that you can predict the future with it but you get comfortable with how [the market] reacts.”
The unspoken premise here is if I consistently make money trading it. Surely if I am losing then I will not feel comfortable or very knowledgeable. If my losses are great enough then I won’t think I know a damn thing and I might even decide to throw in the towel altogether! In other words, by phrasing the advice in this way, he suggests you will make money consistently because that is the only way his statement will be true. This is good persuasive technique as well.
Are you getting the gist of where I’m going with all this? I will continue with my next post.
Categories: optionScam.com, Wisdom | | Permalink
Posted by Mark on September 12, 2013 at 07:22 | Last modified: January 24, 2014 08:41
In my last post I began to lay some foundation for critical thinking. This is useful to evaluate others’ claims in the financial industry or otherwise.
Television has dramatized countless times over the decades how you often cannot believe what people say. Summed together, CSI: Crime Scene Investigation, CSI: Miami, and CSI: New York have entertained audiences to over 740 television episodes and not a single episode has failed to feature a suspect who did not lie. The same may be said for patients of Gregory House in 177 episodes of House, M.D. Pretty Little Liars features continuous deceit as does [probably] any and every soap opera ever to appear on TV. If people in general can’t be trusted then claims about success (read: marketing) certainly cannot be accepted without intense scrutiny.
This is valid reason why you probably should not heed others’ advice in financial matters. “Others’ advice” may include premium investment advisories, investment/trading education packages or “mentorships,” and for-profit trading rooms (if you are paying then they are profiting). The ultimate arbiter is the PnL and regardless of how well they organize a presentation, you can never verify its true authenticity. Visiting face-to-face with the person and holding in your hand monthly brokerage statements with account numbers displayed tempts true belief but in the financial industry this never, ever happens. More often, you talk to people over the phone, e-mail via the Internet, and see or hear alleged performance numbers. Never do you personally witness a signed tax return complete with SSN.
This simple observation about human nature gives me tremendous latitude to say things that sound very logical on the surface. If I present these words with confidence and appear to have a following of others then I may even have great persuasive power. An apparent following may include positive reviews on Amazon.com, virtual participants appearing to be attending my webinars, students I claim to be enrolled in my education program, or my face frequenting financial media such as theStreet.com articles or CNBC segments. When you believe me then you will pay me because you hope I can make you rich.
In too many cases, all you will end up doing is allowing me to live criminally.
Categories: optionScam.com, Wisdom | | Permalink
Posted by Mark on September 9, 2013 at 07:40 | Last modified: January 24, 2014 08:41
A few days ago, I heard a trader addressing a group. By the tone of his voice and the superficial meaning of his words, this was certainly sage advice. Today I will begin to lay the framework of critical thinking that should always be employed to evaluate what people say in financial circles [or anywhere else, perhaps].
The ultimate arbiter on all things right or wrong about financial markets is the profit/loss (PnL). I can say whatever I want about this stock or that market, this pattern or that valuation, this metric or that performance statistic. If I make money for myself or for others then I will stay in the game. If I lose money then I will eventually go bust and you will hear me no more.
Unfortunately for those listening, you can never know what my true PnL is. I can tell you that I’ve made hundreds of millions of dollars in stocks. Will you believe me? In an industry sometimes suspected of snake oil, chicanery, and egregious fraud driven by human greed, should you believe me?
If there’s any possible way that I might profit now or later from your belief then you probably should not believe me.
Mull that over for a couple days and I will continue to develop this thesis in my next post.
Categories: optionScam.com, Wisdom | | Permalink
Posted by Mark on September 6, 2013 at 02:47 | Last modified: January 24, 2014 08:41
The last couple of posts elucidated my general belief that the financial industry is a comprehensive scam. I mentioned chipping away at a foundation suggesting that once the evidence accumulates, the totality of deception will be overwhelming beyond any reasonable doubt.
Today I heard something that had the veneer of trading wisdom. You know, the old adages that seemingly light the way to the Holy Grail… common mistakes that I am always guilty of making when I lose significant money…
Here is what I heard:
“I think one of the most important things X teaches is trading the same market over and over and over again. You get to the point where you don’t need any indicators. You really understand how the market breathes. You get really comfortable [and really start to think] ‘okay, I know what I’m doing today.’ It’s not that you can predict the future with it but you get comfortable with how [the market] reacts. I sit here in front of the screens all the time watching the 5-minute bars on all the futures and I’ve gotten very comfortable with my trades because I kinda know… I get decent entry points because I know how the market is moving around when I’m getting my trades on and I know when to just… hold off… doing my adjustment for 5, 10, or 15 minutes to see—you know, typically it’ll reverse here so I’ll wait and see and maybe get a better price. On this trade, I think it’s important to really understand how [the market] works so you can see the graph and see how these candles affect the trade. You’ll see patterns among the stocks.”
Does that sound like good, reasonable advice coming from a professional trader? Words to live by?
I’ll begin my analysis in the next post.
Categories: optionScam.com, Wisdom | | Permalink
Posted by Mark on August 30, 2013 at 05:22 | Last modified: December 11, 2013 14:04
In my last post I began a slow ramble about how the financial industry strikes me as a scam.
Maybe it doesn’t matter much that financial advisors and fund managers are crooked given that I can trade and invest my own money but few people actually do. A cursory Google search found this article from 2011, which indicates only 11% of trading volume to be retail. In some way, shape, or form, this implies that 89% of all trading is done by firms managing other people’s money.
If the financial industry is a scam then it’s a big deal.
My view is not going to be a popular one.
The money and the influence belongs to Wall Street, which has power to direct the media, influence publications, etc.
My words would probably be laughed at, debated, labeled as absurd, and rejected. My reputation would quickly be tarnished.
Thankfully, I’m not out to win a war of propaganda. My goal is only to better understand for myself and in so doing, to have greater awareness of what it will take to succeed as a retail trader.
To repeat: I care about my performance and my results.
Follow me and comment as you wish.
Categories: optionScam.com | | Permalink
Posted by Mark on August 27, 2013 at 04:15 | Last modified: December 11, 2013 13:35
One thesis I explore in this blog continues to be supported with few exceptions: the financial industry is a scam.
I cannot prove this.
I sometimes have trouble explaining exactly what this means.
But the more you read my posts and think about how the general themes fit together, the more you will see me chipping away at a foundation assumed by many to be, at some level, sacrosanct.
Make no mistake: respect for the financial industry is hardly held up on a pedestal or even, in general terms, spoken about with healthy respect. The Occupy Movement (“we are the 99%”) drew a line separating “Wall Street”–the few people with great wealth–from “Main Street”–the vast majority of the population comprising a small percentage of total wealth. Banks and investment advisory services are often spoken about with disdain. The stock market is often said to be manipulated.
People do seem to have an easier time hating the financial industry in general than the specific people or entities with whom they interact. As an example, you may have a good relationship with a banker or manager at your local branch. You may have a financial advisor who you trust. Cognitive dissonance theory helps to explain this (http://en.wikipedia.org/wiki/Cognitive_dissonance). Most people need to have a local bank and most people with money believe they need a financial advisor. If you truly dislike your banker and your financial advisor then why are you sticking with them? If I am with a bank I hate and a financial advisor I don’t trust then maybe I am the dummy for not getting off my couch and exploring to find new ones. People don’t want to admit this so they [unconsciously] form a more favorable opinion of their bank and their financial advisor, instead. Your own mind may contribute to your being sold.
And while people hate the industry as a whole, they’re less likely to suspect or realize the ones they have direct interactions with are also cut from the same, untrustworthy cloth.
I will continue this discussion with my next post.
Categories: optionScam.com | | Permalink
Posted by Mark on August 22, 2013 at 07:46 | Last modified: December 6, 2013 14:36
Over the last two months, I have been backtesting the weekly option trade described here. I studied 26 weeks of the trade from January 6, 2011, through July 7, 2011. The trade won 14 times and lost 12. The winning trades averaged $441.64 while the losing trades averaged -$912.50. The profit factor was a dismal 0.57: low enough to make minced meat out of any size trading account.
Blame the trade or blame the backtest?
Because this is a negative gamma trade, I suspect the backtesting methodology exaggerates the losses. Negative gamma refers to the “frownie face” (upside down parabola) shape of today’s risk graph:
To the upside, negative gamma makes net position delta (slope of T+0 curve) more negative. To the downside, negative gamma makes net position delta more positive. I lose money either way.
The biggest detriment of these moves may occur near adjustment points. In these areas, net position delta is relatively large. Due to the observation above, I would hypothesize the trade to lose more from an X-point market rally (decline) beyond the upper (lower) adjustment point than the trade would gain from an X-point market decline (rally) from the upper (lower) adjustment point. In live trading, I can monitor the trade and make adjustments in a timely fashion. In backtesting, though, I only had 30-minute intervals of data and I had to settle for available prices regardless of how far beyond the adjustment points the underlying may have moved.
I suspect the error (difference between market price at 30-minute intervals and the actual adjustment point) hurts me more than it helps me.
The only way to assess how accurate these backtesting results might be is to trade the iron butterfly in small size. Seeing how dismal those backtesting results were, though, I’d rather keep the cash and take it to Vegas.
Show me a backtest that performs well in the face of minor tweaks biased against it and you’ll have a trade that I would be willing to place with real money.
Categories: Backtesting | | Permalink
Posted by Mark on August 19, 2013 at 07:13 | Last modified: December 5, 2013 12:36
In this blog series, I’m backtesting the weekly option trade described here.
Week 26′s trade begins with this:
After threatening the upside, the market reversed and hit a downside adjustment point:
After the weekend, the market continued to move lower and hit a second adjustment point:
The market continued moving lower that day and hit a third adjustment point:
Due to transaction costs, this adjustment would have taken the trade from a loss of $777 to $921, which is max loss. I therefore did not make the adjustment.
The trade survived into the next day where the market continued to hang out below the third adjustment point. Having collected an additional day of time decay now, I could afford to make the adjustment without hitting max loss:
The market traded in a range into expiration Thursday when the profit target was realized:
P/L on Day 1 ranged from +$90 to -$498.
P/L on Day 2 ranged from +$27 to -$287 on an adjusted margin requirement of $5,769.
P/L on Day 5 (nothing happened over the weekend) ranged from -$435 to -$777 on an adjusted margin requirement of $4,719.
P/L on Day 6 ranged from -$291 to -$633 on an adjusted margin requirement of $4,812.
P/L on Day 7 ranged from +$345 to -$264.
The trade was closed on Day 8 for a profit of $588, which is a return of 10.2% on max margin.
This trade has now won in 14 out of 26 weeks.
Categories: Backtesting | | Permalink
Posted by Mark on August 16, 2013 at 07:51 | Last modified: December 5, 2013 12:33
In this blog series, I’m backtesting the weekly option trade described here.
Week 25′s trade begins with this:
The market rallied into Friday and hit an adjustment point:
Unfortunately, the trade was already down $621. Slippage on the adjustment alone would push this trade beyond the max loss of $631. Exiting the trade prematurely would insert an additional parameter into this trading system (i.e. how many dollars under max loss does the P/L need to be to allow for adjustment). Since more parameters requires more detailed backtesting to avoid curve-fitting, I opted to hold on.
Max loss was realized soon after:
This trade lost $1,035, which is 32.8% on $3,159 margin. The market rallied 13 points–about 1%–in one day to knock this trade out.
The trade is now 13-12 in 25 weeks.
Categories: Backtesting | | Permalink
Posted by Mark on August 14, 2013 at 05:54 | Last modified: September 10, 2013 10:49
In this blog series, I’m backtesting the weekly option trade described here.
Week 24′s trade begins with this:
The market rallied in the afternoon to an adjustment point:
Soon after, the trade hit max loss of 12.9% on max margin of $4,857:
The trade was down $486 before the adjustment and $522 afterward. While slippage is a reality of trading, perhaps I should not have adjusted with max loss being $560? The adjustment did cut net position delta from -38 to -7. Taking into account delta only (gamma was slightly higher in the non-adjustment case), the following table shows projected P/L with and without adjustment:
Basically this trade is damned if I do and damned if I don’t. Adjustment gave the trade farther to run before hitting max loss, which was hit anyway.
The trade is now 13-11 in 24 weeks.
Categories: Backtesting | | Permalink