Slow Trader

Category: Slow Trader Hedge Fund

  • Most important, but often ignored

    Probability is something we understand very clearly when it comes to sports, but it seems to be a concept that we struggle with as a trader.

    We realise (because it’s been mentioned a few times) that the difference between a trader and a gambler – if we where to picked one thing – is adding or not adding probability into the mix of reward and risk.

    Some sports lend themselves very well to the example of probability. Basketball, tennis and (particularly) golf come to mind. I mentioned basketball last week because the point scoring matches well the traders multiples of reward to risk.

    In basketball we can score 3 points from a shot taken from outside of the defenders area; 2 points from inside the area; and 1 point from a free shot, if the opponent commits a foul. As a trader we often look to achieve a minimum target that is 3, 2 and 1 times our actual risk. (I like this to be planned risk but it is actual risk that the traders equation depends).

    We could suggest that a basketball shot taken from outside the defenders area has a probability of success that is low (it’s a long way to throw it!); however, the risk is also low as the defending team have little chance of a quick, undefended, attack in reply.

    A 2-pointer attempt is medium in probability as the (6’7″) defenders are there with us in the shooting area. It is also medium in risk as it is a dynamic manoeuvre and often with the full commitment to the shot from most, if not all, of the team; a quick steal and counter attack is possible.

    A free shot is never available in trading, therefore, I’d equate the 1-point attempt, in basketball terms, to the lob up court to a teammate in the hope of a quick score. The risk of interception is high but the probability, if our own team member catches it, of scoring quickly is also high.

    All well and good, but where does this take us in financial traders terms? As a trader, and regardless of which timeframe of chart we trade, we’re all looking to take trades where the probability, reward and risk make good sense. To do otherwise is, as we’ve said, gambling.

    As an aside, as a trader we’re always participating in the basketball equivalent of the NBA championships because the trading professionals (institutions and the like) make up most of the opposition and in this ‘zero sum game’ they’re always-in.

    In our basketball match, if we lob the ball up court but we don’t have a team member to receive it we have given the ball away; if we take a 3 point shot at basket when we have no defenders between us and the basket we have merely reduced our probability for no good reason.

    Our judgement of probability in sports is generally very good – instinctively making a workable probabilistic assessment; but as a trader we often ignore this all important aspect.

    Technical trading is a financial ‘sport’ where we can only participate against the professional league. At that level we cannot get probability, reward and risk confused. To do so is the same as chucking the ball up court without a receiver.  As want-to-be traders however we seem to do this all the time (ignore probability) and wonder why we don’t win.

  • A three-pointer, bar by bar

    I played a lot of basketball as a young adult. A sport relatively new to the UK at the time, I consider it the one major factor that gave me the confidence to go on and achieve my career aspirations as a pilot.

    The shot on the left from sometime in the early 70s and the reunion (good to see there is little change!) last week.

    How to relate this to trading. Well, sometime in the 80s the basketball three-point rule was introduced. This is a lower probability shot taken from beyond the three-point line, a designated ark surrounding the basket.

    Thank goodness they introduced this, as our opposition last week were younger (obviously), fitter, bigger, stronger – we had little chance of getting near the basket for the more probable closer shot. However, our long-range (low probability) shots, and particularly from the little bald guy on the left, were excellent.

    The equivalent in trading is a trade taken at an inflection point, where the probability is low but the reward can be at least three-times the risk.

    Here’s an example: a bar by bar trade taken yesterday morning.

    (Before I do so, I must explain that due to the uncertain volatility to sterling from Brexit negotiations I’ve dedicated myself over the last couple of weeks to being familiar with the currency pairing USD/JPY. You may recall that previously I favoured GBP/JPY. The former has, in general, smaller bars, however, the spread is correspondingly small.)

    For a couple of days the chart has been in a broad trading range. From the higher timeframe chart (not shown) the upper channel of the range is higher than bar 1 marked on the chart. However, as the higher time frame chart is always in short it would not be unusual for a decrease in price at this point. From the close of bar 1 we only have a moment to decide. I enter the trade short.

    We are aware that the close of our entry bar has engulfed several of the previous bars and closed below the 20 bar exponential moving average. However, significantly the bar has not yet crossed a change in premise line (marked by the red arrow). In basketball terms, a weak two-pointer.

    The next bar (bar 2 on the chart) goes against us. It closed higher than previous closes but is still below the recent wick marked by the green arrow.

    Another bar higher, a close beyond the wick and the likelihood of at least another move higher (and probably up to the channel line of the higher time frame chart). We’re out of the money with this trade. But we’ve structured the trade so that we have a distant stop position.

    Price starts to show some bearishness again and after a slight pull back we set a limit order to short at the high of the previous bars which gets filled from the wick of bar 3. (A low probability three-point basketball shot!) We are now entered short twice – once at the close of bar 1 and again from the high of bar 3. (Our stop for both is at least a measured move above the last leg of bar 2 and its subsequent bars).

    Hurrah, we get our anticipated short which puts us back into the money with our initial entry and in good profit with our second entry. The doji at bar 4 puts uncertainty back into the mix, and I exit both trades.

    This was correct as the market then went long. The purists would say that bar 5 is a good probability long…..however, after a ‘three-point bounce off the ring and in manoeuvre’ I wait, stay flat and gather my thoughts.

     

  • A traders day of two halves

    Very sensibly, most traders will not trade lower time frame charts because of the effect many news announcements have, seemingly unpredictably, on price.

    Let me give an example by following me through a (common) recent day of trading.

    The day I have chosen has a good array of news announcements, many of which have no effect on price but one does – the announcement that the UK interest rate will remain unchanged at 0.25%.

    At mid day, and within a few seconds of the (seemingly) unspectacular news, this happened to the chart:

    This is a chart of sterling to yen. The chart jumped just over 100 pips, which to a higher timeframe trader, say someone who trades using daily closed bars, and, as the chart will often move over 100 pips in a day, this is no big deal.

    To the lower time frame trader it is not the amount of the move but the little time that it took. That is what scares people away from short-term trading, and on the lower time frame chart this can happen a few times each week.

    However, through a combination of knowing when the news will be announced and (more importantly) reading the chart, we can be in the flow with price and very rarely risk being caught on the wrong side of such a price move. Conversely, because of risk, I’m rarely on the right side of such a large move either. That is not where I get my gains.

    Here’s the day per trade before that event.

    The chart always looks different prior to a big (relative to timeframe) move due to proportionality of the chart.

    My day started early, about 6am on the chart, concentrating on the one chart. Due to a combination of low bar size (price change) and high spread a start at 8am (UK time) is probably better, but there is nothing set.

    The close of bar number one was my first trade taken long. Not the best of trades as we have two small attempts to push up prior to bar one which ended up being a third and final, and possible exhaustion, push. A good out would have been the doji three bars later; however, I held and came out at a loss, but before my stop, as bar two crashed short.

    I entered the close of bar two short. Changing direction of trade is not the easiest of things for a trader to do; and because of this I only entered with one-third of my usual amount.

    I held that trade through the pull back. At the close of bar three I went short with the remaining two-thirds. I’m now fully committed short. The doji four bars later gave me pause for thought, but I held through until target which was a measured move to near the bottom of the next and large bar short.

    Very good, we’re nicely in profit at this stage. The close of bar six was the next take short. This was an early take and I didn’t get my measure until the next but one bar and this provided another 18 pips of profit.

    Bar five, for me, provided a good probability long. So I entered long at the close of bar five. My target was 17 pips above. Excellent, that worked.

    Easily the most sure trade of the day was the close of bar six short. My target was below the low of the day, however, with the doji at the bottom of that leg, I exited the trade with 22 pips of profit. Moreover, the interest rate news announcement was imminent, so a great time to be flat.

    After the news announcement and the rapid 100 pip bar long my strategy is to take the close of that bar long expecting another 100 pips. I didn’t as emotionally I was uncomfortable with the 100 pip risk. By early evening the move was completed.

    I’m pleased that after the news announcement, I then positively managed one swing and two further scalps, but amounting to significantly less than the subsequent 100 pips on offer for the afternoon. That is not disappointment on my part (an emotion that a trader has to ignore) but a reinforcement of my strategy, maybe for next time.

  • Trade without bias

    “No data yet!….It is a capital mistake to theorise before you have all the evidence, it biases the judgement.”                            Sherlock Holmes

    We’ve previously touched on an issue that: doctors, engineers, solicitors etc may have when they try to trade – and I was no exception.

    For a long time we have, through professional good habit, been comfortable predicting the way ahead based on our experience, good judgement and assumptions.

    In technical trading, however, such attributes do not help. Having a preconceived idea of what the market will do blinds us to reading the market in the moment. Or, as Arthur Conan Doyle wrote, “it biases the judgement”.

    We have previously considered (from Joshua Foer) that a grand master chess player does not look several moves ahead, as we all assume, but rather is coldly reacting, more or less, to the opposition pieces presented in that moment.

    A form of trading, which I like a lot, is what I call “always in” trading. This is best done on a single market and timeframe. Always-in provides the dual meaning of direction of trade and committing to a trade direction wherever possible.

    Whenever we are confident of an always-in trade direction, then we are to do everything we can to enter the trade.

    In a neutral, or 50/50, event the trader waits. But as soon as the always-in is defined with some probability then the trader enters the trade.

    Okay, there is more to it than that and why ‘always-in’ is a method, I think, for the experienced trader only – but bizarrely all beginners seem to start out with this or a similar methodology.

    To do the same in my previous career, it would be like joining the Red Arrows before completing flying training.

     

  • A chart mix

    My mother missed her step coming off a pavement and fell and broke her hip. She is doing remarkably well and I look forward next week to getting back to my trading, I’m a couple of weeks behind.

    Trading GBP/JPY on the 5 minute charts works well for me. I like the size of this market and on many days GBP/JPY can be quite defined. Anyone familiar with EUR/USD or even GBP/USD will find GBP/JPY quite lively.

    Many that trade major pairings will not take the spread into consideration, a mistake I think, but not a big one. Particularly if they trade from 15 minute charts or higher. GBP/JPY however, on a lower time frame, teaches us the necessity to consider the spread. To do otherwise, and be consistently profitable, is more difficult – I think.

    To make the best of both possibilities I’m happy with my results of concurrently trading GBP/JPY on the 5 minutes chart (as the priority chart) with a watch on USD/CAD, Gold and EUR/USD – each of which are on the 15 minute chart. I tried many possibilities but these choices give me good opportunity, diversity, liquidity and a spread value that I prefer.

    For example, GBP/JPY does not work with GBP/USD as both react almost in unison. Moreover, oil is often a mirror image of USD/CAD: so to trade one would have too much influence on the other. I do find that Gold and EUR/USD often have similar movements and on such days I consider a swap to AUD/USD or (and I’m in the early stages of this) the US 500 SPTRD.

    Other FX pairings, and particularly exotics, are not considerations for me. Primarily due to spread but also we are dealing with randomness and probability, and we don’t need big uncertainty too. As already mentioned, I’ve looked carefully at the US 500 SPTRD and this is a possibility on the 15 minute chart with good liquidity once the US market has opened.

    To trade the fund on the 4-hour charts is not possible (for me anyway) with already four intraday charts to manage. If my results are what I know they can be (and so far so good) over the next few weeks I will consider how to join the slow trader fund within this – more intensive – methodology.

  • A sucker game

    A point worth serious thought from Nassim Taleb from his book “Antifagile: things that gain from disorder”.

    Yes, he creates, I think, an appropriate new word (antifragile) to help get his meaning across. In one area Taleb presents his argument on medium risk (referral to a financial portfolio) and how he considers there to be no such thing as “moderate” risk.

    His point is that in the event of a “Black Swan”, that is a catastrophic negative event, then all – low, medium and high – risk is going to get hit. (As an aside, I consider that a negative Black Swan, to an expert intraday trader, can become a positive Black Swan).

    Fully committed to a “moderate” risk account is, actually, at full risk; at best, this provides medium upside potential but with all the possible downside. That is because medium risks can be subjected to huge measurement errors.

    Taleb points out that: rather than being fully committed to a “moderate” risk portfolio (and in the event of a negative Black Swan, a potentially emotionally draining experience); better to be 90 or 80 percent in a boring, inflation proof, no risk cash (or: bond, cash, share mix – my words) account and 10 to 20 percent in a very high risk account. (Taleb uses 10 percent very high risk, I’m simply following Pareto’s law)

    The 80/20 example means that we have little downside – assuming that 10 to 20 percent downside is acceptable – whilst still exposed to massive upside.

    To finish, Taleb writes: “Someone with 100 percent in so-called ‘medium’ risk securities has a risk of total ruin from the miscomputation of risks”…..”that in fact is a sucker game”.

  • Nothing to lose

    I hear this a lot in sports “I’ve got nothing to lose….”

    But it does work. It is obvious in tennis, a sport I watch whenever I can. A game, for example, that is closely matched but the score, not reflecting this, has one player up a couple of sets. Often the opponent with “nothing to lose” at this point turns the match around.

    This is a mindset that I use in trading but in a different way to our tennis player. Let me explain:

    If I were to use the sporting analogy in trading, that is, I’m on the ropes and nothing to lose, it would be the way of the gambler. No planned consideration from the outset of probability.

    The participant in our tennis analogy starts out risk averse but then with “nothing to lose” relaxes and wins low probability shots. The opponent that is two sets up, looking for the final set to win the match, goes the other way only taking high (predictable) probability shots.

    Unlike our tennis player friend, the expert trader has a planned “nothing to lose” attitude from the outset. The (retail) trader does not have to return every ball. We can wait to take the high (obvious) probability trade when we know our opponent is wrong footed. When we do take the low probability trades we do it (staying with the analogy) at a crucial point in the game where the reward is many times the risk.

    In other words: “I can only lose a relatively small portion of my funds with each trade. With low probability trades my wins are a few times greater than any potential loss. On high probability trades I’m selective with my entries.”

    With this in mind, and with lots and lots of practise, I can be properly confident and relaxed, over the longer run, because I manage probability, … nothing to lose.

  • Slow Trader fund to a corporate CFD trust account?

    A few words going forward regarding our ‘Slow Trader’ fund.

    As our fund grows I’m looking at its future organisation.

    I’m considering moving the fund to a CFD traded corporate trust account, nominated as a hedge fund.

    If we were to do this we still wouldn’t pay stamp duty, but we would pay capital gains tax.

    Shares within the company would reflect the share distribution of the fund. Any losses would be tax-deductible.

    It’s important that we retain the ability to hedge (trade long and short), and are able to trade intra-day in our present selection of forex, commodities and shares, from a platform I’m familiar.

    Some technical stuff: A CFD, a derivative, satisfies this requirement. CFDs have a spread on forex and commodities; shares are commission only, no spread. Which is all good for us. Moreover, CFDs are traded on margin with a provision for guaranteed stop orders.

    A private limited company for such a purpose would be relatively easy to manage and report. I will let you know on this and seek everyones thoughts after I get further clarification from my accountant.

  • Law of large numbers

    In all forms of trading – whether it be short, medium or long-term trading – there is an overwhelming tendency to take winning trades (incorrectly) too early – that is before target, and to allow losing trades (correctly) to go all the way to our stop-loss.

    Psychologists would, I’m sure, have a good explanation for this. But it does cause a disproportionate problem for the trader. If we are trading correctly, as a casino, then we are looking for the accumulated positive smaller percentage over the longer run and after the many win, lose and break-even trades have been accounted.

    That casino percentage is quickly taken away when our losses are often greater than our wins. Therefore we have to develop a very clear ‘don’t touch until target’ strategy.

    Easier said than done I agree. However, we manage it with our stop-loss position so clearly it must be possible with our target position too. Within my “algorithm to trade by” page I’ve set myself very clear rules that prevent me (emotionally) from taking profits early without a predefined strategic reason.

    To be consistently profitable it helps to have the ‘law of large numbers’ batting for us.

  • Longer-term, should we consider North Korea et al

    A reminder that we periodically take a look at the US 500 chart (or S&P) to get a feel for what our chosen FTSE 350 companies may do.

    We use the US 500 and the FTSE 250 charts as the FTSE 100 is, we feel, more driven by the large commodity companies and therefore does not provide us with a platform to judge the non commodity companies within the index.

    Even if this were not so, we’d still consider the US 500 as a good indicator of not only the associated 500 companies but also of companies within the FTSE 350.

    The US 500 is at a big number position which often has an effect on the chart. Moreover, we have a measured move up to its present position from the 2014-2015 high and low. It would seem also that we are in for a consecutive ‘bear’ month. (The bulls go up and the bears go down).

    The strength of the bulls however would, to my mind, not bring the chart too far down at this stage. I would consider any pull back to be a flag rather than a major reversal. Possibly the next 2 to 3 months may see a pull back. This, I think, will probably be bought by the bulls and the market pushed back up to the high of the big number again.

    On the daily chart this will create a more significant double top. And this in itself may be strong enough to create a major trend reversal which will start on the daily chart and follow through to be measured on the weekly and possibly the monthly chart as a reversal.

    Where would the reversal go? Back down to the 1800 position and at the low of 2014 to 2015.

    Lets now take a look at the FTSE 250 monthly chart.

    The chart has been in a tight bull channel for some time. Of note, I would have bought the December close anticipating a swing target that is at, or almost at, the present high. This high is still short of the top of the channel but it is at a measured move position and almost at a big number. I personally wouldn’t short at this point but I wouldn’t take it long from here either. I’m waiting to see what happens.

    Finally, do we factor in Trump, North Korea and Syria? Well, yes, these could be a catalyst for at least a small correction and if so this will accelerate the points we’ve made.

  • Not a good idea to match experts

    Each of my faults, the ones that I’m aware, seem to balance themselves out.

    For example, my type of dyslexia (probably detectable in many of my spellings) gave me reading problems as a child (I’ve overcompensated as most would now consider me a voracious reader) but was balanced by my skills in mathematics.

    Later in my career as a squadron commander my propensity to change my mind in a flash and go with a different tack was undoubtedly frustrating for my management team.

    That same trait is, as it turns out because I wasn’t aware that this oddity of mine could possibly be put to advantage, gives me a traders edge.

    That is because in trading, and in particular my chosen method of short-term trading, is based on probability. Where (according to Taleb) probability is about the belief in an alternative outcome, it is not about the odds.

    Beliefs (Taleb goes on to say) are said to be path dependent if the sequence of ideas is such that the first one dominates. We may be programmed to build a loyalty to ideas in which we have invested time – a good salesman, for example, will take advantage of this principle.

    A great trader on the other hand will change their belief (probability assessment) in an instance. That is why it is not a good idea to attempt to take the same trade of an expert: we know they are long, they said convincingly that they are going long, we follow and take the trade long – the expert went short.

  • Financial spread betting

    For my day trading I use a financial spread betting company.

    Don’t get bothered by the word ‘betting’, it could quite easily be called financial spread trading. However, putting the ‘betting’ word in there qualifies for no tax (under the current rules).

    My opinion on why no CGT, stamp duty or explicit trading commissions:

    • It is well-known that most (and I mean most) people lose at financial spread betting. It’s not the spread betting that people lose at per se, it’s trading in general and particularly day-trading.
    • Therefore, if financial spread betting were taxed, then the large majority would be claiming tax offsets for their losses.
    • Spread betting companies, on the other hand, make money (they operate like the casino) and the government are better off leaving the pundit who is attracted to and enjoying tax-free trading (losses) and taxing the profitable companies.

    Financial spread betting is a derivative based trading which simply means that we don’t own the physical product. This does give us the advantage (not necessarily always an advantage) of being able to buy, go long, or sell, go short.

    We also, unlike an ISA trade, don’t pay a fee for our trades. (I’m considering short-term trades from a DFT here). However, we do pay a spread. A spread being the difference between the buy and the sell-price.

    It might be noticed in my ‘algorithm to trade by’ page that I make repeated reference to the spread – in particular half-spread. The beginner doesn’t fully appreciate the importance of managing the spread. Furthermore, both the beginner and the intermediate, particularly if the latter drops into the dip, don’t fully understand the importance of managing margin and leverage.

    Spread:

    • On selecting a spread betting company probably my biggest criteria is the tightness of the spread.
    • A spread of, say, 2.5 pips for GBP/JPY is not a lot when we are trading at the minimum of £1 per pip. (As an aside, my amount per trade is always based on my reward/risk measurement which, in turn, is based on a consistent potential loss per trade).
    • If we entered a trade and exited immediately then for the £1 per pip example this would cost us £2.5 for the joy of trading.
    • Okay, that sounds very reasonable particularly as the average ISA has a ‘in/out’ trade cost of £24. (An ISA also has a spread, but lets keep it simple)
    • An expert’s (retailers) account may take them to the region of £60 per pip. An immediate ‘in/out’ in this example would cost £150. And they wouldn’t want to do that too often.
    • So, as we can see spread is a definite factor in financial spread betting; in my day-trading I measure to 0.1 of a pip so the spread is very closely included in my measurements.

    The real benefit of spread betting is leverage – for the expert at least who has learnt how to manage leverage and margin. The beginner, and often the intermediate trader, will misuse leverage (only having to commit 1% to 10% of funds to a trade). There is an enquiry ongoing to protect the inexperienced trader by a substantial reduction in leverage allowed. Particularly if a trader has less than 3-years experience. The effect of which will probably kill financial spread betting as an attractive trading vehicle for the expert.

  • Sequences and signals in the moment

    In “Moonwalking with Einstein: The Art and Science of Remembering everything”, Joshua Foer considers that chess masters don’t plan ahead as far as we think they do.

    Actually, Foer shows how such players don’t plan their moves ahead of time more than the next couple. However, he does show that through a great deal of practise chess masters rely on recognising, in the moment, many sequences of moves.

    Clearly the more skilled an opponent then the more subtle, seemingly random or non standard a response of effective play can be expected.

    In the same way as a chess master will remain open and reactive, so must a short-term trader, and particularly in the markets of heavily traded currency pairings.

    The expert trader does not fall in love with a preconceived trade. It’s simply a trade that is happening in the moment and one that the trader will reverse their decision on in a heartbeat if a sequence or signal gives predetermined reason for change.

  • Algorithm to trade by

    Nicholas Taleb, in his book ‘fooled by randomness’, suggests that “some psychologists estimate the negative effect for an average (traders) loss to be up to 2.5 the magnitude of a positive one”.

    Therefore in short-term trading, and particularly day-trading, that is a lot of pangs.

    A longer-term investor may check her portfolio, say, once a year. If she averages a 15% gain per year then this investor will have an emotional pang about one in nine years.

    The expert day trader on the other hand (the beginner and intermediate trader are off the scale here) will have 7 to 15 trades per day of which about half will be an emotional drain. Leaving the trader some 250% more emotionally drained – and that’s on a reasonable day!

    Beginners are attracted to day-trading because it sounds cool, and, as a stop order can be closer in a low time frame trade, they can trade for less per trade than on a higher timeframe chart. An individual’s chance of surviving the beginner to intermediate to expert in day trading is slim.

    An expert day trader, someone who was properly coached or who has graduated from the ranks of the higher time frame trades, will, I feel, only survive the emotional pangs of day trading if they develop and follow an (unemotional) algorithm.

    That is why I’ve renamed my page ‘how I trade’ to ‘algorithm to trade by’.

  • Long-term, what does the S&P chart suggest

    The S&P 500 is, I think, a reasonable guide for us when considering our long-term FTSE 350 top ten.

    The chart we are considering is the monthly chart, and this snip covers the last few years. The month just gone finished with what is known, technically, as a doji. This is an indecision or a trading range bar.

    The chart has been strong, having now completed a measured move up from the last pull back at about 1800. Also, the chart is currently at a big number, being 2400.

    The big number, completion of a measured move and finishing the month as a doji all point to a probable pull back at this stage. Albeit a small (in monthly chart terms) pull back; what the technical analyst would call an anticipated bear flag.

    Any small pull back will, in all likelihood, be bought and the chart pushed back up to 2400 or higher. However, if the pull back is stronger than anticipated (…the possible government shutdown crisis and the congressional fight over the continuing resolution that expires on April 28 is a factor) then we could see the chart coming back down to the 1800 level. As we’re on the monthly chart such a scenario would take one to two years.

    The bottom line is that the chart is at a measured high with a doji and significant news on the way. I would hold for a time and see where this leads. A pull back to 1800 would provide a good buy point – but, of course, in holding we may miss (and possibly the more probable) further move up.