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.