Friday, October 13, 2006

Stopped Out Again

Again the model was stopped out today. I lost a lot of money. The majority of my profits from this experimental trading period have been lost. In fact I am back to the return the market has given over this period. From that perspective I guess it hasn't been too much of a disaster? :) If one stuck exactly to the model a day like today wouldn't be disastrous. But if you don't trade the system properly days like today are very bad news. Over this period I have improved the model and decision rules a lot. It is a much better system than at the beginning of the period. So it hasn't been a waste. I am not giving up. I still have some profits left and a tool that in theory can produce tremendous profits. I'm not sure what the problem has been. Too much leverage does make me nervous and do dumb things. I plan to use less leverage going forward and try to stick more closely to the model signals. Doing what are really two full time jobs at the same time is hard. I end up doing neither very well. On the other hand trading more than one thing simultaneously in smaller amounts in each instrument would be psychologically easier. Soon I will be able to start paper trading at IB (I initiated the transfer of $5000 today). I am thinking to experiment with trading two or three instruments simultaneously. As it won't be real money I won't be worried about losing money. Probably trading NDX, bonds, and Australian Dollars would be a good combination as the three assets have little correlation with each other. I won't have time to model bonds and dollars so I will trade these purely on the basis of charts. Right now I'd be long the AUD and short bonds probably.


StealthBucks said...

moom, I am sure the model works but do you also do the same analysis on your trading behavior? This can be even more enlightening but somewhat painful.

I sucketh on short term trades so I really might be talking out my back side however, you have mentioned several times you deviate from your model. Why is that? More importantly can you learn from it?

Peanut gallery thoughts from a pathetic optimist.

mOOm said...

I'm trying to learn and work that out. I discuss some of that in this post. Most traders end up losing. First most people don't have a winning method and then of those like me that do have a potentially winning method most don't have the psychology to actually use it correctly. I'm trying to master the psychology that is the difficult process I am going through. I am interested to see if I perform better when no money is at stake using the simulated trading in the IB platform which I will soon have access to. Intuitively one would think that one would perform worse as with no fear of loss you might take bigger and worse risks. I suspect that the opposite can happen and that the fear of loss leads me to freeze and not break out of losing positions fast enough or to initiate new positions too early. I'm also trying to develop a trading method that my psychology can manage. As I discuss in the post perhaps trading 3 different instruments at once might be psychologically easier.

pfstock said...

I will again offer you my condolences. If you start trading three securities simultaneously, wouldn't that be like having four full-time jobs?

About your model, I would not feel comfortable with the fact that you only seem to have two possibilities: long and short. It seems like there should be some neutral middle ground, what you called "confused trading," where taking either position may be hazardous.

Regarding psychology, I think that you really want your model to be correct, rather than looking at it for what it is. In this way, I think that you lost some degree of objectivity.

Anyway, that's just my two cents worth. Good luck.

mOOm said...

Hi pfstock. I think these are all very good points which are problems all traders face. Great commentary that has made me think.

Going forward I am going to look to be long and short only in the better set ups. At the moment the model is proving less useful and is not in as favorable an environment as earlier this year. I guess my thinking was by pushing myself to perform with real money I would be forced to improve the methods - "necessity is the mother of invention" - and this happened. But I was trading more money than neccessary to achieve this focus.

As for trading 3 things at once I am not planning on doing that with real money at the moment. So that takes less time as I won't waste time on worrying about losing real money. I am anyway looking at what the Aussie Dollar and interest rates are doing as a lot of my assets are affected by these two variables. What I am hoping is to train myself to waste less time worrying if the paper trading proves successful.

Anyway, it is all learning experience. My investment return year to date is still about 9% which though less than the MSCI (13%) and the S&P 500 (11%) is ahead of many actively managed mutual funds (like some famous Legg Mason and Fidelity funds). And the net worth chart at right is fully up date.

OK, this makes me feel a bit better :P

StealthBucks said...

Moom, Legg Mason is not doing well as a company or a group of funds. This is almost a bit sad for me as the firm pre Smith Bsrney was amazing....

I know I can be a shit but I think you would enjoy a few of the Behavioral Econ books regarding trading and investing. I am a pretty meager technicioan and damn poor economics guru but am pretty decent on Behavioral stuff. That is partly why I read your blog.

Adventures In Money Making said...

IB is weird. i sold the puts and they show up as negative balance in my account and seem to be substracted from the cash at hand instead of being added to it.

mOOm said...

Nirav: The way this works is that when you sell maked options some of your cash is set aside as a margin deposit alongside the cash received from your option sale. This total margin requirement is then continually adjusted as the value of options changes. Very similar to shorting a stock.

I'm still waiting for IB to approve my account. They sent me an e-mail saying it was fine but then I couldn't do anything and they have answered that it is still under review.