Thursday, March 22, 2007

Stupidest Trades Ever

I did what must be some of my stupidest trades ever today. I did nothing until the FOMC announcement. Then when the market began to rise when they announced that they were softening their bias towards tightening I went long. Very good up to this point. Then I went short and initially the market fell, but then it soared and I remained short. Despite the model being long! Eventually, I gave up and then started doing some more trades 8 NQ contracts at a time. Initially, I got back part of my loss, but then I lost more.... I blew up about half the profits I have made so far on my IB account - about $2500. The stupidest bit is I know these are bad trades as I am doing them almost... Maybe I just should ignore the market on Fed days like Trader Mike does. Some of my other worst disasters were on Fed days. I lost more than $4000 on that day in June 2006. So maybe I am getting better!

As the Australian Dollar soared after the FOMC announcement I am still above $US400k in net worth. But back below $A500k. My t-statistic for NQ trading (z-score) fell to 1.86. Well, at least I am above the low after my previous blow-up. And the t-statistic is way above the level it was when I first computed it. So I am making progress of sorts.

Here is a chart showing today's trades:


Yannick said...

Hi mOOm:

Thanks for sharing your experience. Jacqui often feels excited about traders' anecdotes, while I am usually more skeptical about the eventual dramatic winnings. Therefore, Jacqui enjoyed very much Liar's Poker, while I am taking a Random Walk on our real portofolio. As a husband, I'm responsible for taxes and investment. :-)

However, I have to admit that I'm pretty amazed by your track record so far. It's hard to see $2500 evaporized within one day. However, even without option trading, I did see my portofolio change values around $2000 a day several times. So you're doing very well in such a difficult game.

I started with trading individual stocks in 2003, which was a pretty good time. Retrospectively, I beat the market not because of my skill, but because of my overweights on tech and energy stocks. However, as I got busy with my research and other activity, I stoped watching them closely and suffered some big loss. Given my schedule, I realized that I wouldn't have been able to graduate on time without giving up my stock picking.

I am really impressed that you manage to invest actively being a economics professor. I will not even try it if I were a professor. You picked a much better game by trading QQQQ index options. You managed your risk well by limiting the size of your portofolio exposure to option tradings. You seem to be winning the game, though not every time, however, most of the time. Good luck to achiev your goal sooner!

I am curious about today's event though. How confident you are about your model? Techinical analysis give predictions after things start to happen. So my guess is that your model should not pick up events like Fed's announcement in advance, unless there's enough information leak to change the market before announcement, right?

Given your winning experience, it's not that difficult for you to tell the level of those salespeople. Also because of it, you can entrust your Mom's money with some managers charging 3% fee because you believe that they will beat the market by a large margin. I did do a bit funding picking (not totally random walk here) too, though conservatively limiting to low expense funds.

Adventures In Money Making said...

i read somewhere that everytime theres a fed announcement, the market will do one thing and the next day reverse it.

mOOm said...

Thanks for the comments.

Yannick - the problem is that I traded against the model and lost money. I let what should have been a very quick short trade turn into a big loss. My model isn't purely reactive to market movment. It forecasts what will happen to technical indicators. Big shocks of course can over-ride the forecast by changing the course of the signal rather than being purely noise. But usually shocks come into an environment where the technicals are set up to either react a lot or react little. Yesterday the signal was trending up anyway so the model was in a long mode and then the Fed news was in the same direction. My first move was correct - long - my next move was meant to be a quick trade and then rapidly went wrong. I'm mostly trading futures rather than options by the way.

With my Mom's money my goal was to get out of managing her money and hire a manager instead. That isn't what really happened. Basically we buy funds through an investment bank who have custody. Some of the funds turn out to be good and some not. She can't buy US mutual funds and I don't know anything about the available offshore mutual funds etc. Well... this could be a huge post :)

Sometime I should explain my theory about technical analysis too in a post...

Nirav: This is pretty common. The Fed announcement is worded differently, but when you read it there is little grounds for thinking that they will cut rates any time soon. This is what people I respect on Silicon Investor also think. Maybe by Friday the market will be heading down again.

Yannick said...

Thanks for sharing, mOOm. You acted after your model responded to the market following the Fed announcement. What's the measure of your model's confidence in switching directions from long to short?

Why do you choose future over options?

mOOm said...

The model was long before the Fed announcement and long after it no change. I traded against the model. That's why I call the trade stupid!

Four reasons to prefer futures to options:

1. The price doesn't involve any of the time decay involved in the price of an option. A rise of fall in volatility won't affect the price. I do trade options in my Roth IRA and try to buy them deep in the money so that they are almost equivalent to a future.

2. The spreads between bid and ask on options are big. Therefore, a quick trade probably will lose money. Now there is penny pricing on QQQQ. But the spread is still 4 times that on the NQ future.

3. For small trades the brokerage is less for futures.

4. Futures are 1256 contracts. This means that in the US they are taxed as if 60% of the profit is long-term and 40% short-term. QQQQ options are taxed as entirely short-term. Options on futures are also 1256 contracts I think so they are better taxwise than options on stocks.

Yannick said...

Hi mOOm:

Take it easy. I guess this past experience shows how well you developed this model. Now you are becoming more confident at your model versus your feel. That's good.

Thanks for sharing the insights on futures vs options. It was a bit counter-intuitive to me as it seems that options are more flexible. However, I guess it comes at a price, higher fee and higher taxes. Now it makes sense to me.

Thanks again!


mOOm said...

Another reason for futures vs. stock options - Globex market is open 24/5 pretty much and options only during NYSE hours.