Previously I discussed different divisions within the trading world. One of those divisions is between technical traders and fundamentals traders. I summarized the distinction as:
- Technical traders base their trading decisions on numeric information about the price and trading volume of one or more securities over time. This can include addition information like order book/depth of market (DOM) and tick/time and sales tape information about individual trade executions. Most technical traders use various types of charting and mathematical or visual indicators to make additional sense of this information. Quantitative (“quant”) traders are a subset of technical traders who put more emphasis on sophisticated mathematics to analyze data.
- Fundamentals traders base their trades on economic information, usually betting that over the long run certain known economic relationships will hold. They frequently pay little information to chart studies or previous price and put more emphasis on determining what the price of a security ought to be based on the totality of information about it.
I also mentioned that my personal bias is towards technical trading, although I’ve done both. That’s not to say there’s anything wrong with trading on fundamentals, but technical trading is much more suited to my temperament and skill set.
I’ve come to realize, based on feedback to this blog, that some people have a dislike or distrust of technical trading. Once upon a time this position was common on Wall Street as well, exemplified by the mantra “I’ve never met a rich technician.” Over time, the Street perception has changed, but I still occasionally hear vestiges of the old anti-technical mantra. Now, I have no interest in telling you how you should trade – what you do with your capital is your own business. But I do think technical trading has substantial advantages, particularly for small, non-institutional traders. Here are some of the reasons I prefer it: Continue reading
In order to evaluate trading strategies, it’s very handy to have one number that represents how good a given strategy is – bigger is better. I’ve suggested a couple of ways of doing that – win rate and expectation. Both are uselful, but both also have substantial limitations that render them problematic in the real world. What I want to do here is briefly describe those limitations, and then suggest an alternate mathematical construct called “profit factor” you can use for evaluating systems. Continue reading
The gambling known as business looks with austere disfavor upon the business known as gambling. – Ambrose Bierce, The Devil’s Dictionary
If you ever want to troll a trading forum, just ask this simple question: is trading gambling? Unless the forum moderators are on the ball you’re all but guaranteed an epic mess. For some reason this question pushes everyone’s buttons, and that’s a shame because it’s a legitimate question and a complete answer sheds light on the nature of both trading and gambling. Continue reading
You don’t have to spend too much time around the stock market to discover that there’s something fishy about many stocks’ initial public offerings, (IPOs). The standing joke is that IPO really stands for “It’s Probably Overpriced”. While that may or may not be true in any given case, there are a large number of pitfalls awaiting the would-be IPO trader or investor. It’s a case of caveat emptor, and in order to be suitably wary you need to understand how an IPO works and how it can be manipulated to your disadvantage. Continue reading
You might be wondering what, exactly, it is that a trader does all day. Or in my case where I have a 9-5 job, what I do with the 3 or so hours a day I spend working on trading. If you look at the example trades I’ve posted on this blog, they don’t take very long – the Tickle Me Elmo trades were only open for a few minutes each. This morning I waited an hour and a half to take a single trade that lasted 7 minutes (a slow one by my standards). Even taking several such trades a day, there’s no way the actual act of trading is going to add up to more than about an hour of time. And since my trade entry and management is largely computer automated, most of that time when I have a trade on is really spent just sitting there making sure the computer doesn’t crash. In an average day I only spend about 30 seconds to a minute actively entering or canceling orders.
Point being, actually trading makes up a tiny part of what a trader does. Continue reading
I hope my passion for trading comes through in this blog. It’s not just something I do to make money – it’s on the short list of things I care deeply about along with family, charity and God. No joke. When I’m sitting around and there’s nothing going on and that internal monologue everyone has starts up – well, mine’s about trading. Maybe that’s a sign of mental disturbance. I don’t know. But it’s true. When I go about convincing other people that trading could be a good job or side gig for them, it’s because I know some of them will find it as fascinating as I do.
But there’s a downside to contagious passions – sometimes the people who catch them aren’t the people you intended. Continue reading
I rarely comment on current events, but today I’m going to make an exception. We’ve had enough time since the explosion of MF Global to get a pretty good understanding of what happened. This is a “teachable moment” about the dangers of counterparty risk and things you can do to avoid it. Continue reading
An infinite number of monkeys, typing randomly on typewriters, will produce the complete works of Shakespeare – the Infinite Monkey Theorem
Part of speculation, and trading in general, is coming to terms with uncertainty. Sometimes your trades work. Sometimes they don’t. If you think you know ahead of time which way the next trade is going to go, well, you’re wrong. You don’t know. You may have some evidence, a probabilistic understanding, but you don’t know. This uncertainty will never change – it’s true the first trade you take, and it’ll be true when you’re poring over the Bund yield curve in your nursing home and complaining that you can’t taste the pudding anymore.
If you’re going to encounter rampant uncertainty your entire career, it only makes sense to have tools for dealing with it. Continue reading
It’s a game of inches… – Vince Lombardi (maybe)
In the process of becoming the most successful coach in the history of the NFL, Vince Lombardi uttered perhaps the most famous commentary on the game of football. Or at least I think he did – there are plenty of people willing to attribute those famous inches to him second hand, and yet I’ve been unable to find a reliable first hand source. In any case, whoever said it was right. I was dramatically reminded of this by a play I saw three weeks ago while watching the Broncos-Raiders game.
Denver has the ball and it’s 2nd down and 4 yards to go on the Broncos 41 yard line with the score tied 7-7. The play is going to be a run, and everyone knows it. Continue reading
I am continually amazed at the number of different types of speculators that exist in the financial markets. While many professions encourage specialization, I can’t think of any others that take it to the same degree. Even medicine, with its 50-100 specializations (depending on how you count) can’t come close.
From the perspective of educating traders, specialization presents a real challenge. Continue reading