Is There a Better Way?

This morning I take a macroscopic view wondering what I’m trying to do here and why I seem to disagree with so many others in the financial industry. It’s not just that I’m trying to find a better approach: I’m trying to determine whether a better approach even exists.

I am not exaggerating when I say almost everywhere I look, I see marketing of a better trading/investing approach (substitute “Holy Grail” to make for slight exaggeration). Many seemingly innocent, matter-of-fact claims are actually the Holy Grail in disguise but that’s beyond the scope of this post.

Just as I questioned whether successful traders exist, I question whether a better trading/investing approach exists.

Consider the following observations:

     –The disappearance of popular/outspoken traders over time
     –Frequent flaws in advertising/marketing claims (e.g. affirming the
       consequent, hasty generalization, fallacy of the well-chosen example)
     –Rampant confirmation bias
     –General ignorance about trading system development and inferential
       statistics: tools capable of installing meaningful objectivity into an
       environment of variable moving targets
     –Multiple “professionals” telling me that generation of consistent, modest
       annual returns [in comparison to what many investment newsletters and
       trader education programs advertise] would have the big money storming
       down my door to invest if I were to start a hedge fund
     –Repetitive articles in financial planning and investment periodicals about
       slight outperformance relative to benchmarks translating to large AUM
     —American Greed on CNBC
     –Financial industry’s overall ignorance about and misrepresentation of options
       to the general public
     –Attraction of discretionary trading as the Holy Grail for many profit seekers

If the concept of “a better investing approach” were on trial then perhaps none of these observations taken individually would be sufficient for debunking. Taken together, however, I see a boatload of reasonable doubt.

Sometimes I feel like X-Files. On the TV program, Mulder feels compelled to continue searching to ultimately discover “the truth is out there.” With regard to finance, I wonder if there is no particular truth to be found (i.e. a better way) even though everywhere I look I see advertising suggesting there is.

State of Mind (Part 2)

I am the only successful trader I know and the second thing this brings to mind is humility.

If my trading endeavor has been “successful” then I am anything but arrogant about it. My trading strategies are hardly unique. I am uncertain whether my profits are more attributable to skill or to random luck. The next eight years may reveal how poor my trading abilities really are. If that doesn’t happen then the eight years after that might wreak havoc on any positive self-concept I have in this domain. Until the day I stop trading I am threatened by Mr. Market and for this reason I find it incredibly difficult to be overconfident.

In a nutshell, the most successful trader I know is virtually shaking in his boots every single day over the unknown of what will come next. Despite that latent concern, I press on intrepidly with my systematic approach and repeat it day after day with continuous monitoring.

Among a backdrop of other traders, my humble, fearful attitude seems to stand out. I could understand why every other trader would feel this way but I simply don’t hear anyone else expressing it. The tone I hear behind most trader talk is an arrogant voice of certainty and ego. I often hear “if the market goes up, down, or sideways then I can do X, Y, or Z.” No matter what happens they got this! It is a voice of infallibility and a stance of immortality.

Across a trader landscape I hear the scattered yell “I know nothing,” but I feel this is artificial exaggeration. I do know that we cannot know a great many things. For example, traders frequently engage in polarizing arguments about future market direction. I believe we cannot foresee the future. Discretionary traders sometimes present strategies with many degrees of freedom. I believe we cannot assess such effectiveness as a result of excess complexity.

I think much time could be saved if traders would take a step back start by considering whether potential answers to particular questions would even be actionable but this is a topic for another day.

State of Mind (Part 1)

I have talked to many traders over the years, e-mailed even more, and met some in person. Aside from being the most successful trader I know, I am the only successful trader I know.

Upon further reflection, this really is not surprising. Others may disclose results of specific trades or less commonly overall PnL but these are unverified claims since people always have potential reasons to deceive. I do my own trades and keep the spreadsheets. I get my own brokerage statements. I see my annual tax returns. I pay the taxes. I get unsolicited feedback from my accountant. I know how much I have made.

Because trading tends to be a solitary pursuit, I doubt my situation is unique. I try to network with others and I have even found others, intermittently, with whom to talk trading on a regular basis. These are acquaintances who may become friends but they are not people with whom I share intimate financial details like total net worth, annual income, etc. I think for many, such details are even hidden from close family members.

So I am the most successful trader that I know and this realization brings two things come to mind.

First, I do not feel wildly successful. By no stretch of the imagination am I any sort of “mogul.” I am not “rich,” I don’t have money to burn, and I still need work to pay the bills. I have accomplished one goal of leaving my corporate job and more than replacing the annual income. I would say my financial position is solid and has improved over the last several years but I still have a ways to go.

I cannot really say whether my overall performance is good or bad. As suggested above, I don’t know these intimate financial details about anyone else. I don’t even know anyone who trades full-time as a business like I do. I therefore have no yardstick with which to measure and this is probably another reason why I feel like anything but a prodigy.

I will conclude with the next post.

Get a Hold of Me

I don’t often hear from readers out there especially because I do not promote this blog. However, I am interested in finding a research partner. If anyone out there has a good understanding of trading system development and/or coding then please e-mail me: mark at optionfanatic.com. I’d love to hear from you!

Catastrophic Loss (Part 2)

Last time I discussed more positives than negatives about my trading business. Today I want to inch closer to this concept of catastrophic loss.

When catastrophic loss happens I try to do a postmortem to better understand exactly what happened. I try to find pearls that will prevent it from happening again. I often come up with a checklist: things to watch for each and every day to make sure I am avoiding potential landmines.

Unfortunately, I believe even the best laid plans sometimes cannot avoid catastrophic loss. When histograms of trade returns are plotted, most results end up somewhere in the middle but a few will locate far to the left (i.e. Black Swan). Maybe it’s a cost of doing business? Perhaps it’s just a necessary evil of trading. As luck (randomness) often giveth, (bad) luck may also taketh away. At the end of the day, if Green > Red then it might be “winner winner chicken dinner.”

One thing I find tricky about the trading business is that catastrophic loss can happen at any time. I find my head must always be on a swivel because in retrospect, the rough times always came out of nowhere and occasionally to a staggering extent. Sometime I should tell the GC story. The whole motivation for writing on this subject now is because of what happened last month with stocks. From August 18 to August 24, the market fell 9.3%. While that is surprising, what happened to volatility is utterly earth-shattering: up 212% in five trading days!!! 

That’s enough to destroy many option traders who are trying to play the odds.

Hell, that was the first time I ever used red text in this blog! If that doesn’t say it all…

Not a typo: up 212% in five trading days! I need a break.

Catastrophic Loss (Part 1)

I do not feel like I have managed this correction very well and I want to spend some time reflecting on it.

For me, “catastrophic loss” is losing much more in a single month (or less) than I usually make in a profitable month. Unfortunately in my seven-year trading career, I have experienced this 4-5 times. Every time I hope it never happens again. Every time I vow to improve.

Before I explore the dark side, I need to fill in context with some details about the upside. My trading business is profitable after seven years. I am immensely grateful to have been able to leave my corporate job and work for myself largely on my own schedule. People often say this is their dream and I am living it.

The way I trade, I make money most of the time. When things are going well, my business is boring. Sometimes this actually drives me stir-crazy! I won’t take up much space dissecting the ridiculous irony of that statement but it will suffice to say I’ve lost any rights to sympathy from others. If anything, this adds pressure to succeed and hopefully that will serve as positive motivation rather than suffocating burden.

The “stir-crazy” nature of my business is one reason I spend time here. While I maintain the blog to keep myself on-track with projects, to organize my thoughts about the financial industry, and to keep myself sharp by practicing writing skills, let’s be frank: I also do it to pass the time! Maybe I also do it to give my carpal tunnel a break from backtesting too much but that’s a separate medical discussion.

Despite the positives, it behooves any good businessperson to keep an eye out for potential threats and for me, the biggest potential threat is catastrophic loss. I will continue with this in the next post.