Notes for Chat with Traders, Episode 129

Added on August 15, 2017 by C. Maoxian.

Father was a goods trader (Sephardic Jew born in Iran?)
Went to University in London (LSE)
His dad said go for the less bureaucratic firm (why he chose Salomon over JP Morgan)
John Merriwether asked him to become a trader, government bonds arb desk
Youngest trader on the desk
He had been in fixed income research at Salomon Brothers
Merriwether left Salomon in 1992, Haghani left in late 1992 ... founded LTCM
Started LTCM's London office
Worked for 13 bank consortium after LTCM failed in 1998 ... helped liquidate portfolio
JWM Partners hedge fund ... also helped start that
Founded Elm Partners five years ago ... "active index investing"
Lowenstein's "When Genius Failed" -- a good read, but not 100% accurate
Dunbar's book is also OK
Buy the Harvard Business School case studies on LTCM, by Andre Perold
We're a product of our experiences
Haghani wrote paper on biased coin flip
Gave 61 subjects (financial professionals) $25, coin biased 60% heads, could keep whatever they made after 30 minutes of flipping, capped at $250
[Sounds similar to Van Tharp's old experiment that he has given hundreds of times]
[Van Tharp gave subjects bag of ten marbles: Seven 1R losers, one 5R loser, two 10R winners. Subjects got 40 marble pulls and a $100,000 bankroll. Expectancy is 0.8R (positive) but most people end up broke because their bet size is too large and they revenge trade]
People bet a lot on tails :-) ... usually after a streak of heads [laughing]
People believe random things have some sort of predictability (human experience versus math)
People got bored of betting on heads [laughing again]
1/3 of people went bust betting on a 60:40 biased coin
1/5 reached max payout ... kids who could flip really fast with smaller bet size mainly
1/2 won $80
Using simple rule of only betting 15% of bankroll would give 95% chance of hitting max payout within 30 minutes
"Suboptimal behavior"
Nearly everyone voluntarily bet their whole stake at some point
Those all-in bets *always* happened after someone took a loss on an outsized bet, classic need to "get it back"
People who busted didn't want to talk about it
A whole range of bet sizes works (8 or 9% to 20%) to hit max payout within 30 minutes
Kelly Criterion number (optimal bet) was 20%
Optimal solution is very complicated, but just use heuristics (common sense)
Without the cap, expected value would be $3,000,000, 4% return on every flip (betting 20% of bankroll)
St. Petersburg Paradox ... expected value versus expected utility
People won't bother to play even if they have positive expected payout
Have to understand your own risk aversion
Betting 50% gives negative expected utility (with 60:40 coin)
Bet sizing is not simple, not secondary ... it's incredibly important [I say it's *everything*]
LTCM trade sizing was all screwed up (position sizes were way too big)
Global equities should have a positive expected return above the risk-free rate or inflation, trouble is the Sharpe Ratio
Thorp inspired the coin-flipping experiment
Haghani believes there are some rare people who can beat the market, trouble is finding them, identifying them in time
Past returns are not indicative of future returns (because we don't have enough data)
How do you identify the biased coin after only 30 flips? You can't, it takes 143 flips
Need to find an investor or trader with 143 year track record
"I don't have very much on the wisdom front"
www.elmfunds.com
Not on Twitter, "haven't figured it out"

You Hang Your Head and Pray

Added on August 14, 2017 by C. Maoxian.

From 2006 ... dummy falling from the balcony a gag ... Folds is solidly Gen X and lives in California.

Ben Folds performs 'Jesusland' as part of his myspace gig, webcast live from his studio in Nashville, Tennessee on October 24th 2006. The drunk 'falling guy' was a dummy, and a prank played by Ben/MySpace. The audience had rehearsed 'being shocked' a few times before going on air.

Notes for Chat with Traders, Episode 132

Added on August 14, 2017 by C. Maoxian.

Episode 132 ... Mark Gardner (55:43)

Australian, heavy accent, difficult to understand
Has four kids
Has a three strikes rule (mistakes, rule breaking, bad judgment, misses something) and he takes a break
In front of screen for 20 years, 80,000+ hours
[Can't understand him, he talks fast ... and there's the accent ... missing half of what he says]
Parents were blue collar, worked seven days a week, hard workers
Goes on "auto-pilot" when he's trading
Sets up his screens consistently, like a gamer, chart pattern recognition
Same things in his field of vision for 15 years
When he's stimulated, he's relaxed ... not worried about burnout
Working for himself, no one else ... that makes a big difference that he doesn't get sick of it
Power napper
Your rules shouldn't say "don't don't not not" ... make constructive rules when in neutral state of mind
Last year of high school in Australia, you need to get work experience
14-year old first time on Australian trading floor ... he was enthralled, exciting, knew he wanted to do this
17-year old he went right to work for brokerage
Grew up in small country town, not studious, University not something he wanted to do
Had a mentor who worked him hard, very strict, but he needed that, no regrets
Ten year apprenticeship, only two or three months of losses over ten years
Top 10% will always eat the bottom 90%
Eventually had enough capital to handle the swings psychologically
Got arrogant in 2014, thought he couldn't lose, then predictably took a big hit in March 2015
"God Complex," took position way too large, lost six or seven months of gains in four hours
Lightning strike hit house, everything knocked out, lost 20% right when that happened, once back up realized he was badly stuck, got angry, snowballed
Usually level-headed and calm, this stressed him out, he sort of freaked out, had a lot of bad thoughts, couldn't walk away, calm down
Tightened up all his redundancy measures after this event (diesel generator, backup computers, etc.)
Took six months to make it all back, which he did
Re-gained his respect for the market after this, respect for risk management
Feels his edge has diminished over the last 15 years
He's not up against another human anymore, he's up against quants
The competition had changed, he had to adapt
Quants are taking advantage of the inefficiencies of human traders
Math guys don't respect old traders, no love for the discretionary traders' pattern recognition and intuition
Human mind can adapt and make complex associations that are not quantifiable but need to be respected
Don't cuddle up to other losing traders when you're losing ... don't seek comfort
Twitter: @42trading

Dirty Dozen, Long Only Portfolio, End of July 2017

Added on August 13, 2017 by C. Maoxian.

Sorry for the delay in posting this ... I've been re-learning how to day trade these last several months and it's hard work, but I think I'm making progress, however slow-going.

One change to the Dirty Dozen portfolio: sold Starbucks (SBUX) on August 1 for a loss (I was worried about it at the end of June). Amgen, Chipotle, Gilead, and Twitter remain on the sidelines for now.

Changes in 2017 include selling Twitter in January, while getting long Chipotle and Tesla in February, Facebook in April, and Starbucks in June. The Chipotle sale last month appears to be well-timed, and we'll see how the Starbucks sale in August looks in time.

Notes for Chat with Traders, Episode 46

Added on August 11, 2017 by C. Maoxian.

Episode 46 ... Hans Dederle (46:39)

[Can't tell if this guy really makes any money?]

Worked for accounting firm doing tax prep, quit
Joined brokerage firm, got series 7
Got interested in trading off of earnings reports
"So to speak...."
Started trading a couple months before the 2008 peak
Blew up his account a couple of times [doesn't give details]
Boredom traded, revenge traded, averaged down, blew up
Had eleven months of trading profits, friends and family wanted to give him money [11 month track record?]
Managing other people's money, he's less emotional, more professional
For his style, high volatility stocks the only way to go
Looks for reversals in the first thirty minutes of the day
Don't try to beat the market makers, join them
Uses five minute candlesticks, finds support on gaps down, resistance on gaps up
Trades one to three things a day
Looks for extreme volume in individual stocks
Buys calls and puts, not the actual stock [how does he price them?]
Also looks at Level 2
Commissions will eat up your profits if you overtrade
Trails a stop on his option positions [market liquid enough to do this??]
Holds positions usually one to five minutes [what?!?]
Tries to set entry and target with every position
Done by 10:30 AM every day, never swings anything
Trades NFLX and AMZN all the time
"For me, ...."
Don't confuse yourself with too many indicators, keep it simple
Uses RSI (lagging) to judge extreme moves
You need a system to stay disciplined
"Fail your way to success" [Zen koan?]
Don't think about the money, think about staying true to your strategy
Has tweaked his strategy all along, adapted to changing markets
Paper traded his strategy for six months to fine-tune and gain confidence
"Hold and hope" instead of stopping out -- deadly
Everyone in the beginning cuts her profits short and lets her losses run, it's only natural
Figure out what works for you
Twitter: @Hdederle

Notes for Chat with Traders, Episode 48

Added on August 10, 2017 by C. Maoxian.

[I've always liked Linda Raschke ... she's the real deal and every word is gold. You should seek out everything she has ever written and recorded]

Episode 48 ... Linda Raschke (49:29)

1981, started as equity options trader on the floor
Barriers to entry minuscule today compared with the past when she started
Once you find the key, they change the lock
Must learn to adapt
What works for someone else might not work for you
Still learns something new every day
After ten years of trading, she felt confident with her plan
You can't go and copy another trader
Have to move to markets where there's volume and volatility
Many markets she used to trade no longer exist (pork bellies, OEX options, etc.)
Markets either go up or down
Don't force anything
Like tennis, keep the ball in play until you see an opening
The big money is made holding overnight, which is riskier
Don't use linear framework to approach the market
Wyckoff ideas of range contraction and tests and re-tests still good
Look for strong volume, strong directional bias
Lethal to trade in the middle of a range
Trade location irrelevant if you're getting on a trend
Market moves now efficient, instantly goes to new equilibrium level
Look at price, not derivatives of price, like oscillators
Always check liquidity first ... can you get out quickly?
Intuition just the sum of experience, she's not a fan of intuition
Every time she's had a hunch, she's been wrong as often as right
Need a very consistent approach or framework to the market
Prepares the night before, has a game plan, comes in next morning ready to go
80% of your profits come from 10% of your trades
Don't scramble in the morning to get prepared, do it the night before
You need to concentrate and focus, don't get distracted by Twitter and TV, shut out the noise
Take anybody else's opinion with a grain of salt
Most "educators" couldn't trade their way out of a paper bag
Anyone who trades well doesn't teach anybody else how to trade, it's a bottom-line business
Find your own style, do your own work
Print out charts and make a notebook, study action that preceded big moves
Gann was demented at the end, suffering from syphilis
Concentrate on one initial pattern and study it: a breakout thing, or a retracement in direction of trend
Keep track of your performance statistics, turn it into a game
Free yourself from ego, rid yourself of the need to call turns
Imagine yourself standing on your surfboard alone in the ocean waiting for the great wave
People think trading is easy, want to follow a guru -- they're doing it wrong
Every successful trader has found one little thing that works for her, and does it consistently
Has a website but neglects it
Look for YouTube videos of her ... all free! (5,210 results)

Your Warmth Sets Like the Sun

Added on August 2, 2017 by C. Maoxian.

The great Joan Armatrading... pity about the keyboardist's solo.

Live at Rockpalast- 19 04 1980

Notes for Chat with Traders, Episode 128

Added on August 1, 2017 by C. Maoxian.

Episode 128 ... Andy Kershner (49:55)

Geologist by training
Ski bumming, early 1990s
[Has a laconic speaking style, a native Texan]
Started trading options out of the library with his buddy with $5,000
Dyslexic friend, Scott Dyer?, in Texas, great at pattern recognition, "savant-ish"
Top 100 IBD names, trade options on them ... all pre-internet
Turned $5,000 into $1,500, couldn't get the prices they saw on the screen
SOES came into being, little guy finally had a chance to get quoted prices
Went to Cornerstone Securities, which became ProTrader, in 1996
David Jamail, David Birch -- founders of Cornerstone?
ProTrader started with 12 seats in Austin, 500 day traders across branch offices at their peak
Sold ProTrader to Instinet in 2001, kept proprietary trading group
He lives and breathes trading
Cornerstone willing to hire savant buddy, but not him, he was a "trainwreck waiting to happen"
Worked part-time jobs, was friends with all the ProTrader traders in Austin
Made one trade a day on the side at first
Markets change, strategies changes, but habits don't change
Once he was on his own and loaned enough capital, he made 100K a month "forever"
80% of his trades were scratches or small losses, 20% were big winners
He's from the era when there was a human on the other side of the trade (mid-1990s)
Computer models today are always searching for stops, no more human involvement
His biggest strength/weakness: he can take a lot of pain
Big numbers don't bother him
Trade according to your psychology, do what works well for you, and is repeatable
Find an edge and see how large you can do it without changing what you do
Best traders trade 100,000 shares exactly the same way they trade 1,000 shares
[He means the decision-making process, not the actual execution which is different]
If you're sitting in a seat all day, you might as well being doing some size
He ladders in and out of positions now
Risks 1.5 to make 3.5 to 4 ... 50:50 odds he's right
Will triple his size when he thinks he can win big
Lots of styles work: scalpers, swing traders, high win rates, low win rates ... it can all work
Have to discover what you're good at, amount of risk you're willing to take
Develop good habits: journaling, reviewing, preparing
Strategies don't matter, good habits matter
Exercise and rest important
Review at end of day, what you got right and wrong, journaling
May 23, 2017 ... his MOMO position, wanted out 46-48, didn't happen .. tanked to 38, sold 41
Lost 90K more on that trade than he expected, gave it too much room [charts below]
He didn't have his game plan structured well enough, too much thinking on his feet
Have to do what you think you have to do ... making and losing money doesn't matter
Fades overextended moves, laddering in, both on the upside and downside
Where people are getting stopped out, that's where you should step in
Trades 100% US equities and loses money consistently trading options [he has a sense of humor]
When you know that you're wrong, get out
He ladders in equal-sized usually ... position sized by liquidity and confidence
Find 3-4 : 1 RR winners, win ratio a little better than 50%
Add to your winners, not your losers
Teaches people good habits for six weeks at his firm, then they go live
Looks for people who have overcome adversity, people who can act with limited information
Engineers tend to be bad discretionary traders
Common mistake new traders make is thinking it's easy
Only 2 out of 10 of the carefully chosen, great people he takes in make it, takes years to make it
Need your finances in order before you start, need your working spouse to float you for those *years*
Recommends reading Reminiscences of a Stock Operator, Market Wizard books
Find the best short-term trader you can find, and go work for him (her)
Shortcut your process
He talked to all the best traders at first in Austin and cut learning process from five years to one month
Good trading goes against basic human instincts -- fight or flight, have to do the opposite
Good trading requires extreme discipline
Don't keep doing the same thing if it's not working
If you're overly emotional, look into automated trading
Do you care about being right or making money?
Software eating the world, everything is getting automated, incl. trading and investing
AI is only a tool, still need smart humans to employ it
Generally uses Python to build models
www.kershnertrading.com
www.cloudquant.com