Nah. I've made made multiples in net profits against this loss and I'm net positive 80% of the time. It's still my personal best year despite the loss. It's a nice living. I think I'll stick around.
I don't have a number for my personal account trading but I suspect it would be pretty solid... my equity curve is basically a 45 degree slope from bottom left to upper right with no sharp dips.
My sharpe ratio at my firm (calculated automatically in our database) was well over 3 until that loss. I don't remember it exactly but it was such a crazy number to believe (relative to other sharpe ratios) that I stopped thinking it was a risk metric that mattered for my style of trading.
I have my own theories on why "following others" adds efficiency to the market. It's a losing strategy if applied on every situation with zero context obviously (which is why most traders lose money), but traders who find a consistent edge doing it "bring the market closer to where it's supposed to go" so to speak, in general. But this is all theory in my little head with no substantial research so I don't care to stake my life on it.
In the end, I don't care that much to argue about social utility. I trade my own cash or I trade the money of guys who completely understand my objectives and choose to back me. I respect your views and I won't bother to persuade you otherwise.
I get the feeling if this thread was about losing $200k to Phil Ivey heads up in Hold Em or Nate Silver losing $200k by betting against Obama on a political betting site, nobody would care to bring up social utility.
1. Is it luck or skill. I'd say there must be some skill, but luck too, kind of like poker maybe?
2. Is it useful to society? No idea if its a benefit, a drain, or neutral.
3. Should it be allowed? It is your money after all.
1) There's always some element of luck involved. After all, I can't control everything that happens. I played poker before trading. There are similarities and differences. You can tell when you get unlucky, like when you get aces cracked by two runners. It's hard to tell if you get unlucky when stopped out on a day trade.
2) At the very least, I don't think what I do is harmful to anyone.
I'd also like to add that I make many trades that are a better example of adding value. In the trade example of buying the dip in AAMRQ (prior blog post on my site), I am making the market more efficient (I'm saying this with the benefit of hindsight, of course). AAMRQ was moving adversely against its clear fundamental value (based on a stock merger deal with US Airways) and by buying it on weakness, I'm adding liquidity on the side that it should "eventually go to". This only works if I'm consistently right more than wrong. I also short garbage stocks that have no fundamental value, another example of trying to restore efficient prices. Price discovery is important so capital isn't allocated inefficiently.
3) Impossible to ban trading without destroying market liquidity. It's also way too difficult to define what trading is helpful vs. parasitic and have everyone agree on it. One could easily place a seemingly "outlawed" type of trade and claim to have sound intentions, which is what makes market manipulation difficult to prosecute.
It's an empirical process. The results themselves are what you use to construct an idea of probability and risk-reward. Nothing is ever certain which is why position size rules are a must. If an extremely specific pattern continues to show up on one specific stock on days with specific conditions (huge multiples of daily volume, for one), it's likely a significant observation representing an edge rather than noise. Unless you think it's totally random for hundreds of independent traders to exploit a specific pattern on a specific stock on multiple repeated dates and make money repeatedly. It's not a poker/blackjack or a casino game where the odds are fixed and known.
Ask yourself, if you flipped heads on what you thought was a fair coin 500 straight times, did you REALLY just observe an ultra rare event? Or is it more likely another phenomenon at work (like a rigged coin)? Whether you can fully explain it or not doesn't matter.
Why do you care so much what I do with my money? Or how a firm chooses to allocate its money? This wasn't client money or institutional money, it's the money of a few guys (partnership type of structure) who used to be or still are daytraders themselves.
(one last edit: if you're too thick to see it, I deliberately tried to showcase my overconfidence to show how things can go wrong easily. guy makes money and wants to make more, guy wins money and thinks he's a champ -- it's called the human condition. I deviated from normal execution rules and position size rules and paid the price)
Hey guys! Thanks again for all the interest. Since this site was responsible for more than 90% of my traffic, I thought I'd address some of the comments in this thread. Hope you all enjoy.
I'm wrong all the time and lose money all the time. The big difference here is I let one get away from me instead of keeping it small/manageable like I always do. It was a situation where I could have controlled it and I didn't. I'm still up more than 4x what the final realized loss was in my trading career.
I used to think TA was a joke. I was very skeptical before using it. I have never bothered to explain why it works intellectual to non-believers. But I do think someone who understood probability and saw the compiled statistics of practitioners would concede that there's 0 chance of non-randomness.
Trading is like the Israeli nuclear program: those who talk about it don't know about it, those who know about it don't talk about it.
If technical analysis actually worked, you'd be able to find the "Technical Analysis Toolkit" for on GitHub, and... technical analysis would no longer work. A little bit of grepping around yields: http://ta-lib.org/ (Technical Analysis Lib).
Ergo: if technical analysis ever worked (there is some evidence it did before about 1990 when personal computers became ubiquitous) it almost certainly does not today.
The only way market timing approaches can work is if they embody significant information that is not generally available. A successful market timer has to be smarter than everyone else in the market at the time of each trade.
Anyone claiming technical analysis works is claiming that there is an inefficiency in the market that has been well-documented in public for decades, to the extent that an open-source BSD-licensed tool for identifying the inefficiency exists, and yet the inefficiency still exists.
An economics professor is walking down the street with a student. The student sees a $100 bill on the ground and tells the professor. The professor says, "Nonsense! If there were a bill on the ground, someone would have picked it up already!"
I actually think that in this case you are probably right, though. But I wouldn't bet my life on it.
I love this joke, because on the surface it's making fun of economists whose theories blind them to an obvious reality. But how often does anyone actually find a $100 bill on the ground?
I found a 20 on the ground by a gas station pump. Its not improbable that someone taking their keys or wallet out would accidentally drop any loose bills they had.
You sound like the people I've seen on gambling forums postings about their unbeatable roulette system that they've "really won with in the long term".
1. Observe the motion of the ball and the wheel between the time they start moving and the time betting is closed, and use physics to calculate where the ball is likely to land. Bet accordingly. This was proven effective in the early '80s [1].
2. Record a lot of outcomes on a given wheel to learn its biases. Bet accordingly. You might think it would be hard to surreptitiously gather all the data you would need, but it is made considerably easier because you do not have to be surreptitious. Casinos love people who are taking notes--99.999% of the time it means that is someone who has some idiotic system that they think will let them beat the house, and casinos want to encourage such people.
There was an episode of the wonderful documentary series "Breaking Vegas" [2] that covered this method, focusing on a family that practiced it. They were making a lot of money until the Las Vegas and Atlantic City casinos banned them. American casinos can ban you for winning too much, even if you are not in any way cheating. They switched to Europe, where the casino regulators prohibited the casinos from banning them without cause, and "winning to much without cheating" is not cause. The casinos tried moving the wheels to different tables to confuse the family, but the family had spent so much time looking at each wheel they could recognize individual wheels be wear patterns and place the appropriate bets. It was pretty cool.
3. My favorite, even though it was flat out cheating. This was also covered on a "Breaking Vegas" episode. Before I explain this cheating method, we need to take a look at an older cheating method that is no longer effective. That was "past posting" or "late betting". In past posting, you place a bet AFTER the outcome of the event you are betting on has been determined. So in roulette that would be placing a bet after the ball has fallen into its final slot.
Of course, that would be hard to do. The risk would be too high that the operator might have noticed that there were no bets on that particular number when betting closed. So what you actually did was modify a winning bet after the fact to make it bigger. You put, say, a stack of 3 of the lowest value chips on a number. If that number loses, you lose those chips. If it wins, the rest of your team distracts the operator, and you swap that stack of 3 low value chips for a stack that consists of 2 low value chips on top and 1 high value chip on the bottom.
There was a guy who was doing a lot of past posting on the roulette tables, back before they had constant recorded closed circuit TV surveillance. The casinos suspected he was doing something to cheat, because he was winning more than they would like (but not enough to get banned), but they couldn't catch what he was doing.
Then surveillance came, and when he would win with a stack of 2 low value and 1 high value chip instead of paying right away they would detain him while they pulled the tape and reviewed it to see if they could see any shenanigans. He had to stop past posting. His career as a roulette cheat seemed over.
And then he had a brilliant idea. Instead of cheating by converting low value winning bets into high value winning bets, why not go the other way? Convert high value losing bets into low value losing bets!
The new plan was to place bets consisting of a high value chip on bottom with some low value chips on top, with the low value chips positioned so that the operator would not see the high value chip. It would look to him like a stack of low value chips.
If their bet lost, they would swap the stack for a stack of all low value chips. If their bet won, they would not touch it, and point out to the operator that there was a high value chip there so they would get the right pay off.
The casinos were, of course, very suspicious. They recognized that they were dealing with a known past poster, so every time he won they pulled the tape...and the tape showed that no one had come near fiddling with the winning bet. The high value chip had been at the bottom of the stack from the moment the bet was placed.
He got away with this for a ridiculous amount of time, with the head of security from one of the major casinos reviewing every win and getting quite frustrated at not being able to catch how the cheat was working. I forget how he finally got caught.
BTW, I highly recommend "Breaking Vegas". They profile some remarkable people, some who cheat, and some who won legitimately. A couple neat examples.
• They have an episode on dice dominators. These are people who, through great practice, can roll the dice at craps with such control and consistency as to get the outcome they want much more often than by chance.
• They have an episode on a man who took up counterfeiting slot machine tokens. The casinos detected this because they were getting high token counts at the end of the day, but they could not tell which tokens were counterfeit. They sent batches back to the manufacturer, and the manufacturer said that all the tokens that were sent were real.
His downfall was interesting. He was playing a slot machine that took something like $25 tokens, and the machine jammed. He moved over to the next machine and continued playing. Security happened to see that on camera, and that made them suspicious. The normal behavior when someone loses a $25 token to a jammed machine is for that person to get mad, and go find casino staff to seek a refund. No one just moves over to the next machine and keeps going--unless that $25 token isn't worth $25 to them. Hence, the guard thought he might be looking at the infamous token counterfeiter. They followed him to the parking lot when he left, and when he opened the trunk of his car that he had boxes full of tokens for all the major casinos.
I recall seeing a graph of a stock index in which all but the 10 (e.g.) best days within a very long time span (~years) were removed - to mock up a trader who removed his money at a few unlucky times. You ended up losing huge.
The lesson was exactly what you're saying -- you also have to count that one huge loss. You can't fence it off as an exception and remove it from the accounting.
Yep, I tried to find the graph but failed. It would be interesting to see again. I have a professional interest in probability and stochastic processes, so it stuck in my mind.
This is what I thought as well when I was initially introduced to the idea of technical analysis and day trading. I was very skeptical.
I don't want to call myself a probability expert but after studying poker theory and reading mainstream works like Fooled by Randomness, I bought into the idea that it was just a bunch of a guys throwing darts and the "winners" whom were trying to sell all their BS were simply benefiting from survivorship bias.
But after seeing the numbers themselves first hand, there's just no way it's random chance. Being net positive 80% of all days traded with all your winners and losers falling in a relatively tight distribution -- luck can't create highly specific, repeated outcomes like that. There is virtually zero tails risk since 99% trades are intraday only.
My loss was a failure of discipline. I froze like a deer in the headlights, failed to execute like I normally do and paid the price. Hope you keep reading to find out what happened!
> Being net positive 80% of all days traded with all your winners and losers falling in a relatively tight distribution -- luck can't create highly specific, repeated outcomes like that.
Yes, it can. E.g. you could sell deep out-of-the-money puts and collect a $1 premium day after day, say 99% of all days. Until one day a {terrorist attack in the US, humongous earthquake in Japan} happens and you lose more money than you ever made.
I just can't stay out of the debate no matter how much I try to.
I am as well-rehearsed in financial history as anyone. I have read about LTCM, Nick Leeson (I even watched the movie), etc. In these situations there was so much size being used that if any unexpected squeeze scenario occurred, those guys would move the markets and cause a horrible chain reaction.
I understand on the surface this totally looks like I'm trading in a "eat like a chicken, shit like an elephant" type of fashion. If I were in your shoes and I read "guy made x, x, x consistently and lost 20x one time!!!" I'd be thinking along the same lines. The difference is, I had more control of my outcome. It's hard to prove this and you won't totally believe me unless you are also a day trader who grinds it out and has a feel for intraday liquidity and slippage (particularly on the otc/pink sheets). I wasn't trading such a large size where I would move the market if I was squeezed out. The risk distribution of intraday scalps is not at all similar to writing naked options with unlimited loss.
It's like this:
normal trade: entry signal occurs. get in. exit signal occurs. get out.
the trade in particular: exit signal occurred and i chose to ignore it and keep scaling in. would there have been awful slippage? yeah but it would have manageable. in the heat of the moment on the largest loss ever, 10-15c slippage on a $4 stock massive size feels like the end of the world but it's better than riding it down 50c or a point.
Which is why it's good to have net-short deltas (when beta weighted against the SPY), to protect against tail risk.
It's also why it's important to trade small, and have a large number of uncorrelated positions.
You can go on believing that nobody makes money doing this sort of thing over the long term. That's fine. But it's definitely not true.
Derivatives have no more risk than the underlying. What makes them more risky is the leverage. Selling 1 option w/ a 0.5 delta is no more risky than selling 50 shares of the underlying.
My comment is an example of why the reasoning below incorrect. My comment does not say "it is impossible to make money by trading stocks/derivatives".
> Being net positive 80% of all days traded with all your winners and losers falling in a relatively tight distribution -- luck can't create highly specific, repeated outcomes like that.
I suppose you're right and that's why I wrote "virtually zero" and not "no chance whatsoever".
Not only does significant breaking news have to happen while you are in the position, which is already very rare, it has to happen in a way in which you cannot respond and cut it off -- like the stock getting halted. Most intraday stock halts that occur are not exactly a shock (like a biotech or a stock under investigation of any kind) so if you are highly leveraged on that stock to the point where your entire equity can get hurt, that's on you.
If something big like GE or AAPL halts, the move proably won't be extraordinarily huge like 20%+, unless it's an Enron scenario.
I feel like you're misunderstanding Fooled by Randomness. The results are supposed to look like steady gains in a tight distribution, but the super far out tails are fatter than the average person thinks. Therefore, typical traders take average risk with below average returns (relative to the risk one bears) whereas Taleb takes high risk with supremely above average returns (again, relative to the risk he bears)
