Sunday, April 13, 2014

Preparing to Win in Markets

I have been spending significant time each day for the past six months preparing for a return to active trading.  During that time, I've developed a method for identifying and analyzing aperiodic (non-time based) cycles in markets.  I've also refined a multivariate method for modeling stock index futures based upon a core set of technical drivers of price action and standardized my methodology for conducting historical market queries to greatly reduce bias and the odds of overfitting market data.  Finally, I've culled my intraday indicators to focus on the few that best track whether or not current market action is falling in line with the forecasts from the cycles, models, and studies.

It's a lot of work.  But that's how you build a business:  you spend days and months crafting your products before you ever make your first sale.  And the crafting never stops, because the marketplace never remains static.

In coming days, I will begin sharing a whole new set of posts.  These will be labeled "Preparation".  Some will be sent out as tweets from @steenbab via StockTwits; others will be included as short blog posts, depending on the content.  Preparation posts will be sent out only if I see distinctive potential opportunity in markets or have special observations that could be useful for traders.  All will be sent out prior to the U.S. stock market open.

Meanwhile, here are a few preparation resources I'll be relying upon to start my market day.  A more complete list will be the topic for a separate post:

Financial blog and journalism summaryAbnormal Returns - Take a look at the links for the day.  There are posts pertaining to markets, trading strategy, the economy, you name it.  You would have to spend hours to replicate the curation accomplished by Tadas.  Combine with your favorite news feed and you have a great resource for staying on top of current market thought.

Stock picking:  StockTwits - Punch up a stock or ETF and you get a chart.  Click on the tabs above the chart and you see the number of messages posted about the issue and the social sentiment for those shares.  Click on "heat map" on the top menu bar and you'll see social sentiment across sectors over varying time periods.  There is a lot of information here, folks--even apart from the content of the people you like to follow.

Charting:  FinViz - News, insider trading info, charts, stock screening, creative heat maps that track stocks and sectors, performance tracking by stock groups, tracking of futures and forex--and that's just their free information!  This is one of the best (and underappreciated) financial sites around.     

IndicatorsIndex Indicators - This is where I get my breadth data, but there is a lot more information on the site, including put/call data the ability to run basic queries.  Mo has done an excellent job of including technical perspectives on international indexes as well as U.S. ones.

Analysis:  Stock Spotter - John Ehlers and Ric Way track cycles and more on this site and include real time stock picks and a full track record of past picks.  The Swami charts take a bit of getting used to but incorporate quite a bit of useful information in a single view.   

Life is a team sport.  One key to success is selecting the right teammates and resources.  There is too much going on in the world--and in markets--to stay on top of it all by yourself.  Preparation is easier when you can also rely on the quality work of others.  I hope to be able to contribute quality work to your trading efforts.

Further Reading:  Three Myths of Trading Psychology


d said...

You are amazing!

Curtis said...

My definitions below may be helpful for you, particular focus on the bounding problem and clusters. As a system and IP trader, I rarely put much effort into studying market themes these days. I do make it a rule to spend at least 5-10 minutes to note any Bloomberg reports. As a synthesis speculator, I would spend a lot more time conducting news research and would be paying attention to oil/stock relationship and Russia. Greater value in developing trading systems then reading blogs, in my experience-- though rarely a good insight is found.

Internalizing: "feeling", ability to feel/know whether a trade is likely to work out, may also "feel" pain from losses.

Externalizing: Defined by lack of feeling. Trader can't feel whether a trade will work out or not. Trader may choose not to feel pain from losses.

Internalizing Processing: A processing modality that consist of focusing on real-time market generated data and internalizing that information. IP trading is not based on setups but on the way in which market generated data is integrated in the mind of the trader, typically in real-time.

Systematic: A processing modality based on if-then analysis, deep knowledge of historical market behavior, and inductive logic.

Speculative Synthesis: A trade style based on synthesizing/combining different types of market influencing information.

Cluster: The intersection of strength, strategy, and belief that defines ideal operational modes for specific trade processing paradigms.

Bounding Problem: Assertation that the primary cause of losses for traders comes from either the information loss caused by bounding trades too tightly or from the tail risk from failure to bound trades at all. The bounding problem can be likened to the precision of a floating point number. Another way of thinking about it, you will be judged according to your claims. Tighter bounding increases profit potential but decreases probability.

Granularity, Leverage, Efficiency: Due to the low granularity and high dollar per tick size of futures, it is often impossible for small accounts to achieve proper bounding across all trades. Example, we want to risk $300 per trade whether we use a stop loss size of 10 points or 2 points. Frequent traders need the highest granularity (small $ per tick), highest leverage (ability to scale $ per tick high), and lowest costs.

Zeno's Risk Paradox: The paradox is defined as thus if one has an exceptionally low probability of blowing out at risking 2% per trade then they should have a very low probability of blowing out at 3% and if the probability is very low at 3% then it should be relatively low at risking 4%. Working in reverse, if the probability is very high of total failure risking 4% per trade then the risk would be relatively high at 3%. The paradox suggest that either one can risk nearly everything per trade or nothing at all. Zeno's Risk Paradox suggest that all that matters is whether the trading method works and that the 2% risk rule doesn't make sense. I find some support for the zeno's risk paradox in studying monte carlo anaylsis of returns.

Halting Trading Problem: An explanation that can demonstrate that trading systems can never be proven to work without invoking conc. of spurious results.

Compete/Collaborate: The idea that the bounding problem may be partially solved by creating antagonistic systems that compete and colloborate against and with each other. Imagine 2 traders on the same instrument and same account. One is told to focus on scalping profits while the other is told to focus on trend (or short vs long or mr. vs trend). The goal is for the traders to compete and collaborate at same time. Dr. Brett may be willing to pair trade ( as in pair programming) with you as an experiment. Contact if interest.

Interal/External Feedback: Conj. mind has 2 processing pathways, one for self generated talk and one that process external info. Switching produces insights.

Mo Shaarani said...

Thank you, Brett. Your insights and research are an immense source of inspiration to me, and unquestionably, countless others.

jim said...

Appreciate your blog and postings
Looking forward to learning more about your trading methodology