Tuesday, June 18, 2013

On The Inevitability of Big Brother

I accidentally committed (pun intended) a blog post when commenting on a friend's social media widget. I thought I would capture it here. 
The magnitude of the outrage over the revelations of the PRISM program caught quite a few off guard, I'm sure. Especially since this is not a new narrative. It has waxed and waned since the Renaissance at least, appearing in the works of Bacon, Machiavelli, Nietzsche (tangentially), Hegel, to list just a few.[0]

The narrative gained its stride during the industrial revolution, as the world progressed through the birth pangs of the practical implications concepts such as those optimistically, if irreverently, labeled "self determinism."[1]

Not saying both dystopias don't exist, but... well, this comic says it best. No need to reiterate.


To summarize, while worrying about the Orwellian vision is appropriate, I wouldn't want to ignore Huxley's prophecies.

Additionally, if you have the supply of Advil required, reading Das Kapital and Contribution to the Critique, stripped of political polemic predicts the path of decades since with nontrivial accuracy. (ref. Marx's dialectical analysis and 6 stages.) [2]

This rant bought to you with my nine-month long obsession with complexity theory, and recent discovery of Dr. Didier Sornette's work with feed-forward systems aggregated over subjective probability ensembles. I'm a fan.

TED talk: http://www.ted.com/talks/didier_sornette_how_we_can_predict_the_next_financial_crisis.html

[0] I shudder to think how many orders of magnitude more sources an informed person - a Taleb (pun intended) - could name.

[1] I do wonder how much it was fueled by disillusionment that was a reaction to being caught between the reverberations of the Great Wars and the emerging zeitgeist that seemed (I'm guessing) ideological, and, prima facie, iconoclastic.

[2] I do disagree with Marx on the specifics. I further disagree with him in his sentiment that we stop at #6. The difficulty folks seem to have in looking beyond the absurd assumption of the finality of individualism in constructing most -ism's - as opposed to seeing individualism as a product of the proto-industrial forces that shaped the 12th century - is something I consider amazing. It's a strange blind spot. But that's a tangential rant for some other time.

Saturday, June 16, 2012

On Student Loans

“I could end the deficit in five minutes. You just pass a law that says that any time there's a deficit of more than three percent of GDP, all sitting members of Congress are ineligible for re-election.”
                                - Warren Buffet

“As long as the music is playing, you’ve got to get up and dance, we’re still dancing.”
                                 - Chuck Prince, July 2007, as CEO of Citigroup

Recently, there has been much talk of a student loan debt “bubble,” record defaults, and associated predictions of an oncoming major dislocation in the education sector. As always, when faced with industry-level talk of this nature, I ask myself: “What’s the trade?”

Short Sally Mae, the entity on the hook for all these loans? What about Apollo Group and its associated cohort? Too obvious. Additionally, APOL actually has a 10% short float already, so I’m hardly the first to see this trade.

Finally, I’ve never been very good at playing these “imminent dislocations:” while we revere those who made their careers shorting the housing market in 2007 (a la Lewis’ The Big Short), we forget the legions of trampled bears who could not stay solvent long enough. In our current environment, there are greater macro trends in play, and lacking a catalyst, I see no reason to take the short trade.

Instead, the optimist in me tells me to wait. Sometime soon, the obvious solution to the student loan issue, and possibly several social situations commonly perceived as related, should present itself. Here, then, is what I’ll be looking for.

It seems a little strange that student loans tend to have similar rates, regardless of major or school choice. I suspect it would take an actuary, armed with the appropriate data, just a few hours to come up with risk of default metrics based on school and major. These loans can then be offered at their respective rates, based on what school the student is going to, what their major is, and any other creative factors said actuary could distill. Eventually, those making the loans can also sell the related paper, providing yet another source of revenue.

Of course, the forward-feedback loop this will create will incentivise certain majors and schools -- those that historically repay loans -- and disincentivize others. Tangentially, this will likely draw flak from people who have strong opinions of what the world “should” look like, regardless of what the world actually looks like. I can’t help but wonder how many of these critiques will come from the same folks that bemoan the current structure of student loans.

This, then, is the trade. I’m going to start looking around for something that resembles the structure described above. When it presents itself, I plan on going long. How do I know it will? I consider it inevitable: the current structure is unsustainable, and I haven’t heard any better ideas.

...or am I just missing something big and obvious? Won’t be the first time.

Sunday, April 1, 2012

Frequency, Not Intensity: Going Slower to Arrive Faster

“If hunger is a problem in America, then why do we have an obesity problem among the people who we say have a hunger program?                                                                                                                                                  -Rick Santorum
One day, I woke up way too fat because I was too poor to afford food, and far too preoccupied with that fact to know better. At 5’11”, I stopped measuring when the scale hit 250lbs. There didn’t seem to be any point.

Fast forward three years, and I had completed a marathon, could do 20 pull-ups easily, and ran 3 miles in just under 17 minutes. While not exactly easy on the eyes -- sadly, you can’t sweat out ugly -- at 165lbs, I was no longer immediately repulsive to my own mother. I had managed to lose a third of a me.

I had replaced said third-of-a-me with a nasty limp, various lower-back injuries, and a tendency to crackle while breathing (lung injuries are, at the very least, entertaining). But damnit, every morning, I was going to run my 5k. After work, I was getting my quick workouts done, come hell or high water. 



A few measly injuries weren’t going to stop me. Mind over matter! 

...until, of course, matter, being bruised, ripped and mostly sponge, finds itself no longer able to support mind. Tore up as a soup sandwich, I learned that limping up to a treadmill with a walking stick draws stares at the gym.

It was six months of painful, slow healing before I was able to walk normally again, ten months before I ran more than a few yards. My body fat crept back into the double-digits, and my Ironman hopes were set aside for some time.

My story, of course, is far from unique. I had fallen into the same trap so many of us do when we attempt long-lasting change. I had treated obesity like a one-off problem to be solved, a dragon to be slain. Neglecting feedback, mistaking stubbornness for resolve, I had ploughed ahead. That didn’t work, so I doubled it.

About now, this should start sounding familiar to traders.

How many times have we gone after a revenge trade, shorting after a rip with a flimsy story? Does “Yeah, it ripped hard, but now it’s made a doji on the upper bollinger band, it’s got to drop now!” sound familiar? That’s ignoring shin-splints and the knotted muscles and going for another morning run. That’s ignoring feedback.

How many times have we, in an attempt to make up for a red day, gone in with double or triple weight? If you’re having a red day or week or quarter, it’s probably because your read isn’t sighted in. It ain’t workin’. Don’t double it.

All of these mistakes come, in some part, from a short-term thought process. Like my (doomed) attempt at a 125lbs clean-and-jerk with no warm-up, they’re looking to take something that should be long-term and achieve it in the short-term. The way I see it, the only thing a short-term thought process leads to is a short-term trading career. 

As a trader, a plan for doing this for the rest of your life translates to managing risk in day-to-day operations. After all, if you don’t manage risk, say by doubling down when things aren’t working, then you reduce your chances -- exponentially, in fact -- of sticking around.

In the words of my co-worker and workout partner, on seeing me stumble into the gym: “You want to be in a position where you’re doing this for the rest of your life. You can barely stand. Take the damn day off.” We’re in this for the long haul. Optimize for frequency, not intensity. Manage risk: size trades appropriately, take cushion early, respect stops.

The alternative is to ignore feedback, and, when faced with a losing course of action, double up and try again. It’s what makes you push well past the boundaries of sense, well past where you’re coughing up red gibbets, keeping the needle firmly buried in the redline. Not surprisingly, the results will be similar. Like my lower back, the account will blow up. Much like me and my marathons, you’ll sideline yourself for months, maybe years, and perhaps even permanently.

Having realized that I had been confusing intensity for frequency, I have not rushed back into my training with the same reckless abandon. I am still running, thankfully, but rarely do I try for those 6-minute mile runs day after day after day. And while my 5k times are improving, I am still far, far away from that 17 minute mark. I am optimizing for frequency first and intensity second. I plan on taking it a little slower this time.

Funny thing is, if I had taken it slower the first time around, I would’ve arrived a whole lot faster.

Tuesday, March 20, 2012

A Quick Detour

The first part of trade automation that I am going to discuss is trade identification. As this involves both identification and a quick risk/reward analysis, before we get too far, I wanted to introduce a quick and dirty way to get a feel for targets and stops.

One very quick way to do this is to have pre-determined trading levels. For example, intra-day, we can use daily and weekly pivots. On longer-term timeframes, we can identify support and resistance levels on charts.

Using python, I quickly whipped up some support/resistance level using the most basic of algorithms. I defined support or resistance as that point where d(Price)/dt = 0, using close-only values to keep things simple. Other additions such as volume weighting, price binning, and intra-day movement can be added quickly to give better levels.

The results:

In the next post, I will use this simple chart to discuss risk/reward and trade identification for an automated trading system.

Thursday, March 1, 2012

On Automation: The First Steps

If you follow me on Stocktwits or twitter, you most likely know that I run a number of systems that generate my trades. These have produced excellent results over the past two years, and I am finally taking the inevitable step of automating them. As my work may help someone, I will blog about the process as I go through it.

I should start by saying that trading systems, especially automated ones,  are far from "silver bullets." All they do generate an "edge," similar to the edge casinos have built into their games. This is described by Mark Douglas in Trading in the Zone, and he delves into the concept far better than I have the ability to.

One of Douglas' little gems is that the nature of the edge is immaterial, so long as the edge is statistically valid. My personal experience watching traders of all types over the years has borne this out. Consequently, I will not discuss the specifics of my trading systems. Frankly, that is probably a good thing: the system is the least interesting part.

I will focus, instead, on the process of automation. As an overview, I will roughly consider the following categories over the next few posts:
  • Trade identification: Indicators, trend, other inputs such as market events
  • Trade execution: Entry, Target, Stop, Timeout, other details of how the rubber meets the road
  • Risk management: Asset allocation per trade, increasing/decreasing allocation, etc.
  • Implementation: Platform selection back-testing statistics, and other mundane matters
Due to my personal preferences, I have focused on trading options using these automated systems. However, I believe futures represent a preferable cost-structure (possibly at the cost of truly terrifying leverage), and so I will also discuss trading /ES and /TF.

I plan on keeping this as a higher-level discussion, and not devolve into a step-by-step how-to. As always, of course, I remain available to answer questions via twitter.

Tuesday, February 28, 2012

Updated Confusion

When we last looked over the macro picture, I presented bonds at the bottom of a descending channel. Let us get a quick update on the bond situation:

As hoped, bonds have bounced and are now testing the top of the descending channel. Despite this upwards push, the market has continued to fair well, with dips being very, very shallow and aggressively bought so far. We have since pushed from SPX 1330s to 1370, a level that many are watching, and one that is proving to be quite stubborn.

While a selloff in the bnods would be bullish for equities and allow us to push through the bother of SPX 1370, the US Dollar is telling a slightly different story, via the UUP.

The UUP is resting on the 200 SMA on the daily, and the 50 SMA on the weekly. While the correlation between the dollar and the market has loosened recently, this kind of support may cause the USD to rip enough to make a difference.

If the DX, and correspondingly, the UUP, lose these levels, then I think we should strap in for a trip to the 1400s. For now, however, I continue long. And although I am scared, I'm leaving it to my stops tell me when I'm wrong.

Tuesday, February 14, 2012

Aliens and Your Brokerage Account

As human beings, we are absolutely terrible at imaging things that don’t resemble us. Consider even the most imaginative monsters in our movies: they are symmetrical, usually have a head, torso with attached limbs, and even have eyes and mouths on their heads.

Is this the best we can do? Seriously?

Frankly, I find myself continually disappointed by sci-fi movies. Not only are the monsters, at best, banal re-maginings of ourselves, another common theme is that humanity is usually saved by... our humanity. These little stories we like to tell ourselves are predictable: we encounter a threat from a distorted reflection of ourselves, and after a struggle, relying on a pure, ideal version of “human,” we usually prevail.

Sometimes, we even find other advanced, allied races -- for some reason, these usually look like elves, and are even more “ideal” than our current state -- telling us that our humanity is what makes us interesting, what makes us unique, what makes us special...

Oh, please. These are stories layered with hubris so thick that our inability to see it is ironic.

I’d like to see a movie with something truly alien. Something with motives that are outside our comprehension, something with perceptions that are not our own, something with reactions that cannot be explained by our pathetic little causality- and narrative-addicted brains. Something that instinctively relies on probability, doesn’t blind itself with narrative, and embraces cost-benefit analysis.

I don’t, however, expect Hollywood to give us a glimpse of what that’d be like. There isn’t a reason to look that far. No, if you want to fight ruthless, focused aliens, go no further than your brokerage account.

When we trade today, we are up against countless algorithms. One way or another, all these algos do is find a setup that has a good risk/reward return, and then... they trade it. They don’t worry about “Who’s buying up here?” They don’t get gun-shy, and they don’t get trigger-happy.

 Spock won't be by to tell us how our special humanity will save us, either.

Unburdened by the layers and layers of narrative filters they put between themselves and reality, they execute as designed. They put up a trade, with a defined stop, and then take the profit -- or stop -- when they get it.

In this arena, it is do-or-die, and we’re up against things that aren’t blinded by causality, by narrative, or by silly superstition. Their instinct is to place the trade, and execute the plan. Discipline is their very nature, their DNA.

So here I sit, long and scared. And there they are, waiting for me to flinch, so they can take my money. The difference is, they don’t get scared. Or flinch. They can’t. They don’t know how.

Sometimes, it’s good to remember that.