The Hunt for Red October

SUMMARY: For years after The Crash of ’87, my mother would call me whenever the market was down, whispering in hushed tones, “Are you OK for money?” Not wanting to explain how trading works, I did the same thing as Jackie Mason, promising to get a “real job” if trading did not pan out. She’s still waiting…

What she failed to recognize is that trading *is* a real job–when you work in the investment industry–that no one at Goldman Sachs is counting on trading profits to pay the rent. Hedge, mutual and pension fund managers all collect monthly fees. No one is sitting there, trading for free.

Engineering Better Bollinger Bands

Pete asked me what I thought about “Sigma Channels” by Hamzei Analytics. I had never heard of this indicator, but on first glance, it reminded me of Bollinger Bands. It didn’t take long to figure out that they were Bollinger Bands with two additional “standard deviations” plotted. [DOWNLOAD PDF] The example used in their presentation

Podcast: An Interview with Alan Greenspan

SUMMARY: Greenie gave a half-hour interview to CBC Radio One this morning. [DOWNLOAD MP3] In the interview and the book, he discussed an amusing encounter with Ayn Rand in his youth. Of course, being a much greener Greenie and not a scientist, he had no way of knowing that she challenged him with the classic exercise (taken out of context I might add) done by Descartes centuries earlier. [QUOTE] Again, if there is one book you read this year, make it The Age of Turbulence. Greenie was also interviewed for NPR on September 18, and September 19.

What do GOOG, CROX, WYNN and JAVA have in common?

Professional traders don’t trade just anything. In fact, trading at the firm is broken down into two broad categories: agency and principal. The specialties are market making, liability, arbitrage, hedging, etc. Pure directional trading, that is, capitalizing on a trend, is rarely done as a principal trade. It is the province of agency trading, that is, for clients and most often, by clients.

Thoughts on the Kase Dev-stop

Robert wrote: Thanks for the time and effort you put into your website. It is of great encouragement to me that I am heading in the right direction. . . .Recently I concluded that I needed to develop and maintain a list of high price-high range stocks to trade and backtest. So your latest articles

Return of the Intraday Traders

SUMMARY: Intraday trading has made a big comeback over the past few months. People are making money hand over fist in a directional market with breathtaking range. The same people who insisted that the market had changed are back to their old ways. And this is usually the time to remind oneself that a good market often hides a multitude of sins. Let’s take a walk down memory lane. I’ve applied my own range indicator with a two-month rolling window.

Alan Greenspan: The Age of Turbulence

Bought The Age of Turbulence last week. The reason I’m only halfway through the book is because I have to tear myself away to write code. There’s no time to write a review, but suffice to say that this opus is the economist’s version of Reminiscences of a Stock Operator, a must read. And while you’re at it, check out a December 2004 speech by Ben Bernake called The Logic of Monetary Policy.

Money creation and the Federal Reserve

SUMMARY: For those who missed the money & banking course in third year econ, James Hamilton explains the money creation mechanism in plain English and shows readers how to account for and reconcile the activities of the Federal Reserve from August 8, 2007 to now [QUOTE]. The truth is really quite boring compared to the conspiracy theories, eh?

FX Trading: How to Lose $100,000 Overnight

SUMMARY: Another day, another sad tale of a forex trader gone belly up [Quote from article at IHT]. Given the typical lifespan of an FX trader is a mere 45 days, one hopes that the industry would take a more proactive approach to educating speculators about the dangers of leverage. But that would be like a casino telling their patrons that gambling is bad…

Fund Management: The Glamourous Life

SUMMARY: In contrast to Ugly’s boxed wine, Dr. Brett’s thoughts on the death of the super-trader dream, and my comment on trading as the unglamourous life, the real life of those who manage OPM (other people’s money) is truly … glamourous. They travel in style [QUOTE $28,000 Bari bag]. They know the definition of a “cellar’s market” [QUOTE $320,000 case of Colgin Cellars wine]. And you wonder why so many deals suffer from The Winner’s Curse…

Trading: The Unglamourous Life

SUMMARY: Less than one week after ordering a new computer, I awoke yesterday to find my main trading computer dead. Without the computer, I found myself with nothing to do. Absolutely nothing. I ended up visiting buddies at the old office, and since the day ends at 1:00PM local time, I indulged in a little unauthorized reading of the September issue of W magazine where I found two articles about what most of us would consider “the glamourous life” that mirror the reality of the capital markets…

Index Futures: A Day in the Life

SUMMARY: Please accept my apologies for the lack of posts to the blog. There are work-related things going on in the background that require my attention for the next week or two. Here is a much-edited transcript from The Trading Clinic that might be of interest to intraday traders. It was a classic “it is written” sort of day, filled with traps for emotional and “breakout” traders.

What Sort of Computer Does a Trader Need?

I ordered a new computer from Dell this morning, just before I read an article by Larry Jacobs extolling the virtues of a setup that would be overkill even for an animator at Pixar. I almost fell off my chair. While it’s great to have a super-duper toy, the fact is that the Dell Vostro 200s I bought today ($849 before tax and shipping) will support two monitors and do everything I need. I also have a Maxtor external hard drive that will be used to back up the computer. Other than that, may I offer some serious suggestions for the trading computer?

Volatility: It’s a Good Thing

SUMMARY: August was a good month to come back to intraday trading because, to paraphrase Gordon Gekko, volatility is good. The point I spent all month emphasizing in The Trading Clinic is this: trade when it’s moving, when there is plenty of range. In other words, if you see a car travelling east at 60MPH, it is not hard to predict where it will be one minute from now; however, if you see a snail on a hot pavement at high noon, betting where it might be an hour from now is a waste of money. The other important point is the fact that risk is asymmetrical in that there is no remedy available to the trader that selects a symbol and time frame that is dead, dead, dead. Losses are sure to follow in the chop. A trader that selects a large time frame in a volatile market can simply reduce size, and stands a good chance of making money from big swings. Here’s an updated screenshot of how the intraday trading system has done with index futures since the beginning of the September contract. The model portfolio is now up $126,877.50 since June 6, 2007.