Monthly Archives: January 2007

Week 12 FX trading results

It’s been a hit and miss week. My account fluctuated between -7% and +10%, settling at +2.6%. I’m thankful that it’s positive but I recognise this is not healthy growth; I continue to struggle to follow the path laid out by the road map (my road map score this week is a mere 5 out of 10 because I dived in to too many trades without proper consideration, losing sense of the bigger picture).

I am enjoying the journey and the challenges presented along the way, but this failure to stick to the script is creating a mental anguish and low sense of self-worth. Whether I make or lose money, I want to have followed the righteous path. The struggle continues, but it is hard only because I make it so.

Emotional discipline

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Two sporting event’s this week illustrate the importance of emotional discipline in performance.  

– In the Australian Open, Andy Murray’s (UK) valiant battle against Rafael Nadal (Spain) was a real surprise. When I last saw Murray perform Wimbledon at, his emotional volatility and lack of inner strength was clear for all to see. It wasn’t just that Murray wore his heart on his sleeve, but that he was easily distracted from his objectives and that he sought out conflict, often appearing to blame external factors for his own shortcomings. During his match against Nadal, however, Murray proved he had matured and developed as a skilled tennis player. For the majority of the game Murray didn’t become easily distracted, as has happened so often in the past. He focused on the task at hand and produced some of the finest tennis of his life. At two sets all, Murray shouted ‘Patience!’ to himself, showing a previously missing level of self-awareness.  Unfortunately, Murray started to show slight cracks in his mental game toward the end and Nadal picks up on weakness like a shark senses blood in the water. Nadal continued to press Murray hard but he ultimately allowed Murray to beat himself, despite his commendable performance.

In tennis and other sports, emotional displays by players add colour to the game, but there are positive emotions and negative emotions, and both can be self reinforcing. Murray is learning the value in self-control and restraint and I believe he can be a real contender in this year’s Wimbledon if he continues to develop in the months ahead.

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– Elsewhere, the UK Master’s snooker final (O’Sullivan versus Ding) provided similar insights. The normally emotionally tormented Ronnie O’Sullivan exhibited an unusual level of self-control right throughout the tournament. Ding, who is known for displaying a maturity beyond his age, was worn down by the pro O’Sullivan crowd and broke down as he realised he was up against against a natural genius who was playing at the top of his game. He was on the verge of tears toward the end of the match; a sad and touching scene, especially when Ronnie O’Sullivan consoled Ding during a match break and again at at the end of the game. Anyone who watched this match will know that any level of emotional discipline wouldn’t have produced a win against Ronnie. But it would have allowed Ding to provide a real challenge. Issues of honour aside, it would have allowed Ding to learn more about the strengths and weaknesses of his own game and constitution.

Giving in to one’s negative emotions is often the path of least resistance but all too often it is the least profitable option. There is little doubt that it is harder to be emotionally strong in defeat than in success, but it is when we are losing when our emotional fortitude is put to the test and that is when it really counts. It affects how you act and react when facing adversity, it impacts the level of loss at the end of the play, and it builds your character for future confrontations.

PS – I believe one big difference between most sports and trading is that in most sports we are playing against another explicit opponent or team but in trading I view the game more as a challenge against oneself. The market does not feed off my weaknesses or respond to my plays. The market just ‘is’. Nevertheless, the parallels with sports are endless – I often play squash and other racket sports for example, and it often feels as if the game is more a case of me against myself, rather than me against my opponent. I realise I need to start to learn to lose graciously.

Steven Drobny quote

In his blog, Yaser Anwar interviews Steven Drobny, author of a book on global macro investing titled ‘Inside The House of Money‘. Here, Drobny reminds us of the importance of humility in trading:

Y: In your book, Inside The House of Money, you interviewed some of the best traders in the world. Could you tell us one characteristic they all shared?

S: Humility. The popular image of big successful traders pounding their chest and always being right is really the guy that ends up out of the market after a couple of years when a secular or cyclical trend reverses. The best traders that have longevity, who have been through multiple market cycles and have consistently made money are very humble. They know that they are not smarter than the markets and to be in this game for the long term one has to be flexible.

I’ll report on ‘Inside the House of Money’ in a few weeks, as I’ve only just started reading it, although I will say that I am enjoying it so far. Good books on global macro are a rarity, the only other one that comes to mind and that is worthy of recommendation is George Soros’ Alchemy of Finance, a real classic.

Week 11 FX trading results

Following last week’s fiasco my account had retreated to it’s end-2006 level of 9600, with a drawdown of around -4%. For several weeks I had been looking for a loss, hoping it would test my discipline and that I would prove myself. Well, I was tested and I failed miserably, giving myself a road map score of just 1 out of 10.  

This week however, I benefited from a run of good fortune and grew my account by 20.8%. There are two points of note:

– Despite the strong results this does not signal a return to the good old days because a portion of these profits can be attributed to an intuition-based trading experiment, which I am no longer pursuing. The intuition-based approach proved profitable but it lacked an obvious rationality. More importantly, employing capital in this approach meant I would have had less capital to devote to my core strategy (to use economist speak, the approach had a potentially high opportunity cost. I will discuss this concept in greater detail shortly because it forms a core part of my trading philosophy).

–  I ended the week with three losing trades. I was about to chase these losses with a much larger trade, but instead I stepped away from my trading station and went downstairs to have a late breakfast; it was the better trade. I am giving myself a road map score of 7 out of 10 this week, which I think is reasonable.

Where is the tapeworm?

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Does anyone know what has happened to Tapeworm at taleofthetape.net? He was my gateway to the interesting goings-on with other traders.

Wherever you are Tapeworm, thanks and all the best.

Bringing Down the House

Here are some market relevant quotes from Bringing Down the House: How Six Students Took Vegas for Millions (by Ben Mezric), a well written story of how a group of students devised a system to beat the Vegas casinos:

– Overall, the team was still way up on the month. But it was a painful lesson to learn all at once. No matter the count, the cards could go bad. Over time, winning was inevitable, a matter of pure math. But in the short run, the game could go either way. Even math left room for luck.

The joy with this type of system is that practice makes perfect. Once you have a strong sense of the statistical probabilities involved you can manage your money accordingly, fully aware of the risks involved. Chance becomes quantified. The financial market is also a casino of sorts but it evolves and it is much more difficult to be anywhere near as certain of the probabilities of success. We do try but our world is filled with inherently unquantifiable uncertainty.

– He remembered what Micky had said when they kicked him off the team: The most important decision a card counter ever has to make is the decision to walk away.

– Blackjack is the only game in the casino that is beatable over an extended period of time, because blackjack is subject to continuous probability. This simply means that what you see affects what you are going to see. Blackjack is a game with a memory. If an ace comes out in the first round of blackjack shoe, that means there is one less ace left in the rest of the deck…in other words, the past has an affect on the future.

The financial markets may not have the same type of continuous probability memory found in blackjack, but most participants who are trying to beat the market must believe the market has a memory of some form or another. Technicians for example, explicitly believe that historical price behaviour influences future prices. Fundamental analysts also share this belief of market memory, though the channels in fundamental analysis are less direct (i.e. past financial prices and economic variables are used to help form an outlook for the future). Personally, I believe I see occasional evidence of memory in the foreign exchange market that suggests the market is not entirely random.    

PS – Mezric also adapted his story for Wired magazine, which is worthy of a quick read if you haven’t read the book.

An infectious failure

For last week’s trading performance, I give myself a road-map scoring of just 1 out of 10 (this is as bad as it gets), because I jettisoned everything I had learned and adopted a new, reckless outlook.

My account was showing a modest profit from Monday through to Thursday (approx +2%), but I was tested by the market on the Friday and I was found wanting. Following a losing trade my account was showing a drawdown of around 2%; this was my first weekly loss since I started this blog and it would have been an honourable loss because I had not strayed from my trading plan. Losses, after all, are part of the process. Instead, I refused to accept the result and went back to the market, looking to make good. For several hours I chased my tail and got thrashed about by the intraday price action, until I was down a further 6%. My trade size grew as my losses increased. I even transferred more funds to my trading account so I could trade in large size with wider stops, giving little consideration to the total capital at risk. After much pain, a winning trade reduced the drawdown to around -4.0% and I decided to call an end to the week. It is a dishonourable, shameful loss.

The cause of this lapse of discipline is no mystery: it is the result of a laissez-faire attitude which in turn is the product of a reduced commitment to trading as a lifestyle. In recent weeks I have been coming to terms with the fact that my edge has eroded and that I most probably can’t make a living from trading. Because of this I have been dusting off my CV (resume) and investigating possible jobs to apply for. The side-effect was that my trading mindset changed for the worse and I reasoned that because I was so close to throwing in the towel, I may as well try to either hit a big score or exit the game in a blaze of glory. With hindsight, I realise that to fail in such a grand fashion would not be going out in a ‘blaze of glory’, as much as a being reduced to a heap of ash in a ‘blaze of foolishness’. The realisation owes less to potential financial losses incurred from such an approach, and more to the potential personal and psychological failure this would imply. Simply put, I believe I have become a better and more disciplined individual for having created and followed a road map, and to throw it all in would speak of a great failure. 

There is a positive that I can take away from this debacle. Even though Friday’s trading mirrored the disastrous behaviour that earlier decimated my account before I started writing this blog, I am sure that my actions were not the result of an old gremlin. Previously, I traded in this manner due to an addiction but this time around it just was a kind of stupidity, or conscious recklessness. I realise I failed myself last week in a big way, but I consider it a temporary deviation from my road-map, nothing more. Time will be the judge.

PS – I hold less store in the mystical than I used to – perhaps rationality is a function of age – but I find it interesting how luck can be eerily ‘lumpy’ at times. After this horrible Friday, for example, some friends and I went to a cinema and we were sorely disappointed by a film (it had very good reviews), we were caught up in a major traffic jam on the way to a restaurant, and when we got to the restaurant we had to wait ages for the food to arrive. And, we regretted it when it when the food did arrive because it tasted terrible. To top it off, this was the most expensive meal I have had in over a year.

Fortunately, I experienced a kind of ‘mean reversion’ in my luck on the following Monday and Tuesday. After a few profitable trades, I decided to risk a small portion of the excess profit in an experimental trading approach. I wanted to see what would happen if I just just watched the charts and traded without indicators and without fundamentals – price alone would be my guide. There are times when I perceive I have a greater ‘feel’ for the market, and this can seem a little mystical, but it is surely no more than the product of of those rare times when the market’s behaviour (patterns of intraday volatility and price action) marries with my perception of the state of market. This was one of those times of such synchronicity and over the two days I managed to string together 26 trades, 25 of which were profitable and 1 of which lost money (just £6). The trades were small but the two days have added a most welcome couple of percentage points to my account balance.