D4, three and a half trading days, capital: 10 000 USD and thinking of post of day before yesterday

Todays SEC statement on the alleged abuse of Goldman's position as market maker in the CDO / CDS market makes me think that a structured finance / derivatives clearinghouse would be a good thing. It would not solve the problem of collusion entirely, but would make it more difficult. The entire situation makes me think of the spitting in the wind during the good old dot com days. Same situation basically: I am selling to an institutional investor something I know will blow up in his hands, just to make more money on the other side of the trade (on the ask side). Now I'm thinking of it, a clearinghouse wouldn't solve this, as large transactions would still go through. Goldman takes it very far by omitting things in the prospectus. The underlying ethics are just as bad as back in the dot bomb age: the players know they are ruining poor pensioners and other endowments, but they just don't care...

D3, three trading days, capital: 10 000 USD and installing Market Delta

As said yesterday, there should be ways to find some spitting in the wind ... trying if Market Delta is a way of getting there. You can go to Market Delta and look at it yourself, but you need a real time data setup with one of the big providers. Works with the data flow from Interactive Brokers as well. Sure looks promising, as it gives immediate insight in bid and ask volume which is tagged directly to the price. Actually very good for a continuation signal if you are using Bollinger Bands or Moving Averages. Not cheap though. Not sure if this is what I need right now for applying my strategy, as the volume data can only be used intra-day .... using the 60 minute could be a solution for swing trades.... to be continued .....

D2, one and a half trading days, capital: 10 000 USD and looking for people to spit in the wind

I am worried today. I am feeling the typical looser angst of missing out on a rally. But this is one of those things we should resist. The world would be a much better place if we had the equivalent for the AA for people speculating or investing. There's almost as much people wrecking their lives with the stock market than with alcohol, and no AA. Just a large number of expensive books people are peddling to improve trading. The "SPA" (Stock Speculators Anonymous) would do a better job, but "soit" as they say in Belgium, not the subject here and now.

Amazon made a mistake and sent me 2 book express instead of expedited which is rather good news, I'm just afraid the one book I ordered express will be shipped in the slow lane ... I am particularly proud of these two beauties and they are important for the following parts of this journey: Quantitative Trading: How to Build Your Own Algorithmic Trading Business (Wiley Trading) ; The Encyclopedia Of Technical Market Indicators, Second Edition

Obviously, I am taking this blog seriously and I am planning to go through all Julia's recipes, hence the order.

Here's the deal: as everyone agrees that discretionary traders can potentially make larger profits than system/mechanical traders I am very much tempted to go for a hybrid approach. I am tempted to think (might be delusional) that I am an intelligent person with a creative mind, and I should monetize this ability. Very often you see discretionary in opposition to mechanical trading, but I am thinking: as the entire idea is to create a framework/system that relies very much on discipline and good execution and a methodical approach to avoiding losses we can get creative in making money in the first place.

Sidenote: I really have to be disciplined whilst I am writing, because my mind has an outline ready, I have a stock which fits the outline, I am looking at the price whilst typing, real time, and I am realizing that with my paltry 10 000 USD and generous application of margin today's profits could have amounted to (aaarrrggghhhh) 1334 USD. But I am not doing anything until the framework and the system are ok. Yes, it is difficult to stick to the promise I made to myself, but I am very much aware that if I jump on the bandwagon, profits will reverse into losses.

Let's get back to discretionary vs system. If we go for a layered approach we can incorporate a very important point, shift in market "character". You don't trade a rally which is long in its legs the same way as you trade a reversal. So part of the framework should be supple and adaptable, part of it should be rigid and a guardian for sudden investor stupidity.

Before I present you a layered or onion approach (which sounds sexier?) I feel like splashing out on an anecdote. No random anecdote, but a humbling one, an anecdote that makes me wiser now I think of it.
A lot of people trade and look at themselves as the lions or the racehorses of the track, the dragon or the tiger. This might be right if you are working for Deutsche, JPM or GS, but for folk like me and you (rest assured, we are legion) we should see ourselves like hyena's at best (if you are a hedgefund trader your would qualify for this), but I prefer to look at myself as a maggot of the markets. There is the clash of the counterparties, the hyena's play their role, but the maggots live of the little remains, or even, clean the wounds.

Flashback to fall 1999 and a trip to Cambridge with a Swedish investment manager. We went over there, evaluating a company that didn't turn out bad in the end, I think it's branded Jobserve now and is specialised in contractor jobsearch, but back then it was just a me-too-monster thing. We were picked up by a lawyer specialised in IPO's, well that is not correct, we were picked up by his driver, we just saw him for 2 minutes as he was hunting (no no, no weekend) and when I looked at his estate I slapped myself for being such a nitwit and not being able to make "big" money. Victorian mansion (the real thing, no "Mc") surrounded by huge sequoias and roughly a thousand acres of land. Ouch. Maggot.
When the driver dropped us off on the premises of an old filmstudio and we entered the offices we just saw a couple of PC's on picnic tables. They presented us the business idea and the technology they were using, simple Microsoft NT server stuff. It was very difficult to take this serious, and I recommended against putting in any angel investment money. The investment manager decided to "just" invest 250 000 (a lot of seed money for pic-nic table setup). I didn't grasp it. He countered by asking me if my sale of shares in the startup I was managing worked out. How did he know? He was one of the only buying parties in the market. He, and some other institutional investors were "spitting in the wind". But how could you possibly make money "spitting in the wind"? I was truly puzzled, but this was because, obviously, the maggot wasn't getting the big picture. Maggots often don't get the big picture. He explained, and it dawned on me. They had a company roadmap, sold it to a number of institutional investors, and on every milestone, the price went up. This was spitting in the wind. Then, after a lot of spitting, the final milestone was reached, the company became "mature" and some pension fund bought a big stake. But they were buying into a mirage? So these poor pensioners could loose part of their pension money. He just smiled. "Their problem". And don't forget, he was just a crow, not even a hyena. Don't forget: we're just the maggots, because any one of who you had been buying into this flying trashcan just after the IPO (at the beginning of the "roadmap and the "spitting in the wind") could have taken a lot of capital gains, and you might have even thought that you were a dragon and a damn good stock picker. Well, you were just setting yourself up for future failure.

Flash forward to the current market situation. You might have heard of Elliott Wave theory. If you haven't, just google Robert Prechter and you'll get a very decent intro. If you want to read about it, order the basic works of Elliott (Elliott Wave Principle: Key To Market Behavior or even: The Complete Elliott Wave Writings of A. Hamilton Bolton), unfortunatly all compiled by Prechter, but don't be put off by this. Basically, all market advances happen in five waves, three up, two corrective waves. Declines happen in three waves, two declines, one advance. So wave one, three and five are up, four and two are down:

(Courtesy Robert Prechter and co)

The first wave is violent and unexpected. The third wave has got the greatest intrinsic push, breadth, strenght and fundamentals, the fifth wave is the con-man's wave: market participants have learned how things work and there is a lot of spitting against the wind. Furthermore, the market is pushed by it's own momentum and participants are increasingly looking for opportunities of lesser and lesser quality.

I firmly believe (can you get more discretionary than this?) that we are in the last leg of the counter-trend rally starting in march 2009. This means we should be looking for the current flying trashcans ad pick out those with the best potential for added value. We should try to detect where the spitting in the wind is going on and adapt our discretionary layer to it, or build it in the mechanics (there are indicators that can give us a clue on this). Our other layers will be less flexible, resulting in a single body that can be automated and get us ROI without a lot of rework in the future (when the "character" of the market will change).

More on the details tomorrow. It's 23 15 here in Brussels and time to get some sleep.

Start, zero trading days, capital: 10 000 USD and a lot of information

Here we go, the very first  post. For years I have been reading about finance, I have a finance related MBA and still, for some odd reason (some say .... it's astrological) I never succeeded in making it "in the business". I have quite high up on the management ladder, making it to CEO of a subsidiary, made money (more than decent amounts some would say), but never in the domain I wanted to be in: finance.

 My best friend, let's call him "M", had more luck, as a couple of people I started of with in University: he started working for a discretionary investment fund. Later he found out he worked for a multi-million Ponzi-scheme (he almost went to jail but proved to be as innocent as you and me) and we both started thinking: a lot of people in the business don't have the talent to actually match the leverage people provide them with. We started reading, buying software, reading again, taking data subscriptions, doing technical analysis, picking stocks, during the internet boom period I even managed to work for the Ikea investment arm doing due diligence on start-up technology and commercial viability. During that period we even invented the term "flying trashcan" and got quite some success with it in international investment circles (an unlikely place like Brussels is a better start than most people would think). "Why do we call it a flying trash can? It take a lot of energy to launch, it doesn't stay in the air very long and when it crashes it stinks.".

And oh yes, we  predicted the 2000 crash. I told the Ikea people. I told some Soros people. They didn't care. They were going to make money anyway. And they did. We just thought we did. We perfectly called tops and bottoms, picked some stocks, made some money, lost some money and we should have realized by then we were going nowhere. Well, actually I was getting nowhere with finance, but my friend was getting some nice results, and I admired him for it. He was happy with some of my savvy stock-picks (Nvidia in 2004 for example, proved a winner, I didn't invest in it myself) and our common analysis. Meanwhile we had invested in some good technical analysis software (Advanced Get EOD) and we were thinking of ourselves as smart as we were using Elliott Waves....

"M" invested most of his money in hedge funds and managed part of it  himself. He made very good results on what he managed himself, even during the 2007-2008 crash. I encouraged him to start his own fund. We worked together on the start of a Luxembourg based (did I tell you that Brussels is the European Capital and is located at roughly 150 miles from ... Luxembourg, neither of them have capital gains tax) fund, an SSF (société de sécurisation financière).

Meanwhile I was putting more and more time in investing stocks, even taking up day tading and using more sophisticated tools like eSignal Advanced Get Realtime. Needless to say: I got nowhere, but I got there fast and with hindsight.

"M" meanwhile, loaded up his fund with 7 million dollars and started trading roughly a year ago. You guessed it: he is getting nowhere as well, as he is finding out the hard way that trading 7 million, not your own money, is much more difficult than trading 50k.

Then a real good thing happened, I found a book: What I Learned Losing a Million Dollars by Jim Paul and Brendan Moynihan. A real eye opener. It was not about how you make money, but how you lose it. I was very much impressed by the 5 stages of loss and how they compared to my situation. Oh my God, was I in denial. I was in denial about the fact that finance and the stock markets where largely a dream I was hanging on to, but that I never really tried to make it, I never invested 100% of my time and brain to succeed. This was my unreal exit, like some neurotic child thinking he can be beamed up by the Enterprise when he is getting bullied, clinging on to his communicator and waiting for the right moment to hail Scotty.

"Teleportation doesn't exist" was the only conclusion I could come to, made sure to add "yet" to the phrase and then I started seeing a lot of stupidity: most people were doing what I was doing: dreaming, they were not trading, they were trying to escape from their drab reality, and it was a lot more expensive than going to the movies. They were chatting on websites not to give their opinion, give advice, but just to get confirmation of their flawed investments and add to their denial. Or then, just as bad, they were using the forums to express anger and blame everyone else for their failure: government, Obama, the Rotschilds (mainly them), Soros, the markets, the bankers, the senators, everyone except themselves. Otherwise they could not repeat their behavior and start losing again.

Frightening, but the markets are actually big wealth shifters, from the dumb to the savvy, from the foolish to the wise.

I had been part of the foolish. "Make it to the wise or step out of it". After this it took me several days to realize: I had to blog about it. Talking helps me thinking. But talking to whom? People helping me to remain in denial was excluded, so the solution was, well, not so obvious, as "stock talking" is dangerous in this respect. Then I saw Julie & Julia on TV. It would have to be a blog, with an "audience", and the fact that it would take some time for them to talk back would help.

Then there would be the subject. Whilst reading I concluded that I had made one more big mistake: I had been doing short term discretionary trades. Wrong. This can be done for long term trades, but not for swing or day-trading. There had to be a system or mechanical element in it.

So here it is: a blog where a rather average person is going to try to build a system to make money, not 100% system or mechanical trading, but partially. And he'll be completely open about it. If he can't do it, he'll stop and call it a day. How long am I going to try? Until end of 2010. Not any longer. You will get access to the resources I built up in 10 years of stock-watching. I'll share the results. Objective: find a way to turn the 10 000 USD in the subject line to 1 000 000 by being real, structured and imitable.