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Training rats to trade markets? Rats "outperformed some of the world’s leading human fund managers.”

  
  Education
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An intriguing book has turned up: Art and Economy, the first volume of a catalogue of projects on the global economy supported by the Landia Foundation and Universität der Künste Berlin.

One project is Michael Marcovici’s Rat Trader. The book describes the training of laboratory rats to trade in foreign exchange and commodity futures markets. Marcovici says the rats “outperformed some of the world’s leading human fund managers.” The rats were trained to press a red or green button to give buy or sell signals, after listening to ticker tape movements represented as sounds. If they called the market right they were fed, if they called it wrong they got a small electric shock. Male and female rats performed equally well. The second generation of rattraders, cross-bred from the best performers in the first generation, appeared to have even better performance, although this is a preliminary result, according to the text. Marcovici’s plan, he writes, is to breed enough of them to set up a hedge fund.

The point the project makes is that trading does not require human interaction. It prompted in my mind as well the question of the circumstances in which the standard assumptions of rational self-interested maximisation apply – whether by humans or rats or any other creatures – and when we should be looking to adopt alternative ‘behavioural’ assumptions.

I also liked Anke Strauß’s The Mechanic and the Machinic: Thoughts on Economic Systems. The essay argues that machine-metaphors for the economic system – “calculable, controllable and manipulable” – are sterile. “Mechanics always need an outside stimulus, some kind of energy.” Worse, “We are the weakest link in a world that has a mechanical way of thinking.” Schumpeter is the hero of economics in this essay.

I’ve not finished reading yet but it’s a very intriguing catalogue.

Nassim Taleb’s Risk Management Rules of Thumb

  
  Education
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Rule No. 1- Do not venture in markets and products you do not understand. You will be a sitting duck.

Rule No. 2- The large hit you will take next will not resemble the one you took last. Do not listen to the consensus as to where the risks are (that is, risks shown by VAR). What will hurt you is what you expect the least.

Rule No. 3- Believe half of what you read, none of what you hear. Never study a theory before doing your own observation and thinking. Read every piece of theoretical research you can-but stay a trader. An unguarded study of lower quantitative methods will rob you of your insight.

Rule No. 4- Beware of the nonmarket-making traders who make a steady income-they tend to blow up. Traders with frequent losses might hurt you, but they are not likely to blow you up. Long volatility traders lose money most days of the week.

Rule No. 5- The markets will follow the path to hurt the highest number of hedgers. The best hedges are those you alone put on. (more…)

The 14 Trading Lessons From “What I Learned Losing A Million Dollars”

  
Analysis, Education
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  1. The potential of initial and temporary success only exists in trading. You can’t just call yourself a brain surgeon and get lucky while messing around in someone’s head. And just stepping on stage and trying to give a violin concert if you have never touched a violin before won’t end too well either.
  2. Right, wrong, win and lose are inappropriate terms for describing the participation in the markets. In 20/20 hindsight, decisions might be good or bad but not right or wrong. With regards to the markets, only expressed opinions can be right or wrong. Market positions are either profitable or unprofitable.Image result for What I Learned Losing A Million Dollars
  3. There are as many ways to make money in the markets as there are participants.  But there are only very few ways to lose.
  4. A light-bulb manufacturer understands that 2 out of 10 bulbs will not work; a fruit seller knows that some apples will be foul. Those losses are expected. In trading, we don’t expect to lose when we enter a trade. Unexpected losses are hard to deal with.  Acknowledging that losses are part of the game and accepting the losses are two very different things.
  5. In trading, losses are treated as mistakes and from early on, we have been taught that mistakes are bad and have to be avoided.
  6. If you know exactly how much you are going to win, but don’t know how much you can lose, you are denying losses.
  7. Trading is an activity without a beginning and an end. In an activity without an end, you can always make decisions and change your decisions based on the current situation. A football game, a roulette spin or blackjack have defined beginnings and endings; after the game is over, you can’t change anything. You have to accept the outcome. It’s not open for interpretation; you (your team) have lost or won. In trading, the “game” (activity) never ends and your trade (potentially) never ends. Because your trade doesn’t end, your loss is never final and it could always turn around.
  8. Rules are hard and fast. Tools have some flexibility. Fools neither have rules nor tools.
  9. A scenario might have been an acceptable trade based on someone else’s rules. Profitable opportunities will occur that you won’t participate in. Your rules will only enable you to engage in some of the millions of opportunities.
  10. You can’t calculate the probability of having a winner. You can only calculate how much you are going to lose. All you can do is manage your losses and not predict your profits.
  11. People usually pick the exit point as a function of their entry point and it’s usually some arbitrary Dollar amount.
  12. People rationalize a trade idea by expressing the trade in terms of the money odd’s fallacy – “it’s a three to one reward-risk ratio! I’ll risk $500 to make $1500”. The reward-risk ratio gives no information about the likelihood of winning a trade.
  13. People who ask, “Why is the market up or down?” don’t want to know why.  They only want to hear the reasons that justify their losing position.
  14. The last moment of objectivity for the roulette player is the moment before he places his bet and the wheels starts spinning. After that, he can’t do anything anymore to lose more money. For the market participant, the last moment of objectivity is the moment before he places his trade. But after that, he can still do a lot to lose more money. That’s why all your decisions and plans have to be made pre-trade.

Trader’s Emotions

  
  Education
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The hardest thing about trading is not the math, the method, or the stock picking. It is dealing with the emotions that arise with trading itself. From the stress of actually entering a trade, to the fear of losing the paper profits that you are holding in a winning trade, how you deal with those emotions will determine your success more than any one thing.

To manage your emotions first of all you must trade a system and method you truly believe will be a winner in the long term.

You must understand that every trade is not a winner and not blame yourself for equity draw downs if you are trading with discipline.

Do not bet your entire account on any one trade, in fact risking only 1% of your total capital on any one trade is the best thing you can do for your stress levels and risk of ruin odds.

With that in place here are some examples of emotional equations to better understand why you feel certain emotions strongly in your trading:

Despair = Losing Money – Trading Better

Do not despair look at your losses as part of doing business and as paying tuition fees to the markets.

Disappointment = Expectations – Reality (more…)

SUN TZU’S ART OF WAR AND THE ART OF TRADING

  
Analysis, Education
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This post will begin a new category specifically focused on the military principles of SUN TZU and their relevance for contemporary traders.  My goal is for you to find my interpretation of this 2500 year old military treatise as beneficial to your trading success as I have.

If you trade and study the market for a living as I do, or have a desire to do so,  I suggest you read SUN TZU’S ART OF WAR.  You can read the complete text here:

SUN TZU ON THE ART OF WAR: THE OLDEST MILITARY TREATISE IN THE WORLD

WHY SUN TZU?

Anyone who has attempted to trade the markets, and by markets I mean any number of financial instruments from oil futures, forex, equities, options, etc., has found out in short order how difficult trading can be. In fact, I would venture to say that trading is one of the most difficult endeavors any of us could ever attempt to master. It is estimated that only about ten percent of those who attempt to trade for a living ever succeed. The ten percent who do eventually succeed will most likely tell us that they lost a few fortunes along the way. It is hard emotionally, mentally, and physically. Only the strongest will survive on this battlefield and is the very reason we need the principles of Sun Tzu to help us along the way. 

Now you know the reason for my site’s motto:

TRADING IS WAR. PREPARE YOUR WEAPONS. (more…)

Eurozone December inflation stays low at 0.8%

  
Analysis, Education
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The eurozone’s annual inflation rate for December has just been confirmed at 0.8 per cent, in line with expectations and the preliminary reading of the data.

Eurostat, the EU’s offical data provider, also confirmed that prices in the last month of 2013 rose by 0.3 per cent from November in the shared currency area.

From the full release:

The largest upward impacts to euro area annual inflation came from electricity (+0.11 percentage points), tobacco (+0.08) and restaurants & cafés (+0.05), while telecommunications (-0.14), fuels for transport (-0.13) and medical & paramedical services (-0.07) had the biggest downward impacts.

The European Central Bank’s inflation target is 2 per cent.

If inflation stays significantly below target in the months ahead, it is likely to stoke calls for the ECB to do more. If price pressures were to continue to disappoint, the most likely options would be another cut to the benchmark main refinancing rate or negative deposit rates, which amount to a levy on banks for funds parked in the central bank’s coffers. (more…)

7 Things -Traders Must Accept

  
  Education
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  1. You will have to accept that over the long term at best only 60% of your trades will be winners. It will be much less with some strategies.
  2. Accept that the key to being a successful trader is having big wins and small losses, not big bets paying off. Big bets can lead quickly to you being out of the game after a string of losses.
  3. Accept that the best traders are also the best risk managers, even the best traders do not have crystal balls so they ALWAYS manage their capital at risk on EVERY trade.
  4. If you want to be a better trader then you need to accept that trading smaller and risking less is a key to your success. Risking 1% to 2% of your capital on any single trade is the first step to winning at trading. Use stops and position sizing to limit your losses and get out when your losses grow to these levels.
  5. You must accept that you will have 10 trading losses in a row a few times each year. The question is what your account will look like when they happen.
  6. You have to accept that you will be wrong, a lot.  The sooner you accept you are wrong and change your mind the better off you will be.
  7. If you really want to be a trader then you are going to have to accept the fact that trading is not easy money. It is a profession like any other and requires much work and effort and even years to become proficient. Expect to work for free and pay tuition to the markets through losses until you learn to trade consistently and profitably.

Trading is about math, ego control, risk management, psychology, focus, perseverance, passion, and dedication. If you are missing one, you may not make it. Trade wisely my friends.

Reminiscences of Marty Zweig: What I Learned From a Market Great

  
  Education
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The early years

After degrees from Wharton, University of Miami and Michigan State, Marty started his career in academia but ultimately became one of the most respected stock market “gurus” in the modern era. I have years’ worth of memories of Marty, and hope readers will indulge me as I reminisce and share some of the most important market lessons I learned from one of the greats.

But first, the personal stuff. Marty was brilliant, there’s no doubt; but he was also quirky, goofy and affable. He was the consummate worrier… but he was also the ultimate warrior. He lived, ate and breathed the markets and perpetually (and tirelessly) strived to “figure it out.”

One of my greatest memories is getting to see first-hand his now-famous memorabilia collection—to which there are no comparables. Among them, there was the dress Marilyn Monroe wore while singing Happy Birthday to John F. Kennedy in 1962; the suits worn by the Beatles on the Ed Sullivan Show in 1964; the 1992 Olympics’ US “Dream Team” basketball jerseys; the booking sheet from one of Al Capone’s arrests; a letter from Madonna to Michigan State declining acceptance so she could pursue a music career; guitars of many rock stars, including Bruce Springsteen and Jimi Hendrix; the fedora worn by Humphrey Bogart in Casablanca; the original Terminator costume worn by Arnold Schwarzenegger; and multiple boxing championship belts, Super Bowl rings and Heisman Trophies. (more…)

10 Things I Learned from Steve Jobs about Trading and Life

  
Analysis, Education
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Less is more, simple is good.

That’s been one of my mantras—focus and simplicity. Simple can be harder than complex; you have to work hard to get your thinking clean to make it simple.

Your first loss is your best loss

Sometimes when you innovate, you make mistakes. It is best to admit them quickly, and get on with improving your other innovations.

When studying the market and speculating about the future, the past is all we have.

You can’t connect the dots looking forward; you can only connect them looking backward. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.

No one gets paid for originality – you get paid for making money. You should be happy to take other people’s good ideas and run with them, as long as you understand exactly why you are in the trade and take full responsibility of the results. If you don’t know why you are in a trade, you won’t know when to exit. (more…)

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