The Eye of Sauros @ The Lord of Trading

Make Millions while watching Porn

2012-01-31T17:40:00.008Z

While I was navigating over other trading websites, I have discovered the FX EA - stands for Forex Expert Advisors. That's trading robots you plug and that make for you millions on Forex markets while you watch porn : that's absolutely great, why bother to spend time trading??? An instance of such an robot is "FX Janine", well I altered the real name, not that I don't want to share the Holy Grail with you, Fellow Trader, but I don't want to link or even refer to this scam... FX Janine is allegedly really superior to the others robots, according to its website that claims : "Other Robots being marketed and sold for a cheap price employ systems that are only based on "indicators" which are not 100% reliable. To the contrary, they are very unreliable because they are no more than guessing. They "assume" a price will go up or down. But my "FX JANINE" doesn’t "assume" or "guess." It "KNOWS" which direction the price will go exactly. So that’s why it is so accurate, with a rate of about 85-95% positive trades.". The website is full of testimonies of guys who allegedly make tons of money per day with printscreens - of Excel spreadsheets...- to prove it. Its author writes : "I have been trading using this FX JANINE on a few accounts at 4 different brokers and I make from $500 to $4,000 on each account every day, depending on the volatility of the markets. The higher volatility, the bigger profits are produced.". BTW, FX Janine is sold for only $2,000 which is an average day of profits for an absolute beginner.

Come on, a bit of common sense for TLofT's sake. Why the hell a bloke who has found a way to make hundreds of grand per day would sell the Holy Grail for 2k and spend time, energy and money marketing it to earn what he makes in minutes though his robot -while he can watch porn-??? Some guys really think people are dumb...They are really thieves. Now in the example of robots it really seems obvious -at least to me- but the very same principle is found everywhere in the trading world, more generally anywhere you can find so-called "experts", "advisors" or "gurus". If a chap knows what the future is, why would he or she try to make a living selling predictions or writing books? If a guy has made zillions from the markets, why would he try to make a few grand giving trading lessons or setting up a website? If a trader has found the trading Holy Grail and has a capacity to make big money from the markets, why bother with clients (who are always pain-in-the-ass, that's an Universal Law) and Other People's money?

This said, the example of FX Janine raises an interesting point : the one of the trading Holy Grail, the Preciousss. A discussion we can have is if such a thing existed -I'm still not sure- what would It look like ? Would be a good stufff to know what we are seeking for all our life long, no? Let's first consider a very standard approach as found in the Trading Litterature, Van K Tharp for example. Roughly, a trading system profitability depends on the combination of 2 key parameters, the percentage of winning trades (%WIN) and the reward:risk ratio per trade (R:R). In that approach a profitable trading system is one with a positive expectancy (%WIN*average profit + (1-%WIN)*average loss >0) and the Holy Grail is a system with a highly positive expectancy (achieved for example with both a high %WIN and a high R:R) but in practice one of the 2 parameters has to give. Basically, getting a 85-95% %WIN like FX Janine does is not so difficult : put a trade on say EURUSD choosing randomly a direction head long tails short and put a take profit 10 pips away from the entry point and a stop loss 100 pips away: it's a 1:10 R:R. The trouble with this kind of system is around 10% of your trades will wipe out all the profits you made 90% of the time and bring you ultimately to losses. No, it doesn't fly. Since I've been trading I've changed numerous times my opinion on what works or what doesn't work, I used to claim myself as a trend follower, now I claim I'm a contrarian, I used to play the range breaks, then the return to the range, short term then longer term then short term again, swing, global macro, TA, Elliot Waves, low leverage, maximum leverage etc. The one thing I've not changed my mind on is the Golden rule of trading : "let the profits run and cut the losses short". I used to believed this rule suggests that you need a high R:R as in 2:1, 3:1, 5:1, 10:1,... which may imply mechanically a low %WIN -just imagine a 100 pips take profit and a 10 pips stop loss-... It works just the opposite of what we discussed before : a few big winners will more than offset the numerous losses. Unfortunately such a system, that I had tried to implement for years with more or less success, is unlikely to work better, all is about trading horizons, a longer term player needs a low %WIN while a scalper needs a high one to be profitable. In the both cases, you need a trading edge to first beat the broker and second beat the odds. You would have then built a positive expectancy system. The third step which is sometimes forgetten is you need to survive long enough to see your expectancy realized. Now the real problem with Expectancy-based systems, is you never know what the Expectancy of your system is, even after 100,000 trades. The markets are constantly changing what has been working for a day, a year or a decade can (it generally does) stop working suddenly at the moment your stake on it is at the highest. Even if you assume you had a positive expectancy system, that expectancy would be realized if you had like 100,000 lives and you spend them trading, you only have one life (I guess). Unfortunately, the high expectancy Holy Grail system works well only in theory, to set up one in practice is another thing.

With time and trading experience, I've moved a bit away from this standard "expectancy" standard approach. Personally, I've been applying the "let the profits run and cut the losses short" not in the trading set-ups, trying to optimize %WIN and R:R, but in my money management system : as you know if you follow the blog, I use an "extreme" anti-martingale money management system. To summarize, I start with a small stake as in 1K, trade with high leverage (100x) and a R:R close to 1:1 so my theorical %WIN is not far from 50%, if I win I put all the money in the account including the profits at stake for the next trade, if I lose I start again from the initial stake. I repeat until I have a long winning streak enough to withdraw a zillion quids of profits. Now there's a mathematical formula to prove that the probability I have a long winning streak is huge, it can be found in an earlier post, Martingales vs Anti-Martingales, but today I'm too lazy to explicit and discuss it. Instead, let's toss a coin hundreds of times, every time you have a long streak (say above 4-5) of heads (or tails) in a row, your friend Sauros is making good money. What is beautiful in that system, is even if my %WIN is low and my expectancy is negative, I will end up having a long winning streak that will make me profitable. A low %WIN will just make that I have to wait longer, sometimes much much longer, before it happens. So to me, with such an anti-martingale system, what the trading Grail looks like is a set-up that gives me the highest %WIN as possible above 50% with a R:R of 1:1: it means massive profits fast aka the Precious. It's been my quest for more than one year now.

Of course, I have now an idea of what this Precious set-up is but to find out more about it, you'll have to purchase my new book "Make millions while watching porn", it's not that I'm an expert advisor on the latter.

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As this post is published: SPX 1310 // SX5E 2417 // NKY 8802 // DAX : 6459 // EURUSD 1.3063 // USDJPY 76.30 // XAUUSD : 1730

The January Effect

2012-01-13T11:05:00.004Z

I've quoted below an extract from Goldman Sachs research, Global Market Daily Jan 5th 2012, just in order to make sure the pattern doesn't work this year ;-)

The “January Effect”: Science, Hocus-Pocus, or Bogus?

Some investors pay special attention to the first five trading days of the year. The reason is that stock-market returns over the month of January have gained a reputation as good predictors of returns over the rest of the year. January is also regarded as a period when returns are relatively higher than those in other months. As with many pieces of ‘market wisdom’, January-driven predictions sometimes come true (as in 2006), but oftentimes do not (as in 2011). For investors, the practical value of this view depends on the relative frequency with which those two outcomes happens to materialize.

The problem in trying to take advantage of this ‘knowledge' is twofold. First, it is not entirely clear if the regularity is statistically solid or what its main drivers may be. Second, even if it was an empirically solid phenomenon, the puzzle translates into explaining why the easy-profit opportunity has not been exhausted by arbitrage. These issues have interested academics for quite some time. There are many papers studying a variety of “anomalies” affecting the seasonality of stock-returns, like the day-of-the-week effect, the turn-of-the-month effect, the pre-holiday effect, the Friday-the-thirteenth effect, and the January effect, which is the focus of this daily.

The three basic postulates associated with the January effect are the following. First, that the sign of stock-returns over the course of the first month of the year are correlated with the sign of returns over the whole year. Second, that returns tend to be higher in January than in other months. And third, that the lion’s share of January’s predictive power lays in the first five trading days of the month. Sometimes, the effect is framed in the context of the small caps vs. large caps premium, or in discussions of the momentum patterns of equity returns.

The three postulates tend to take center stage in many discussions at the beginning of each year, which is why we decided to take a closer look at the January effect in this daily. With respect to each of those postulates, one can simultaneously find some degree of scientific evidence, some coincidences akin to hocus-pocus magic, and some forecasts that approximate prophetic bogus. Although we will not disentangle them all here, what we do is to analyze the long-history of returns in the US and other countries to obtain simple but well-founded conclusions of our own. We also discus some reasons that have been put forward to explain the effect and we highlight the risks involved in taking it too seriously.

The Effect is Somewhat Solid in the US, But Far from Certain

We analyzed the long-run history of S&P500 daily returns (since 1928 to the present time) to answer three basic questions: 1) Is there a positive correlation between returns during the first five trading days of the year (or January more broadly) and those on the rest of the year? 2) Do returns tend to be higher in January than in the other eleven months? And 3) Are returns higher than their historical average when January returns are positive? These are the answers we found:

• When stock-returns are positive during the first five trading days of the year, returns over the whole year are also positive about 60% of the time. The figure is similar when the condition is that returns be positive for the whole month of January. We went further in exploring whether the correlation changed depending on whether the given January was classified by the NBER as a recession month or not. As it turns out, the proportion remains more or less constant for the five-days type of conditioning (at 60% and 61%, respectively), but change somewhat for the whole-month conditioning (at 53% and 61%, respectively). More interestingly, conditioning on whether the analysis applies or not to an election year has a larger impact. The proportions for the five-days conditioning change to 70% and 57%, respectively, and for the whole-month conditioning change to 65% and 57%, in the same order.

• January does tend to show higher returns relative to the other eleven months of the year. Taking the long-run history, annualized returns over the month of January average approximately 38%, compared to the historical average of returns of about 8%. The annualized returns for the first five trading days are much higher. For example, during the post-WWII period, the annualized average returns over the first five trading days reach almost 130%. January surpasses returns in more than half of the other months of the year, and are especially high in comparison to the summer period.

• Returns over the course of the whole year tend to be higher than their historical average if returns in January were positive. The long-run average of stock returns is of approximately 8%. When returns during the five first trading days are positive (negative), the average return for the whole year is 11% (-1%). When returns during the month of January are positive (negative), the average return for the year is approximately 14% (-4%). These figures imply that when January returns are positive, returns over the course of the year are likely to lay above their historical average. In contrast, negative January returns tend to be associated with below-average yearly performances.

To verify the robustness of these findings, we looked at return series that are available for other composites, although they cover shorter histories. The correlation for the first five days of trading is weaker for Dow Jones composites weighted by capitalization, at 50% for the whole-month type of conditioning. In contrast, the correlation is higher for NASDAQ100, at about 64%. In most cases however, yearly returns tend to be higher than average when January returns are positive (at about 15% for the Dow, and 26% for NASDAQ100). Yet a broader test of the January effect is to explore the empirical evidence for other countries.

Patterns Are Similar in Other World Markets, But Data Is Imperfect

There are a handful of other countries for which sufficiently long and high-frequency series are available to carry out similar analyses. Even then, data start since the 1980s or later, which makes it difficult to draw very solid conclusions. In any event, it is surprising that similar patterns are visible along the lines of the questions we posed above for the US:

• The correlation of January returns and rest-of-the year returns is high in many other countries outside the US. Although the evidence is not uniform, we found various examples of countries where returns during the first five days of trading are indicative of subsequently positive returns for the year. In some cases, the correlation remains strong if the conditioning applies to the whole month of January, but not in all of them. Examples include (figures refer to the five-days and whole-month conditionings, respectively): Australia (38%, 38%), Brazil (50%, 38%), Germany (67%, 40%), Greece (63%, 44%), Japan (43%, 40%), Netherlands (63%, 50%), South Africa (67%, 44%), or and Spain (50%, 54%).

• Returns during January tend to be relatively higher with respect to other months in some developed countries, but the evidence is harder to confirm in emerging markets. Because stock markets outside the US and a few developed markets tend to be more volatile, it is harder to distinguish abnormally high returns in January with respect to other months of the year. Errors in the computation of nominal returns in emerging markets compound this problem. Still, we did find examples of countries where similar patterns hold, like Canada, Chile, Mexico, South Korea, South Africa, and Switzerland.

• When January returns are positive, yearly returns effectively tend to be higher than average in many other countries. This is a point where the relative nature of the comparison yields more reliable conclusions. The following are examples of cases where this holds (in parenthesis, we give the country’s historical return, followed by the average return when the January conditioning was positive): Canada (9%, 12%), Chile (11%, 19%), France (8%, 13%), and Switzerland (9%, 15%).

From the perspective of a global investor, it is helpful to know that the patterns more commonly associated to the January effect are visible outside the US as well. However, caveats remain on how strongly one can rely on these empirical regularities.

Exploiting Anomalies May Be Profitable, But Also Risky

The reason why these patterns are anomalies from the perspective of many academics and market participants is that, if they entail opportunities to profit-making in equity markets, arbitrage would eventually bring them down to zero. The survival of the patterns, especially those related to the seemingly abnormally high returns during the month of January, have been related to more ‘fundamental’ causes, especially tax-loss selling at the end of the previous year, transaction costs, year-end de-listings, and omitted risk factors in pricing models.

In fact, ‘risk’ turns out to be a key word when discussing the January effect or other seasonal anomalies of asset returns. The beginning of each year is a period of heightened uncertainty of what will come during the next 12 months. It is a stage of information gathering and strategy positioning by many investors, and early-year price action reflects the convergence of a mixture of expectations. In the end, although it is appealing to know the facts that can be extracted from the historical experience in terms of relative frequencies and average returns, a more careful analysis of fundamental drivers of equity returns is almost surely a better guide to predicting future returns—to the extent such thing can be achieved, of course.

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Cut the Feel-like-a-trader crap

2012-01-11T11:10:00.007Z

Let's be honest :
- How many times did you trade just to feel like a trader ?
- if you were proposed a trader's job with an Investment Bank, would you turn it down ?

In my previous post, Groundhog day trader, I claimed that with my current trading system. I expect to make a fortune from the markets while spending just a couple of hours a day to monitor them. I'm sure you are thinking, Fellow Trader, that I'm dreaming, I'm unrealistic, it's pure BS or even I'm nuts. Frankly, I don't care -I would definitely be nuts if I gave (or even sell) you too much details about how I will make it-. My claim today is whatever your trading style is (I guess it's true even if you're scalping) you can reduce dramatically the time spent trading and monitoring the markets if you manage to get rid of one of the main sources of waste of time and money : the need to feel like a trader. Trading for the feel-like-a-trader's sake is one of the most destructive game I know.

I understood it when I was running the Orc race trading with investment banks. I used to interview a lot of young guys for trading jobs, I'd say nearly 100 of them over nearly a decade. Most of the kids, graduated from the world's best universities, had outstanding resumes and knew everything (sometimes much more than me) about Black-Scholes crap, stochastic calculus and equity derivatives -is there other markets than equities ?- but not one had the slightest idea of what a trader's job looked like, not a clue. I remember a chap who, answering to my question "what do you think the job is like on a daily basis" described me what could be the script for the pilot episode of "The Streets" series or "Wall Street strikes back" movie. It sounded like : "It's 6am, John the trader parks his Ferrari, the yellow one it's Tuesday, and gets in the trading room. In the air, the odour of the money freshly made. The ringtones of the etrali phones struggled to cover the cheers of the traders who made their first million for the day. Etc etc". That guy wanted to live the cliché of what he believes being a trader means, most of them do.

I had believed for a while the main motivation of those kids was the prospect of making big money -which with hindsight is a total delusion but it's not today's topic-. I was wrong, silly me, I had just to look back at my own case to see it. When you're 25 and are used to live with less than 300 quid a month, a 2000 quid salary makes you feel you win the lottery every month. No it's not the loot, that comes a bit later (soon enough), it's the "trader" title that counts. What counts is to be recognized as a trader. Of course the banks have understood this for a while and watering their staff with pompous titles like "assistant trader" (instead of slave on a trading desk) or "global head of trading your dick" (instead of senior slave on a trading desk) saved them a lot of money.

I'm a Trader

The first aspect of this feeling, maybe a less harmful one, is social recognition. We want to be recognized as a trader as for some reasons "trader" is believed to sound "cool" among our friends, family, acquaintances and milkmen, their brothers and other guys we meet in the street. Despite all the Wall Street protests, crisis, devil bankers, Ponzi and stuffs, I guess it's still true today among chaps, at least the ones more or less involved in financial markets. Myself, I used to be very proud to announce to the guys (the girls particulatly) I met "I'm a trader" [not mentioning that I input all day quotes in a bloody spreadsheet for a living]. My dream then was to trade metals so I could claim "I'm a metal trader" which sounds even greater. Now when I'm thinking about it, the title actually impressed no one but me. Most of the guys didn't give a damn, the rare who did were at best jealous, at worst considering me like some kind of criminal. Looking backward, I just looked like an idiot, but it's really not a big deal. To me the social aspect is not so harmful as in it doesn't cost much : at most an expensive car, watch, starred restaurants, big parties or just a few rounds of beers to impress your mates and in-laws - look at this guy, he's a trader, he makes it rain. In the worst case, you just look like an idiot like me. That's all right as long as it doesn't impact your trading.

The second aspect of this need for recognition can be way more expensive. It's the recognition through other markets guys eyes and more dangerously through a trader's own eyes. Ego, once again is a mortal enemy here. Professional trading looks like a big cock contest and a trader has constantly strong incentives to show off he (or she, but the analogy doesn't work here, sorry Ladies) has a bigger one. A continuous pressure coming from sales, brokers and other traders tends to lead us to put on more positions or bigger ones only for the sake to be recognized as a trader, well to feel recognized as a trader to be precise. I won't argue on this point further : if you're trading, you know precisely what I'm talking about. Let's be honest with yourself : how many times did you trade just to feel like a trader ? Now to discuss the particular case of day traders, I guess their need to feel like a trader is even stronger. Firstly because, most of day traders dream to trade for banks or professional firms and are to some extent "failed" bank traders.Once again, let's be honest with yourself Fellow Day Trader -I know this post may be unpleasant, sorry- if you were proposed tomorrow a trader's job with a major Investment Bank, would you turn it down ? Secondly, day trading can be bloody boring (believe me on that)... and lots of day traders in order to kill boredom socialize with other ones and hence need to be "recognized" by other traders using twitter, in chatrooms or in trading forums and one of the way to be "recognized" (and to kill boredom) is to put on trades and talk about it. I have in mind a couple of examples where the feel-like-a-trader stuff impacts day traders, in addition to the classical ones of the blokes who get 50 screens, 15 computers and 10 phone lines to trade in their basement. Just one instance : a few guys around me in the UK have chosen Interactive Broker (IB) as broker -I don't know one who trades with MFGlobal but the idea is the same- just because it is used by hedge funds with hundreds of millions of AUM. First that choice of broker limits (big time) the positions they can afford -most of them can't trade more than 1 contract at the time- and this limitation profoundly affects their trading and money management systems. It doesn't make sense, the choice of broker shouldnt impact trading, it should be all the way around,. Secondly, in the UK, financial spread betting which is basically the very same thing as CFD but totally tax free is a no-brainer, that's clearly an arbitrage (if we assume that you expect to be profitable from your trading...) and one can open a position with an spread betting account as low as 100 quid (1 quid per EURUSD pip or 0.1 SPX point for instance, controlling rougly 12-13k) and control up to a few tens millions - I really doubt a day trader needs much more-. But here is the thing : spread betting firms (while they are generally just English branches of US massive Forex brokers) sound like bucket shops and it definitely sounds more "trader" to trade with IB or MFGlobal...

Now realistically, I can't claim that I've managed to get rid of this feeling, after all this website is very modestly called "The Lord of Trading" but come on Fellow Trader, let's cut the feel-like-a-trader crap the most as we can. Let's follow the ball, the real one, the only one ball : money. And if in the meantime you are bored, instead of putting on silly trades and throwing your money in silly stuffs, just do like me, write silly posts.

TLofT be with You
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As this post is published: SPX 1292 // SX5E 2347 // NKY 8447 // DAX : 6152 // EURUSD 1.2729 // USDJPY 77.00 // XAUUSD : 1637

Forex is better than Sex with TLofT

2011-12-26T21:34:00.003Z

Only the traders who have experienced a long ride of the EUR, the cable or the USD/JPY in their direction know how true it is : Forex can be better than Sex, so much better! ONLY Forex can ;-)

I've designed a new T-shirt for those who understand what I'm talking about, available in my T-shirt forest.

I'm waiting for you there!

Arwen.

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Visit the Forest of Arwen EveningStar

Groundhog Day Trader

2011-12-20T09:43:00.001Z

"Well, what if there is no tomorrow? There wasn't one today." -- Phil - Groundhog day

You may remember the 1993 movie "Groundhog day" where Bill Murray wakes up every day the same day. After a while, he takes advantage of the situation and gets insights about everybody's life, screws women (including Andy McDowell), steals money, learns piano, ice sculpting, French,... A lot of people, particularly in the Orc race, feel they are to some extent in a similar time loop, that everyday they live the very same day as the day before - unfortunately for most of them, it IS the same day and it will be the same for the next 40 years. Now, even in such an "exciting" activity as trading, daily routines and repetitive tasks are necessary and days after days, trades after trades boredom can eventually creep in. One step further, I'm convinced that these repetitive daily routines executed tenaciously over years are precisely one of the keys to the Kingdom of the Lord of Trading. Like the chap in the movie, I believe the trick is to try to take advantage of my routines to learn more and more about the trading game, become an Uber-trader and more generally the perfect guy: smarter, healthier, fitter, more cultivated, a better husband, better father, richer,... This is my trading ultimate hedge : even if you screw up as a trader and go broke, TLofT forbid, you can still end up an escort...

I'd been looking for a while for the right daily routine that would allow me to achieve my ambitious purpose and that meets my lifestyle targets. Earlier this year, I came up with one I've been experiencing for a few months now and I'm pretty happy with. This is what my current "Groundhog Day" looks like:

Around 6.00am : wake up
No clock alarm, no wake up call, I try to wake naturally but generally my 3-year old child is helpful : "Daddy, wake up ! Daddy !!!"

6:30 am : gym
On Mondays, Wednesdays and Fridays, I have a 45-minute-to-1-hour weight training session. I try to lift heavy, not many reps but a few ultra loaded ones. Doug Mc Guff even recommends in Body by Science only a single 12-minute session per week based on this"high intensity-low frequency" method.

8.00 am : breakfast
I have a full breakfast everyday enjoying my time with family during which we are all exposed to the mood enhancing blue light of a Philips goLITE Lightas recommended in The 4-Hour Body. For breakfast I generally have eggs (not more than 6 per week), a wholemeal bread toast with peanut butter, a smoothie -perfect to stuff tons of healthy food that taste too bad to be eaten, for example baobab powder- or a whey protein shake and a few supplements : multivitamins, fish oil, acai berry, green tea, gingko baloba, garlic.

8.30 am : heading to the City
I use my time on the Tube to read books on my e-reader or old good paperbacks, very rarely fictions, often trading or finance related books... This said, I'm currently reading a History book, A Little History of the World, a great read I'd really recommend. Then I have a 10-minute walk near the Bank of England, the Old Lady, during which I daydream about how I will spend my future zillions: mansions, yachts, sport cars and high class whores. Classical.

9.00am : beginning of the trading day
You'll notice I don't have any markets update before 9. I used to monitor them constantly, almost 24-5, but as I got more experienced, I realized that the fact I watch them constantly doesn't influence the direction of the prices and the events that occur overnight. Monitoring them from home is just a source of stress (and divorce). It's just useless and not worth. This said, I keep on receiving on my mobile phone the margin calls and forced closures at the moment they are triggered, ie anytime, and tweets from plenty of guys I follow with the last markets updates. Maybe I should fix this one day and unplug these too at home.

Now with years of experience, I manage to log in Bloomberg anywhere in less than 15 minutes despite the bloody fob that attempts to recognize my digital print to give me a second passcode to log after I input my first password : Bloomberg engineers are quite creative to make sure all the users pay their access, so creative that even those who pay struggle to access... On my screen are displayed the news flow, the forex main pairs, the main stock indices and futures, the futures on govies, lately the European CDS spreads though a "crisis" screen, gold -I always have my long position purchased when the price was at $700 :-)- my favourite Asian mutual funds (not really the best year for them) and the intraday charts of the instrument I have positions on or I consider to trade.

First thing once connected is the check of the opened positions, finding out on the best days that the take profit orders have been filled overnight -always a good way to start the trading day-. I then catch up with the markets, try to read the sentiment, do some chart and technical analysis, define the trading strategies for the day and the potential entries levels and put the relevant orders, if any...

10.00am : a bit of reading
Every morning I read at least Bloomberg "read" (the most read news), ADVFN morning round-up, zerohedge, ftalphaville blog, its long room and a few articles of the Economist -my challenge is to read 100 percent of the articles of the latest edition in one week. I also have access to tons of banks research, my favourite being Goldman's. It's generally clear and well written (probably by Ivy league guys) and useful to understand some technicalities but the thing to keep in mind is often the banks use it either to unload their own inventories and stand at the other side of the recommended trades or at the opposite to frontrun the guys who follow their recommendation.

10.55am (I have a reminder on my phone): snack
A handful of nuts and a glass of semi skimmed milk

11.00am : running the Orc race
I happen to claim that I managed to quit the Orc race, but it's only partially true : I still have to run it, just a few hours of work per month, but still. I have to work notably to justify the investment banker salary I keep on receiving every month. Maybe I have to justify it only to myself because some days I feel like I'm robbing the bank, some rare days I really feel sorry for my colleagues who earn less and work like dogs, running after a carrot they'll never get. How I managed to reduce my work to a few hours per month while I earn more than when I used to work 15 hours per day is a long (and incredible) story I keep for another post (maybe). Now, back to my daily routine, I have a maximum cap of 1 hour of work for my "day job" per day, but most of the days I work no more than 5 minutes. I even manage to take some days "off" at office when I don't do a thing for my dear employer the for weeks.

Noon and 1.30pm (reminders on my phone) : contractions
That's another trick I got from The 4-Hour Body, contractions trigger GLUT4. I don't understand a thing to all this but they allegedly help the carbohydrates you eat to feed the muscles, not the fat. To do so I hold a kung fu horse stance for 2 minutes then do 40 wall presses (push up against a wall) in the toilets.

Between noon and 1.30pm : lunch
I'm French: I need to spend at least 1 hour at lunch everyday whatever happens. I just make sure I'm back for announcements. A few more supplements when I'm back: odourless garlic, acai, alpha lipoic acid and a green tea thermos for the afternoon.

2.30pm GMT: Wall street opens
I monitor carefully the markets for half an hour after Wall Street opens, the SPX particularly.

3.00pm : standing meditation
I used to try to do a 20-minute power nap in the praying room of the building but I never managed to fall asleep. Now I'm doing a 20-minute standing meditation instead and it works well: the more I practice the more I manage to empty my mind and find it helpful.

From 3.20pm onwards : "free" time
When I have open positions I can spend hours watching at charts, I'm sure you know what I'm talking about, Fellow Trader, but I guess it's a pure waste of time. Alternatively, I can read e-books from my computer, write some posts for this blog, learn some new stuffs or take care of administrative crap.

4.30am (reminder): snack
A handful of nuts generally

Between 5.00-6.00pm : Ciao Markets!
Time to go home and spend time with family. The best moment of the day is the bed time story with my child at home.

8.00pm : movie time
Most of the evenings, as we watch a rented dvd with my wife, I'm reminded of a cost of opportunity of a few hundreds grand. A few years ago I was proposed to invest in lovefilm.com, but rejected as I lacked funds (as always...). The investment would have returned something like 10x in 2 years and even more after the company was purchased by Amazon. If only... OK, stop, no time for back trading

10.30pm: Shaolin Warrior
I end the day with 1 hour of Shaolin workout in my living room, I alternate between Kung Fu and Qigong. I believe a mix between cardio (Kung Fu) and more cool stuffs (Qi Gong looks a bit like Tai Chi Chuan and includes breathing exercices) are the secret for a health and longevity.

11.45pm bed time
A last few supplements before bed time : creatine (Kung Fu days only), protein shake, acai, garlic, Gingko Baloba, ginger root and 75mg of aspirin with a glass of milk. That's it for the day.

I've been following this routine for a bit more than 3 months now and guess what? I've had my most profitable trading quarter so far. Now I can't be sure it's totally correlated but the thing is I feel greater than ever. A few years ago, I managed to reduce the time spent on my day job in the Orc Race from 15 hours per day to a couple of hours per month. Now after almost 4 years of trading for my own account during which I'd been under pressure and monitoring the markets like 15 hours per day, I have managed to reduce the trading-related tasks to a couple of hours per day and it looks like it works! Now I have a dilemma: should I allocate more time to trading, for instance the afternoon's "free" time and try to push even further or should I use it to focus on new business ventures and exploration of more ways to make money? The thing is I know that my current trading system I've spent years to develop will allow me to end the trading game one day, even with the few hours I'm currently spending on the markets. It's not (only) wishful thinking, I did the maths. But the (slight) problem is I don't know when this Day will come and, believe me or not, my Investment Wanker income + the profits from trading I've cashed in so far are just enough to cover the expenses of my lifestyle in London (OK, I really can't complain about it) and a minimum of savings. This said, for now, I guess I will chose the easy option : don't change anything and keep on doing what seems to work.

Merry Christmas and TLofT be with You.
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Rate me my Friend, Rate me again...

2011-12-08T11:07:00.003Z

"Rape me
Rape me, my friend
Rape me
Rape me again"
-- Nirvana - Rape Me

The rating agencies should be closed and their employees stoned with blackberries then thrown into stadium to be eaten by lions -along, as I proposed earlier, with Investment Wankers and mexicans who illegally crossed the US border-. The job of a rating agency is to attribute some ratings based on its own analysis and assessment of the information it got PRIVATELY from a company, and not to sit in committees and decide whether a country has to be downgraded or not based on GDP/deficit or GDP/debt ratios that the whole world know, that can't be more public."Hey guys, I'm starving today, let's downgrade France". ? Who those guys think they bloody are ? Don't forget the main rule : on the markets, there is no Lord but the Lord of Trading :-)

The problem is the whole system has given too much importance to the rating agencies and that made them almighty. Politics -Obama, Merkel, Sarkozi and co-, corporates and financial institutions fear them like the Black Death because the rating will determine the price at which they will borrow money from the markets. Regulators use ratings for their requirements, Basel and stuffs frameworks, banks use them in the valuation models, in the collateral agreements they have with their counterparties. On the latter point, collateral agreements between markets counterparts include plenty of rating triggers that totally biaises a given rating in a selfulfillling spiral: if a company loses say one notch, it can be in a situation where it has to give back some deposits it has in respect to its collateral agreements. For instance, according to an article, "Citibank NA, the deposit-taking arm of New York-based Citigroup, was downgraded to A from A+. The bank estimated in a quarterly filing that a one-level reduction to the unit’s rating could trigger $4 billion of collateral payments and other cash obligations" In other words, when you are in the shit and downgraded, you can be asked to give back a few billions of collateral in an environment where the liquidity is scarce because everybody is in the shit, you are even more in the shit. That's what happened to ACA financial guaranty, a bond insurer: In 2007, because of the margin calls and all the collateral they had to give back resulting form the loss of one notch, they ended up losing 11 of them in one day, from A to CCC (see below). BTW Lehman was rated A and BBB before it went bankrupt almost overnight. How reliable is a rating when it can be downgraded of 10 notches or the company go under by the time you can say "standard and poors" (or even just "S&P") ?

Rating history of ACA Financial Guaranty: from Asince 1997 to CCC on Dec 19th 2007

On a pretty similar topic I've recently read am interesting commentary by Jonathan Weil on MF Global (rated BBB before they crashed): MF's missing money makes you wonder about Goldman. If PricewaterhouseCoopers that audited MF Global in March missed the 1.2 billion hole in the books, what about the accounts of Goldman or JPMorgan they also audit? The question raised is what's the point to have audits if one can't rely on them, it makes the things worse : "The point of having a report by an independent auditor is to assure the public that what a company says is true. Yet if the reports aren’t reliable, they’re worse than worthless, because they sucker the public with false promises. Maybe, just maybe, we should stop requiring them altogether". It's the very same thing with ratings : what's the point if they are not reliable? A rating can give a false risk assessment and msilead investors. A perfect instance of this is the ratings of the CDO (Colllateralized Debt Obligations), highly rated papers that became almost fully written down during the crisis. The CDO ratings definitely contributed to the crash as they allowed the investors to be stuffed with crap that was highly rated. According to George Soros in The Crash of 2008 and what it means, in 2007 half of the revenue of the rating agencies came from the ratings of these CDO and other Asset-Backed Securities or ABS stuffs. Half of it, while once again the job of these chaps is to assess the fundamentals and inside information about corporates to give them a rating. Let me now tell you how the ratings of these CDO stuffs used to work then. Moody's and S&P provided the banks that arranged such CDO transactions with an Excel spreadsheet. The slaves of the CDO arranger had to fill it with the portfolio of names of the CDO to be rated with public details : their rating, their industry, etc. They had then to press on the "Rate me!" button to run Monte-Carlo simulations following a very basic gaussian-bell model (the same kind as the ones used by LTCM, works well...) in order to finally get a rating. They had then just to return the spreadsheet to the rating agency for some checks "Are you sure Coca Cola is in 'Aerospace and Defence' ??? " and finally a validation. "OK, it's AAA and for you mate, it's 100 grand mate, thanks!". 100 grand in a couple of hours and ten minutes of work, that was a good business. The trick is the CDO arrangers (Investment wankers) needed a rating as a selling argument to stuff their own clients with "well-rated" crap. And it worked really well as a lot of guys, teased by a sexy rating, got totally stuck with loads of toxic products. In that case, not only the rating agencies were useless, but they happened to be dangerous.

Now maybe the rating of a corporate makes sense, but to me a major flaw began when the agencies started to rate totally different risks, far beyond their scope : countries, CDO -tomorrow I'm sure they will rate football players or pornstars- and using the same notations (AAA, BBB and so on) for the whole range can only be misleading. For the CDO, the motive was pretty clear: greed, but it's less obvious for countries. To me, it will inevitably lead to Conspiracy assumptions as the agencies has become almighty and a potential instrument of market manipulation. To be frank, I seriously believed I got it all... until the downgrade of the US (I was convinced that the US would send Jason Bourne to the Moody's office before they could be downgraded, for me it was merely impossible). Moreover, now that S&P placed 15 euro nations on warning for downgrade potentially screwing up the EFSF and acting as if they wanted the things to go worse in Europe (American move?), I have to confess something, Fellow Trader: I'm totally lost. I feel I'm going to be downgraded soon...

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Traders! Tonight we dine at the Salvation Army!

2011-11-30T16:44:00.007Z

"Go tell the Spartans, thou who passest by, That here, obedient to their laws, we lie." -- Epitaph of Simonides, translated by William Lisle Bowsles

Leonidas at Thermopylae - Jacques Louis David

A commonly used refererence to courage in History is the one of the Spartans in Ancient Greece and king Leonidas at the Battle of Thermopylae. In a last stand where "they defended themselves to the last, those who still had swords using them, and the others resisting with their hands and teeth." (Herodotus), while outnumbered something like 10 against 1, they managed -before they were annihilated- to inflict severe losses to the Persian army. Maybe 20,000 Persian losses against 2 to 4,000 Greeks, we don't know precisely, the only thing we're sure of is they definitely gave them a tough time! Afterwards, such a "performance" could be explained by 3 main factors that gave the Spartans an edge that I will discuss in this post along. Much more on our favourite topic, Fellow Trader, and as usual, I will try to discuss how I believe these factors can be applied to provide an edge in Trading.

- Resolute acceptance of death (or of ruin)

Leonidas is remembered as a fearless chap, see for example Gerard Butler in "300" ("Spartans, tonight we dine in Hell").

According to the legend, Sparta consulted the Oracle at Delphi who prophecised that to save Sparta, the sacrifice of a king had to be made:

"For you, inhabitants of wide-wayed Sparta,
Either your great and glorious city must be wasted by Persian men,
Or if not that, then the bound of Lacedaemon must mourn a dead king, from Heracles' line.
The might of bulls or lions will not restrain him with opposing strength; for he has the might of Zeus.
I declare that he will not be restrained until he utterly tears apart one of these"

That means that King Leonidas led his troops to Thermopylae for a suicide battle, a sacrifice in order to save Sparta and the acceptance of his death made him and his companions fearless. In a very similar way, almost 20 centuries later, in the 17th century's Japan, Miyamoto Musashi, allegedly the greatest samurai of all times who won numerous duels including ones involving tens of enemies against him, explained in the introduction of the The Book of Five Rings that "Generally speaking, the Way of the warrior is resolute acceptance of death". The Way of the trader may lie in the acceptance of financial losses as a guy who has such a resolute acceptance has no Fear. I've already started to discuss the topic of trading and fear in my previous (excellent :-D) post "Fearless trading" , but I'll raise a few more points here. Fortunately Trading is not (well I hope not...) a matter of life or death. We fear death because we have no idea what happens after, it's the Unknown. In the case of trading, the worst case is going broke, financial ruin (well I hope for you it's the worst case, you shouldn't borrow from the mafia to feed your trading account) and we have more or less, depending on one's experience of life, an idea of what ruin means. The other thing is if you read these lines, you are likely to live in a country where, even if you are totally ruined and penniless, you won't starve to death. I don't say it's a pleasant experience nor I wish to anybody to go broke, but going broke nowadays is nothing compared to what had happened to the guys who lost military battles, were slaves, serfs, knew Death plague epidemy, basically you'll be better off than most of the guys in the past 10,000 years.

My own recipe against fear lies in my money management. I use an anti-martingale system, I increase my stake after a profit and decrease it after a loss, and I push this principle to the extreme : it leads to a small initial equity and most of it at stake at all trades. A consequence is, while I wait for the winning streak that will bring me huge profits boosted by the power of compounding, I lose pretty often a huge chunk of my initial equity but I don't care : as I told, it's small. Inherently, in my trading system, I have to accept losses and be resolute to them as they are frequent

- Training

The "average" Ancient Greek chaps were fit, very fit as they spent their life training for the Olympic Games and war but among them the Spartans were particularly tough. The Spartans conquered the land where they set up Sparta and lived surrounded (and outnumbered) by the conquered people, reduced to slavery. That's why they had to be able to cope at all times with potential insurrections. Consequently, the men had a tough education (the new borns judged "unfit" were just killed) that aimed to make them warriors. Young boys trained all day long, were beaten just to be strengthened and had to survive a whole year alone in the forest. OK these guys were totally nuts, but it seems it worked fairly well. Another analogy coming form the East (as you may know my recent research on Fear those past few months have led me to consider a lot of Oriental stuffs), same idea : as I explained in my (excellent again :-D) post "Shaolin Trader" , "Kung Fu" means in Chinese the mastery of an art achieved though long and repetitive training. Train and train again and again and again and again and ... and you will end up with the ability to break bricks on your head for breakfast. In a very similar way, I believe trading mastery comes though repeated practice. Trade and trade again and again and again and again and again ... -my brokering bastard will love this post-. Thousands of hours over years, years and decades spent in front of trading screens will ultimately allow you to kill the game one day. A Lord of Trading has to acquire the "Kung Fu in trading". Nowadays, most of brokering bastards provide free practice accounts that allow to "paper trade". I myself when I started to speculate had used such accounts for months (along with trading contests), it's not so bad to improve the trading skills, set ups and understanding of the markets, but unfortunately it doesn't help a trader to master his/her fear, our first point above. Nothing compares losing real money. I will once again quote the " Holy Reminiscences" regarding training based on paper trading :

It is like the old story of the man who was going to fight a duel the next day.His second asked him, "Are you a good shot?"
"Well," said the duelist, "I can snap the stem of a wineglass at twenty paces," and he looked modest.
"That's all very well," said the unimpressed second. "But can you snap the stem of the wineglass while the wineglass is pointing a loaded pistol straight at your heart?

Basically what I say is one has to put at stake real money and trade a lot, and inevitably implies frequent losses. Once again, an anti-martingale system will allow this as the amounts at stake are small. Over time a trader can trade a lot, gain experience and ultimately achieve mastery with hundreds of deals

- Technical superiority

One thing that probably contributed a lot to Ancient Greeks military superiority against the Persians while they were always outnumbered (victories at the battles of Marathon, Salamis and Platae then later Alexander's conquest of Persia) was the superiority of the Phalanx formation and the discipline the Greeks had to hold it in the middle of the battlefield. The equivalent in terms of trading would be the set ups and the technical skills (whether they are based on technical analysis, fundamental analysis or voodoo) that define the entries and exits of one's trading system. This aspect of trading is being broadly discussed along the Blogosphere and in the Trading Literature for which the "magic set up" is the "Holy Grail" and personally I don't claim I have a better insight than those guys. More generally, and I really doubt I'm revealing here anything new to you, a trader needs to have developed and experimented a complete trading system of his/her own with a "technical" edge then he/she needs the discipline to follow it religiously and to stick to it in the middle of the markets battlefield.

Actually, a combination of fearlessness, endless training and superior technical skills will give you an edge in any area you can think about. In particular, I'm convinced those 3 factors must be components (if not pillars) of any profitable trading system. Over years of practice, I've discovered a few other tricks that I believe to be also trading secrets, but if you want to know what they are, Fellow Trader, you'll have to "come and get them !!!" :-)

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When Liquid Bonds are Illiquid...

2011-11-24T15:50:00.003Z

"Fifteen-hundred people went into the sea, when Titanic sank from under us. There were twenty boats floating nearby... and only one came back. One. Six were saved from the water, myself included. Six... out of fifteen-hundred. Afterward, the seven-hundred people in the boats had nothing to do but wait... wait to die... wait to live... wait for an absolution... that would never come. " -- Rose (old)- Titanic

And now Germany! The German screwed up their 10-year Bund auction and couldn't find a bid for 35% of the bonds on sale. I like the comparison used in a Bloomberg article, what Germany has is just a first-class ticket on the Titanic and "When the Titanic sank in 1912, even its first-class passengers ended up in the sea". To stay on the comparison, I'd add Dicaprio who, as we all know sadly sank, sounds like an Italian name :-). If one goes in water they all go and to some extent I understand the market : why get a 2 percent yield for a risk not so different than the one of a paper that yields 7 percent, the break up of the Euro area would have disastreous consequence for Germany. More generally, the fucked up auction just confirms the sentiment that now, no one, and particularly the banks, wants to buy European sovereign bond anymore, whether from first-class passengers, economy class ones or guys travelling in the baggage hold illegally thanks to swaps arranged by GS. It seems the safe haven is not that safe and the liquid bonds have become not so liquid. A bit ironically, the regulators have given the banks a big incentive, though the Liquidity Ratio and Required Stable Funding in the Basel III framework, to invest in "highly liquid" sovereign bonds. Now they are loaded, it's a shame they may be asked to take a 50-60 percent writedown on it. Moreover, what makes the things worse, is looking at the Greek CDS that has not triggered a Credit Event after all what happened on the debt, one can arguably wonder if the CDS protection for a country is worth anything. What I mean is the sovereign debt exposure can not be hedged easily. All in all, it looks like the banks are well stuck with a big European sovereign debt exposure. It is likely that going forward, for the next few years, such an exposure will be treated by the banks as one of legacy assets...

Bund future - 1st generic, there's like a drop on Nov 23rd

Legacy assets, distressed assets, their anticipated unload from the deleveraging banks balance-sheets may appear as a potential source of trade opportunities in the next few years. It's the topic of an article published in this week's Economist on hedges funds "waiting to turn trash into treasure". Even if we exclude the European sovereign bonds for which I really doubt the "Sheriffs" (governments, central banks, treasuries, regulators,...) will let evil hedge funds get arbitrage on them -buying at distressed levels-, I think the hedge funds will really have to wait for a while: they are just dreaming, well most of them are dreaming. Let me tell you how the distressed business works:

- Former investment wankers who used to work in the business that became distressed and have been fired set up a "distressed" hedge funds.
- They keep on speaking to their former colleagues who have survived the redundancy wave and remain on that business.
- The guys who remain at the bank convince their management that the assets are shitty, are worth pennies and that the bank would be better off to sell them to ... their former colleague's funds,.
- Finally, once it's sold at a distressed price, those guys just resign and join... you get it... the hedge fund

So I agree the banks deleveraging may bring some opportunities, but only for the Investment Wankers who luckily are in the right business (meaning the one that harms the bank the most) and manage to survive the cuts (so basically who don't need a job). This may seem unfair, I know, but if you want my personal view on this, I believe the Bankers are also on the Titanic and even not in first-class.

TLofT be with You

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Sacked and the City

2011-11-22T11:08:00.002Z

or "The Paradox of the Wall Street Protester"

The "Wall Street" protesters in the UK should be happy as the base salary of investment wankers increased 12 percent to £83,000 in average (and +21 percent for the MDs to £237,000) in order to offset the regulatory move against bonuses (see article). Happy -and not the opposite- because it means that further to these pay rises granted at the beginning of the year when the mood was better, the jobs bloodbath among the City bankers will be even more severe. The "Wall Street darkest days" are looming and so far 200,000 job cuts have been announced according to Bloomberg, take that wankers! On my side, what I suggest is public executions where bankers are stoned with blackberries or even better, games in stadiums where they are eaten by lions along with mexicans who attempted to corss the US border. Wait Komrade, maybe that's not really good news for the Economy whether you resent the bankers or not. I'm not an economist (thanks to TLofT) but for me, austerity has a limited effect and ultimately the way out of this crisis is to luanch back the private spendings: somehow the people have to spend, spend, spend (BTW my wife contributes greatly to the rescue of the Economy). The thing is a banker based in London brings back home after tax £3,500 a month in average, a MD £9,875 and let me tell you one thing : he/she spends every penny of it in food, restaurants, clothes, gadgets, cars, women, pets etc etc. I don't know what share of the GDP is directly or indirectly impacted by the Financial industry and its Investment Wankers in particular but I'd say a huge chuck, 30-40 percent at least (purely my guess but I'm pretty sure it's an underestimate). When one front-office guy (that's the one with big salaries) is fired, that's 2 or 3 support functions guys (that's the slaves of the former) who are fired also, I wonder when an investment wanker loses his/her job how many cab drivers, builders, waiters, sales, pizzaiolos, prostitutes etc lose theirs. Maybe the investment wanker, this fat and greedy scumbag millionaire, is a necessary evil for the British economy.

On the other side of the Channel, the French "Wall Street" protesters have much more reasons to be cheerful as the bankers jobs bloodbath will probably be avoided in France. More cheerful? Let me explain. Next year in May, there will be a presidential election and Sarkozi for sure doesn't want to see a leap in the unemployment figures -even if that's evil bankers who are sacrified- and for sure he will make sure most of the cuts are done abroad. This said, BNP Paribas announced it will cut around 1,400 jobs out of which 373 employees based in France. Now if you look closer into it, there will be no one "made" redundant in France and the 373 will all be volonteers, probably guys about to retire. "Hey grandad, you are supposed to retire in 3 years, come on, take a 3-year cheque and stay at home instead of coming and getting bored at office". I guess that's how it will work and this election is a bit unfortunate for the others guys who would like to volunteer too but won't be able to because their leaving the bank would increase the unemployment stats. Why a guy far from retirement would volunteer to be "fired" ??? The French social plans for "volunteers" are really great. For instance I remember in 2008, most of the French banks proposed to the volunteers 6-month of salary plus 2 month per working years. For example, if you had been in the company for 10 years, you had 26 months paid in compensation -I've been told a story about a guy who said "I'm really looking forward for the plan, I've been in the bank for 21 years!". It's not all, once you leave the bank you can claim for 60% of your income (with a cap at 4k monthy) paid as unemployment benefits from the government for up to 2 years. It's not all... You could grind a bit on other budgets and get tens of grands tax free to pay for education and training (MBA or ballet lessons) or to set up your own company. Too bad that this time, probably not every one will be able to volunteer, damn election, if only there could have a jobs bloodbath in France too! That's why French "Wall Street" protesters can be very happy: the French bankers will be punished, they will keep on having a job.

TLofT be with You

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Europe : Remember what you did last Century

2011-11-18T16:03:00.004Z

“I’m deeply concerned, have been deeply concerned -- I suspect will be deeply concerned tomorrow and next week and the week after that” -- Barack Obama

Last week, on 11-11-11 (at 11am to be precise) was Remembrance day. We definitely do have to remember and give respect to the poor guys who died during the global butchery known as WWI and more generally to all the victims of war. It’s always a good opportunity to realize how lucky we are nowadays, of course it looks like we're going back into a deep crisis, the Recession strikes back and we’ll probably struggle but at least we don't have to fight in trenches with 5 minutes of residual life expectancy. If you read this, it means you're alive and you have an internet connexion, so stop whining! Now I think what we can't remember enough about the Great War is the timeless ability of politics and ruling leaders to shoot themselves in the balls. In the case of the WWI, it was about more than a few pairs of balls, the impact was even deeper than 9 millions of killed combatants: the guys who decided to go to war (and hold it so long) totally screwed the whole old Europe. As described in the prologue of the (excellent) Lords of Finance by Liaquat Ahamed, in 1909 Norman Angell a journalist (who was awarded decades after the Nobel Peace Prize) argued in Europe's optical illusion that the Economy had then reached such a level of global interdependence that a war involving the major European powers would be a total economic non sense with no benefit for anyone. For him, because of this, no major conflict could possibly break and even if it did by accident, it would end very quickly. History showed him both wrong and right. Wrong, dead wrong because as we all know, the war broke, lasted 4 years and indirectly led to a second one. He was also wrong because actually the war economically benefited to the United States, a country that had then 150 years of history that became Masters of the world. The FED, then (literally) a Gentlemen's club, ended up with most of the world gold as the precious metal massively fled from the old continent at war. Thus, November 11th should be also the celebration of the US supremacy, WWI was its start. On the other hand, Angell was also right: the war was an economic non-sense and it totally ruined the European powers involved. One of the implications of the WWI (the Treaty of Versailles to be precise) was the hyper inflation Germans experienced in 1923, with at the worst prices doubling every 4 days (+20% daily). And while inflation was experienced by their (great) grand parents, the German today still fear it and it is the base of the German position towards ECB, its potential money printing and its recent clash with French. My point of view on this precise point has not changed since the beginning of the European debt crisis and was discussed in my post "Dona Merkel Quichotte vs the mills of inflation" dated June 2010.

Back to the WWI as we could see, the decision to go to war has still some profound implications today, almost one century after. It appears afterwards as a disastrous decision economically, now was it politically justified? I really don't know but if we have a look at the bunch of world leaders we have today, we could assume the events that escalated into a war were just the result of attempts from a few assholes in charge to flatter their own ego and prove them right and I'm sure we wouldn't be that wrong. OK, I shouldn't use the current stories to find out about the past and do the other way around, I know, I know. The lesson of the past is, and that's a bit scary, that the future of World, the Economic situation, the resolution of the crisis, the future growth etc have always been depending on the decisions of only a handful of guys. And in the case of Europe, looking at the handful of leaders who act sometimes like children in a playground (or orgy like Roman Emperors but fortunately Berlusconi is gone and DSK didn’t make it to Presidency), but the good news is, as one can see in an article on Bloomberg "Europe's insult diplomacy" (and see the chart below) : among European leaders, Love is in the air...

Source : Bloomberg, Europe's Insult Diplomacy

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The Uber-Trader

2011-11-16T16:13:00.015Z

"YOU WILL LEARN (in less than 30 minutes each)
- How to prevent fat gain while bingeing (X-mas, holidays, weekends)
- How to increase fat-loss 300% with a few bags of ice
- How Tim gained 34 pounds of muscle in 28 days, without steroids, and in four hours of total gym time
- How to sleep 2 hours per day and feel fully rested
- How to produce 15-minute female orgasms
- How to triple testosterone and double sperm count
- How to go from running 5 kilometers to 50 kilometers in 12 weeks
- How to reverse "permanent" injuries
- How to add 150+ pounds to your lifts in 6 months"

-- Tim Ferris - The 4-Hour Body

The more I trade and gain experience as a speculator, the higher are my expectations and I've come to the point that I'm now convinced that "supra-human" returns are achievable by day traders using the appropriate leverage and trading system. I don't want to discuss here too much my own trading performance and targets but let's say that I consider multifold profits starting circa 100x (+9,900 percent) as "supra-human" but achievable (as in possible, I don't say that's easy). As a benchmark, we can use the case of Sylvain Duport, a French swing trader on stocks who achieved "live" (paper) perfomances of respectively 34x and 87x times his initial stake in 2 subsequent 6-month trading contests.Now, let's make a point clear: this may seem paradoxical but for me Soros or Buffet's performances (roughly 30 percent in average per year for decades) are much more difficult to achieve and unlike most of guys, I even don't even think about replicating their strategies and their trading/investment style.

Last year, I launched the Operation "Absolute Trader" aiming to improve my level of fitness and my health along with my technical and mental skills in order to become a better trader as I found out that these are directly correlated to my trading performance. To push the same idea one step further, in order to achieve the kind of supra-human trading returns I mentioned above, being an "absolute trader" may not be enough. I've been trying lately to take the Operation to the next level : the "Uber-Trader" level. In order to become an Uber-Trader and achieve uber-profits, I tend to believe that one has to become also some kind of Superman and that's been precisely my new goal for a little while. All the human skills and abilities, both intellectual and physical, have been crunched and crunched again for 250,000 years. Techniques and practices to enhance them and push them to a level one can consider "suprahuman" have been found here and there, either they were revealed or kept secret for thousands of years. The good news is nowadays, apart of the secret of making money - if you had that secret I'm pretty sure you'd keep it for you- for any given skill, there's a guy, a so-called "expert", who has crunched it and knows how to bring it to an extraordinary level and who, most importantly, is happy to reveal it and this precisely in order to make money. Consequently the name of the game is to find the right guy(s), one who knows and learn the techniques from him or her then experiment them on oneself and practice/adapt/improve/customize them. Tim Ferris the author of The 4-Hour Work Week and of The 4-Hour Body seems to be a Master in that art. I've not read the former book because I already work much less than 4 hours per week :-))) but I found the latter, which is precisely a guide to become a kind of superman and is "the result of an obsessive quest, spanning more than a decade, to hack the human body. It contains the collective wisdom of hundreds of elite athletes, dozens of MDs, and thousands of hours of jaw-dropping personal experimentation." quite inspirational. The book, even if I found that most of techniques and tricks described somehow haven't suited me, has been a good starting point in my Quest and is the source for most of the topics I will discuss today in this post.

As trading lets me a lot of available time, I spend most of it on my Quest to develop and improve myself in as many areas as possible I believe to make me a better trader. I'm grinding on a lot of different topics at the same time. Notably, I read a lot about the History of the world, try to improve my chess game and I read the Economist from cover to cover every week, but for these I don't consider my skills and knowledge to be anything like suprahuman (yet...). I will just discuss in this post a few skills I've beem working out and consider I've done not too badly.

- How to become immortal ?

As discussed in a previous post, the Infinite Trader Theorem, I do believe that on the long run, the probability I make a zillion from trading is massive (as in close to 100%) and both the fact I guess the Expectancy of my trading system is positive and the fact that my risk of ruin is virtually zero (as long as I manage to find a few hundred quids, I could manage to build a significant trading stake, I target something like 100x remember) should speed this up and I should be able to make it before Eternity. The longer I live (physically) the higher is the probability I end the trading game (and the longer I enjoy a zilllionaire's life once it's achieved...). In other words, if I manage to be immortal, I will be a quadrillionaire (or whatever-lionnare) for sure : it's really worth trying!!! The Immortality Institute, a web community for life extension advocacy and research, is crunching (seriously) the question of immortality. For instance, they came up with a vitamin they believe to be "perfect".

Personally, in order to extend my lifespan at the maximum (and make a zillion!), I try to optimize my supplements intake, exercice and diet:

Firstly, regarding vitamins and supplements, I take daily (and I guess it replicates more or less the formulation shown above) a multivitamin (Wellman sports), Acai capsules, garlic extracts, ginger capsules, green tea, Gingko baloba, creatine (2-month cycles), Cod liver oil, flaxseed oil and 75mg of aspirin.

Secondly in terms of exercice, I try to workout 1-2 hours daily 6 days a week. As I posted previously (Shaolin Trader), I've been integrating in addition to my standard workout (weight training mainly) some "Shaolin workouts", both what is called external (Kung Fu) and internal (Qigong). I believe those monks, though a mix of cardio and breathing exercices they had crunched for 1,500 years, caught something about longetivity and suprahuman powers. A thought I had is with the "standard" workouts and competitive sports, the older you get the less you perfrom well (except for Rocky Balboa...) but it seems not to be true with these Chinese martial arts. Finally in terms of diet, I've been on constant diet for years looking carefully at whatever enters my body. The main principles of both exercice and nutrition, with an analogy to trading, were discussed in a post titled TradersHealth.

- How to sleep 2 hours a day ?

Because the markets are 24-5, the dream of many traders is to be able to trade all day : Asia overnight, Europe during the day and US in the evening. The thing it is almost possible thanks to what is called polyphasic sleep. Changing the sleeping patterns, some guys managed to reduce the time of sleep needed using different sleeping patterns The charts below show different ones.

To find out more, I've been reading forums on guys who had tried the "Uberman" pattern, only 2 hours of sleep per 24 jours with 6 20-minute naps every 4 hours. Unfortunately it looks like it doesn't work so well (guys have some deficiencies, too few guys managed to do it to be relevant and no one managed to do it for years) and it is impossible in practice if you want to live a "normal" life with "normal" social constraints. I personally tried the biphasic (1 power nap, a caffeine one actually) and Everyman (2 power naps) patterns. It was cool but unfortunately unlike a Fellow Trader of mine who falls asleep as soon as he lies down, I don't manage to sleep in the middle of the afternoon, even if I only slept a few hours the night before. So what I've been doing instead, in line with my other Shaolin stuffs, is a daily 20-minute standing meditation (half an hour after Wall Street opens). Unfortunately I still need to sleep during the night, so for now, it's a failure. To be continued...

- How to memorize a 1944-digit number ?

Jesse Livermore attributed in the Holy Reminiscences his trading skills partially to his very good memory of figures. Actually after I read Maximize Your Memory Power by Nishant Kasibhatla, I found out that with the right techniques and efforts, a really outstanding memory is achievable. The author himself "memorised a 400-digit binary number and recalled all the digits in the forward and reverse orders with an amazing 100 % accuracy, a 1944 digit random number, a shuffled pack of 52 playing cards in 2 minutes 32 seconds and recalled the sequence in forward, reverse and random order" and the best is all comes from simple techniques he discloses, he used to have a "normal" memory before he practiced them.

- Zen and the Art of mental computation

As I wrote in the Infinite Trader Theorem, I spend about one hour a day playing with an Android app Math Workout and making simple computations 35+57, 12x9, 106-58,... and since that post, I've improved my best score of 2 seconds and I answer the 20 questions in less than 26 seconds (which is so far still human, wait a bit more and see :-)))). The trick to be faster and faster is not to compute consciously but manage to be totally detached and let the unconscious mind play. That's the idea of Zen (well my understanding of it), if a Master Zen is able to shoot 3 arrows at the very same point in the darkness, I believe I'll probably be able to make the winning streak of trades I need to end the trading game if I work long enough on that aspect...

- How to end the trading game ?

Well, easy one : just keep on following this blog :-)

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The Secret

2011-11-02T17:01:00.003Z

“In this business you are only as good as your last few trades. Mine have not been very good. Whether I have lost my edge or simply need a break after 23 years I am not sure, but I certainly hope it is the latter.” - Christian Siva-Jothy

Carpe Diem, enjoy the moment before you go bankrupt

Another one bites the dust... 2011 is definitely not the best year for ex-Goldmanites who stayed in the proprietary trading game. Among the recent news, I refer of course to the bankruptcy of MFGlobal run by Corzine who "learned the strategy of making big trading bets during his 24 years at New York-based Goldman Sachs." and had a good steak before he announced a massive loss. The other instance I have in mind was in February, when SemperMacro, a hedge fund run by Christian Siva-Jothy, Goldman's former head of proprietary currency trading and star trader, was shut down after delivering poor performance. To come back to the latter chap, Siva-Jothy's interview in Inside the House of Money tells a lot about the proprietary trading business in Investment Banks: Goldman used to be a proprietary trading house in the 90s with hundreds of prop traders, but after that very same Siva-Jothy made a few hundred millions loss on a GBPJPY position, the proprietary was cut down to 3 chaps (including him...) with the mandate to hedge the bank's franchise business. The company understood one thing the whole industry has been keeping secret since: there's no money to be made by a bank with proprietary trading. For the banks, taking positions is way too risky while they (believed they) can "safely" stuff their clients with high margin products. Talking about Volker and all the efforts to curb proprietary trading, I wrote in a previous post to me trying to curb proprietary trading in Investment Bank is just shooting on dead guys.

At that stage, one can wonder the reason why it is kept secret. I'll tell you now where I believe the answer lies : Ego, the one of Financial professionals is huge, it's their Achilles' heel and the banks management and HR have mastered the way to flatter it in their favour. In a previous post, I confessed I was totally admirative of one thing about Goldman: how every banker knows they are thieves but dream to work for them, how everybody on the buy side knows they spend their time stealing their clients but wants to be their client. The answer to these is precisely thanks to the "Proprietary Boutique" image they have. Sell side, Buy Side, 99.99 percent of the guys who work in the Finance industry dream about one thing when they join, the one thing that what you, Fellow Speculator, and me are doing all day: to take positions. Maybe it's because of the gaming aspect of the speculation or the challenge to succeed where zillions of guys failed or whatever. The thing is the banks, by hiding the Secret, manage on the one hand to enslave the best members of the League of Extraordinary Assholes (for a lower price) "Hey come and join a proprietary boutique man, you'll make billion bonuses if you take the right positions" and on another hand manage to charge higher fees to their clients : "We are a proprietary boutique, Sir, your money is safe with us."

Here's the Secret expressed in other words: Bank traders can't take positions. I know it may sound crazy and maybe my argument here is not very convincing, but trust me on that one: they just have no clue how to. I don't claim that I personally know how, I don't claim that the buy side and its army of money managers is better and actually I'm not sure ANYONE knows (without inside trading, front running and market manipulation) but I know for sure that the bankers don't. Another thing is interesting to notice: a lot of Investment Wankers (albeit not the ones who get the big bonuses generally) haven't understood that and still live with the delusion they know how to speculate. There are a lot of ways to make money from the markets, the paradox being it's very difficult to find just ONE of them, but I believe that one of them is precisely to aim to take the money out from the shaking hands of these Investment Wankers and other guys with the delusion they know how to make it because they have 10 screens and work in a trading room. They are big enough to influence the market, they are the crowd and as you may know my favourite target is precisely the crowd. Actually I have been spending some time to study the standard strategies, behaviour and practices of my dear friends the Bankers and so far my most profitable trading set-ups result from my attempts to profit from my knowledge of the Secret, but I can't tell you more for now, Fellow Trader. One day maybe...

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Tag Heuer Monaco my A$$

2011-10-21T18:09:00.004+01:00

As you can remember, the SNB (Swiss National Bank), one of the last Airblenders, decided to cut its balls (again!) and to cap the Swiss Franc on October 6th. So far, it looks like they peed strong enough against the wind not to have the shoes and trousers too wet. As a good back trader, I would say I was not really surprised (while I had no position on the CHF at that time) by their decision, knowing a bit how they can do anything to weaken their currency. For a short term (as in ultra leveraged) player like me, the difficult part is to get the timing of such an intervention right. For this one, I've found incidentally and afterwards (unfortunately...) the Truth and the real rationale for such a timing, I've found it while I was shopping at Canary Wharf shopping mall in London : there in a glass window, the (allegedly) last available piece of the 150-limited collection of Tag Heuer Monaco v4 watches has been on sale for the mere price of £71,500 (seventy one thousand five hundreds pounds ONLY). Then I had the revelation: the watch has been on sale from October 6th, the precise day of SNB's decision to cap the CHF. I know that the price of the Monaco v4 has always been CHF 100,000. But that morning, the GBPCHF opened at around 1.27, meaning the CHF 100,000 watch should have cost roughly £78,740 so at the 71,500 price, there was an arbitrage. So to me, here is the Truth : the SNB intervened at that moment, before the jewellery opened, just to make sure that no City banker or other scumbag millionaire in London would benefit from this opportunity : there's no free lunch, mate. Now to be frank, I'm struggling to justify why the SNB would spend billions in order to make sure a chap in the UK doesnt make 10k... Well, I might be wrong...

GBPCHF Daily

Now, let's be a touch more serious, firstly just a word about arbitrages as I raised the point. The financial theory assumes no arbitrage opportunities, in practice in a very equivalent way there are arbitrages but there are lots of guys who benefit from them (and therefore close them) even before you can think about it. I do believe that as a trader we have to integrate the no arbitrage opportunities assumption and its extension, the no-holy-grail-trading set up assumption, in our core trading system and philosophy. There are always guys faster than you to benefit from an arbitrage you might have found, there are always guys who found the magic Holy Grail set up before you did and those assholes just make them respectively not available to you and not working anymore. Just keep in mind that there are zillions of clever, well connected, powerful, fast, with teams of hundreds and plenty of inside information, highly educated, hard working and whatever-you-can-imagine guys who have been trying to make money from the markets for centuries. You are not the only one. Remember: there is no free lunch.

Back to the £71.5k watch, I'm a bit surprised to see that while we are nearly end of October, it has not been sold yet. After all, Luxury seems far from the crisis as London luxury homes surge to record prices and LVMH (that owns Tag Heuer) beat all estimates and is "proud to disappoint bears".

What is a mere 71 grand amount for a watch that benefits from the latest watchmaking technology "The techniques used in the design, prototyping and production of the V4 are the same as those used to develop complex aerospace systems. Tools, techniques and expertise were drawn from an eclectic fusion of disciplines, such as the automobile and IT industries, applied mathematics, chemistry, climatology, computer engineering and micro-mechanical sciences. New TAG Heuer-designed machines and methods were specially created, including proprietary software automated micro-couplers and rheologically controlled high-pressure injectors". All this technology allows the watch to lose or run faster less than 2 seconds every 24 hours. Wait, less than 2 seconds??? But a less-than-£1-quartz watch made in China is more accurate than that, much more actually... Actually, a few years ago when I started to trade and I was even more dumb than today, I used to force myself to withdraw some cash from my trading account from time to time and purchase silly stuffs (nowadays, I need the money I withdraw to feed my family) and once I purchased myself a £3.5k Tag Heuer Monaco after a good trade on the EURUSD. What a mistake! The bloody watch is just not accurate and runs faster like 10 seconds a day, I sent it for service at Tag Heuer's and they sent it back after demagnitizing it (we live in a world with magnetic fields everywhere!!!). Two days after it returned, it started to run fast again, I then purchased a demagnetizer I use from time to time and it's still not working properly...

Today, while my mobile phone has the precise hour it gets from the network, I wear the Monaco on my wrist in order to constantly keep in mind that 3.5K lesson: we live in a stupid world where the almighty Lord of Marketing brainwashes us and makes us think that we are assholes if we don't have the latest iPhone, iPad, Tag Heuer or Aston Martin and if we don't eat Cheerios for breakfast. That's not that I've become a Trotskist or a Buddhist monk or something, I still spend my time trying to make (big) money, but to me the endless race behind the carrot just doesn't make sense. I've been living in London for almost a decade and I've found out one thing: whatever amount of money you make, there's a guy next door who makes 10 times more, WHATEVER the amount, believe me. And if you're 2nd in Forbes fortunes ranking, you're upset not to be the first, if you're the first, you're upset that you have only a few tens of billions more than the second, this bastard. It's an endless race that can't be won and the only solution seems not to run it. As I mentioned, I had run the Orc Race with Investment Banks for more than a decade and I saw lots of stuffs there including a 25-year old guy crying and whining because of only a £250,000 (first) bonus, I'm not kidding. When I used to compare my salary in French rankings, I was, at 25-year old, in the upper right quadrant along with CEOs with 40 years of experience but I kept feeling I lived like a student in London. That's how it works: some guys with for only experience the Finance industry are benchmarked to the kind of money one can earn there, they never had the sense of reality. Some guys (it was my case) had experience in others areas before entering in the Finance industry and understand that the amounts earned there are huge and they know that it can't last forever. At the beginning, most of the latter saved tons of money, but after one bonus, two, three good ones they tend to forget it and tend to think that it actually WILL last forever, helped by the pressure of the Lord of Marketing, the colleagues, friends that live the High Life and the comparison with that guy next door that makes 10 times more and just purchased another Aston Martin. Ultimately, both types of guys end up with no sense of reality, either they never had it or they lost it. Now, that will seem strange to you, Komrade, but when a bank announces zero bonus or cut 10 percent of their workforce, I have a thought for these guys (and I think I'm really the only one in the whole world but their moms) : how the hell do they cope ? A guy who makes 1 million a year in the UK takes back roughly 40k home every month. The (sad) thing is in London one can spend 40,000 quid per month without doing anything extraordinary and get used to it... I really wonder how they cope when the source of this income vanishes. I know, I know you don't give a damn, Komrade. To be frank me either (even if I know plenty of these guys), it's really hard to cry for them, that's just that I'm pretty curious by nature and I’m just wondering.

TLofT be with You

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Goldman rules the (End of) the World

2011-10-05T17:53:00.002+01:00

"[...] the market would crash as it was now ruled by fear and that all the big players in the field know that the market was toast. This is not a time right now for wishful thinking that governments are going to sort things out. The governments don't rule the world -- Goldman Sachs rules the world.[...] Personally, I've been dreaming of this moment for three years. I go to bed every night and I dream of another recession." -- Alessio Rastani interviewed by BBC

In case you missed the Joke of the past week, here's the video:

Alessio Rastani, the interviewed chap, is at least a good clown, I found his interview pretty funny, but he's apparently a paradoxical guy: he is, according to his website, an "experienced stock market and forex trader and professional speaker". Also, in his interview, he tried to seem very tough and cold "My job is to make money" but he didn't manage to hide his good heart "I want to help people"... What a Saint! As a blogger myself, I have to recognize I have been tempted to provide my dear reader(s) with what I believe to be good educational materials and advises, write about my own techniques and set up. I've been doing this for years but as I'm gaining trading experience I understand more and more that "experienced trader" and "professional speaker" are in total contradiction: one of the golden trading rules seems to be Silence : shut it up, just shut up. There lies the paradox of the blogging traders (or trading bloggers I don't know) : if you know how to make money from trading, why the hell would you share this knowledge publicly ? The only valid answer I've personally found so far is that I'm blogging only for the very selfish purpose to make my ideas clear to myself : public scrutiny notably forces me to be more accurate in my research, just to make sure that what I write makes a little sense, it notably forces me to stay aware of what happens in the world and what the blogosphere thinks about it. So far it has paid off because I'm happy with the whole trading system and philosophy I've come up to posting here after years. This discussion raises more generally another paradox, the one of money management: if you know how to make money from trading why the hell would you manage other people's money? Any other answer than "Because I trust my skills and want to add more leverage to my personal stake by taling clients" coming from a money manager means the guy is dishonest.

Now to be back to Rastani's view: things go bad in the world, noooo really ????? I'd say that when the cab drivers start telling you it's time to purchase stocks, it's time to sell. In the very same way, when guys like Rastani start telling you on BBC Breakfast or Teletubbies that the end of the world is coming, the time to buy back shouldn't be that far... I know I look like a mad man writing this right now but I really don't care. About the 3-year dream of recession I hope for our friend first that the guy has other dreams in life and second he was not short in the meantime. Personally I've been dreaming about the Apocalypse and the moment we'll all live in a Mad Max world, I can't wait! Now it's my turn to give you a piece of advice (sorry I can't help, I should shut up, I know I know) : don't go short, even if you have the most Bearish view in the world, the short side in such an environment is just too dangerous. When you go short, you face the guys I call the Sheriffs: governments, treasuries and Central Banks. At the moment, it really looks like they don't rule the world (nor Goldman) nor control anything but at any time they could do whatever it takes, including what is illegal to us, mere mortals (ie market manipulation, inside trading, etc), to support the things, blowing out the shorters on the way. In the middle of the crisis, in October 28th 2008, I personally witnessed a 900-point rally of the Dow Jones (+11%, about $300 billion of market cap growth) the time for me to go and get some food at Tesco. A more recent example, look at the SNB or the Japanese government ready to throw a few percents of their GDP per day just to attempt to manipulate the markets. If you are really convinced the end of the world is coming, just do like Rastani or Roubini, write books, appear on TV, post on blogs, record a song "Short the world" and show your bottom on YouTube: in the best case scenario you'll appear as a Prophet, the guy who predicted the end of the world, but let me warn you, after this, it will become impossible for you to be bullish again, never ever (Can you imagine Roubini becoming a bull ?)

Now regarding the statement that made the whole blogosphere writing about this interview: "The governments don't rule the world - Goldman Sachs rules the world", I'd say that in the "unconventional" methods used by the Sheriffs to support the Economy I mentioned above, Goldman used to be the weapon that would allow the execution. To that extent, they ARE the goverments or to be more precise they used to be. Formerly the US Treasury (Hanke Paulson), soon the ECB (Draghi), former Golmanites are everywhere among the Sheriffs... This said it looks like the Sheriffs have given up their favourite weapon and Goldman's share has lost 50% the past 2 years (the “top” was reached a bit after Paulson left the Treasury), they were just fined a half a billion fine in the Abacus story and according to the Sunday Times they plan to cut bonuses to zero this year, If they rule something, they rule the end of the world.

Despite the global resentment towards Goldman, from the crowd because it symbolises the scumbag millionaires’ bank, from the bankers because they want to be scumbag millionaires, I feel a profound admiration for the bank. To me, they managed to do the impossible in terms of marketing and image: the whole world knows their Business model is to steal their clients, but everybody wants to be their clients. All the bankers know the employees are gangsters but all the bankers want to work for them. It’s just extraordinary! Personally, the day I’ll join Goldman, the very first action I'd take is to order 15 boxes of Business Cards (30 if I wasn't married) : Sauros - Global Head of Shoe Shining - Goldman Sachs... the dream! Unfortunately I'm afraid that even if the recruitment process was inefficient enough to hire me, I would be fired before I receive my Business Cards. I definitely don't fit the mould of the Goldmanite. The Goldmanite needs to be a member of the League of Extraordinary Assholes, I'm an extraordinary guy but not an asshole... Let's be realistic and keep on blogging. maybe one day you'll see me on TV also.

TLofT be with You

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The Lord of Rogue Trading

2011-09-23T16:51:00.003+01:00

I, Nicholas Leeson, have lost 50 million quid, in one day! -- Nick Leeson, Rogue Trader

It's been a while since I last posted some market comments but today the recent news headlines have been so rich that I don't know which one to begin with. Let's start with French credit spread. The screen below is a snapshot as of Sept 20th of the spreads of the 5-year CDS for sovereign debt, the spread is the cost of protection against the default of the underlying country, the higher it is, the riskier the market implicitly perceive the country’s sovereign debt. For instance, Abu Dhabi has a CDS spread of 101.77 bps on the screen, it means that you have to pay yearly 1.0177% of a given notional for 5 years to be protected against Abu Dhabi default. Now look at France, because of its banks, it has a spread of 184.88 bps. According to my computations (well it's bloomberg's CDSW function actually...), with a recovery rate assumed to be 60% (it seems fair I dunno actually…), the implicit default probability is 22%. 22 percent for the 5Ydefault probabilty of France (still AAA-rated) !!! This spread puts France at a level, in terms of risk, slightly better than Indonesia and Philippines but worse than Thailand, Brazil, Mexico and Malaysia. BTW as I'm writing, the French spread is above 200 bps. "What??? Are you trading French OATs ??? Do you have Emerging markets limits ???"

The second news I want to comment today is Siemens' one (about French banks again!). According to the FT, the company withdrew 500m from a French bank (rumoured to be Societé Genérale) to deposit them directly to the ECB. If true and if European firms start refusing to deposit to the banks, Europe is in the deep(er) shit... That could end with a bank run as we see in our History book on the 1929 Great Depression, the only difference now thanks to progress, one doesn't need to queue for hours in Threadneedle street in front of the Bank of England to withdraw money anymore. "There are all signs of an institutional run on French banks" according to PIMCO's CEO Mohammed El-Erian in a post in the FT whose title summarizes pretty well his view :"French Bank could tip Europe back into a full-blown crisis", This said, bank runs are purely triggered by fear and panic and stories in the media and posts from "gurus" like El-Erian definitely don't help. Seriously this kind of communication should be totally forbidden in such an environment. Now, personally I will also withdraw my 2k savings from my (English) retail bank and deposit directly to the FED, while I'm a bit reluctant to lend to the Central Bank of a AA country, well... I'll maybe choose the BoE finally...

Last but not least, from French banks to Swiss bank: UBS and the story of Adoboli, the rogue trader who lost (more than) $2.3 billion, but all is fine, he said he was "sorry". If I had time (and the will) to examine carefully the similarities between Nick Leeson, Jerome Kerviel and Kwelu Adoboli, I would write an user guide likely to interest a lot of Investment Wankers : "The ultimate guide to Rogue Trading : how to lose billions of a bank's money". To summarize the main ideas of the book, the 2 main steps in the art of rogue trading are the following:

- Step 1 :Build a position for the bank

Although everybody thinks that Investment Banks traders' job is to take positions and do "propr" trading, the banks don't take positions and they don't know how (not sure anybody knows how to BTW). Even before the new regulation, the proprietary trading was very marginal, a tiny tiny share of the traders as in 1% or less, even in "proprietary"-reputed houses (Goldman). The reason lied in the Banks business model: why take any risks with positions while they had a recurring business milking clients and stuffing them with complex ultra high margined structured products. Paradoxically, I'd say 99 percent of the Banks front office guys (at least the junior ones) dream of one single thing when they join: taking positions. Consequently to break a bank, the very first step is to manage to make it take a position and there's only one way for this: the bank’s systems have to think the position is fully hedged. In order to do so, the hedges have to be fake the easiest way to do that being transactions booked against fake counterparts. That's what did Leeson with his (in)famous 88888 account : the Barings was massively long Nikkei versus the street but hedged (short) with the owner of the 88888 (who appeared to be nobody). In a very similar way, UBS said in a statement : “The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio. The magnitude of the risk was masked by “fictitious positions”. In all the cases, the bank's system believed the positions were "properly hedged". Now one common point between Leeson, Kerviel and Adoboli is they had solid Back-Office skills that helped them to screw the systems, so I'm really tempted to say Back-Office skills is a must for all the apprentice Rogue traders but the thing is now the transfers from Back-to-Front office positions should be made more and more difficult not to say impossible. In the future, we may have to find some new tricks to screw the systems. Too bad.

- Step 2 : Add on that position as it makes losses

Once you managed to screw the systems and build a position the bank has no idea about, use an old good martingale, average down and add on as it loses money. It's the Holy Grail : the markets always come back and revert. They do until the day they don't come back soon enough to let you solvent. Actually martingale is the Holy Grail for going broke with certainty. Without the power of exponential used when adding on losers, you won't be able to make huge losses, you won't be able to lose billions, not fun... That's something Leeson did after Kobe's earthquake and he tried to support the Nikkei, buying massively as it fell, it's something Kerviel did as well, buying in the bear market early 2008 and I bet that's something Adiboli has done as well, I can’t think about another way.

Now as day traders and speculators, we can't rely on client stuffing to survive (would you purchase my “Ultimate guide to Rogue trading” ???) and we have no choice but taking positions. But the second step I discussed above can give us a clue about what has to be done to end the trading game : my point is if some guys managed to broke banks and lose billions in weeks, you or me should be able to make a few millions doing the very opposite of what they did. In that way, I've been arguing for years (notably on this blog) that the Holy Grail of trading lies in using an anti-martingale : adding on profits. In a martingale one may do a lots of small profits very often but they are usually more than offset after a few rare but huge losers, sometimes huge enough to wipe out a bank in the case of our rogue traders. In the very opposite way, by using an anti-martingale, one may face a lot of small losses but the goal is to survive long enough to wait for the huge gains that will inevitably more than offset them and bring to profits, huge profits. During years of speculation, my views on what works and what doesn’t have changed a lot, but not the anti-martingale thing and sometimes, the news headlines strengthen my opinion and show me I’m right. From times to times, the trading Holy Grail is displayed publicly but only to the traders who know what to look at.

TLofT be with You
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The Infinite Trader Theorem

2011-09-02T14:38:00.000+01:00

"I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times." -- Bruce Lee

Since a fellow trader of mine lost 20k in minutes because of a computation mistake on his margin requirement, I've been training on a regular basis my mental computations skills while I keep using an Excel spreadsheet for all trades -better to wear both braces and belt. Far from the elaborate mathematics used by the Investment Wanking quants in their Gaussian bell-curve models, my everyday's trading only requires in practice very basic computations : additions mostly, sometimes multiplications, only to compute 2 or 3 ATR or a percentage. In order to work out my mental computation skills, I've found on the web a good resource with a couple of simple tricks and techniques to improve these: the Mental-Workout.com site and I always have an opened session on my desktop and do exercises from time to time, but what I really use repeatedly and on a day basis (mainly in the toilets. one day I really have to write a post on all the stuffs one can do in the toilets to improve trading) is an Android app called Math Workout. The latter game principle is very simple : 20 basic math computations 25+36, 15x9, 96-58,... you have to answer as fast as possible. It maybe seem a stupid game but I find it reflects properly some of the main aspects of my anti-martingale trading system.

So far in the game I have managed to answer the 20 questions in less than 28 seconds in "hard" mode but I know if I keep on playing again and again (and again and again) the time will come when I will break the 20 seconds mark or even much much lower because:

- Firstly, as an very obvious benefit of perseverance in training (and that's precisely the purpose for my playing so often...) the more I play, the better my mental computation skills become and the faster I will answer the questions. With practice, I'm finding new techniques and tricks, memorize more and more computations I've already had and recalling their result as they come out again, finding properties on the digits and more importantly I'm feeding more and more my unconscious mind. As you may know I've recently done some research on the "unconscious trading" and how I can make my unconscious mind crunch trading patterns for me. Here in that game, I'm convinced that to achieve superior results and break records, I'll need to let totally the hand to my unconscious mind that will play for me: as the questions come, I'll have to know the answer and not to compute them consciously. Typically in this game, I can see that my conscious mind commits sabotage and slows me down "Come on are you sure the answer is 16 ?", "how are 6+7? 13 of course how silly I am", "don't forget the carry" or the 2 worst brakes of all "wow you're being very fast you have to keep on", "you have to use your unconscious mind, you have to use your unconscious mind, you have to..."

- Secondly, while I improve my skills, the more I play the more I experience lucky streaks : sequences of very easy computations (2+2, 45x0, 15x1,...), that's "Black Swans". The occurrence of a Black Swan (say for instance a sequence of 20 times "1+1") is very rare but the more you play the higher the probability one occurs, on the long run (say after 10,000 games) you are likely to experience at least one of them, a positive one. Actually you'll meet positive ones (a long lucky streak) and negative ones (a long unlucky one) but the thing is you don't care about the latter : if you complete the 20 questions in 10 minutes, just reset and play again : what counts is the fastest time, not the longest one or the average or whatever.

The link between the 2 points above is reflected in Thomas Jefferson's quote : "I'm a great believer in luck, I find the harder I work, the more I have of it". The better my mental computation skills, the more computations I find "easy" come out. I took the example of a math game, but what I wrote applies to a lot of other stuffs and different areas : almost any video game, where continuous playing will allow you to "end the game" or sports, for example if you throw repeatedly again and again a basketball, the time you manage to put it in the basket 20 times (50, 100, 1000) in a row will come. Now the question is whether the principle applies to trading? Actually the examples I have chosen above work because they were activities where training and practice can be done repeatedly again and again, I'd say "infinitely". In mathematics it's called the "Borel-Cantelli lemma" or the "infinite monkey theorem" : if a monkey types randomly on a keyboard for an infinite time, the probability it will type the entire text of the Bible is 100% (BTW my monkey after 6 months of non stop typing managed to type "EUR" I'm quite proud). Roughly, this works because infinity is quite a long time... Now the problem with trading is one's account is not infinite, even generally not big enough to trade (say) 1,000 times without risking ruin. Wait! There's a way. The only system that allows to replicate the principle described above is an anti-martingale (increase of the stakes after profits). Combined with the low minimal stakes allowed by the retail Brokering Bastards (as low as hundreds of quids for a trade) and the levels of leverages granted (50x,100x), an anti-martingale system can make it. It can fly because firstly the small initial stakes allow you to trade very often and a lot (as in thousands of trades over years), repeatedly and without risking ruin assuming you'll always be able to find a few hundreds quid for a stake and secondly the power of compounding of the anti-martingale and the high leverage allow you to multiply the initial stake, (for instance with a 100x leverage a stake on the EURUSD is doubled roughly every 150 pips) and get thousands of quid of profits. As discussed earlier, the more you trade, the more you'll meet Black Swans, positive ones (in the case of an anti-martingale long winning streaks) and negative ones (long losing streaks). The beauty of an anti-martingale is the impact positive or negative black swans have on your account is asymmetric : an extremely long losing streak can make you lose up to tens and tens of K, even hundreds in the worst case scenario, but with an equivalently long winning streak, you make millions, tens and hundreds of millions... and for once I'm not exaggerating.

A word on "Expectancy" to conclude this post. In most of trading manuals, it's written that to win the trading game, one needs a system with a positive expectancy. I used to think so as well and even argued for it years ago on this blog: beginner's mistake. The thing is when your trading system relies on back tests and/or Monte Carlo, it is the only result you can derive : "Have a positive expectancy." My first point is we have no idea of what the expectancy of a trading system is, we can't. Even with 200 years of historical tick data we can't : the markets are ever changing, what used to work in the past won't work in the future and the Gaussian Bell-curve models are not applicable there : the average is a bad (and dangerous) estimator, remember, the average wealth of my friends on facebook is above £1 million . Now let's come back to the example of my math computation game. In a "standard" approach, my expectancy would be estimated by my average time to answer one question or the average time to complete the 20 (this said, in practice when I screw up and take time to answer one question I just reset and start again so it wouldn't work). Further to our discussion above, one can see that it notably doesn't take into account my improvements as I play more and more or the time I spend to answer "easy" questions and what are the questions I find "easy", that I find more and more "easy" questions etc etc. We just have no clue what the expectancy is. My second point is in the framework of the infinite monkey theorem, we don't give a damn of expectancies or probabilities. As you can guess, the probability the Bible is typed using random keys is pretty tiny and the probability the monkey types 10 times, 100, 1 billion, 1 trillion or 1 zillion times the text of the Bible in a row still remains 100%... It will happen whatever the probabilities, odds, expectancies or any computations one can make are. To finish I propose a way you find out on your own how you can make a million with a NEGATIVE expectancy system. Black Jack, assuming you don't have a counting method that put the odds in your favour, is of negative expectancy (less than other casino games but still negative). When you have a couple of hours to kill, download a Black Jack game and play and play again with at each deal 50-100 percent of your account at stake (an old good anti-martingale), if at some stage, your account is low (or you're ruined), just restart with the initial stake. What I argue is at some stage if you play long enough, you will reach an account of say 1 million. Good luck!

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Shaolin Trader

2011-08-26T19:42:00.012+01:00

"I know Kung Fu" -- Neo - The Matrix

According to the founding legend of Shaolin Kung Fu, Bodhidharma, a buddhist monk, initiated the physical training of the monks at the Shaolin temple (he also allegedly introduced Zen to China). According to the legend, he was first refused entry to the monastery -what it doesn't mention is to enter the Shaolin temple you had to accompanied by a hot sexy girl, like at the Chinawhite in London- and he lived in a cave nearby, where he "faced a wall for nine years, not speaking for the entire time". "In one version of the story, he is said to have fallen asleep seven years into his nine years of wall-gazing. Becoming angry with himself, he cut off his eyelids to prevent it from happening again. According to the legend, as his eyelids hit the floor the first tea plants sprang up". That gives me an idea, a brilliant idea indeed, I will I will face a wall of Forex charts and quote screens for nine years and maybe after this I will be a Shaolin Trader! If I feel asleep, I will cut my eyelids and maybe money will spring up from the floor!

Let's do some stretching exercises before going to Wall Street

Actually, I used to practice Kung Fu when I was young(er). The most memorable day was the day I had a whole day session with a shaolin monk : that day I wanted to die... (and I think I was about to!). At that time, I was pretty fit, practiced Kung Fu at least 6 hours per week, played regularly squash being fit enough to tease the other player during the games like Gordon Gekko in Wall Street, but this preparation was far from enough to endure the work out that day. We were like a hundreds guys coming from different clubs in a gymnasium, the monk and his young disciple, a very slim teenager who actually did all the demonstrations during the sessions (actually the monk just stood, watched and walked around during the whole time). I think the guys didn't realize that we, normal guys, usually don't workout for 8 hours per day as they did since they were 5 and don't do 10,000 push ups and break some bricks on our heads for breakfast. After 5 minutes of workout, I think I lost like 1zillion calories and litres of water, couldn't breathe and the only thought that came to my mind was [tune of "I like to move it"] : "I want to vomit vomit, I want to vomit vomit, I want to VO-MIT". But I looked around and the other guys were struggling also but no one had given up yet, I couldn't be the first to stop because I had the stupid thought it would be a dishonour for me and my club (the Ego sometimes can really be stupid). A few minutes later, I thought "OK, if I’m the only one to vomit it's gonna be even worse" and finally gave up and stopped (or collapsed I can't remember precisely). My honour was almost safe as I found out that finally I was not the first to stop, but the first one was a girl and she was in my club... Finally, my honour was totally saved because in the afternoon session, a guy from another club did actually vomit: shame on him !!! Ultimately after the first morning stress, I had managed to achieve more or less the workout, needless to say that after this, I could feel pain in every single muscles of my body and walked like Robocop for a couple of weeks.

That day I realized the benefits of perseverance in training, endless works out, long and hard work repeating the same exercises again and again, this in a physical activity like martial arts or any other sport but also in any technical fields and of course Trading. Actually that shaolin work out showed me there's no possible comparison between a guy who practices full-time for a few years with the best Masters using 1,500-year-old secret techniques and one who “only” practices a few hours per week (or even per day) during decades, even at high level (as in high level competitors or club teachers). The young monk was like one can see in the movies, no wire, no special effects. I could see it from my own eyes, no doubt that after decades of practice, the masters become merely superhumans. From what I have understood, the term "Kung Fu" in Chinese is not related to the kick-ass stuff we all know but applies to any fields : the "Kung Fu" refers to the mastery of a skill achieved after long, hard and repetitive work and thus one can have the Kung Fu in cooking, the Kung Fu in Ping Pong or the Kung Fu in Origami (what we commonly know as Kung Fu is actually Kung Fu Wu Shu, literally -my own translation- the Kung Fu in kicking asses). I'm sure you've guessed that what I want to achieve is the Kung Fu in Trading and for that matter I think that the Shaolin monks can bring something. Not that I want to be able to break bricks on my head, pull a 38-ton truck with my teeth, jump from the fifth floor of my building when the lift doesn't work or kick the ass of London rioters, what it can bring is I think more on what is called the Internal part: "External training includes the hands, the eyes, the body and stances. Internal training includes the heart, the spirit, the mind, breathing and strength.". As you may know, when I don't trade, I spend my time seeking for techniques in non-related-to-trading areas that may be of use in my own trading and that could improve my skills as a trader (it's what I call the operation "Absolute Trader") and I've been lately looking to improve what I call my "inner game of trading". It's not about Karmic or Cosmic forces and you won't see me so soon in Oxford Street singing and dancing "Hare Krishna" with my brothers but it's all about raising my trading to the next level: after years on conventional trading practice, I believe that the unconscious mind is able to find trading patterns that 1 zillion computers, an army of statisticians and algo traders or decades of practice of technical or chart analysis are not able to detect and I've been seeking for all the techniques to help my unconscious mind to crunch data. In order to improve this part. I’ve read a few books, the ones I recommend is The Inner Game of Tennis and Zen in the Art of Archery (I mentioned both in a previous post) and back to the Chinese martial arts and Shaolin monks, I started practicing Qigong and Tai Chi Chuan, they are reminiscent of my earlier year's Kung Fu Wu Shu, but less tough and athletic versions and much more focused on the Internal part.

While I was writing this post, I found out a dvd filmed with a Shaolin monk who reveals the authentic workout practices by the novices at the temple, kept secret for ages, Shaolin Warrior Vol.1 - Beginners. The reviews of the dvd by readers on Amazon are kind of funny when thinking about my experience described above : "it's not for beginners, it's tough!", "I've 10 years of experience in martial arts and I struggle!" etc etc. Needless to say that I couldn't resist the temptation and have ordered it :-)

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The Last AirBlenders

2011-08-12T18:19:00.002+01:00

"Water... Earth... Fire... Air. Long ago, the four nations lived together in harmony. Then everything changed when the Fire Nation attacked. Only the Avatar, master of all four elements, could stop them. But when the world needed him most, he vanished. A hundred years passed and my brother and I discovered the new Avatar, an airbender named Aang. And although his airbending skills are great, he still has a lot to learn before he's ready to save anyone. But I believe Aang can save the world." -- The Last Airbender

I wanted to use a pun (I’m quite proud of) and title this post “Kill T-Bill” referring to US downgrade by S&P last week but I preferred to highlight here the uselessness of the recent interventions of Swiss and Japanese aiming to weaken their currencies. They actually blended some thin air and once again peed against the wind and as I write the whole impact of the interventions have been more than offset, their trousers are soiled and wet. I couldn’t help thinking about the guys who went back home after a (very) bad day :

- How was your day, honey ?

– Not so good, I just lost a few percent of the country’s GDP, what’s on TV tonight?

USDJPY intradays

What you can do to kill boredom and if you have nothing more interesting to do is to read again my post on the first Japanese intervention in January: Peeing against the wind, it sounds still timely except for the last paragraph: the money doesn’t go anymore in Asian and US stocks, it looks like it goes to Gold, CHF and JPY… It looks like a new battle in what was called last year a Currency War has started. Let me define what a Currency War is : it’s the fight between different nations, Earth Wind & Fire :-), to get for their currency the “Peso” title after the Avatar -even if we don't know who he/she/it is- had vanished. This year among the belligerent nations, the European one –unfortunately against its will- is the favourite: will we see an European Peso? To reach this supreme title, all the weapons are allowed : currency peg, quantitative easing (the Londoners have experienced this week a very innovative form of QE, help-yourself-in-the-glass-window), rate decrease, devaluation and… OK let’s write it: downgrade.

OK, OK, I’d probably be pushing a too far if I argued that the US downgrade was a way for the US to weaken its currency, but I still can’t believe that such a decision, I don’t know how many times more harmful to the US (and to the whole world) than 9-11, has been taken without a few green lights from the government. One thing is pretty sure to me is that a crowd of insiders were warned much before and that crowd triggered the fall that started before the week of August 1st and before the downgrade. Of course after the warnings, it didn’t come as a total surprise but if you consider the situation a couple of months ago, it was unthinkable. I wrote in former posts that the downgrade of the US was impossible (to me AAA was benchmarked by precisely the US) and that the analyst from a rating agency who would even consider it would feel a sudden and strong urge to commit suicide, with a couple of bullets in the back: where was Jason Bourne last week? I was wrong, it was impossible unless someone gave the green light to do so. This week with the fall of the S&P 500 down to 1100 and the dollar which doesn’t manage to weaken (to the Euro, it looks like 1.42 will be an universal constant for the EURUSD pair…) seems to prove me wrong but at the same time, it could have been a bad decision and a wrong bet, after all Lehman bankrupted after a green light was given.

Now the fundamentals and the global Economic situation are bad, really bad, not only after the revised GDP figures, the bad ISM, the downgrade (actually the US had already defaulted decades ago) and co but to me, mainly because the guys I call the Sheriffs (Central bankers, Treasuries, etc) have no more bullet, they shot them all 2-3 years ago. 3 years ago Gordon Brown (was he the Avatar?) as he said himself saved the world (instead of saying the banks) when he started to take whatever it takes and showed the example to the rest of the world. Today all the political staffs have changed, Obama (is he the Avatar?) is stuck and can’t spend any penny without facing the wrath of the Republicans (no, no Avatar among them, that's a certainty), the situation in Europe is a mess. Seriously, I’ve been considering all the angles of the situation for month and I really don’t know how we will get out this time. It means the time to BUY (no it’s not a typo) is soon, very soon, as soon as the whole world will recognize that the situation is desperate. The old good "Buy when everybody sells", once again! Soon but not yet, for now, after a lot of them lost their shirt on the road, there’s still a bunch of guys who are surviving and are claiming that the things are cheap, but trust your old contrarian friend, as soon as those guys will be killed too, the time will come for us to get back into it as the Avatar, the last Airblender, returns. Keep faith in the meantime, TLofT be with You

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Fearless Trading

2011-07-29T16:48:00.008+01:00

"There is something to be learned from a rainstorm. When meeting with a sudden shower, you try not to get wet and run quickly along the road. But doing such things as passing under the eaves of houses, you stil get wet. When you are resolved from the beginning, you will not be perplexed, though you still get the same soaking. This understanding extends to everything." -- Yamamoto Tsunetomo - Hagakure, the Book of the Samurai

For me, this understanding has to extend to Trading too. I've seen many traders expect to pass under a rainstorm without getting wet: they expect to grow their trading account without taking any loss. If you trade, you will take some losses, it's as inevitable as you’ll get wet under a rainstorm. Firstly, I would argue that maybe to be profitable you HAVE to take some losses: while many traders focus on having a high percentage of winning trades, it seems (we can't be sure) that among the traders who have what I could call a "standard trading approach" based on a positive expectancy as for example the one used by the professional money managers, the best performers have a percentage of winners of only 30-40 percent. It means that in this approach, the best traders lose 60-70% of the time. On the opposite side, I have a few examples of guys who claim to have system generating 80-90% of winning trades and that go broke or offset years of continuous gains after a few bad trades. All this strengthens my conviction that one of the keys of trading is "to let the profits run and cut the losses short". Secondly I'd say that we tend to forget that a trader's overall performance is known after a whole sets of trades, after long battles and when either he/she is ruined or rich. Our human nature drives us to give too much consideration to the past few trades: after a (few) profit(s) we are in "God Mode", think we have finally decoded the secret of the markets and have become invincible, at the opposite after a (few) loss(es), our moral is ruined, we think that trading is impossible and that we are a shit. If you are a trader, I know you perfectly know what I'm talking about. To me, one of the keys to become a master of the trading game, a Lord of Trading, is to be able to harness this constant emotional rollercoaster, to be resolved to take losses and ultimately learn to trade without fear. Of course, it is easier said than done, we are human, but it's a habit I believe that can be learnt with strong will and hard work. Two elements of my trading system are helping me to get there. The first one is my definition of what is a trading profit and loss: a profit is what goes in my bank account (aka my pocket)and not my trading one (aka my equity), a loss is what I put from my bank account to feed my trading one. OK, it may sound a very obvious definition but think about it and you'll see it's not a so common one. Let me ask you a question, fellow trader: when was the last time you withdrew some money from your trading account? Basically to get a trading profit in my definition, I have to WITHDRAW money from my trading account to my bank one, I can have a billion in my equity, while it's not in my pocket, it's just paper money, not profit and there’s nothing to get excited/proud about. The second stuff that helps is my money management system which is an anti-martingale system with a kind of trailing stop: I start with a small stake, say 1k, then put a large share of my equity at stake on every trade as in 50% until I lose say 50% of it. The loss of 50% of my equity is inevitable and comes one day or another, of course the more I manage to grow the equity before it happens, the better. When it comes, I withdraw all what I have in my equity (it's my profit) and start again with 1k (it’s a loss of 1k). Combining my P&L definition with the money management system, one can see that my maximum loss per "strategy" (or set of trades before I "reset") is of the tiny initial stake, 1k in the example.

In theory, I believe this money management system to be what Nassim Taleb, the author of the "The Black Swan", calls "anti-fragile": it's bankruptcy proof because whatever happens, even a Black Swan, my theoretical max loss is of 1k and I assume I will always be able to find a (few) grand(s) to build a new stake and start again. Now in practice what can harm the moral, faith and can be source of financial destruction in that strategy are long losing streaks. Loosing a grand a day for a prolonged period keeps the doctor at work. That's what happened to me during the first half of this year, I've had the longest losing streak I've ever experienced but paradoxically, it was probably the best thing that happened to my trading so far and it led me to raise it to a level I've never reached before. In the last few trades of that bloody losing streak, I experienced what could be seen at first sight as a sequence of "extreme bad luck" : stopped at less than 1 bid-offer from the bottom before the market went in the direction of my position, missed a couple of opportunities to the pip, ONE bloody pip from my entry order... Afterwards, the analysis of these losers showed that there's nothing to see with Little Miss Bad Luck, the real cause was Fear. After a few losers and after I had to feed the trading account a few times, I was dead scared to trade and to lose more money. That fear held me back in my position taking, I traded with a shaking hand and had my timing bad. I finally managed to break that streak by trying to find a way to cope with the fear of loss. I sought in the Literature and have found interesting books, notably one in the world of sport: "The Inner Game of Tennis" by Timothy Gallwey and one in the world of Zen: "Zen in the Art of Archery" by Eugen Herrigel. One of the main ideas of both books (as far as I've understood them...) is that one, to achieve mastery, has to manage to reach a state of detachment and emptiness and to understand the paradox of being purposeless while a Goal (winning the tennis match, shooting the arrow in the target or becoming a zillonaire thanks to trading) matters more than everything. My take is that among our conscious and unconscious selves, we have to let the latter one on the driving seat for our actions. The unconscious mind after years of training and practice knows how to play tennis, knows Archery and understood how to make money from the market, but it is altered by our conscious mind that tries to fuck it up thought a mechanism called, you got it, fear : "If you lose this point, you're in the deep shit, dude, you'll lose the set and then the match" or "if this trade end up a loss, you are really a shitty trader, you'll be ridiculous because you posted on your blog you found the holy grail, your expectancy will drop dramatically, your percentage of winners will drop dramatically, you'll head for ruin, you should give up trading and find yourself a real job, your wife will kill you because you promised her vacations at the Bahamas, etc etc" I can fill 200 lines of stuffs here from my real experience. If we apply the principle above to trading, it would mean on the one hand, we have to trade with a detachment to the "result" of the position, whether it ends up a winner or a loser and on the other hand, we have to trust much more our intuition, the trader's unconscious mind has, over years of careful monitoring of the markets, crunched billions of data, news, prices, charts, technical indicators and found patterns the conscious mind or a computer are not able to. My quest of the mastery of trading has led me towards this direction currently. The current question I try to find a answer to is how to harness the power of the unconscious mind to be used in my trading?

I will conclude this post the same way I began it, with a quote from Hagakure: The Book of the Samurai. The Samurai code is a bit extreme example as it is said Samurais had pushed their fearlessness to a strong will to die at any time "in order to be true to their master". Fortunately we are not in the 17th century's Japan, not Samurais and I believe that Life is to be cherished and celebrated above all, but if in the following paragraph you replace "death" by "trading loss", "financial destruction" or "ruin" and "samurai" and “swordman” by "trader", I guess the text is close to the idea I have of mastering the art of trading, being a Lord of Trading.

"Yagyu Tagjima−no−kami was a great swordsman and teacher in the art to the Shogun of the time, Tokugawa Iyemitsu. One of the personal guards of the Shogun one day came to Tajima−no-kami wishing to be trained in fencing. The master said: "As I observe, you seem to be a master of fencing yourself. Pray tell me to what school you belong, before we enter into the relationship of teacher and pupil. "
The guardsman said, "I am ashamed to confess that I have never learned the art".
- Are you trying to fool me? I am teacher to the honourable Shogun himself, and I know my judging eye never fails."
- I am sorry to defy your honour, but I really know nothing".
This resolute denial on the part of the visitor made the swordsmaster think for a while, and he finally said, "If you say so, it must be so; but still I am sure you are a master of something, though I do not know of what.
- If you insist, I will tell you. There is one thing of which I can say I am complete master. When I was still a boy, the thought came upon me that as a Samurai I ought in no circumstances to be afraid of death, and I have grappled with the problem of death now for some years, and finally the problem of death ceased to worry me. May this be at what you hint?
"Exactly! exclaimed Tajima−no−kami. That is what I mean. I am glad that I made no mistake in my judgment. For the ultimate secrets of swordsmanship also lie in being released from the thought of death. I have trained ever so many hundreds of my pupils along this line, but so far none of them really deserve the final certificate for swordsmanship. You need no technical training, you are already a master.˜

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All my Friends are Millionaires!

2011-07-20T15:32:00.006+01:00

"The casino is the only human venture I know where the probabilities are known, Gaussian (i.e., bell-curve), and almost computable." -- Nassim Nicholas Taleb - Fooled by Randomness

I know a rich guy! I finally know a rich guy !!! We read every day about rich guys, we see them on TV, in magazines or in the news, but ultimately we don't know any of them personally, not one (as a reminder I use Felix Dennis’ definition: the "lesser rich" starts with a wealth of £15m). This time the guy is real, I really know him, we used to work together, to speak to each other every day, to meet at parties, to play football together, to argue. I found out in a fortune magazine that his wealth is estimated to more than £100m... Wow! One hundred million quid, that's a figure! I'm truly very happy for him and I believe he deserves it, but more egoistically I'm very happy because his success makes to some extent my hopes more real: he did it and I know him, it's possible, it's do-able, it’s not an invention from the media and there are rich guys. Now in order to be consistent with the arguments I've been raising on this blog, I wish I was able to say he's a normal guy like you or me and he did it trading (or speculating which would be a more accurate word), but "unfortunately":

- He is a member of what I call the "League of Extraordinary Assholes". He's extraordinary: graduated from the best Business school and major of promotion, young, a sportsman, handsome (the kind of guys we can see in the adverts for razor blades), natural born leader, deal maker and entrepreneur, married to a bombshell and most of all, he has won the Orc Race: MD before he reached 30, then head of a team of 250 guys based in 15 different countries, tens of million euros bonuses for years, etc.

- He did his money by bullshitting the world, using his network built in the Orc Race, had likely some inside information (aka "arbitrages") and stealing his clients: he owns a Hedge Fund. The story is fully consistent with my opinion that nobody can become rich with hedge funds but hedge funds owners...

Nobody's perfect... but morality is not my topic today (actually I don't care ;-)). The thing is this story provides me with a perfect example of what Nassim Nicholas Taleb calls "Extremistan" and "Mediocristan" in the Black Swan. Actually this chap, the only rich guy I know, is my friend on Facebook. I'm really not a fan of the social network and I don't give a damn about what my "friends" had for lunch, who or where they shag or how many "friends" they have. Personally I "only" have 100 "friends". What is very interesting to notice is, thanks to the rich guy I mentioned earlier, the average wealth of my FB friends -including my 15-year old cousins, students, my wife's nieces- is above 1 million quid. One million quid per "friend", not bad uh? Wealth doesn't belong to Mediocristan, Human height for instance does: consider a sample of X guys, measure their average height, the standard variation and the Gaussian distribution will work perfectly, you’ll have good metrics and won't have a 10-kilometer tall guy. On another side, as the wealth of my FB friends shows, Wealth belongs to Extremistan. So are trading gains.

Last year, I attempted to crunch my own trading gains distribution with a simple model (I don't think it works but I'll use it for the sake of the discussion). I took a sample of about 100 of my own trades for which I had recorded the "Expectancy" (P&L divided by initial risk in pound) and ran some Monte-Carlo. I simulated a basic anti-martingale strategy: starting with an equity of 1,000 quid, I would put at stake 70% of my equity, trade 100 times (actually I draw 100 times randomly in my Expectancy distribution). If at some stage, I loose 70% of my equity (the highest level reached), I would reset, cash out what remains in the pot and start again with 1,000 quid. I did this 10,000 times. The results looked pretty decent at first sight: I came up with an average profit of 30k with a maximum drawdown over the 10,000 trials of -9k. 30k in average after 100 trades and risking a few k in total sounds good, right? Well let's have a look to the maximum gains I had in my trials: £ 27,015,810 - Wow! That's better. Second best: £ 26,862,757 - still decent after 100 trades and starting with 1k... The thing is among the 10,000 trials, 17 had a profit above £1m quid and without them the average drops from 30k to 15k and to 5k if I remove the first percent of best performers... Shit!

A few years ago and you can see it if you read my first posts, I was really convinced that the key to trading profist was the optimization of the Expectancy and one of my bibles then was Van K Tharp's classical Trade your Way to Financial Freedom. Now as I've gained some trading experience over the years, my opinion towards Expectancy is more and more mitigated. To me focusing on Expectancy has 2 fundamental flaws:

- As we saw above, trading gains belong to Extremistan. The normal distribution (and the kind of stats I used above) just doesn't work. The expectancy isn't a good measure of my future performance or the one I could expect, it would probably if I had 10,000 lives but unfortunately I only have a couple of them...

- We can never know what our Expectancy is, even we can never have a reliable estimate. Trading is not a Casino game with known odds, the markets are constantly changing, what works today won't necessarily work tomorrow. Even with 500 years of historical record of your Expectancy, it can totally change tomorrow. It's reminiscent of Taleb's parable of the Turkey that thinks everyday "Everything is OK, the humans are pretty cool, they feed me" until Thanksgiving comes :"Consider that the turkey's experience may have, rather than no value, a negative value. It learned from observation, as we are all advised to do (hey, after all, this is what is believed to be the scientific method). Its confidence increased as the number of friendly feedings grew, and it felt increasingly safe even though the slaughter was more and more imminent. Consider that the feeling of safety reached its maximum when the risk was at the highest! " (Taleb - The Black Swan)

To conclude, I'd say I’m convinced my own trading system would work with a negative expectancy (while you'd need some "luck" and it may spend some time), I'll discuss this in further posts. Well, actually I'll be able to share with you only some bits of it as it remains my ticket to riches. 100 million to beat, I have some work, Fellow Trader, I'll let you here.

TLofT be with You
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The Orc Race

2011-07-07T17:44:00.002+01:00

"The trouble with the rat race is that even if you win, you're still a rat." -- Lily Tomlin

The new Managing Director looks cool

I often mention in this blog the Orc Race but I have never had the time to discuss about it. For me it's like the Rat Race but in my mind the racers run faster there. I imagine in the ranks of the Army of the Orcs are found warriors of the tertiary sector, horde of Investment Wankers and other employees from the League of Extraordinary Assholes. I used to run myself the Orc Race pretty fast (but of course not enough, you can never run fast enough actually) and long enough to have understood a few basic principles there. For me, running fast the Orc Race takes 3 steps I will discuss below. As a preliminary, a very basic principle: it's WAR and of the dirty kind. To run faster you have to run over other racers, push them, kill them, you have to find allies you'll backstab when of no use, you have to shoeshine (I write that to stay decent) and be a perfect courtier when needed, you have to let the dominant male screw you waiting your turn to screw other guys. It's a rule I spent too much time to understand as I grew in Disneyland and that cost me years of hard work and millions of quid, I'm not kidding. Some people are natural born killers, for those who (like me) aren't, I'd strongly recommend if you expect to run the race you know by heart and apply continuously and religiously the "48 laws of power" from Robert Greene": Machiaveli, Bismarck, Sun-Tsu and Rambo are definitely the masters. End of preliminary comment, let's now go to the 3 steps of the Orc Race

Step 1 : Get yourself a good education
Graduate from an university of the Ivy League, from a British top university, a top French Grandes Ecoles, etc... It's not because the education you'll get there is better, let's be very clear: when you start running the race, whether you graduated from Harvard or a Disney School, you don't know a thing, not a thing. What makes the difference is a "top" university has a "top" network and what you need is the Network. A guy who graduated from Harvard will hire other guys from Harvard, support them, fund them, help them, forward to them offered positions, recommend them, do their wives and will be more reluctant to fire a guy from there. OK, if you're lucky enough and you got a good education, good for you, you just have at that stage a few millions other highly educated guys to beat, otherwise just forget about getting one, sorry mate but it's too late. Forget about the MBAs, certificates, CFA and other stuffs: nowadays after the crisis, you have to be really extraordinary to get in, to be able to pay something like 50k per year and even if you get in and graduate, nothing guarantees you ultimately find a decent job. Your competition is on the one hand highly educated guys who started to run the Orc Race in a front office or M&A position with Lehman's before they got fired and on the other hand, Asian guys who have been preparing the GMAT since they are 10-year old and have no other choice but to succeed: either you got yourself a high education or you'll live in a slumdog and work your whole life in a British Telecom hotline. That's quite more motivating than "if you don't have good marks at school, you won't be allowed to play with your playstation for a whole week", is it?

Step 2 - the start of the race : develop technical skills, ride a bubble and do what other guys don't want to
In my (arrogant) opinion, what makes the difference when you start running the Orc Race are technical skills. In the beginning improve them, become an expert, a geek, a nerd in a very specialized area. Your skills have to be in a booming sector. OK the latter one is an obvious advice, but less obvious is the reason why: because the booming sector is the one to burst once you have got enough experience and have become a guru. During a burst the (job) market becomes totally inefficient: the guys who are in the worst areas, the ones that drag the whole world down, keep their job while the others are fired, they have pay rises and guaranteed bonuses split over years to make sure they stay. This is because they are the only ones who understand the shit they put the whole world in, that's called expertise and one of the multiple applications of the Law 11 "Learn to keep people dependent on you". Ultimately they appear as saviours and manage to go to step 3. Now the trouble is a booming sector is where everybody (and unfortunately the most extraordinary assholes) wants to go, so an idea to discard some of the competition is to do there what other guys don't want to do -one can recognize here my contrarian mind- ultimately it's on these things that your expertise will pay.

Step 3 - the end of the race - switch to political, exploit slaves and become the king of the Orcs
I'm not sure I'm of good advice for this step as it's where I've failed. I believe in the race, there's a moment one has to switch from technical to political, enter the management game and apply the Law 7 "Get others to do the work for you, but always take the credit." The political game is where your network that you have been developing since Step 1 help you the most, the technical skills acquired during the Step 2 allow you first not to depend of your slaves and second to have their respect (young Orcs admire technical skills), personally I ate very quickly all the bossies I dominated technically. Now even among those who succeed in the first 2 steps, belong to the most powerful networks, are genius in their area, saved the world and are genius leaders, only a tiny minority will succeed the step 3, because there is only one king of the Orcs and only a very few seats under the sun.

Now the Orcs spend their life seeking for what is called the cheese, the carrot or the coconut aka high salaries, bonuses, stock options, corporate titles, power, companies benefits, bigger and bigger offices with nicer and nicer views, and more and more slaves working for them and more and more hot secretaries, etc. The list is endless but very interestingly it doesn't include:
- Happiness
- Health
- Time to spend with family and friends
- To get rich, I mean truly rich as defined for instance by Felix Dennis, an English self-made-man for whom the "lesser rich" level starts at £15 million. The Orcs generally think they are done much much before that (£15m after tax is like several lives of work in the Race or at least a few decades for the best runners), so aim (and stop) much below that level.

and that's very fortunate for those who seek for these goals (I'm definitely one of them). Very very fortunate actually because the Orcs are very smart, clever, highly educated, motivated, hard worker and run fast, very fast. They are a damn competition it's wise to avoid, let them fight between them and let us focus on our Precious.

Come, fellow trader, come with me on the narrow path that will lead us to the Lord of Trading. The way is not about trading set-ups, secret algorithms or magic technical indicators, it's about a way of life and a philosophy focused on the maximization of the 4 points I mentioned earlier: happiness, health, time and money. Our Precious is definitely worth much more than their coconuts! In that quest you won't have to kill millions of extraordinary assholes to succeed but you'll have to beat only one ass: yours. Don't think that makes the game any easier, it's actually the most difficult challenge I've faced so far. The more I trade the more I realize that to succeed, I have to unlearn a lot of what I know, I have to deny a lot of what I can see, hear or read and sometimes trade against my own analysis and what makes sense to me. I am the enemy.

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The League of Extraordinary Assholes

2011-06-30T17:16:00.005+01:00

"How many times do I have to kill these cretins?" -- M, The League of Extraordinary Gentlemen

There are some extraordinary people on Earth. For instance, I read recently the bio of Natalie Portman, the actress. First movie aged 12 (Leon), Al Pacino's daughter in Heat, she got one of the only female role in the Star Wars saga, she did Darth Vader and is Luke Skywalker and Princess Leia's mum, winner of the best actress Oscar for her role in the Black Swan this year, model for Dior, advocate of animal rights, environmental causes and supports actively antipoverty organisation, she graduated from Harvard with a B.A. in psychology (she acted in Episode I during the summer holidays)... and she's only 30. I'm ready to bet (with a fair quote) that she will end up president of the USA one day (my bet at 60 to 1 that Bin Laden will end up Peace Nobel prize by 2031 is now dead, literally)

I can remember one of the first time I met a bunch of people I found extraordinary. It was back to the early 2000s when I was a young French trader based in Paris. We were invited with my old friend GanTALF to a party in London organized by some colleagues, fellow Investment Bankers based in the City. Of course, at that time, for young guns considering a career in Finance like us, London and the City were like dreams. At that time, with the GBPEUR somewhere between 1.50 and 1.60 (it's at 1.11 as I write), London was very very expensive for French guys and even if we used to live like kings in Paris with the income of front office chaps, we felt like clochards there. I remember we took a "luxury" train+hotel package : on the one hand, we travelled Business Class on the Eurostar, which was (it still is) very decent, but on the other hand, the luxury hotel room was definitely very far from the suite 2806 of Le Méridien in New-York... It was untidy and so tiny that there was almost no space between the twin beds:
- Hey dude, are you masturbating?
- Well, yes...
- Would you be so kind to use YOUR penis please???

When came the party itself, I was totally impressed by the people there so they all seemed extraordinary to me. A few recollections:
- I met there for the first time a star prop trader, a kind of living legend in the bank, who used to be on the same pit as Nick Leeson in Singapore and who came with his wife, an Asian top model (because she was worth it!). "Let me introduce my wife" the chap said, then I instantly thought to myself "Let me introduce YOUR wife...".
- I can remember as well a tall and fit black guy with Barry White's voice: "Every morning I wake up at 5, I go to the gym for 1 hour and I cycle to office, I work for JPMorgan" [myself at that time I was more "I wake up at 9, have a couple of cigarettes for breakfast and rush in the Metro to go to the office" kind of guys
- A French guy I discussed with for a while (in French indeed) suddenly started to speak to another guy in a perfectly fluent English : amazed, I asked him "How long have you been here in the UK, you’re totally fluent for a Frenchman" he replied "I've been here for 21 years and by the way I'm not French I'm Lebanese...", on the opposite way a British sales with whom I used to work and with whom I had been struggling to communicate in Shakespeare's language suddenly asked me in a perfect French without an accent : "Ils se sont tirés où les autres?". Before that, I was discussing with a very hot British girl and as she was talking to someone else, I said quickly to my friend "Elle a de beaux seins! (she has great tits)". Later as I made a stupid joke about the British weather, her reaction in French was imminent and lasted 10 minutes "Qu'est ce que vous avez vous les français avec le temps, à Paris ou à Londres, c'est le même, alors arrêtez de nous gonfler avec le temps anglais, etc etc"
- I met a 23-year old girl with a French dad and a Turkish/British mum, she had grown in China and graduated in the UK, she was coming back from Dubai where she had an internship and her boyfriend was Italian and she often came to see him in Italy. As a consequence, she was fluent in French, English, Turkish, Chinese and Italian and she had a some basic knowledge in Arab and Spanish

Now I've been living in London for 7 years and I'm much less impressed by this kind of people, a lot of typical City workers are like that here and I have probably become one of them myself to some extent. One step further, I even tend now to see the typical financial professional City guy like an extraordinary asshole. Welcome to the investment wankers world! I met recently a guy who has a model wife (because she's worth it!), who lives in a huge flat in Central london (his kid's bedroom is as big as my lounge) with a swimming pool and gym in the basement, owns several properties in Europe, participates to Triathlons, active in charities, etc… Actually to summarize, he's the Hollywood cliché of the financial guy. But he has some flaws, first he's dumb: he invites from his free will his parents-in-law to stay at his place and he even pays the tickets for them! Second: he drives a BMW and BMW are like hemorrhoids, it's for assholes... and finally and most importantly, he works for Goldman. It means that he funds his whole lifestyle from stealing clients.

Goldman Sachs! Their business model is really outstanding and a total mystery to me: everybody knows they spend their time stealing their clients and everybody wants to be their clients, everybody knows their employees are creeps but everybody wants to work for them. To be totally frank I'm sure I'd be the first to run if I was proposed a job there and if this happens the very first thing I would do as an employee is to ask for 10 boxes of Business Cards, well let's make 50 boxes... Realistically I would be fired after a couple of days (or hours), not because I'm not competent but because I'm not in the mould required to work with this type of firms, I don't fit the herd. Now I don't consider the investment wankers as assholes only because they make a living from stealing clients (actually the morality problem is theirs, not mine), but because they claim they know how to take positions, particularly Goldman that used to be reputedly a prop trading house, but they can't, they just don't have a clue, that's a secret I got from my decade spent with them in the Orc race.

The thing is the League of Extraordinary Investment Wankers assholes controls the market, that is a playground for its members. They manipulate it, front run, use inside information, stop gun and use a lot of others questionnable practices. To me, one of the keys of the trading is a deep understanding of how the League works and the herd of its members think and react and trade accordingly. At that stage, I've not come up with anything concrete and tradable to exploit what we already know about the League : its members
– make a living from stealing clients and they can use any practices to reach their goal
– are from the same mould and react and think in a predictable herd.
– Don’t know a thing about speculation but are convinced they are masters

At that stage, it's just food for thoughts, but at least the "enemy" has now a name: the League of Extraordinary Assholes.

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Trader'sHealth

2011-06-24T14:24:00.003+01:00

"I should probably be stretching first but if I do that I’ll have to wait in line—already some faggot is behind me, probably checking out my back, ass, leg muscles. No hardbodies at the gym today. Only faggots from the West Side, probably unemployed actors, waiters by night, and Muldwyn Butner of Sachs, who I went to Exeter with, over at the biceps curl machine."
-- Pat Bateman, American Psycho (Bret Easton-Elis)

As you might remember, I launched the operation "Absolute Trader" almost one year ago. The idea is to spend the "free" time let by day trading in order to improve my skills in all the areas I believe that can help directly or indirectly me to become an absolute trader, a perfect trading machine. To be totally honest, I've not managed to improve as far as I expected my technical skills in mathematics, economy, statistics, history, philosophy etc. The thing is the more I gain trading experience, the less I think this kind of skills is useful: when I was a student in Sciences in a phD environment, I found out that the more I learned, the more I realized that I actually knew nothing and that there are always a lot of guys much more brilliant than myself in my discipline, and this whatever the level I will reach. With all these geniuses in all these various fields around, I guess if the trading conundrum has not been solved yet, the key does not lie there. That's the reason why I'm try to seek for fields that are much less obviously (or I should say less academically) related to trading. For example one field where the operation has been a real success is definitely on the health area. I decided to improve my health after I've found out, at the cost of heavy losses, that my fitness and health are highly correlated to my trading performance. It may sound strange and don't ask me why, I have absolutely no idea, that's just something I observed, maybe a cosmic stuff... Actually, I have also 2 other reasons related to trading to improve my health and my life expectancy: the first is after years of development and struggles, I've finally come up with a trading system and philosophy I'm happy with and I do know that on the long run that will lead me to ultra riches, but the thing is I don't know how long it will take so I have to lengthen my life expectancy to make sure to win the trading game (and benefit as long as possible from my future ultra wealth). The second is in the very unlikely case I don't make it (there are Black Swans ;-)))), improving my health (and the whole Operation actually) is a kind of hedge: even I don't make it, I will end up a healthier person, wealthier, more cultivated, more intelligent, better father, better husband, better friend, more open-minded, etc,etc, ultimately be happier and this whatever happens.

On the subject of health and life expectancy, one of the main topic is weight control. Since the beginning of the Operation, I've learnt some skills from scratch, have read plethora of nutrition books, have been in a continuous diet and spent hundreds of hours working out, run and cycled hundreds of miles. So far I've lost about 7% of my weight and more importantly shed more than 10% of body fat. As for every single thing in my life, I've been trying to find some analogies between the topics of trading and weight control, I’ll share with you some of them here:

- We have no clue.
Before I looked into the weight loss problem, I used to believe the solution would be quite straightforward, that the scientists know how do lose weight efficiently. It's not really the case, they are not sure about what works or not, they don't agree, some research papers favour one thing, other ones another, there are zillions of different diets that recommend totally opposite things and the law of ever changing cycles applies. For instance, eggs in the past were the enemies, now they are your best friends, olive oil was bad, good then not so good when hot, carbs were bad, now low-GI carbs are (maybe) good, high proteins diets were the thing but actually they could be dangerous... Every year a new super food is THE super food that will finally defeat cancer: acai berries, then blueberries then coconut water then... (I even got some baobab trees powder recently…). Maybe in a few years, some guys will recommend a diet based on big macs, who knows? It's the very same with trading (and more generally Economy) : we don't know how it works, we just have no clue and 2 guys can’t agree. It's a endless debate whether Technical Analysis works or not and even in the technician world, you have hundreds of different indicators and theories: Gant, Elliott waves, chart, analysis of the position of Uranus or voodoo. The very same applies with fundamental analysis. The other thing is markets are also constantly in ever changing cycles, some stuffs that worked yesterday are not working today and that really doesn't help! Actually, some days I'm even not sure such a thing as a trading edge really exists, needless to speak about the trading Holy Grail. We just have no clue.

- Don't follow the crowd
I can remember when I started a diet for the very first time in my life last year, all the chaps around me were wondering why I spent my time eating and believed I was mad. In the crowd's mind, the key to weight loss is to eat less often (and exercise more often). Don't follow the crowd, it's dead wrong. The human body, though a chemical process called metabolism is a continuous fat burning machine. And it is proven that this machine is the most efficient when it's fuelled with food on a regular basis: 3 main meals per day + 3 snacks = 6 meals, I even see now 8-meal-per-day diets recommended. The other thing is when you go to gym, the crowd is always where the cardio machines are and the weight room is generally pretty quiet and empty. Once again don't follow the crowd: if during a session, cardio burns definitely more calories than anything else, on the long run, meaning hours and days after your work-out is over, that's weight lifting thanks to the recovery process after the session that burns ultimately the more calories. In trading, I've written a lot of posts about having contrarian views, let me try to make it simple on this one: the crowd ultimately always lose money and go broke, always, so the only way to make some and get rich is to be a contrarian and do the very opposite: once again don't follow the crowd.

- Focus on the important factors
While a large fraction of the crowd believes exercise is a major part of the weight loss, it's only about 15 percent of our calorie burning. Other 15 percent come from the digestion and the remaining massive 70 percent from a process called basal metabolism that happens when you do nothing. Actually you loose more weight when you sleep than when you run... I believe most of traders focus on the wrong thing, they focus on the trading set up (where to get in, where to get out) while to me the basal metabolism of a trading system, the machine that makes profits, is the money management. You can have the best set up in the world with a huge expectancy, a massive percentage of winners but not manage to kill the game and make a fortune because of a poor money management. At the very opposite, even an average set up with just a decent expectancy may, combined with a good money management system and a bit of luck (we all need some at some stage) bring you to the way of riches.

- Don't waste your energy
At the gym, I don't warm up. Research shows no evidence that warming up helps to reduce the risk of injury, so to me, that's just a waste of time and energy. In my trading, I'm continuously seeking for ways to save my money (and energy), for instance one year ago, the analysis of my winners showed that 95 percent of them would remain winners if my stop loss was at a distance of 2-ATR instead of 3-ATR, I just reduced my stop losses to 2-ATR. No need to waste money, the game is already tough enough.

- Pyramid
It burns 100 calories per day to feed 1kg of muscle, so one of the ways to lose weight is to build muscles (and for this reason proteins should have an important role in the diet). Any muscle you build will burn fat for you night and day without your doing anything. In trading in a very similar way, pyramid and add on your winners with freshly made money, put at work for you these little dollar bastards as soon as they falls in your wallet.

- High Intensity - Low Volume
I change my weight sessions programme on a regular basis, but the sets of exercises I've found to be the most efficient are the high intensity-low volume ones: I will load quite heavily the weights (high intensity) and lift them until exhaustion, no count of rep and will do such a work-out only once a week (low volume). In trading in a similar fashion, I will put on heavy positions (a huge share of my equity) and trade only when all my entry criteria are met: I only have a few bullets so I have to shoot to kill. Now in a trading system, there's a trade off between the criteria that define a trading opportunity, which implicitly define the frequency of trades and the odds that with these criteria you make a profit. Now to be honest, I've not totally ruled out the best combination yet in my system and still experimenting a few stuffs

I'm really tempted to add another analogy between weight control and trading but the thing is I'm not totally sure it works : if I have a strong determination and desire to control my weight, if I adapt consequently my life, my habits and focus 24 hours a day on it with obstinacy day and night, I will manage. The same applies with a lot of different fields, if I spend enough time, I'm determined and disciplined enough and work hard on nuclear physics, chess, golf, cooking, piano, ballet or so with the same obstinacy as I trade, I probably won't be Tiger Woods or Kasparov but I will have for sure a high level and be good at it. Now I'm not sure it also applies to trading and that my obstinacy will lead me to riches, I sincerely hope so and I want to believe it but I'm not 100 percent sure... Well, I'll find out.

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Die in Debt and Screw them All

2011-06-08T17:27:00.005+01:00

"Borrowed money is inherently likely to produce moral hazard. Suppose that I'm a smart guy, but without any capital, and that based on my evident cleverness you decide to lend me a billion dollars, to invest any way I see fit, as long as I promise to repay in a year's time. Even if you charge me a high rate of interest, this is a great deal: I will take the billion, put it into something that might make a lot of money, but then again might end up worthless, and hope for the best. If the investment prospers, so will I; if it does not, I will declare personal bankruptcy, and walk away. Heads I win, tails you lose." -- Paul Krugman - The return of Depression Economics

It seems that Moody's may be about to lower the rating of a few American banks (BofA, Citi and Wells Fargo) as the support from the US government to the largest financial firms taken into account in their current ratings may be limited. Well nothing really surprising here but the story reminds me of a "funny" stuff. The bean counters manage to profit to some extent from the downgrade of their own firm and the banks are kind of hedged against their own downgrade. When a firm issues bonds and borrows some cash from the noteholders, it has to pay a spread (over LIBOR, the interbank rate). Very obviously, the more "fragile" is the issuer and the lesser its credit quality is, the higher the spread (the Credit Default Swaps or CDS spreads work in a similar way). It's a risk premium. Now let's assume that a bank has borrowed a zillion with an average spread S, after it's downgraded, it has to pay a higher spread. Actually it means that the "Mark-to-Market" of the issuer spread is positive : If it had to borrow today it willl pay more than what it paid, so it claims a profit... Basically, in other words. the banks are kind of short of themselves : the more they are hurt, the more they will profit from their issuer spread. I'll try to translate the idea in (bad) English, it means that the more you are likely to die, the less likely you will be able to repay your debt and thus the more you screw the guy who lend you some money. So what the banks suggest is : die in debt, you won't have to repay. It's brilliant is it?

Let's try to follow this concept and derive a strategy : while the standard portfolio allocation BS (stands for Bull Shit not Black-Scholes) theories tell that the optimal strategy is to invest all in stocks when you're young and switch progressively over time to bonds and cash to end up fully in cash when you are old, I'm proposing here an allocation strategy based on moral hazard and the "die in debt" principle. My strategy lies on the assumption that the debt doesn't follow you in the after death, I guess it's realistic enough and hopefully we won't be told "Hey man, you died with a debt of 1 zillion, that will be 10,000 years of purgatory for you" or a bad joke like that. The idea is very simple : "the older you get, the more you get leverage and borrow". If thanks to that leverage you become a zillionaire, with a bit of luck you'll live long enough to enjoy a bit your wealth and you may also be hedged in the after life as generations and generations of your heirs, will, without a doubt, be grateful for your allowing them to live a high life without having to do a damn thing during their lazy life and pray for your soul, clean up the statues of yourself, florish your grave and name pets, institutes and brothels in your honour (I'm sure even your great great grand daughter Paris will). If you screw with the leverage and go broke : as discussed earlier you'll crystalize a profit of the amount of your debt the day you'll die but "Sorry my dear children but you'll have to make it on your own and work...". Unfortunately, the banks master this kind of practice but don't allow their beloved clients to do so: the price you pay when you borrow money is computed as if you will die 10 years ago, it's strange because on the other hand, their cousins the insurers when comes the pricing of the annuity you will receive for life assume you will live until 150 years... All bastards!

OK, OK, that's my silliest post ever. Sorry... I'll do better the next time
TLofT be with You

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The Lord of Bargaining

2011-06-01T17:44:00.003+01:00

"A good strategy to get a better deal out of a marriage is to enhance one’s outside option—that is, the payoff from divorce."
-- Abhinay Muthoo - A Non-Technical Introduction to Bargaining Theory

The art of bargaining may teach us something about the one of trading. When I was a young (and handsome...) man, I used to think that to "get rich" the best way was on the one hand to earn a lot of money (indeed, clever boy!) and on the other hand, to buy things with a huge discount... I worked hard on the latter part and I had ended up a kind of Lord of Bargaining. Actually it's hard to imagine how everything and anything can be bought with a massive discount (as in 80-90% off), frankly I could maintain a whole blog with the stories of my negotiations : from the purchase of useless souvenirs during my holidays or how I filled my wardrobe with ten 5k-tailor-made suits for less than the price of one to a real estate transaction done with the son of a billionaire cousin of Bin Laden's that now appears to be the deal of a lifetime. The latter was my first transaction of "money dirtying": not (only) because I traded with the family of the dead terrorist (this said, he had like 60 siblings so he could have something like 10,000 close cousins) and I didn't know how they spent the money I earned honestly but mainly because I had to pay 20k in cash to the seller, a young playboy, and after the transaction he proposed me to go to the strip club. I then thought "Damn, I've earned this money working hard and it will end up in the underwear of a stripper...", that's what I call money dirtying... literally. Believe me or not, I don't give a damn. Not to give a damn (or pretend not to if you actually care), I believe it's one of the main principle of the art of bargaining. Fix in your mind a price with a huge discount at which you want to get the stuff and don't move from that price in the negotiation: you don't give a damn, remember.

Now as I'm getting older, I tend more and more to think that it's not worth wasting time on saving peanuts, seeking for small bargains and more generally being mean and too careful about everyday expenses: I believe I will be better off focusing, working day and night and concentrating all my efforts on potential sources of huge profits (trading for instance): I expect a Few massive gains will more than offset thousands of cost of bargain opportunities. But lately, I found (actually it was recommended by Niederhoffer in Practical Speculation) a very interesting article on the Bargaining Theory, A Non-Technical Introduction to Bargaining Theory by Abhinay Muthoo, that studies the factors that determine the outcome of negotiations, taking example from real estate transactions, married couples negotiation on who is gonna to take the rubbish down to discussions with Union and international negotiation. Let's examine the main determinants of the bargaining outcome according to the article and I'll share with you, Fellow Trader, some thoughts on trading those factors inspired:

- Patience: "A key principle that will be discussed is that a player’s bargaining power is higher the less impatient she is relative to the other negotiator.". Patience, impatience actually, is the key component of the price move in the market. A price goes up when there are more guys impatient to buy than guys impatient to sell and goes down in the opposite situation. There are two ways to play with the impatience of the market participants, the first is to try to anticipate the future disequilibrium between impatience to buy and impatience to sell and enter before the momentum in this direction, the other is to try to anticipate at what level the balance between the impatient buyers and sellers will change side and try to play a reversal. Generally speaking, I believe patience gives a significant trading edge and personally I force myself to trade as if I was less impatient than I really am. For instance one of the techniques I use: if I have a signal to entry at a certain level, I put a limit order at a cheaper level, 0.2-ATR cheaper actually as the analysis of hundreds of my past winning deals shows that in most of the case the market went at least 0.2-ATR against me. This allows me to trade with a discount, that's the return of the Lord of Bargaining. I believe that generally all the trades have to be done with a discount of at least the bid-offer spread, you don't want to pay the brokering bastards, do you? The only cost of such a practice is only a cost of opportunity: you can miss winners but a surfer can't ride all the waves and there will be other ones for sure, patience, patience.

- Risk Aversion: "a key principle [...] is that risk aversion [of seeing the negotiation broken down] adversely affects bargaining power: i.e., a player’s bargaining power is higher the less averse she is to risk relative to the other negotiator." Here's my "I don't give a damn" thing. In trading it's for me a major principle as well. Using what I call an "extreme anti-martingale" money management strategy, where I start with a tiny "equity" and put at stake most of it as it grows and until I become a zillionaire or I go broke, allows me not to give a damn and to be less risk averse. If I burn all my equity, even if I managed to grow it to a zillion, what I lose ultimately is only my initial tiny stake and I don't give a damn.

- Outside and Inside options: the option to break the current negotiation coming respectively from an outside source (for instance another proposal from a third party) or an inside one (the pay off not to enter into a transaction, for instance in the case of a house sale, the possibility for the seller to live in the house) I'd say in trading, these options could be seen as the possibility to cut a position (outside option) or to hold it (inside option). Sticking to the old good "Let the profits run and cut the losses short" golden rule, I think that the more the market goes in your direction and your position shows a profit, the more the inside option (hold it) should be valued and the more the market goes against it, the more is worth the outside one (get out!)

- Commitment Tactics: "This tactic involves a negotiator taking actions prior to and/or during the negotiations that partially commit her to some favourable bargaining position.[...] A key principle [...]is that a player’s bargaining power is higher the larger is her cost of revoking her partial commitment" Well, I have to confess that on that one, the analogy with markets I can see is not straightforward. It would concern pyramids (or adding on a winning position with the gained margin) which can be considered as an additional commitment during the trade. As you may know, I'm a big fan of pyramiding so I'd agree that the more I add on, the better my position is.

- Asymmetric Information: "An important determinant of the outcome of bargaining is the extent to which information about various variables (or factors) are known to all the parties in the bargaining situation." In trading, the information is definitely asymmetric and a lots of players try to benefit from their exclusive knowledge, but using it is called insider trading and it’s illegal. In my own trading, I don't try to get inside information and generally don’t "play the news", not for moral reasons or by fear of be caught and go to jail but I assume firstly that there are always a crowd of better insiders than me who get the information before and secondly even with an inside information, I'm not sure what's the right position is so the market reaction is unpredictable...

Further to these considerations, I'd add that to me, bargaining, negotiating and financial markets speculation are the part of the same stuff and thus are very similar and require the same basic skills. The trading approach that is the most consistent with bargaining is the contrarian one: "buy when everybody sells and sell when everybody buys", and that's the one that makes more and more sense to me as I gain trading experience. I'd claimed for years being a "trend follower" but as I wrote earlier "when you make profit, you always appear as a trend follower". I guess that my true nature is coming progressively out, the Lord of Bargaining may be back!

TLofB be with you
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As this post is published: SPX 1326 // SX5E 2827 // NKY 9719 // DAX : 7217 // EURUSD 1.4406 // USDJPY 80.86 // XAUUSD : 1546