Banks - please lower you lending standards now!

While US markets were on holiday for King’s Birthday, stock markets in Asia dropped like a rock. Trading was halted in India. Japan and China were in free fall. It joined US market in panic selling. We are talking about thousands of stocks moving together. So the old ideas of diversification do not work any more. Big caps, small caps, foreign techs they all move together. Diversification will reduce you risk - but the remaining risk is still too high.

(This is what makes me so interested in the fast trading strategies which show low degree of correlation to overall market on Collective2).

The second big news today was Fed’s unexpected lowering of the interest rates by ¾ of a percentage point. I like the idea of lower interest rates. I would like to pay less on the mortgage that I pay. But, I do not see this helping me any time soon.

1) Mortgages rates have not followed feds rate closely at all during the last decade. Seems like banks were profiting handsomely on the spread (my heart goes out to them now). A good web site that I found which tracks all these interest rates is mortgage-x.com.

2) Banks will not lower their lending standards as a result of this cut – so if your home value dropped, you lost your job (er – between jobs), or if you are a small business owner whose tax return will laugh you out of the banker’s office, or you live in the high priced regions of the country – most likely you will not be able to refinance to lower your burden. It seems counterintuitive that in order for everyone to benefit, lending standards have to be relaxed. I am not saying let’s not have any standards, let’s have standards that make sense and that allow people to refinance homes or sell them if they can no longer able to live in them.

Banks – please lower your lending standards. We all need it now!

The third big news both democrats and republicans are close to an agreement on stimulus package for the economy. Must be elections are coming… that’s right elections are coming! They even determined a level at which it will make an impact. This level turns out to be 1% of GDP.

Wait a minute… isn’t 1% by definition is something that is insignificant? Let’s say I buy gas at $3.33 per gallon here in California, now I will pay $3.30 per gallon. Am I supposed to be excited?

Don’t get me wrong, if someone will give me 1000 bucks, I will take it. I will even be thankful to the guy who gives it to me. But let’s not fool ourselves; it will do absolutely nothing for the economy.

Politicians - please do not try to buy my vote. If you don't know what to do with 1% of GDP, please give it to poor starving children.

Jumping into Futures - started trading "Have Fun" on Collective2

Comparing various trading systems on C2, future systems as a class show better performance over stocks, options or forex, so I decided to give it a try.

My worst fear of futures comes from the fact that commodity prices are much more volatile than Gaussian statistics predict and large price moves happen much too frequently. (This is sometime referred to as "fat tails" of the distribution). In those cases it is possible to wipe out many years of gain in a few days or even hours. So, I was looking for a system that makes few very high probability bets and does not stay in the market for too long. Based on that, "Have Fun" was the system I felt most comfortable with.

This system trades futures of Russell 2000 stock index which is a very broad indicator of the US stock market. The reason for my selecting this system is consistency of returns, high realism and reduced exposure to market reported on Collective2 web site. I also like relatively short trade duration of 1.9 days and no significant correlation to stock market.

I began auto trading "Have Fun" system with $35k account. The system is scaled so most of the time only a single contract is traded. The underlying value controlled by one contract is about $70k. So with 1 % change in the underlying security value of my account changes by 2%. So if instead of futures, I was trading the index, I would have to margin 100% to get this leverage. And this is only a single contract. Bottom line, if you only have traded stocks before, trading futures is quite nerve racking. If this is the only money you have - don't do it!

In this system trade signals come very infrequently and you need to be ready all the time. Case in point - last night my kids "hi-jacked" my computer for playing Warcraft and I forgot to set it up for auto trading. Being on the west cost, I did not wake up at 6:30 AM for the beginning of trading and just like that - missed a profitable trade... That's it! No more Mr Nice Guy!

But seriously, if you are auto-trading, equipment malfunction can also destroy many years of gains if you end up on the wrong side of the trade while your DSL line is down or Windows decides to install some type of patch and cause system reboot. These types of things don't happen too often, but realistically they may happen more often then large market moves. So be careful - and if you can help it keep your kids, your spouse, your buddies away from the machine, make sure machine is plugged into unswitched outlet and make sure that there are no screen savers and no other programs running that can interupt the auto-trading program (Trade Bullet) to route orders to your broker.