Robert Dubik - investments, trading

Banks Are Causing Deflation

2009-01-31T10:25:00.000-08:00

Last year I have predicted that 1% stimulus package enacted by Bush will do nothing for the economy. That prediction has unfortunately proven to be true. Economy now is in a much worse shape. Last quarter GDP contracted at annual rate of 4%. Unemployment has risen sharply. Even in California where I live, home to most vibrant investment, start up and high-tech community, the unemployment is now at 9%.

I have also argued that banking standards had to be lowered not tightened and that interest rate be reduced or caped. In September 2008, I have written that banks should be only bailed out if the interest rates were capped. Opposite has happened. Banks received funding but has not resumed any lending. Mortgage rates stayed the same despite fed rate reduced to virtually zero. Banks are saying that they are helping home owners to work out mortgages but in fact they are sending work out packages that are more onerous than existing mortgage. Many of the home owners are upside down on their mortgage, which means the can't sell, move or refinance. As a result housing crisis is accelerating, more foreclosures, more wealth destroyed and more people are suffering.

Fear of inflation has been replaced with fear of deflation. How is possible you would think with so much of government's injection of money? I suspect that the reason is that the banks are "sitting" on it. By not lending, banks are effectively reducing money supply thus causing deflation.

One way that monetary expansion can occur is to get around the banks - such as direct funding of specific projects, which is the aim of Obama's stimulus package.

So, will the Obama's package which is about 10% of GDP work? In such a deep crisis, I am afraid it may not be enough. In addition to government spending, credit must be made to flow again.

Obama's administration, has authorization to use second have of TARP money. They need to put restrictions on the use of those funds to be directed towards reducing lending rates and reducing lending standards (now even people with excellent FICO scores are refused credit).

The banks that do not sign up to this plan should be allowed to fail.

Trading Resumed and Why I Never Achieve Hypothetical Trading Returns

2009-01-18T07:37:00.000-08:00

I secretly resumed trading Best Market Chances and Have Fun as they have again proven resilience. If I had stuck with these two systems all last year despite heart stopping drawdown period my investment of $50,000 could have grown by $70,000. Instead I barely got some gains. I still have not figured how much. When I do, I will sure to publish.

Following are the main factors of such huge discrepancy

1) Fear. Whenever trading system does something you don't expect you think its broke. Statistically there is much higher likelihood that the system is broke then a simple drawdown. So you pull the plug.

2) Technology. Routing trading system through my computer at home was a big mistake. Lots of lost orders due to multiple hardware, software and communications issues. Now I use OpenECry, the broker which receives orders directly from Collective2 web site. No problems yet.

3) Money Management. Using Have Fun I could be trading two or three contracts and still have the same volatility as Best Market Chances. Instead I succumbed to fear and traded one.

4) I did correctly killed two systems before they took me down. More fear!

Another issue that I worried about was slippage. However, at least with these two systems slippage was not a huge factor. So you can pretty much get close to the performance reported by Collective2.

Ok, now that I fixed the technical issue, my conclusion is that fear is the main culprit responsible for missing gains. But it also responsible for avoiding big loss.

So as everyone else this trader is driven by greed and fear!

Therefore, if I new the system would not break, I would be able to make a sizable gain. However, if I blindly trusted the system I would most likely suffer a sizable loss. So my returns are determined in large factor by my ability to distinguish a system that undergoes a sizable drawdown versus complete break down.

Few words about vendor communications. I like to communicate with the vendor and get an idea of his reasoning. However, most vendors would like to believe that their system is sound even in the overwhelming evidence to the contrary. Many will continue trading and sending signals until the system completely blows up. This is wrong, vendor should pull the plug at some point and save his subscribers from catastrophic losses. Instead some vendors keep assuring subscribers to hang on and point to previous record of accomplishment.

Think about this analogy - you are driving in a car and tracking your progress on the map. You can go slower or faster, but you pretty much able to plan how long its going to take you somewhere based on your average speed. This what happens when we consider a trading system: if you selected a system at some point in time it was because a particular system did not blow up yet. You can look at the stats and decide that this is the vehicle for you to take you into the future. You figure, sometimes it will go fast, sometimes slow but on the average it will gain so many $ / month and you will get to your destination.

Let's say there is a detour in the road and you have to backtrack and take a different road. Now the distance to your destination increases. This is similar to your system is going through a drawdown. Hopefully, you will get through the detour and will be back on your way sooner or later. Your system sooner or later will get out of the drawdown. Keep in mind that time to your destination is determined not so much by your average speed before the detour but how big the detour really is. It could delay you by half hour or by 12.

Now consider a tornado in your cars path. It lifts your car and throws it across the two lanes of high way into the ditch and the car is completely totaled. Miraculously you come out of it unscathed! Every, second after that you average speed begins to fall like a rock. A this point using previous statistics simply does not make sense. Same thing goes for a trading system, there could be something about the market that has changed, and the system that worked over some period of time met its demise. It could be a new regulation, it could be a new large trader that entered the market, it could be some other subtle way that markets interact with each other. Staying with it after that point would make as much sense as sitting in a totaled car and waiting for it to get moving again.

Recognizing your situation and making human decision is the main reason why we can not achieve the hypothetical returns shown on Collective2 and other similar web sites.

Finally fewer homes built then needed.

2009-01-18T07:25:00.000-08:00

As I have written last March there are approximately 1.2 M new households created each year. Now 4 years after the housing market peaked in 2005 we are seeing new construction fall bellow what is needed. New housing starts are now at 0.6 M which is about 50% of household growth. Keep in mind that it takes awhile for a new start turn into a new completion. And completions still have not fallen as much as starts: the latest figures show 1 M completions. (Still less then household growth).

At this rate it will still take several years to work of the inventory of homes that were built in access of demand but the tide has turned.

Interest rate caps must be a price the banks pay for bailout

2008-09-25T08:56:00.000-07:00

I have to admit that I am very impressed by Bush administration finally starting to come up with ideas on how to limit the damage from economic and financial "hurricane" created by housing collapse rather than just looking for someone to blame. Previously I have argued that I thought that to get things moving we need to cap the interest rates charged by mortgage companies. Of course, this would never happen voluntarily because the banks were defaulting even without interest rate caps.

However, now that government is buying "bad" mortgages, they can implement rate caps as condition of bailout. Once interest rates go down and through refinancing mortgages become more affordable it will benefit not just the troubled mortgage holders, it will benefit everyone. It will reduce cost of housing significantly for vast majority of people, making more money available to purchase other goods and services thus stimulating broader parts of the economy and promoting job growth. It will bring new buyers into the housing market increasing demand for homes and reversing price decline. Reduced mortgage payments, reversed housing price declines, and increased employment will finally bring the foreclosures rate down.

I think Paulson and Bernake think that bailout will cause banks to lower interest rates voluntarily. However, if I was putting up this much money, I think I would be entitled to a guaranty that it will actually happens immediately and not at some future point and at bank's discretion.

Best Market Chances - Suspended Again

2008-09-23T09:15:00.000-07:00

Suspended 9/22 - dramatic loss of value in short period of time. Lost everything I have made during the year and then some. This happened during high volatility period with Lehman failing, AIG rescued, gold shutting up 18%. DOW moves up and down by more than 3%. Going back to my weather metaphor - this is category 3 hurricane. Doesn't happen too often but when it does - watch out. The reason for suspending trading is purely emotional - lost too much money in the short period of time. In the last 40 days my equity went from $50k to $57k, down to $47k. This wild ride is hard to stomach.

What is common between banking and trading systems and how to fix housing slump

2008-08-25T12:21:00.000-07:00

What does banking and trading systems have in common? Actually quite a bit:

First of all bank lending is defined by certain rules and regulations. For example when you submit an application for mortgage bank checks you credit score, your tax return, verify you debt to earnings ratio, verify value of property. (Obviously, I am assuming standard procedures and not what are considered "bad" practices). The procedures are collective wisdom of previous years of banking which were designed to make sure that the bank makes money. In a trading system, there are a number of rules in place which designer of the system thought would generate positive return for the system. These rules are often tested on historical data and then by real live trading.

As we have already observed, even systems that have worked well in the past can blow up. Something may have changed in the way the markets or commodities work and the system that worked well in the past no longer works. Same thing goes for banking. I believe the single most important error in banking rules was that price of real estate will go up. Therefore all these other rules that were in place may have been relatively less important as the more important assumption of rising prices. As soon as prices began falling, buyers stop buying, fearing future declines. Since most home sales are made with leverage of 5 to 1 or higher, even small decline in value of real estate creates a huge decline in invested capital. The opposite is true also: small increase in price results in large investment return.

So it seems our banking system has blew up just like any other trading system. Even a huge spread between Feds rate and what banks are now charging for mortgages which normally would result in windfall profits for the banks are not motivating banks to help resolve the situation.

In order to solve their own problems banks must be aggressive in reversing housing price declines and get customers back into their own doors. They must reduce the mortgage rates by no more than 2% over Feds rate. They must unilaterally and across the board reduce existing mortgages by !-2% so that foreclosures stop or drastically reduced. It is time to recognize that the previous system the banks have devised to make money is simply not working when the prices are falling!

Bernanke is right on

2008-08-22T09:01:00.000-07:00

I have always thought of the recent housing bubble, which precipitated financial slump which precipitated commodities bubble is really a natural disaster such as hurricane. With a lot of very powerful economic forces getting out of control and pumeling everything in its path. In dollar terms this economic hurricane is orders of magnitude larger than physical hurricane such as Katherina. I am very happy to hear that our chief economist also uses a weather metaphor in his assessment.

"Although we have seen improved functioning in some markets, the financial storm that reached gale force some weeks before our last meeting (in Jackson Hole in August 2007) has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment," Mr. Bernanke said.

I think Bernake is right on. Keep on top of it Ben!

Greenspan - immigrants help getting out of housing slump

2008-08-13T17:57:00.000-07:00

Earlier, I have wrote in my blog that it is a good thing that housing starts declined as much as they have. The reason is that supply of new homes has to drop below the demand so that unsold inventory can begin to be reduced. The demand side of equation is growth in number of households. In an interview with Wall Street Journal Alan Greenspan is basing his housing analysis on the same idea. (I guess I was not sleeping in economics class after all).

Interestingly;y, he suggests that immigrants account for 1/3 of new households and therefore liberalization of immigration laws would help significantly in depleting unsold inventory thus reversing housing slump and getting economy out of malaise. I would assume converse to be true as well.

Best Market Chances - re-subscribed

2008-08-08T08:49:00.000-07:00

After three week pause it seems like the system did not die and I am back as subscriber as of 8/7. However, I am no longer trading IB/TradeBullet set up and using OpenECry now. What I like about it is that there is no intermediate step between C2 and OpenECry, the order goes direct. I do not have to worry about DSL line or my computer or software.

So far I like OpenECry - you can get someone to talk to before the typical "interrogation" that you get at every other broker.

International Brokers TWS, Tradebullet Set Up.

2008-07-22T13:08:00.000-07:00

I received some questions about why the set up is not working for me. Simple answer is that there are too many things to go wrong.

Here is my trading log for Have Fun as shown on C2. For the purposes of this discussion it is close enough to real results. (Click on the picture to zoom in).

It is difficult to tell what caused the trades to miss. It could be DSL line interruption, it could be Tradestation (TWS) API, it could be Tradebullet, it could be IB server, it could be c2, it could be one of my kids messing with computer, it could be Windows OS doing something it's not supposed to, it could be that I did not set up Tradebullet correctly (there are a lot of options to choose from). Everybody thinks that they are not the problem. I do want to specifically comment on very good and responsive tech support I received from TradeBullet.

But I have to look at the facts: I have tried unsuccessfully for many months to make it work which cost me not an insignificant amount of money. At the end of the day, the only thing I know for sure it is not working FOR ME.

I am hoping with OpenECry is will be easier to find the culprit if something goes wrong. But will see that if I find a system to trade. Any suggestions?

Have Fun - Suspended, Best Market Chances - Unsubscribed, Trade Bullet - Cancelled

2008-07-20T20:41:00.000-07:00

Looking at the title of this blog you may be thinking that last week was meltdown, and to be honest it was! It pretty much wiped out any earnings I had.

I started with jumping back into Best Market Chances hopping that it stabilized. Bad mistake - $2500 gone in one day. I am so sad about this one - I really liked it and the developer - Helmut Fuchs. I forgave it two long strings of losses. I will back off for a while to see if performance gets back on track. I have stopped subscription in the mean while.

Have Fun is my other darling. However, I have missed a lot of trades with it because of International Brokers / Trade Bullet set up I have been using. However, for some reason lately the set up missing trades. I have been working with Francis - Trade Bullet's technical support to resolve the issues; however, I can not make it work. I do not know if it is me of software, but if you look at the log of the trades with have fun, you will see that lately most of the trades did not go through.

I have convinced myself that I can not make the client side solution work. It also does not help that there are too many parties involved and at every stage something can go wrong - the system vendor, c2, trade bullet, trade station, communication link, the international broker's server. The failure can occur at every stage and then you are left troubleshooting the entire chain. So, I have shut down Trade Bullet and Tradestation and opened OpenECry. This is one solution that reduces number of places where things go wrong. C2 should be sending data to OpenECry with no intermediaries. So now I am ready...

This brings me to the last point. Have Fun has suffered 3 consecutive losses. Normally, it would not be a problem; however, in this case it is. According to C2 stats, win/loss ratio for this system is 75%. Since the system is only trading 4 times per month we should not be seeing 3 consecutive losses very often (less then once every 16 months). In other words, this should be a very rare event. I also did not like the last trade was handled. System was profitable at least twice during this period however vendor went for extremely risky move of leaving the system open overnight. Since the system trades Russel index futures, large overnight moves are possible. Because this system is discretionary, I am afraid that the previous two losses clouded the vendors judgment wanting to bring home a big win, but instead resulting in the loss.

At this point I am set up to trade however, I do not have any system to trade!

Looking at the history I see a lot of systems that blew up. At this point I do not feel that by looking at a previous performance it is very likely to pick out a system that will not blow up.

Gold Survivor $10k portfolio, Ruby look like the blew up. DeltaHedge, Index Spreads are dying. The only one which is still ok is Dgmma and Gold Survivor Energy. This means that only 2 systems out of twelve did not blew up in the last 8 month of me using c2. This is very scary.

Past returns does not guaranty future success. I have found this to be true in simulated results (Beware of Fidelity / Wealth Lab - I lost a lot of money trying to make that work too). It is now turning out to be true in real life trading. If you playing with your only money please stop - this is not the place for you!

Best Market Chances - Suspended Trading

2008-07-02T12:52:00.000-07:00

I again suspended trading after 8 consecutive losses. You say why? Isn't such string is unlikely and the gain is now forthcoming? Perhaps, however, making sure the system did not blow up is much more important then a short term gain. So we'll wait for a while to see if win/loss proportion gets back to historic average.

I am still continuing to have computer issues with TWS/TB set up. Vendor is saying that it is due to my DSL connection and it well could be true. But seems like this is a real world condition that is faced by many. I know I am very frustrated at this point and I do not want to be blaming anyone. However, the set up that I currently have I am very unhappy about. The only saving grace is some of the missed trades were real losers.

Have Fun, Best Market Chances and CHF Vola(tility)Breakout

2008-06-27T08:08:00.000-07:00

I am still trading Have Fun and Best Market Chances. Total gain for May and June is about $11,200 or about 16% with bulk of it due to Best Market Chances. I like that system vendors are responsive to questions and try to help where they can. This is as good of an endorsement as I can make, because at any time any system can blow up and go south and then my endorsement will look silly. Second, I do not really want too many people signing up for these systems and ruining it for me. Sorry, I am am human and a little bit selfish.

It is very difficult to judge when the system becomes broken versus when it goes through a natural draw down. I had to suspend trading Best Market Chances and CHF Vola Breakout when I saw a highly improbable string of consecutive losses. I resumed trading both when I saw win/loss ratio get back to normal. However, I had to urgently bail out of CHF Vola Breakout when losses resumed. Now, it is clear that bailing CHF VolaBreakout was a good move as the system completely fell apart. However, at the time it was not so obvious. All in all loss on the CHFVola.Breakout was about $2500 or 3.5% of my trading capital. You can see my actual trades in the picture above. The other thing I discovered is that trading Forex with IB and TradeBullet is a major hassle, because you end up accumulating CHF in your account and then have to manually take it back to USD. This is not easy unless you are a pro - liquidate position function does not work with Forex very well and you still end up having foreign currency in your account. I tried this using Traders Work Station and Trade Bullet - I still have 3000 CHF in my account which I need to get rid off.

Jumping back into BestMarketChances was a good move with significant profits during the month of June.

If you would like to subscribe to any of the systems that I am currently trading, please send me your email and I will send you a warning whenever I feel there is something wrong and I am either suspending or stopping trading the system.

Finally, I have to say that although I like a common pool of money to allocate to multiple systems and IB is the only vendor that advertises support for stocks, options, futures and forex, the reality is quite different. Forex trading did not work for me at all. Trading futures is much better; however, I had a large number of technical issues where trades were lost due to either a bad connection, software, my computer or a combination there off. If you go this route - please use a dedicated machine that does not do anything but runs TWS and TB, never log off the account, never go to sleep, never run any screen savers and never allow any automatic updates unless you set the time to off hours on the weekend, never get your kids to play games on that machine. Even then make sure the system is responsive and not locked up every day before the trading starts. It is very touchy and unless you are willing to learn about all the quirks - you should not be using this system. It is not one of those things where you sign up and forget.

Best Market Chances

2008-05-18T23:17:00.000-07:00

A string of losses was broken and I have resumed the trading. Hope it was just a fluke and this system is back.

Heed the warning - Past performance is no guaranty of future results.

2008-05-15T18:10:00.000-07:00

You have probably seen this warning many times when you signed up for your brokerage account and on C2 web site as well. Well, take it seriously!

Since, I have came upon c2 web site I have tried to use all tools at my disposal to select winning systems, however, the track record is not encouraging. Out of 4 systems I have tried, I had to discontinue or suspend 3: mwz, best market chance and CHF.volabreakout.

Then there were 7 systems that I thought looked pretty good but collapsed since I began tracking them Slow and steady, Spy options, Team aphid bird, Trendsensor II Jumbo and Golden Index, Grain Analyst and Fundamentals Only. In this sample I have a pretty wide range of trading styles and underlying instruments represented. I guess, the only saving grace is that I did not subscribe to them. It's a small consolation - but I will take what I can.

There are still 5 systems that I am watching that has not collapsed: DeltaHedge, Dgmma, Gold Survivor $10k portfolio, Gold Survivor Energy, Index Spreads, Ruby NQ100 M. So, 5 out of 12 not collapsed rate so far.

I am still subscribed to Have Fun however, performance has not measured up to what it was previously.

To get to next level it is really critical that C2 brings together in one place all the early warning signs that the system is about to collapse and signs that system is already collapsing. Right now, it is still too hard.

I would be interested to hear from anyone who has successfully traded portfolio of systems for longer than 3 months.

Best Market Chances

2008-05-15T17:48:00.000-07:00

Subscribed since May 1

Suspended May 14: Encountered a highly improbable long string of losses inconsistent with previous performance. Average performance before this string of losses was about $288 per trade per contract and trading as often as it does is likely to result in phenomenal returns. Until it no longer does what it did in the past...

Trading costs of this system are high - about $400 per month at a current trading frequency . There are also some issues with Interactive Broker / Trade Bullet set-up that I am using. Orders are sent to exchange right after it is closed resulting in rejected orders. C2 log seems to contain a lot of errors - for example slippage of >$100, which may or may not affects statistics.

This system is trading night and day from Sunday to Friday. Do not try it until you have autotrading set-up one way or another.

I suspended trading of CHF.VolaBreakout

2008-05-08T17:07:00.000-07:00

I am suspending my trading today. Likelihood of 5 consecutive losses in a loosing streak, given it is a loosing streak, is only couple of percent. This chart is created using last 6 month of trading data as available on Collective2 web site. This is first time in 6 month 5 losses in a row has happened. According to system's vendor max loss run since inception is 8. I will be watching if the system returns to a more reasonable win/loss distribution.

Very high likelihood that the system is broken.

CHF.VolaBreakout

2008-04-18T00:55:00.000-07:00

Today, I started trading CHF.VolaBreakout at Collective2. It trades long and short Swiss Frank (CHF) using US dollars.

The technical goodies for selecting CHF.VolaBreakout were consistency of return, length of track record (9 months), Sharp above 2, APD above 0.3 (although I am still not sure if I trust APD, I like the concept in principle), and last but not least last 90 days of return and annualized return. And a huge bonus is a low $49 subscription fee. This allows me to try with smaller allocation of $7k.

In addition, I am not overly concerned about huge spike one way or another in CHF to USD exchange rate. Having written "I am not concerned" I feel like I am jinxing myself. So actually I am concerned about it.

Which brings me to the last reason why I like it. It has very small "duty factor". Average trade duration is only few hours and it generates about 10 trades per month (at least according to system vendor). In other words, most of the time it is in cash and only short time it is exposed to market risk. So probability of major negative event happening is reduced by the "duty factor".

So why do it? In one word - diversification. I want to reduce correlation between different strategies and FOREX is one way of doing it.

This is my first foray into FOREX trading and I am proceeding cautiously. Actually, I am quite nervous about round the clock trading and I am very worried about IB + Tradebullet set-up being reliable enough and a lot of mindless daily maintenance that goes into it. In fact, I am going to see if I can replace it with server based solution.

My second concern is that lately dollar was going only one way - down. So you could say there is almost a perfect correlation between CHF.VolaBreakout and CHF to USD exchange rate. Because the return was generated both through short and long sales I do not really think that correlation is there, but if the exchange rates become more volatile or starts trending in the opposite direction will CHF.VolaBreakout strategy continue to work? Suspense is killing me...

My original choice for FOREX TeamAlphapid was abandoned, replaced with Team Aphid Daily. Very Disappointing.

Finally new homes supply is in line with demand

2008-03-18T11:52:00.000-07:00

It seems like everyone is upset the new home starts is at all time low. It averaged at around 2.1 Million / year in 2005 and this February it was at 1 M / year. Instead of crying over the fortune of few home builders, we all should be happy. The reason being is that number of US households is only increasing by 1.2 M / year. Since very few homes are being demolished and obsoleted every year all these new homes result in additional capacity. Ignoring obsolescence, in 2005 there were 1M extra homes built then anyone needed. 2006 averaged 1.7 M built and 2007 averaged 1.3 M. For these 3 years is about 1.5 M of overproduction. (And with such extreme overproduction comes housing collapse).

Of course, I would much prefer the builders cut back production by another 50% but there are way too many "greedy" builders for this to happen. So at this rate it will take a few years to work through the inventory. But at least with supply being less then demand, inventories will start coming down.

Why do you care?

If you want to buy a cheap house - now is probably the best time to do it.

If you are worried about your wealth loss because of so much of your money is tide up in the house - then probably you can start seeing the light at the end of the tunnel.

Configure Automatic updates to avoid problems with autotrader.

2008-02-13T15:21:00.000-08:00

I am currently subscribed to "Have Fun" trading system. Usually I set up the computer the night before to enable it to start trading as soon as markets open. This is 6:30AM California time and I admit that for me being up and awake at 6:30 sometimes is easier said then done.

This morning by the time I made it to my computer it was already close to 7:30. Looking at my laptop I noticed a Windows log in screen, rather than a familiar auto trader screen. As I logged in I saw a "friendly" Windows pop up which informed me that windows installed system updates and a restart was required. I scrambled to log on to Collective2 web site to see if I missed any trades and sure enough I missed a trade signal. It is just my luck that the reset happen to occur today rather than the previous 5 days when there were no trade signal generated at all.

Trying to guess if I should enter the trade, I decided that the price level was close enough so I fired up the trading application and I was in. I felt a little reassured as immediately my profit was starting to build up. When I returned to my laptop at the end of the day I was sad to find that the trade ended up being unprofitable after all.

So, if you would like to avoid this type of emotional roller coaster please make sure that automated processes on your machine are not going to wake up some time in a middle of the day or at night before the trading session. There are two control panels you should check. Go to start menu, then select control panels. First one is Automatic Updates. Second one is Program Updates. Go through every program listed and schedule updates in a way where you are not going to be interrupted during trading hours or at night before the trading session. I have set mine for Saturday night. Now if you forget to leave your lap top fired up on a weekend, you may still have problems come Monday morning. If you really paranoid about this, you can set it for manual updates, but then you have to deal with the hassle of overseeing the update process which will sap a lot of time out of you.

Another pitfall for laptop users - do not plug in your laptop into a switched outlet! Even if it is turned on at the time you set your system up, does not mean that someone will not turn it off and cause your laptop to be off during trading hours. Seems obvious, but... been there, done that, have a T-shirt.

In any case, consider yourself warned and happy trading!

Banks - please lower you lending standards now!

2008-01-22T22:04:00.000-08:00

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

2008-01-16T19:51:00.000-08:00

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.

Review of mwz trading system on Collective2.com

2007-12-27T19:08:00.000-08:00

After only 9 trading sessions I decided to unsubscribe from mwz. These were my reasons:

- As soon as I have subscribed, trading frequency shut up 3+ x over historical average making $30k, which I have allocated to this system, too small to be viable. The trend of number of trades per day generated by the system is shown on the graph.

- Discrepancy between reported and my own performance was too high. I estimated discrepancy of 14% / month at my allocated capital size. This would wipe out most of the reported performance of this system. (I do not have a tool to analyze over 700 trades that were generated to find the root cause of discrepancy. Although Collective2 web site has an option of displaying real trades along with hypothetical trades, my trades were not reported for some reason). The table shows a summary of discrepancy of my results versus reported by c2 web site.

- Vendor did not respond to my questions.

- I did not have a stomach for combination of high leverage, short selling and in some cases >50% of equity going to a single security.

My trading set up uses an account at Interactive Brokers + TradeBullet, a required 3rd party piece of software which costs $50 per month. Interactive Broker's commission is about $1 per trade. MWZ subscription cost is $22 per month.

Comments, questions, suggestions are welcomed.

Proposed rules will aggravate housing slump

2007-12-18T18:28:00.000-08:00

I think Fed's idea to disallow no-doc / low-doc loans would have been a good idea before the housing bubble, but in today’s climate its impact will be devastating. This significant tightening of the consumer credit policy cannot come at the worst possible time.

Many people faked their income to be able to afford the home they want or any home at all. With housing costs increasing faster than their incomes, faking income was possibly the only way to become a homeowner in their lifetimes. Others may have had a good income but lost their jobs (temporarily or permanently) or simply retired. Yet there is another category of small business owners who find it difficult to qualify for a loan.

Many of these folks, who are good payers with high credit scores and ability to pay, under new rules will not be able to qualify for a new loan, either refinancing (to take advantage of lower rates or to avoid ARM reset), cashing out to meet short term obligations or major expenses or needing / wanting to move to a different part of the country.

Inability of these people to obtain a mortgage will contribute significantly to increased backlog of homes as well as push away potential new home owners because

o Who wants to invest in depreciating assets?

o Home values seen as considerably more volatile (risky), reducing attractiveness and increasing cost of financing purchase.

o Home is seen as an asset which is hard to buy and to sell (not liquid) or has a potential to become not liquid during the course of ownership.

o Loss of confidence in regulators who can step in arbitrarily at any point and change rules of the game in a way that will wipe out your investment returns.

It will amplify housing market slump and cause more people to loose their retirement nest eggs they have built as equity in their homes. Many will be forced into foreclosures, bankruptcy and poverty and is likely to result in major recession / depression.

This step will not “punish” those who have speculated or got into homes they could not afford – this will punish everyone.

Tightening consumer credit policy and causing the housing prices to plummet even more than they already have, is the craziest idea I have heard coming from Washington in the long time.

There is a 90 day public comment period. You can let your opinion to be know by going to Fed's web site.

mwz system on collective2.com

2007-11-28T20:00:00.000-08:00

I am very interested in trading tools available through www.collective2.com which allow investors to publish and subscribe to trading systems, verify and compare performance of such systems. I will be commenting on these tools in a separate blog. In the mean while I would like to post on the first system that I have subscribed to through C2 - "mwz".

I will be tracking a number of systems on Collective2.com.

This is a discretionary system which means there is a human driving the boat. I don't particularly buy into publisher's explanations of his own strategy (you can find those on his web page); however, If the results he achieves are real he does seem to have a 6th sense, so I am going with it. Human brain is one of the best pattern recognition devices ever created. It is my understanding that if you take one of human senses such as hearing and wire it to the part of the brain which is responsible for sight, pretty soon you will be able to hear again. In other words brain will make sense at any pattern thrown its way. Granted, the brain may play tricks on you: it may see one pattern when in fact there are many or in fact none - like Escher painting or a cloud that can look like many things or nothing all at once. But this is the risk you are taking with a human system, no two ways about it.

There are few things that make me nervous about this system. I really hate shorting as a strategy, period. Then, a lot of weight is given to a single stock once in a while which can blow up in a big way. Granted it did not happen yet, but it could and sooner or later it will. The other thing is that you need a good size equity to trade it because it generates a huge number of trades (about 30 / day). Using Interactive Brokers account this is about $200 / mo. Plus you need to pay for Trade Bullet (a mandatory piece of software), another $50 /mo. Bottom line is if you only trade $30k (which is the minimum you need - remember government regulation does not allow day trading if you have less then $25k in your account) be prepared to spend at least 1% of your earnings per month on fees.

The reason why I decided to go with this system is consistency of return and low (almost negative) correlation with the market. This is the best way I thought of allocating some money to a day trading strategy.