Trader’s Narrative

Two small blog updates:

Avert Your Eyes
I finally got around to updating the About section. Not only does it have more info like my favorite trading books but I also put up a picture that was taken for the Globe & Mail article earlier this summer. Yes, now you can see what I look like. Let the stalking begin!

Going Long RSS Stats
A few months ago I featured a chart and asked if you would go buy the breakout. You should have gone long. Here’s an updated chart of my Feedburner RSS subscriptions showing it cracking the 1000 mark:

The spike around June is due to my discovery of a plugin which forces all RSS feeds to be taken from Feedburner rather than my own blog feed. This relieves pressure from my own servers by using the free and awesome server power at Feedburner (Google).

Some read this blog by visiting the site, others through RSS readers and others have opted to receive updates via email. Over the summer holidays I got these auto-email messages telling me those who had opted for emails were out of their office. I was pleasantly surprised to find out through this means that many of my readers work at major firms on Wall St. and around the world.

I’m flattered to have all of you as readers. Feel free to drop me a note to comment on what I’ve written or to offer suggestions or feedback on the blog.

Usually I try and avoid pontificating on the VIX because Bill over at VIX & More does a fantastic job of examining volatility in all its shapes and sizes. You could say that he picks up the VIX by its scrawny neck and bashes it about until the poor statistical measure gives up every drop of market insight it has and more. If you haven’t yet to discover his blog, I highly recommend you read it regularly.

I’m sure that Bill will excuse this slight incursion…

As the market fell yesterday, it caused the volatility (VIX) to spike higher and close slightly under 19. This is high but not high enough to show real fear.

In the past few years, when the VIX has reached 20 and above, we tend to find some sort of footing and rebound (see graph below). The most recent example of this occurred in early March 2007 when the VIX hit an intra-day high of just above 20.

I find it a bit strange to talk about volatility highs or spikes in the 20’s range. Not that long ago that was nothing! Real volatility spikes registered in the mid 40’s. Things sure have changed. If we then go back even further in time, to the mid 1990’s, we again find ourselves in today’s volatility scenario where 20 is high enough to cause short term and intermediate term bottoms.

Are We There Yet?
This is why we can’t only look at the VIX’s nominal readings. Over time the landscape changes and what once was considered “high” is no more. A simple way to iron out such possible distortions is to look at the distance that the VIX is from some daily moving average (see bottom most graph).

I like the 50 moving average but you can use any reasonable number really. Putting the VIX through this moving average filter, we see that it still isn’t high enough. It is close. But just… ehn, ehn, under it.

Which means that we could very well spike higher from here and fall further down. But the good news is that theoretically, the VIX doesn’t have to go much higher or the market fall much further before we find an extreme reading from the VIX.

Causes of Low Volatility
For those curious enough to wonder why the volatility is so muted, everyone has their theories. Mine is that it is due to mainly two new forces:

One, the rise of the program buying/selling which parses prices and movement into finer and finer increments to squeeze out alpha. And two, the rise of gargantuan amounts of money to eek out bond like yields (in a low yield environment) from selling options. The massive amounts of options which these funds have to sell day in, day out increases supply and therefore, volatility.

Click to Enlarge Graph:

Now that you’re done reading my take on things VIX-wise, go read what Bill has to say.

A few weeks ago I got a nice email in my blog contact inbox from a journalist with the Globe & Mail (the Canadian version of the Wall Street Journal). Apparently he stumbled on my blog while browsing the net and for some unfathomable reason wanted to interview me for an article.

And yesterday another nice guy came over from the Globe & Mail to take my picture for the article. To be honest, I wasn’t ready for my closeup. Even on a good day my visage frightens children and causes spasmodic twitching in small animals. But yesterday I had a headcold and had slept very little. So you can imagine the challenge he faced.

Thank God for Photoshop.

Anyway, the term “close up” is passé. They refer to it as a “tight shot” now. The photographer was very professional and fun to work with. All he needed was one picture but took more like a couple hundred. I don’t envy him the job of picking one out of the pile.

So there I am, posing, turning, smiling more, smiling less, putting my chin down, putting it up, etc. When, before I know it, I’m half-naked strewn across a lounge chair. Man, these professional photographers are smooth talkers.

I just hope he keeps those pictures for his personal stash. It would be too embarrasing to have them become public:

Oops! You mistyped and made a fat finger trade

There is so much ink and pixels spilled on how to succeed in trading. So I thought, being a contrarian, I would zag instead of zig and outline how to fail as a trader. Without further ado, the 10 vital steps you must take in order to fail in trading:

1 Start out undercapitalized
Become enthralled with the romanticism of taking $500 to a $1 million - ignore any pesky thoughts about the improbability of such a Herculean task.

2 Ignore risk management
Always value conviction over discipline. Don’t worry when a trade goes against you, just put it aside and think of it as a long term investment. Or double down. It has to come back eventually.

3 Compare yourself to other traders, not yourself
Don’t use R or any of that weird stuff like MFE/MAE. Instead compare yourself to other traders using dollar amounts.

4 Look for the right system
Rather than gaining an understanding, search for the killer trading system - it is out there and it will make you rich beyond your wildest dreams! Take someone else’s system, seminar, etc. never waste your precious time in doing your own research. Don’t ask too many questions or push boundaries; crush your sense of wonderment and your natural thirst for learning.

5 Don’t keep a journal
Or in any way, try to learn from your previous trades.

6 Be secretive
If you stumble on an idea or insight, keep it to yourself. Never ever share it with other traders or ask their input on it.

7 Be casual
Don’t take it seriously, do it on the side, part time - don’t devote a lot of attention or resources to it. See #4

8 Fill your charts with as many indicators as possible
More information means more signals and money so make sure every chart is so complex that price action is hardly visible through all the indicators.

9 Trade with your emotions
If you’re feeling greedy, push your trades and buy more. If you’re fearful, stand aside or sell. If you don’t have strong emotions, go with the crowd. If they’re fearful, there must be a good reason, sell. If they are buying, join them. They must know something you don’t. And if you don’t know how to monitor the crowd, let a TV personality do it for you. Buy what and when he says.

10 Be inconsistent
Try to be completely random (that’s what markets are like after all, right?). One day trade based on news, the next day on candlestick patterns, the next day on fundamental analysis. Each day trade a different market: Monday: corn, Tuesday: the spoos, Wednesday: FX, Thursday: gold, etc.