Category: Trading

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My Journey to Fully Automate My Trading: The Extreme Volatility Challenge is Blessing in Disguise

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It is the end of second quarter of year 2020, I am so busy with so many things I could not really sit down to write something for this series for months. Since this series is a documentary, I guess I should write something so that looking back, I have what happened on record. After contemplating on several ideas, I decided to talk about the impact of extreme volatility on my trading strategies.

There it was, March 2020, the fastest and steepest decline in S&P500 in its history. And then even more amazing, was the miracle rally from that swing low pushing S&P500 back up to almost unchanged for the year. Nasdaq 100 has even made new all time high now.

So many of you have asked whether my trading models are doing fine? I can detect the undertone even though English is not my native language. My guess is that they are wondering if I lost a lot of money during this time.

In short, I am doing fine. If I were trading mostly discretionarily, I will not be. The automated trading strategies saved me from making major trading mistakes many times during this period. I am so glad that I managed to convert about 50% of my trading method to fully mechanical trading models right before the start the extreme trading environment.

What Went Right

The strategies managed to avoid most of the trading days that has extreme swings. Some of you may wonder why avoiding those days. Isn’t it the purpose of day trading to capture the intraday movements?

Yes, day trading strategies are designed to capture the intraday price movements based on the microstructure for which price would move a certain way given certain pre-conditions are met. However, when the volatility is way too high, even if you are on the right side of a move, the strategy will still be stopped out easily thanks to the extreme swings every few minutes.

Of course you can increase the size of the stop losses to participate in the game. But my research shows that is absolutely counter-productive. First, increasing the overall risk taken per contract means you need to reduce the total size of each trade to protect the trading capital from an overall risk management perspective. Second, the equity swings can be nerve wrecking which can disable you from take care of your everyday tasks. In other words, you see extreme swings in your equity and likely ended up doing almost nothing.

One very good thing that stands out is the data and order server stability with all these firms I work with. Comparing to the financial crisis back in year 2008 and 2009, the experience is so much better. Back then we have so many outages making trading nearly impossible. Just the fear of being trapped in an open position was bad enough. Again, the advancement and maturity in technology and infrastructure with these firms are something I greatly appreciated.

What Went Wrong

I was caught off-guard several times when the brokerages made sudden announcement to change the margin requirements. There was once that the change was made in the middle of a trading session. These sudden changes caused me to miss several trades due to the orders being rejected by the brokerage system.

Not happy with these incidents mainly because the missed trades are all winners. LOL

And I learned from this experience that the brokerages are reacting to the situation very differently. For example, Interactive Brokers and Tradestation at times raising their day trading margin requirement to full exchange overnight maintenance margin while some pro shops just double up their promised day trading margin requirement. What the brokerage firms do is not to protect their clients. What they are doing is protecting themselves. This shows that the pro firms understand their clients are professionals so there is no need to exercise extreme caution.

The worst part of the experience so far is the next to none support from many firms as the lock-down due to COVID19 forced many to operate remotely with very limited access to their staff. So anything that requires human intervention or help becomes not available or that the waiting queue is so long that you just have to give up. Can’t complain about that since this will probably become the new normal if the outbreak continues for a prolonged period of time.

What Could Be Improved

Technically, highest priority is the integration of position size into some of my trading strategies so that they can change the order size should there be a sudden margin change. This is not difficult but takes time to develop and test the code. Just one more project on the table that jumped my long queue of other things I need to get done.

I already have remote control of everything setup so that is not a problem. The remaining disaster scenario is that we have some form of global internet outage while I have an open position. For this scenario, I am still working on a way to minimize its impact.

What’s Next

The time I saved from manual trading gave me the freedom over the past few months in completing a few business deals. The main benefit, however, is that I have more time to spend on automating even more of my trading strategies. It is just fun watching these bots going live and doing their things.

It feels like playing Legos when I was very young or playing SimCity as a teenager. The satisfaction coming from the accomplishment is very hard to describe.

As I mentioned in my weekly blog, the success I have achieved so far with the conversion process has given me the confidence to keep going until everything is automated. One fund manager who is a long time friend sum it up nicely – once you have converted to automated trading, you will never go back.

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TLC Weekly Update June 19, 2020

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This week is the quarterly option expiration week. So much emotions from both bulls and bears calling where the market will close by the end of today (Friday). Well, this is just another typical op-ex week. In case you are wondering what I mean, just pay attention to the range established over these past few weeks. Where would the option market makers want the price to settle at?

Of course it is somewhere in the middle of that range! Option market makers are just like bookies on football games. They make money from both bulls and bears. They do not make money by being right. They make money by being not that wrong.

I found this interesting channel on YouTube about watch collection. I found this video particularly disturbing because the fake watch looks really close to the real one. For amateur collectors, it spells trouble because you have no way in verifying the watch you are going to buy is a real one. How can you trust the dealer? And if you are buying a second hand one online, the risk is even higher. This definitely makes me think twice before buying another watch.

An article on the hidden cost of these tech disruptors that changed our way of life. It is a good reminder about all these latest tech companies of their destructive forces. And it is nothing new either. Paypal before it cleans up its acts, it has all kinds of problems including money being stolen. How do we justify allowing a particular type of tech disrupting the society with no check and balance?

For aspiring trader, here is a good video on decision-making by Liv Boeree, a poker champion.

I have so much things going on lately I don’t know how to sum it up here. One of the most interesting ideas I am playing with is to start a proprietary algorithmic trading firm with several like-minded friends. I know we can make it happen but there are many details that we have to fill in first. I like the idea very much. I will go out to see if we can get enough funding to kick start the project. Feel free to contact me for more details. Maybe you can help us out too!

Have a great weekend all!

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TLC Weekly Update June 5, 2020

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It looks like I still cannot escape to my cottage this weekend. So instead of preparing for the trip, I try to be more productive and wrote two articles on trading technologies. First one comparing different hardware of their trading strategy optimization speed. And the other one about Windows 10, whether it is time to trust it for trading.

I was talking to several fund manager friends this week. They are all sitting ducks at the moment because of the uncertainty going forward. Yet they do not have a way to explain to their clients why the stock market is behaving the way it does. The part that Nasdaq 100 printing new all time high is especially funny because they are questioned by their clients why they failed to take advantage of the crash.

Lucky that I don’t need to handle calls and emails like this.

One thing I know for sure is that this is a unique event that we have experienced like nothing else in human history. After the fact everyone is a genius. However, the indices are not telling the truth of what is happening in the real economy. I know from my contacts that many companies that are not well capitalized enough or that they do not operate defensively before the outbreak lock-down are gone already.

People are in distress. Yet the stock market is back to near all time high can really poke the nerve of many. If we see revolutions in many western countries within next 12 months, it will go down in history that the central banks are at fault in causing the world real chaos.

Mark Manson has an old article on Why You Can’t Trust Yourself, it is a good reminder why we need routines and process to improve our performance in almost anything. The central bankers obviously lack both as they have been making bad decisions all the time.

On the lighter side, check out this old video clip from The Late Show with Stephen Colbert. I am not a political person. I hate politics and hate to talk about politics even more as people gets too emotional on these things. I think if Stephen Colbert is more neutral with his stance, he can create same routine for every single politicians in US.

Have a great weekend all!

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TLC Weekly Update May 22, 2020

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I just reviewed my online ordering pattern and I found a very disturbing trend that Amazon slowly but surely taken over almost all of my online orders. I used to order items of specific categories from specialty shops. Amazon is my default option to order computer related items only, like a replacement hard drive or a special cable. Now I order almost everything from them including my coffee supply. This tells you how much I depend on Amazon. Damn, should have bought more Amazon stocks several years ago …

Here is a great advice video from Tim Ferriss for the younger readers seeking a direction in developing their careers.

Now that daytradingbias server upgrade project is completed, and after some post upgrade fine-tuning it is working perfectly all week, I can move onto other projects that were held up.

First, there are a number of interesting experiments I have done on various trading platforms to compare their performances, specifically on trading strategy development, backtesting and optimization. I will summarize the results and post them up soon.

And the long awaited video lessons that I have planned for Trading Success Blueprint and Emini S&P Day Trading Course, will be released. I am working on the voice recording now. I find that I am still not very comfortable hearing my own voice. There is definitely a learning curve I need to overcome.

And the webinars on trading can finally resume. I have a number of ideas written down. It is just a matter of picking which one to proceed first. For those of you who want to ask me specific questions about trading, just drop me a line.

Have a great long weekend!

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TLC Weekly Update May 8, 2020

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A busy week of catching up with emails, closing deals and writing scripts for my video lessons. Been a productive week except that I can’t exercise much due to shoulder pain. The pain had finally subsided so I guess I can get back to training slowly.

We are looking at potential re-opening soon in US and Canada. However, I doubt that after weeks of programming, the old normal may not return for a long time. One factor that affects people much is being cash strapped due to being layoff. Many businesses are not coming back. How to address this issue should be of highest priority for the governments worldwide.

A very disturbing article on an innocent man who spent most of his live in jail for a crime he never committed. Read it and you will be in awe too. How can all these people with the proper authority, knowing this man is innocent, yet did nothing to get him out?

The complete disconnect of the US stock market from reality drives many readers email me with questions like did they missed the bottom already or that should they short this rally, etc. Well, I suggest watching this video with Sam Zell talking about the post-virus economy. You will gain some insight about the new world we are going to face post COVID-19.

For all of you mothers out there, Happy Mother’s Day!

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TLC Weekly Update April 24, 2020

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Another week of life under lock-down here in Toronto. Yet everything are getting done as more people adapted to using the technologies they avoided in the past ten years. I now have meetings with lawyers who insisted to meet face to face in the past with zoom. e-Signing documents with people who have the misunderstanding that e-signature are not legally binding. Things changed a lot as people are forced to adapt to the tech world that has been there all along.

For those of you traders and investors, here is an article on CalPERS failure to protect its assets as explained by Nassim Taleb. Idiots who have no understanding of tail risk nor proper trading experience in derivatives are often put in positions to manage risk. And this is a prime example of people who think he knows what he is doing. Unluckily, this is the norm for 99% of the financial industry. Here is another one coming from Canada.

I am still waiting for the hosting company to upgrade daytradingbias web server. It has been a struggle with them for weeks now. I understand that the lock-down is affecting their ability to handle non-emergency work. I guess I just have to wait for this to get done while working on the video lessons …

I hurt my shoulder one morning and now can’t do much until it recovers. It will be interesting to see how fast I will recover from the injury given that I have all these toys that are supposed to improve the recovery speed. I will explain what they are when I get the chance. Next week I should know if they helps.

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TLC Weekly Update April 17, 2020

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An article on how these ancient computer systems are still in use today by the governments that leads to the mess we are seeing during this crisis. I know about this all along as I have friends who are expert in these old programming languages that are very well paid to maintain these systems. The sad thing is that transition to more modern computer technology is not likely because it implies automatically obsolete the existing management teams …

On YouTube Bloomberg channel there is a good video talking with Ray Dalio on his take on the current situation. I find his objective reasoning still as sharp, that the Fed has no choice but to choose who to save, and as an investor you have the choice to choose to invest based on that information. In other words, don’t mess with the Fed until they blow up.

DaytradingBias is undergoing major server upgrade these few weeks. After that we will also update the site itself again, this time to comply with the Google transition to so-called secure internet connection. All these will be done with the hope that users access will not be affected significantly.

After the hardware upgrade I will release my video lessons on the site. It should be good enough to handle the load by then.

Many people email me asking how the stock market keeps going higher as they see more and more people are out of work. Well, remember that the stock market by design is not a tool to reflect the true value of anything. During time of high uncertainty, the expectations of the future by the investors will not be as united as in stable time. And that creates extreme swings as people of opposite opinions duel it out.

It is really not the time to think about investing. All the major players I know of have stopped all their near term investment projects. Deals that are in the middle of negotiation are all dropped. All savvy investors are sitting this out until we have clarity. That’s common sense.

While I am waiting for the server upgrade this weekend, I will work on more video lessons.

Have a great weekend everyone!

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TLC Weekly Update March 13, 2020

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People everywhere I bump into asked if I am doing alright when the stock markets worldwide falling apart. Obviously they are not traders. And depending on their tone,I can tell some of them have this schadenfreude high. Schadenfreude means pleasure derived from another person’s misfortune. I think you get the point. There are always people like that.

In order to avoid a lengthy discussion of the topic, I would just say, “Oh, really? I am busy with other things lately.”

It is already difficult to tell a beginner trader about the current trading environment. It is even more difficult to get the point across with someone who has all kinds of incorrect beliefs about trading and investing in general. And if any part of the explanation includes me making a handsome profit during this time, it will open a big can of worms …

So I kept my mouth shut to have some peace.

Interesting read on fasting that may help you to get better sleep. Some of my friends always have to eat something round the clock. I just sent them this article. I will follow up to see if any of them would give it a try. I am eager to see what the results are.

Will take a break this weekend after a week long hectic trading. In high volatility environment, when the stock market is swing hundreds of points in the Dow Jones Industrial Average every few minutes, lots of concentration is needed to do things right. And that takes a toll on the brain. It is important to keep a clear head if you choose to trade in this environment. You can make a lot of money quickly, but you can also lose as much money, if not more, in even shorter period of time.

Good news is that I am finally wrapping up one project this week. Although there are many more to go, I can see a few more will be done in coming two months. Very happy with the progress I made.

Talking about progress, I managed to double my pull-ups but it really hurts. At my age, it is much harder to recover from injuries. I guess I have to take it slow. Train smarter, not harder.

Have a great weekend all!

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Mercury Retrograde: Blessing in Disguise

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Everyone talks about Mercury retrograde as if it is a time of trouble. This year (2020) Mercury retrograde from February 16 to March 9, then in June 18 to July 12 and once more in October 13 to November 3. We are about to see the end of the first retrograde period. Let’s sum up my experience so far with this retrograde.

The famous electronic device failing issue:

  • my cell phone used up all its battery once
  • one of my UPS (uninterruptable power supply) battery suddenly died
  • my laptop suddenly dropped its speed to 0.4G
  • my remote trading server works fine, but Tradestation crashed like an hour before market close

The famous communication issue:

  • I ask for one document, people give me something else all together, several times
  • Some deals just stuck on unimportant points

Is it a time that we are supposed to experience more hiccups? Sure.

But should we be afraid of it? Hell no.

Learn to make use of the positive side of Mercury retrograde is what matter most.

Instead of pushing hard on getting deals done, I know it is a time to take things slow and review documents carefully. So things may not progress as fast as I like, at the same time I get to hammer out all the details with time to spare.

This is also the best time to push hard on conducting research projects. As someone who spend a lot of time studying the financial markets. This is the best time for me to review what I have done in the past and see if I can improve on what I have accomplished before. Even past research that ended up not useful can become inspiration of a new research direction.

During this retrograde, I found one significant flaw in one of my trading models that leads to the large drawdown that I do not feel comfortable trading. This particular problem is there for 12 long years since I started trading the model. Some of you may recognize that 12 years is also an important cycle.

The breakthrough to this issue helps me drop the drawdown on this model by half. And in turn, the new research helps me applying similar ideas to a number of other models to improve their trading stability. I never thought I can improve these trading models any further until now.

I am very happy with the results.

The key to utilize Mercury retrograde is to first dive deep into research / study something important to you before the retrograde at least several weeks prior. Then revisit the subject again during the retrograde to see if you can gain new insights. Incorporate the new insights to further your understanding of the subject. It’s effectively a hack to gain expertise quickly.

I am looking forward to the next Mercury retrograde already.

Mercury retrograde is really a blessing in disguise for traders and anyone who conduct serious research.

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TLC Weekly Update March 6, 2020

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I spent significantly more time with the market this week due to the wild moves all week. My automated trading models all have built-in filter to avoid trading in such high volatility environment so nothing much happened there. Engage in manual trading was fun riding all these 50 to 100 points moves.

I came across this video on How to Control Your Negative Thoughts. If you want to achieve anything in life but you are stuck right now, watch it. I can’t explain the subject and the concepts better than this guy.

If you have not watch Tim Ferriss on Mastery: Start with End Game and Make Space for Creativity before, do it. You may not get the message first time around though, perhaps it is not the right time for you yet. In that case bookmark the video and watch it again in the future when you need to shake things up in your life.

Workload still on the high side due to sudden need to assist my friends on several business deals. In turbulent time like this, looking out for friends and family is of high priority.

Have a great weekend all!