Friday, June 25, 2010

Money, meet Mouth

Three weeks ago I wrote on this blog of how I had been doing some research into stock market trends, and that from the research I saw signs in the trading of 25 May 2010 that the market would turn around and begin an uptrend. That's exactly what happened. A couple of days later I told my wife that I had accurately made the call, and she brought me up short. "It's only a call," she said, "if you put some money into it."

Of course, she was right. I took all the stock trading training with her that we originally had, though she's had some more since then that I didn't have. But wanting to concentrate on my writing, I let stock trading go, and barely looked at it all through 2008-2009. What little time I did spend on it, I spent on overall market research. I found a pattern that looked promising to me (wrote about it later in a Suite 101 article), but really didn't want to get back into trading. Consequently, that pattern I'd watched came and went in February of this year, and I wasn't watching to see it happen and take advantage of it. It happened exactly as my research suggested it would.

In the spring, when I decided to come back to trading, I also decided I would study the major market movements for a while prior to placing trades. So I began doing that, and wrote a number of articles from that research--but placed no trades. Until yesterday.

The research I did Wednesday night convinced me that we were in a short-term market pull back, one that might give up as much as 10 percent of its value. Already it had fallen 5 percent. I had done several paper experiments with trades designed to take advantage of these short movements, including to the downside. I didn't get the trade ready on Wednesday night, but decided instead to watch the market opening on Thursday and be ready to enter a trade if 1) the downtrend continued for the first half hour of trading, and 2) it did not exhibit any reversal just after the first half hour.

That's exactly what happened. So I fired off my trade, a put option in the S&P 500 index. It filled at my limit price. I could make this trade because my work yesterday was to be all at my desk, on the computer, so watching the trade during the day was easy. Easy to sneak a peak at the market from time to time.

Well, the market went down, and the value of my trade went up. It wasn't a large trade; I'm not about to retire on the gains. But it was nice to be able to say: I studied the market; determined its probable direction; planned a trade to take advantage of that movement; placed the trade; and by the end of the day saw the value increase by 5.6 percent. That's a good result.

Of course, it kind of makes me wonder why I'm bothering with writing, which pays next to nothing even if you are successful. Both writing and stock trading have their own type of creativity. Both have subjective and objective elements. Both can be frustrating and fulfilling. But due to time constraints I can't be both.

What's an engineer to do?


Gary said...

Repeat the experiment a few dozen times and calculate if your results differ statistically from the null hypothesis at p=.05. Then you can decide about changing careers... And remember that casinos love to see first time gamblers walk away as "winners."

David A. Todd said...

I don't know what the null hypothesis is, but I assume it has something to do with gambling. This isn't gambling, though explaining how it is different would take quite a bit of time and many pixels. I've been working on market direction research for a year or longer (admittedly with a few gaps in there), and a theory of market direction I developed proved true in February. Unfortunately, I was so busy I wasn't watching the market at that point and lost the opportunity back then to put money and theory together.

But you're right, following market trends has risk, though much less risk than gambling.

Gary said...

No, it's a statistical term. The null hypothesis is that the treatment (your prediction of the market movement) in no more accurate than guessing. You have to have a statistically reliable difference from that to make a valid claim that you can predict with some measure of skill. Even being right 60% of the time is okay if you can be consistent at it.

Although I don't mind anybody trading with his own money (even on margin if he has collateral), it's closer to gambling than investing (buying and holding for more than short-term). You may not be relying totally on luck, but the unknowns certainly are large. In terms of skill, maybe it's similar to card-counting in 21.

David A. Todd said...

Okay. Funny you should mention 60 percent, because that is the target to be correct for a stock trader. The expectation is though price and volume studies you learn to recognize human behavior. From that you learn to place trades closer to the most opportune time. You have more gainers than losers, and you manage the losers to minimize losses.

Closed out my position today, up 44 percent in four trading days. So that's 1 of 1 so far.