Too much on my mind

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The past weekday has seen a fair bit on my mind. I shall attempt to condense all of it (while keeping some out) in a single blog post.

To begin with the BBY saga At a personal level I believe that ASIC has failed in it’s role as a regulator considering that in 2005 ASIC placed doubts on BBY’s quality of research. That should have been “bells ringing” to keep a closer eye on the business. Not just slap a fine and move on.It’s been 10 years now & look what we have! I wouldn’t be surprised if there are more, similar fails due in the Australian brokerage business. The question is, whose next? Sadly, the client always gets sc***ed.

Master Chef and Trading: One of my hobbies that allows me to explore my creative side is cooking. Without need to mention, I do watch the reality television show- Master Chef (Australia). I like to look at the philosophy behind any activity that enables an individual to bring about the best in them. One such chef who I believe has a quality philosophy is Marco Pierre White. In one of the more recent episodes he mentioned a phrase to the contestants which resonated very strongly with trading and investments & I quote, ” Consistency comes from Simplicity”. This is a vital feature, especially if one is transforming from discretionary trading to something more systematic. I also believe, this is where a systematic approach to trading has an edge with respect to the discretionary approach.

Pen down your thoughts: It is unfortunate how our thoughts during the day go ignored and left aside. Some of these thoughts may be genuine ideas, utopian or even negative. Over the last few months, I have taken a page from one of my online mentors ( as I like to call ) and begun penning down my thoughts in words. You will be amazed how clarity sets in regarding a situation once you pen things down. It may not be obvious but the subconscious does not deal with the objectively obvious. This is also where, a trading journal is of vital importance.

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Stuck In Traffic

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Beginning this post with a song that sums my thoughts at times. Sing along!!

This Saturday saw me driving a fair distance and an hour long journey took a good two and a half hours due to roadwork.

It seemed like every route I took ended up with road work.LOL

Finally after I reached my destination I realized that at the start of my journey, I had taken a different route (to the regular) and after beating around the bush with traffic ended up taking the original route.

Anyways, when-so-ever I am stuck in traffic I see it as an opportunity to test my patience and observe my erratic attitude with respect to other drivers on the road. It more than often surprises me how a significantly tolerant person like myself ( I hope to think so) can often become impulsive and agitated.

Perhaps, I am in a “conscious incompetence stage” with my driving attitude. Definitely something to work on.

Staying Accountable

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My weekend meandering has been about accountability and the psychological challenge associated with taking up responsibility to do so.

Without being judgmental- I have observed managers and leaders in organizations when I worked in Retail and then the Banking sector, & one repetitive pattern which I noticed is the refusal to accept accountability. (Let’s keep the politics of hogging the credit without accepting accountability aside)

I guess this lack of passion towards accountability comes from the need to be correct and the social constraint involving what other people think; if things go wrong. More importantly, accountability exposes us to ridicule. And who would want that?

Now perhaps this is particularly true in the trading and investment business where decisions are made on a constant basis.More so because what works today may not hold in the future (still searching for the Holy Grail).

On the 23rd March 2015, I made a post- Discretionary VS Systematic Trading where I mentioned converting one of my discretionary strategy into semi-automated. Lesson #1 to begin with is converting discretionary logic to coding logic is one of the biggest challenges. Never-the-less it has also got me on the mental track of keeping it (strategy) simple. This has resulted in me looking at a chart slightly differently and a potential new strategy in making (glimmer of hope).

While I haven’t completely shelved my original discretionary system’s (due to coding logic challenges) conversion to semi-automated- I think it is time for me to hold myself and the current discretionary system accountable.

I will be posting monthly paper portfolio performance for same to stay accountable.

In the mean while, wishing myself luck in developing a systems approach trading!

Under Promise But Over Deliver

If there is a straight cut lesson learnt via trading markets; applicable directly to a professional/personal environment- I consider the statement ” Under Promise But Over Deliver” as an all time favourite.

To some individuals it may sound as not displaying confidence in oneself ( I totally respect the view). In my case though I consider it as a means to staying humble in victory and graceful in defeat. It also helps the subjective mind from running too much into our future and visualizing the process of an outcome which perhaps reduces the probability(mathematics to make it sound logical) of a conscious experience in present.

A rather difficult concept to explain because the logical mind might interpret this as a laid back approach-but there is more to it!

Aussie Dollar losing it’s Bearish Fizz

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It’s coming to be about two months now since the Aussie Dollar has failed to show any relevant directional movement. While the trend is still bearish and certainly oversold, a temporary counter trend rally could be a good opportunity for bears to re-establish shorts.

With this said, I am particularly interested in the AUD with Gold/USD; and Aussie Unemployment with US Fed Funds Rate- inversely correlated charts, to gain an insight into the Aussie Dollar’s direction.

Chart 1:

Aussie Unemployment and US Fed Funds Rate

Aussie Unemployment and US Fed Funds Rate Source:Trading Economics

The above chart is a rather unorthodox view of an inversely co-related chart with the AUD. Historically, a drop in US Fed Funds Rate has meant an increase in Aussie unemployment numbers (bearish for the AUD). With the mainstream view being that the Fed could be increasing interest rates before year end 2015, signals potentially improving unemployment numbers in Australia (the numbers that come out from ABS) and a stronger Aussie Dollar. But let’s keep in mind that the US Fed has been playing verbal games on increasing interest rates since last year with no follow-up.

A more accepted inverse co-relation is that of the AUD with Gold/USD. I like viewing the areas of confluence as accumulation periods after which markets move in the longer trend direction.

Chart 2:

Correlation AUD with Gold/USD

Correlation AUD with Gold/USD

Technically the AUD seems to be well supported at approximately 75 cent level but keeping an eye on US Fed rates (including the hold in current rate) in combination with confluences that show up on AUD with Gold/USD inverse correlation could provide an indication to the next runaway move in the Aussie Dollar.

My weekend rant-A little knowledge is a dangerous thing

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I frequently receive emails from a group that considers itself inclined to creating a sustainable investment revolution via a cooperative business structure. While there is no doubt that most of the involved are good at heart and I wouldn’t be surprised if a few have been through a Hippi life phase to cement their current opinions…I was indeed taken aback when a recent email had “all glory” towards a Hedge Fund by the name of Robin Hood Coop Anyways, what Robin Hood Coop does is- It develops algorithms which track institutional market order volumes and trades with the institutional direction.The catch being, they use a significant portion of their profits to fund not for profit activities. You can read more on their website…and there is a business model to it. Coming back to the email I received- It’s rather unfortunate that people who position themselves as highly ethical fail to understand their emotions when it comes to thinking straight. They seem to sway with their ideology, most of which is often absorbed from one sided propagandists and Oh…not to forget the self claiming illuminated who make most of their dough by selling books and seminars.To mention names as examples- Fox Network, RT Network, the Max Kiezer’s, the Larry King’s and Oprah’s (and I have nothing against any of these). The Robin Hood Coop fund talks about taking from the rich and giving to the poor. What puzzles me: how exactly is Robin Hood distributing to the commons??since it’s riding the market wave with institutional investors ( Buying with the institutions and selling with the institutions) and causing someone a loss which is inclusive of the retail investor-the average Joe, mom and dad investors!The retail investors probably stand to lose more than institutional investors. In short, your so called wealth distribution marketing tool ain’t add up to me. And yes there is a lot of good work done by a number of Hedge funds…so stop portraying yourself as a Savior of the commons. To cut my rant short, I reckon I am trying to get to the concept of “knowing thy self”. I would have a higher level of respect and value for an individual/organization that knows what they stand for rather than sway with the wind.

Discretionary VS Systematic Trading

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I have always been a discretionary trader, however the idea of transforming my discretionary system into something mechanical has always interested me. This interest to a great extent is disruptive due to my limited comprehension of programming language. Yes, I have given the study a try…but lets say my brain is not hardwired to grasp some concepts or I take longer than necessary.

All said and done, there are some software’s (some Brainiac thought of giving non-coders a taste of coding followed by a sensation of frustration) that allow non-coding proficient traders, to develop strategies using simple logical  flowcharts. While such software do develop codes based on certain criteria, an efficient system will still require tweaking by a programer. Moreover, there exist limitations pertaining to the number of parameters that can be coded by such software.

Never-the-less, it gives you an opportunity to build systems using simpleton indicators (available for free) followed by back-testing to disappointment(as I expected). With this said, it’s a good tool to have in your back pocket. While it may not be able to build you a complete system, it does allow you to test the validity of some indicators and more importantly gets you thinking (at-least did so to me).

Such was my case last weekend when I attended a workshop on Systematic trading. One of the most beneficial outcome of this workshop was an opportunity to mingle with a quantitative/algorithm coder who used to work for Kaizen Capital.It gave me a good idea of the resources and time a fund puts into developing models/strategies. As a retail investor, I reckon it’s better not to even consider such an option unless you are one cashed up cow (Call me). And in all due fairness, even after moving on from their roles these coders are tightly bound by legal constraints.

I had always suspected that the mind-set of a trader/investor is very different to a coder. Coders do not have all the solutions and their job is to build systems, irrespective of the system’s profitability. For some reason, I got the feel that they just don’t care of the output of their work. In other words, a new puzzle will interest them far more than using a resolved puzzle to make a buck. Don’t get me wrong…of-course, everyone wants to be paid for their work.The output is not their motivation unlike a trader/investor, what motivates them is the process.

My first step towards systematic trading will not be able to completely automate my system/s. However, I am looking forward towards semi-automation and developing a thinking pattern with respect to setting expectations from a mechanical system. More importantly, translating trading ideas into defined parameters to produce a desired output.

Market correlation as a statistical tool

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While I do understand the basic concept around the use of statistics in financial markets, I do not consider myself as a mathematically talented individual. I possibly account for this lack with an ability of striving to be sensitive to my surroundings and forecast accordingly by observing striking patterns. My minimum statistical ability results in dependence on market statistical input from a few other.

A commonly used tool in statistics is Correlation. There are plenty of examples on the internet where you will find market pundits plotting charts to show correlation between markets.

The problem which I see with a pure statistics based approach is well expressed in this phrase

 Statistics is like a bikini,it shows you a lot but hides the vital components

In other words the historical back test period, assumptions and more importantly the economic/investing concept that is being promoted can all influence its making.

Don’t get me wrong, correlation can be an indispensable tool in the hands of a broad minded investor/trader.But rather than trying to use it mechanically to develop an investing model/strategy, it is better left to observe periods when markets that normally correlate to an extent- no longer do. These changes in correlation in combination with economic policy could signify turning points to enter a position.

Figure4Source:Tradestation

Various current market correlations are in an ever so susceptible economic policy, which could indicate turning points. All said and done, choosing the right instruments to study market correlation is a whole different story!