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The world does not need yet another market commentator. Our tools are designed to help investors along their investment journey

  • Signals: trend reversal signals (Bull/Bear) on equity indices, Forex and government bonds
  • Trading systems: simple steps from concept, back tests to auto-trade
  • Money management: bet sizing algorithms, money/risk management tools
  • Psychology: research and practical tools on habit formation
  • Topics: discussions on the industry, trends

What is the difference between stock trading and gambling in a casino?

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MonteCarloAnswer by Laurent Bernut:

I’ll give You the same answer I gave two CIOs of Fidelity. The common point between professional poker players, star fund managers and street hookers is that they go to work: it is not meant to be fun.
Excellent question. Beyond taxes and manufactured negative gain expectancy, there is much market participants could learn from professional gamblers:
  1. Gambler’s serenity prayer: grant me the serenity to accept folding a losing hand, the courage to take calculated risk and the wisdom to know the difference
  2. Cut losses and run winners: in poker, money is made by folding a lot and be aggressive a few times. Successful fund managers spend their time cutting losses. The paradox is that the way to win the war is to accept losing small battles
  3. Position sizing: Black jack is a game where You play against the house. It is manufactured to have You lose. Yet, Edwin Thorpe, whose track record towers Warren Buffet’s, beat the dealer. His method forced casinos to adapt. His secret sauce was position sizing, a fraction of Kelly criterion
  4. Position sizing algorithms: Gambling is a far more mature industry than investing in the sense that a lot of position sizing algorithms used in finance come from game theory. Martingale, reverse-martingale, drawdown/run-up of bankroll, Kelly Criterion
  5. Gambling is boring: hookers, poker players and star managers go to work. It is not meant to be fun. They leave their emotions at the door. Treat gambling and markets as a job so that You can fleece the emotional players
  6. Gamblers have a system: gamblers are not smarter, they have smarter gambling habits. Adherence to a system takes discipline. Reinforced discipline is called habit
  7. Gambling as trading is not a zero sum game: one of the most common myths about the market is the zero sum game. Slippage, commissions erode however slightly the account. Take every trade as if You put a chip on the table
  8. Quantified risk: the notion of calculated risk has unfortunately been perverted by those who do not understand it. Risk is not an abstract dissertation at the end of an investment thesis. Risk is a hard cold probabilistic number
  9. Odds and win rates: one of the fallacies of market participants is the belief they need above 50% win rate to be successful. 2 things here: 1. trading edge or gain expectancy shows that low win rate can be compensated by big payouts. 2, Distributions of P&L of most traders (excluding mean reversion and market making) show aggregate win rates over the cycle of 30-45%. Winners compensate for losers. The important lesson here is that traders walk into a trade expecting it to win, when they should be mentally prepared  for a loss. Pre-packaging grief (see my post: The view from the short-side: how we process emotions and the market signature of the 5 stages of grief Kubler-Ross by Laurent Bernut on Alpha Secure ) . This means that throughout the cycle, styles come and go. Making money means knowing when your style is out of favour and betting small and then when in fvaour take risks. Back to the serenity prayer
Conclusion
Investors usually look down on gamblers. Yet, there is much to learn from gamblers. How come a few of them become successful despite built-in unfavorable odds ?
Beginners in both markets and gambling believe they are on to something when they double down after each loss. They believe that their luck is about to turn, so they use martingale (it comes from the French for winning streak). They just forget two things: dice have no memory so each run is independent from the previous one. More importantly, the maximum expected value is break-even. This means that any outcome other than the best one carries an interesting probabilistic property called “certainty of ruin”.
In other words, there is a reason why casinos have gold, marble columns, master paintings and rookie gamblers go broke…

What is the difference between stock trading and gambling in a casino?

The Habit of Short-Selling

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Selling short is not antipatriotic. It most certainly is not a hedge to Long. The only commonality with art is that 90% of artists starve. Short-selling is not some shadow conspiracy undermining the economy. No short sellers seats on any board on sinking ships. Short-selling is none of that.
Short-selling is a habit, just like exercise, healthy eating of brushing teeth. t may be mundane and boring, but eventually it is something that makes You healthier, stronger and eventually happier.
I have been a 100% systematic quantitative short-seller in a prestigious bottom-up fundamental house for 8 years. My mandate was to underperform the inverse of the longest bear market in modern history: Japan Equities. Every day, I woke up -100% net short, welcome to my world.

 

The hero’s journey of short-selling
“Too many people look at what is from a position of “what should be”, Bruce Lee
We, human love stories. We relate to the hero’s journey, because we aspire to be one. Now, ask yourself: do You want to retire on stories or on healthy returns ? If You still cling on to the story, then read no further and see You in the octagon of the markets…
Short-selling is a hero’s journey, but the story of redemption is unappealing. The journey is about unlearning, calculating, mastering emotions, baking the daily bread. Even if You choose never to sell short, that process itself will make You a stronger investor.
Please subscribe to my website. It is completely free and there are useful resources for serious market participants: Alpha Secure Capital | Alpha Secure Capital
The myths of short-selling
“The usefulness of a cup is its emptiness. Empty your cup”, Bruce Lee
  1. Unlimited downside: would You floor a Maserati knowing it has no brakes ? Well, if You can answer this question, either You can’t afford one or You have just fixed their notoriously bad brakes. Rule 0 of short-selling: set your stop loss before entering a position.
  2. Structural short: structural shorts are just like stupid people: they are everywhere. Profitable structural short is The Unicorn of short-selling (capital T, capital U). By the time the word structural short is associated with a stock, Borrow cost, short squeeze frequency, volume etc all suggest that the Long side is no longer the wrong side. More importantly.
  3. Fundamental shorts: Fundamentalist grieve their way into Short-selling (The view from the short-side: how we process emotions and the market signature of the 5 stages of grief Kubler-Ross by Laurent Bernut on Alpha Secure ). This is an expensive process: every bit of information that ultimately leads to a short has a price-tag. Everyone gets burned while short-selling. So, next time around, we take precautions. We want our story straight, our numbers squared, our facts checked and our boxes ticked. Well, if that is what You want: join the crowded short crew
  4. Contrarian shorts: there are two ways to kill bulls: either in 1. a  triumphant corrida with a colorful display of courageous faena as the bull bites the warm dust or 2. zapping them in a slaughterhouse while listening to cheesy pop songs. Second option does not get the glory but does not get the horns either. Selling short is done along Long selling.
The dynamics of Short-selling

1. Structural shorts are a form of a laziness

Back in hedge fund days, My manager took notice of my keen interest in selling-short but also took umbrage at the accompanying trading activity. He then proceeding to instruct me to look only for structural shorts. What he really meant was:
  1. I don’t want to bother with shorts: they are not fun. They are complicated, unsexy and messy
  2. I just want to go Long, have fun, find 2-3-4-10 baggers and be a rockstar, but:
    1. This is a hedge fund: so we need to hedge, right ? But also I want to:
    2. Charge big fees: no-one is stupid enough to pay 2-20 if I just sell futures or buy ATM puts
  3. So, I need to find shorts (… so as to generate cash and buy even more Longs…)
  4. Then, find me shorts i can SHORT & FORGET: throw away the key, they go down nice and easy. I can forget about them and then I can focus on finding 2-3-4-10 baggers and be a rockstar
Well, the fund went bust. This is not character but myth assassination here. There is no such thing as a structural short. The short book shrinks when successful so it requires more attention than the Long book. That is just a plain arithmetical truism.
2. The curse of successful shorts: the Short “magic skin” (peau-de-chagrin)BalzacMagicSkin01
Successful shorts are the “magic skin” of the markets: they shrink as they are successful. This means their good attributes such as Beta, sector  country, currency, market cap bracket, exchange exposures contribute less and less. It means You have less of a good thing when it works. This entails three things:
  1. Successful shorts must be replenished
  2. the Short book needs constant attention: shorts have naturally shorter cycle and shorter lifespan. So, they need constant attention
  3. Unsuccessful short must be weeded out: unsuccessful shorts balloon. So, You are left with more of something undesirable
This leads us to the secret behind successful short-selling. It is a simple yet powerful “haha” moment question that will alter your reality
A suivre…, to be continued…
If You want part II, III and IV, please subscribe to my website. It is completely free and there are useful resources for serious market participants: Alpha Secure Capital | Alpha Secure Capital

The Habit of Short-Selling

Has anybody gotten rich through automated trading?

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Happy New Year from Alpha Secure Capital. This was an answer to a question on Quora. It has been read by more than 16,000 people.

Now, I am a digital nomad investor: Viet Nam, Singapore, Tokyo, KL, Venezia, Palermo, Reikjavik. Rents get paid in our sleep, balance gets bigger by 1-3% every week. Dream life, hey (*) ? Well, it came at great sacrifices.

Autotrade sub 30 mn is the tallest order in the trading industry. On the one hand, there are HFT shops, with whom there is no point competing. They already do a wondeful job at killing each other not so softly. On the other hand, point and click prop shops ecking penny after penny. Then, there are Delta one and deriv desks arbitraging small corners away. All those guys have the money, the resources, the access, the info, the programmers You will never have. You are outgunned, outnumbered and let’s face it: outside. Now, let the race begin.

It took me 15 years to mature the concepts, 3,694 hours to code, 3 2/3 years to run  and a lifetime to refine them. This has consumed my life, my waking hours, my sleep. Ever woke up breathless and feverishly write equations ? I nearly burned the house not once, but twice, because i forgot that there was something on the stove, while i was wrestling with some C#. Once, my wife came yelling at me for not taking care of our screaming baby. I just did not hear our daughter crying… on my lap. Well, code would not compile…

Sisyphus stones
Then, there is the sheer frustration of never being enough. Then there are bugs. One rule of thumb, never add, always subtract, always come to simplicity when solving bugs. Then, there are “100 year flood”, perfectly rhyming with the late “100 nights of solitude”. Then, there are platform issues. They are not meant to do scale-out/scale-in and adaptive position sizing. Then, there are those small issues that You will have to face one after the other.  There will be times where You wander and meander like Ulysses, “what if this, what if that ?” But there also those immensely gratifying days when You wake up with light and equations flowing through like when I found my personal holy grail of position sizing

After the Daedalus of development, one day the end will be in sight; it will be there, almost, just a few modules away. But then, there are those shortcuts You took 10 iterations ago that will come back and bite You. They stand between You and the finish line. And You know that tackling them means overhauling the entire architecture.
This is the realm of frustration. The last mile is always the hardest. Please remember this though: autotrade is like watch-making. Until the last cog fits in the right place, your clock will always be off, so don’t give up, never give up.

Then, You run your own money, face drawdowns, go back to fix the last few bugs. Then, You run it on small amounts. The best moments are not when You make your previous monthly salary in a week while kitesurfing or going wine tasting. The most beautiful moments are when You make those few hundred dollars week after week and when You finally know it is viable. It feels like watching a flower blossom. This is the best sleep You will have in your lifetime, well at least for 3 months …

Here are the lessons I learned. A viable trading system is built backward:

  1. Focus on the short side: the short side is notoriously harder. If Your system works on the short side, it will work on the Long side. Any 3 star Michelin chef can flip burgers. Now how many Burger king employees can do 3 star meals ?
  2. Focus on the exit first: a race is never won until the finish line is crossed. Some of your positions are marathonians, some are sprinters. You never know until You see them on the field.
  3. Stop loss: it is the only variable that has a direct influence on 3 out of 4 variables of your trading hedge
  4. Money management is key: how to preserve capital when your system won’t work and how to take calculated risk when it does ? This is where the heavy mathematical artillery should be concentrated, not on the entry. Think about it: everyone owns Apple. The difference that makes the difference is how big You are
  5. Simplicity: complexity is a form of laziness. If your solution is still complex, it means You have not worked hard enough to find a simple one. There is no exception to this truth
  6. Symmetry: once the short side delivers, translate it to the long side. You will have unambiguous signals, unified risk management
  7. Watch Star Trek and the original Kardashians, they were not as villains as the newer ones, breaking bad, desperate house wives etc
  8. Then, last and very least, but first take the dogs out. And then finally, sorry don’t forget to water the plants first. And then finally, oops have You called your mother yet ? And then finally, take the trash out and after a good night of sleep, You may think about entry. Entry is at the very bottom pile of the priority list of an autotrade strategy, long after labeling priorities on multiple positions

In the end, You will realise that the goal was never about money. It was first about the freedom from a paycheck and the long term uncertainty of retirement. Rich and wealthy are not synonymous. Rich should be the experiences You accumulate over your life. Now, we live out of our suitcases, frugally as usual, but what a life! Speaking of which, time for a Prosecco with our neighbours, our landlord the architect and his buddy the last Gondola maker in Venezia

(*) Now, the highlights of our week is to hunt for consecutive stop losses. We have excess capacity. We have suffered a great deal coming up with our strategy on MT4. Most modules had to be built from the ground up. We  genuinely want to spare this Sisyphean ordeal to aspiring autotraders.
So, we will choose 2 or 3 people and help them build their strategy.
I can help anyone formalise their own strategy through a thorough guided discovery process. This is not pleasant.
Then on the MT4 coding side, the person I work with is a senior programmer for the US Department of Defense (be nice to him or he will bring democracy to your computer…). I can code alright, but his stuff is military grade… Reach out if You are interested, or if You like what You read

Has anybody gotten rich through automated trading?