I think you're right to an extent. It's mentally definitely very difficult to trade a positive skew strategy. To take an extreme example, suppose you have a Taleb style tail protect strategy which returns 100% every 10 years, and -5% every year. That is a positive expectation, so worth trading outright. In practice you'd really struggle mentally if that was your only strategy. It only makes sense if you had say a 40% exposure to that, and a 60% exposure to a stocks portfolio, such that the hedge gave you a zero loss in the every decade disaster. But even then you'd be cursing yourself for 9 out of 10 years for buying this insurance. On the contrary its very easy mentally to trade a negative skew strategy, and take profits every day. And then every year, or every 5 years, or every 10 years depending on the strategy; you get murdered. Mentally that is easier; at least 99% of the time. For a given sharpe ratio you can to an extent choose whether you get that return as positive or negative skew; lots of small up days or occasional large up days (though negative skew tends to have higher sharpe ratio, as thats a poor judge of returns with big tails). I know if I backtest only taking the highest sharpe ratio opportunities, then I'd reduce my sharpe ratio. I guess this might be a factor of the length of time I'm generally holding positions; as I'm not familiar with intra day trading I don't really know. However I think it may also be a function of trading style. If you're trend following, you have to cast a lot of lines, hoping one will bite and become a decent trend, taking small losses on the rest. If you wait until it already is a decent trend you've already missed half the profits. If you're mean reverting or relative value, then it often makes sense to wait until the mispricing is higher. (There are also higher trading costs if you don't 'leg into' positions but thats a different story) My own strategy is reasonably balanced, in the sense that its a combination of negative skew carry (and a bit of relative value) and positive skew trend following. Also, and perhaps that is the most important thing, I only trade a minority of my net worth. The rest is in dividend paying stocks and bonds. From a sharpe ratio perspective this is inefficient. However mentally having the cushion of those dividends coming in every year and not having to touch my trading capital, is more comforting than having to dip into trading capital in loss making years to pay living costs. I am however interested in this comment: "The successful traders I know all seem to have an undesirably high emotional exposure to their P&L" ... which goes against most 'market folklore', that the most succesful traders are those who can gain a degree of emotional detachment. I haven't spent enough time hanging around succesful discretionary traders to know if that is really true. I know plenty of hopeless discretionary traders, including myself, who suffer mental anguish when they lose money; which is why I think that system trading is better for the vast majority of people.
Trades since I last posted (26th March): Code: code contractid filled_datetime filledtrade filledprice 3108 ASX 201506 2015-03-27 01:50:32 -1 5925.000000 3136 AUD 201506 2015-03-27 14:13:14 -1 0.774800 3205 AUD 201506 2015-04-02 02:01:25 -1 0.755400 3154 AUS3 201506 2015-03-30 01:07:14 1 98.300000 3166 AUS3 201506 2015-03-30 02:17:19 1 98.300000 3157 AUSSTIR 201606 2015-03-30 01:24:39 -7 98.080000 3235 AUSSTIR 201606 2015-04-08 01:36:36 1 98.060000 3109 BOBL 201506 2015-03-27 07:32:33 1 129.410000 3127 BOBL 201506 2015-03-27 14:09:42 2 129.410000 3193 BOBL 201506 2015-04-01 07:34:13 -1 129.340000 3169 BUND 201506 2015-03-30 07:20:24 1 158.590000 3124 CORN 201512 2015-03-27 14:06:44 -3 413.250000 3187 CORN 201512 2015-03-31 17:54:43 1 403.750000 3214 CORN 201512 2015-04-06 14:30:00 1 412.000000 3223 EDOLLAR 201809 2015-04-07 12:14:48 1 97.880000 3178 FEEDCOW 201503 2015-03-30 17:21:51 -1 216.710000 3145 GAS_US 201506 2015-03-27 14:16:53 -1 2.693000 3202 GAS_US 201506 2015-04-01 12:16:57 -1 2.679000 3110 GBP 201506 2015-03-27 07:45:50 -1 1.480500 3196 GBP 201506 2015-04-01 11:15:11 -1 1.475700 3238 GBP 201506 2015-04-08 06:11:47 1 1.483100 3199 GOLD 201506 2015-04-01 12:11:16 -1 1183.500000 3211 GOLD 201506 2015-04-02 13:10:30 1 1205.100000 3121 JPY 201506 2015-03-27 13:28:10 -2 0.008403 3160 KR3 201506 2015-03-30 01:01:36 -1 109.330000 3151 LIVECOW 201510 2015-03-27 15:31:28 -1 151.700000 3226 LIVECOW 201510 2015-04-07 15:41:44 -1 149.850000 3139 MXP 201506 2015-03-27 14:14:57 -4 0.065820 3190 MXP 201506 2015-04-01 02:04:06 -1 0.065240 3093 NASDAQ 201506 2015-03-25 16:01:21 -1 4368.000000 3148 NZD 201506 2015-03-27 14:20:47 -1 0.751900 3241 OAT 201506 2015-04-08 10:56:17 -1 156.410000 3181 PLAT 201504 2015-03-31 13:51:28 1 1128.100000 3184 PLAT 201507 2015-03-31 13:51:28 -1 1129.000000 3208 PLAT 201507 2015-04-02 12:13:33 1 1156.900000 3133 SMI 201506 2015-03-27 14:12:02 1 8982.000000 3094 SP500 201506 2015-03-25 16:04:35 -1 2067.000000 3274 SP500 201506 2015-04-08 14:14:05 1 2073.000000 3283 US2 201506 2015-04-09 14:17:25 1 109.640625 3112 V2X 201506 2015-03-27 08:24:00 -2 21.800000 3130 V2X 201506 2015-03-27 14:12:54 -7 22.100000 3172 V2X 201506 2015-03-30 08:53:12 -1 21.550000 3175 V2X 201506 2015-03-30 11:22:46 -1 21.700000 3220 V2X 201506 2015-04-07 14:21:50 -1 21.300000 3286 V2X 201506 2015-04-10 09:03:52 -1 20.600000 3106 WHEAT 201512 2015-03-26 16:33:50 -1 532.000000 Total slippage: process -611.080000; bidask 320.640000; execution -136.790000; all trading 183.880000; grand total -441.090000 Managed to pay about a quarter of the spread on average, rather than half. Current positions: Code: code contractid positions Lock WrongContract InFwdNotRoll 29 AUD 201506 -2 False False False 18 AUS10 201506 1 False False False 27 AUS3 201506 5 False False False 23 AUSSTIR 201606 5 False False False 17 BOBL 201506 3 False False False 15 BTP 201506 1 False False False 24 BUND 201506 2 False False False 22 CAC 201504 1 False False False 20 CORN 201512 -4 False False False 8 CRUDE_W 201512 -1 False False False 28 EDOLLAR 201809 5 False False False 0 EUROSTX 201506 -9 False False False 2 FTSE 201506 -2 False False False 16 GAS_US 201506 -4 False False False 14 GBP 201506 -2 False False False 1 JPY 201506 -3 False False False 25 KR10 201506 2 False False False 26 KR3 201506 8 False False False 3 LIVECOW 201510 -2 False False False 5 MXP 201506 -5 False False False 19 NZD 201506 -1 False False False 21 SMI 201506 1 False False False 11 SP500 201506 1 False False False 13 US10 201506 1 False False False 6 US2 201506 4 False False False 4 US5 201506 2 False False False 9 V2X 201506 -13 False False False 12 V2X 201505 -5 False False False 10 VIX 201505 -2 False False False 7 WHEAT 201512 -2 False False False P&L in that period: £26,153 To date: £337K Below HWM: £11.1K Decent profits in short VIX and GAS_US Expected risk: £5,575 per day Big shorts: GAS_US (risk £1800 a day), JPY, GBP, MXP, V2X, VIX (so long dollar, short volatility) Big longs: US2, AUS10, US10, US5, KR10, BUND, AUS3, KR3, SHATZ (yes.... all bonds)
12 V2X 201505 -5 False False False 10 VIX 201505 -2 False False False What is the difference between these 2? I recognize the May VIX Futures in the first line, so what is the second line? Thanks
The first line is the "European VIX" May contract. The second line is the US VIX, also May. Note that the VIX has about 9 times the contract value of the V2X, and about 8 times the risk.
Thanks for your interesting post. I'm not saying that they lose their cool when down on the day or week, or that it affects their judgement; just that negative periods (and the potential for negative periods) affects them more than they would like. And the decisions taken to mitigate this emotional exposure lead to worse returns than would otherwise be achieved. For example, both taking time off and trading smaller positions are detrimental to equity growth but seem to be required in order to maintain the necessary emotional balance. It is individual to each trader so not something we could categorise as strictly true or false beyond the broad generalisation that (most) people do not seem to enjoy losing money. As for any mental anguish it could create - I don't see why it would be different whether the losses occurred due to manual or automated trading. Though I agree that most people do not have the appropriate personality to be traders. This is almost an example of what I mean. Richard Thaler (U Chicago) termed this "mental accounting". However in your case I'm not sure your emotional exposure to P&L could be termed undesirable, unless a down year is going to cause you anxiety. Your posts remind me a little of an ex-IB chap I know who retired in his late 30s. Work and particularly his colleagues began to grate on him; the culture/attitudes, some people being less than honest with clients etc, and what he termed a myopic obsession with money and status. He was far happier with his freedom and time after leaving work than he ever was grousing about bonuses and chasing new toys. Given the diminishing marginal utility of money, choosing to trade at a level where it can be challenging and worthwhile but avoid risking your financial security is sensible. What you are protecting is the freedom and time money can buy. And with this foundation in place, an automated trend following strategy which might be in drawdown for more than a week or so could be a perfectly appropriate choice. Unless you're in the low latency space I'd be very surprised if there were any short term trading strategies which could be fully automated. For those using trading to bootstrap, short term futures strategies can make the most of the ability to leverage, reduce risk by being in the market for short periods of time and always flat at the end of each session. Of course the % of net worth risked will reduce after capacity is reached and the surplus invested elsewhere.
Report since April 10th Market moves: Big falls in Korean bonds (7 daily sigma move), Aussie rates, Italian bonds (greek contagion?); all of which unfortunately are longs. Equities and US bonds were up, Korean equities biggest riser, also rallies in currencies against the $ (again, not great, the end of the best trend of the last few months). P&L: MINUS 27, 763, or 6.9% of capital Biggest losses in GBP, KR10 Drawdown is 9.4% of capital The average DD from simulation is 9.2%. The worst drawdown in live trading until now was 8.9% Trades since I last posted: Code: code contractid filled_datetime filledtrade filledprice 3298 AEX 201504 2015-04-13 08:10:43 1 506.40000 3352 AEX 201504 2015-04-15 08:22:46 -1 506.10000 3355 AEX 201505 2015-04-15 08:22:46 1 501.35000 3409 AEX 201505 2015-04-17 16:30:48 -1 489.65000 3289 ASX 201506 2015-04-13 01:30:00 1 5981.00000 3454 ASX 201506 2015-04-20 01:47:25 -1 5796.00000 3367 AUD 201506 2015-04-16 02:54:28 1 0.77410 3394 AUS10 201506 2015-04-17 02:28:22 1 97.64000 3448 AUS3 201506 2015-04-20 01:02:57 -1 98.20000 3457 AUS3 201506 2015-04-20 02:10:00 -1 98.19000 3397 BOBL 201506 2015-04-17 07:40:05 1 129.70000 3331 CAC 201504 2015-04-14 13:53:35 -1 5223.00000 3334 CAC 201505 2015-04-14 13:53:35 1 5163.00000 3370 CAC 201505 2015-04-16 08:05:37 1 5172.50000 3403 CAC 201505 2015-04-17 11:44:58 -1 5098.50000 3361 CORN 201512 2015-04-15 14:30:01 -1 396.75000 3406 CRUDE_W 201512 2015-04-17 12:13:09 1 61.10000 3385 EDOLLAR 201809 2015-04-16 16:42:36 1 97.89000 3445 EDOLLAR 201809 2015-04-17 19:14:41 -1 97.95500 3316 EUR 201506 2015-04-14 02:16:36 -1 1.05920 3391 EUR 201506 2015-04-16 19:42:31 1 1.08090 3337 EUROSTX 201506 2015-04-14 16:00:23 -3 3702.00000 3388 GAS_US 201506 2015-04-16 18:06:47 1 2.70400 3292 GBP 201506 2015-04-13 01:38:28 -1 1.46340 3364 GBP 201506 2015-04-15 19:16:24 1 1.48420 3493 GOLD 201506 2015-04-23 12:09:53 -1 1188.30000 3487 KR10 201506 2015-04-23 02:28:40 -1 124.64000 3451 KR3 201506 2015-04-20 01:10:31 -1 109.59000 3460 KR3 201506 2015-04-20 02:20:18 -1 109.58000 3490 KR3 201506 2015-04-23 03:26:40 -1 109.39000 3472 LEANHOG 201506 2015-04-20 15:05:00 -1 76.50000 3418 MXP 201506 2015-04-17 18:47:36 1 0.06502 3313 NASDAQ 201506 2015-04-13 14:54:23 1 4435.50000 3412 NASDAQ 201506 2015-04-17 16:36:14 -1 4345.75000 3502 NASDAQ 201506 2015-04-24 14:03:09 1 4512.50000 3358 OAT 201506 2015-04-15 11:16:46 1 157.30000 3499 OAT 201506 2015-04-24 11:51:35 -1 156.88000 3415 SOYBEAN 201511 2015-04-17 18:18:26 -1 956.00000 3307 V2X 201505 2015-04-13 14:52:42 5 19.60000 3310 V2X 201506 2015-04-13 14:52:42 -5 20.00000 3463 V2X 201506 2015-04-20 08:06:05 4 22.15000 3478 V2X 201506 2015-04-22 11:50:15 1 21.85000 3496 V2X 201506 2015-04-24 08:10:54 2 21.75000 3325 VIX 201505 2015-04-14 13:40:49 2 16.05000 3328 VIX 201506 2015-04-14 13:41:13 -2 16.95000 3400 VIX 201506 2015-04-17 10:18:53 -1 16.60000 Total slippage £175. Positions: Code: code contractid positions AUD 201506 -1 AUS10 201506 2 AUS3 201506 3 AUSSTIR 201606 5 BOBL 201506 4 BTP 201506 1 BUND 201506 2 CAC 201505 1 CORN 201512 -5 EDOLLAR 201809 5 EUROSTX 201506 -12 FTSE 201506 -2 GAS_US 201506 -3 GBP 201506 -2 GOLD 201506 -1 JPY 201506 -3 KR10 201506 1 KR3 201506 5 LEANHOG 201506 -1 LIVECOW 201510 -2 MXP 201506 -4 NASDAQ 201506 1 NZD 201506 -1 SMI 201506 1 SOYBEAN 201511 -1 SP500 201506 1 US10 201506 1 US2 201506 4 US5 201506 2 V2X 201506 -11 VIX 201506 -3 WHEAT 201512 -2 Risk: Overall risk is low, as you'd expect given losses, £4500 per day target. Big shorts in GAS, JPY, GBP, GOLD, LIVECOW. Big longs in SMI, BUND, NASDAQ, Eurodollar, SP500.
If you can't do that, its very hard to trade... One trick I found is to only look at drawdown in %. Makes it easier than cash terms. I admit it would be harder if last financial year hadn't been so amazing.
I should add that although I paid slippage of £175, I would have paid £240 had I paid half the bid/ask spread each time (i.e. just crossed the spread) which is what I assume I do in simulation. It doesn't make sense to include a figure like £175 in without explaining the context and what my expectations are.