Thursday, July 30, 2009

Why do traders ignore so much data?

Stock market trading is driven by data, however most systems and the traders that use them, simply ignore huge swathes of data - it's been written off as just too hard. For instance BHP, Australia's most traded share is bought and sold 15-20,000 times a day - and that's just in Australia. Let's think about that for a moment, some of those trades are institutions, some are Mum and Dad investors, some are professionals, some are automated computer (aka algo) trades. So what do systems do to analyse those trading patterns, who is buying in? who is selling? etc, basically the systems do nothing - those 15,000 trades are reduced to 5 figures - Open, High, Low, Close and Volume.

Reducing all the trading data down to 5 figures made it easy (at least easier) to analyse, that was especially relevant when you had to hand draw your charts, and work with paper and pencil. The thing is we don't do it that way any more, my laptop has enough power to store and analyse the ASX100 live so why do my trading tools ignore that power and only allow me to look at history as OHLC? I reckon the answer is cultural, even though trading is meant to be the biggest user of the most advanced technology, at it's heart most traders are still using techniques that have been around for a century. They simply use them on really fast hardware.

As a little taster of what's possible, once you use the raw data you can split out the big institutional trades, identify certain types of algo trading - orders for 11, 12, 11, 12, 13, 12 ,11 etc shares. See if there's a stampede by the bit players into (or out of) a share all kinds of real world knowledge is there for the asking. Of course what you do with it, is upto you.

Tuesday, July 21, 2009

Trading it's not rocket science

Buying and selling shares for profit is the dream of many, fortunes can be made, and as a 'business' it's completely scalable. If you can trade $1000 into $2000, then you can trade that $2000 to $4k and so on you'll be a millionaire in no time. However, doubling your money is unusual to say the least, doing it consistently is the stuff of dreams and not reality. Most successful traders are happy with a consistent set of small(ish) gains, balanced by smaller losses.

To minimise losses, you have to be prepared to sell and take a loss, psychologically that's the hardest part of the whole game. When you lose you lose face, confidence and are humbled by the market, it's a tough lesson. The pain can be managed by trading to your plan, and setting a stop loss, an automated sell, when the share reaches a low threshold. If you don't do that you'll hold on to a losing trade, and your losses will just grow. Buy and hold might work in the long term, but buy low sell high and protect the downside with a stop loss is the real way to make money in the market.

My trading golden rules :-

1) Know when to buy - important, but don't worry about buying at the bottom
2) Know when to sell - crucial, set lower and upper limits and sell, take that loss or profit and plan for it before you buy
3) Manage your money - it's all about risk management, only risk a small proportion of your stake at a time

Treat trading as an education process and expect to pay for that education. If you do that then you'll have the right mind set. Don't expect to make money from the get go, and don't expect consistency early on, but do track what worked and what didn't, Learn from that.

Thursday, July 16, 2009

Smart meters but dumb houses

The Victorian Government is supporting project to roll out smart meters. The cost benefit justification for this is around cheaper meter reading, much better accuracy and the ability to spot distribution issues. However, althiugh the meters could be used to give feedback to consumers, that part of the project has been ruled out of scope - I'm really not sure why.

We know that giving people an idea of how much power they use is a really effective way to get them to use less. So it's a massive disapointment that the costly roll out, doesn't address that, even a tweak to the build regs for new buildings would make sense. If electricity meters were in the kitchen and visible, then power use would go down, while they stay out in the cold in a hidden box, consumers just don't know where their power is going.