Daytrading.no - the website of Oddmund Grøtte

Over the weekend I read Curtis Faith's Way of The Turtle. This is the book about the legendary "Turtles", a randomly picked group of people trained to become good traders. Overall the group performed well, and Faith describes some of the methodology involved, though I believe most of their strategies performed much better in the 80's and the 90's than today.

The book is easily understood and a very good starter for potential traders new to mechanical trading. He revealed some of the strategies they used and backtested all of them, and it gives an insight in the main aspects of mechanical trading.

One chapter is dedicated to risk and I quote this excerpt (risk is my favourite topic):

"Now I see life as a trader approaches his craft: Nothing ventured, nothing gained. Risk is your friend. Don't be afraid of it. Understand it. Control it. Dance with it. Traders take chances with good expectation but expect to lose regularly. They are not hesitant to act because they're afraid that they might be wrong, a quality that emerges in the kind of life they lead. They follow their own path and don't worry that sometimes they will fail in certain attempts because they know that is part of life, they understand that failure is a necessary prerequsite to success and learning....You cannot learn without risking failure."

He concludes the book by listing the major tasks in a complete trading system:

• Markets: What to buy or sell
• Position sizing: How much to buy or sell
• Entries: When to buy or sell
• Stops: When to get out of a losing position
• Exits: When to get out of a winning position
• Tactics: How to buy or sell

ple market neutral pairs trading, and my trading firm provides me with enormous gearing opportunities. The point is to employ several strategies to smooth the equity curve (and treat it like a business). 

Trading "professionally" is a great way to speculate. The cost of doing business is very low. Except from commissions and taxes, here are my yearly overheads:

- Internet connection: 600 USD

- Accountant: 225 USD

- Bank wires: 300 USD

- Interest (for carrying positions overnight): 2000 USD

- Exams etc (need to travel to US or London): 400 USD

- Infrastructure: 700 USD

- Total cost: 4225 USD

Add to this the initial cost of about 1000 USD for computers, monitors etc (which most people buy anyway). I have a home office and no rent to pay. With a capital contribution of about 40K USD this gives me a buying power intraday of about 1 million and 400K over night. IMO, when comparing this to the profit potential (which for good ones can run up to 300K - 1 mill USD), I think this is a great business for those willing to assume the risk. Obviously the opportunity cost for wasting your time is not included (if you dont make money).  

9th of September, 2004
Everyone is a speculator

"Everyone who makes a decision in the absence of complete information about the future consequences of all available opportunities is a speculator."

- Paul Heyne, The Economic Way of Thinking

Several newssites on the net today report that the recent surge in the oil price is because of the "speculators". No further explanation is given. I mean, who are the speculators? Can they manipulate the market/corner the oil market? Highly unlikely. As usual, the speculators is given the blame for the unwanted: the speculators are the root of all evil. I dont know why the word speculator has such a bad symbolism for socialists. Usually no documentation is required when blaming the "speculators", it is just something automatically worth blaming. 

IMO, we are all speculators. We speculate in love, marriage, retirement plans, business etc. Every business endeavour is a HUGE speculation - noone knows if there is gonna be any demand after your products. IMO, speculator is a positive word synonymous with risk-taking. We should be grateful we have risk takers. Derived from the latin word speculare, Paul Heyne describes very much the essence of the noun. Thus, everyone is a speculator:

  "Everyone is a speculator, not only in his financial life, but also in his career, his romance, and his retirement and family. It is in the entire decision-making practice."

- Victor Niederhoffer, The Education of a Speculator

I am very proud to call myself a speculator. For me this is a very positive word: I am a risk taker taking rational calculated bets, and I am certainly not exploiting other people. I just do my business and bring my money back home to Norway and pay my taxes, just like any other income generating export business.

4th of September, 2004
Some random thoughts about risk

Risk is a very negative word for many, but as a speculator you have to face financial risk (even ruin for some kamikaze traders) every day. But to make a living trading stocks you have to face risk in a bold way. IMO, the greatest opportunity for success goes to those who are not afraid of taking risks and at the same time managing risk in a proper way (and knowing EXCESSIVE risk may lead to total ruin). By that you have to analyze risk in accordance to potential reward. Success may come to those without fear, but many of the fearless have fallen by the wayside (and we never hear about them).

That also means not afraid of looking stupid. Remember that learning is inhibited by caution and experimentation. Children who are afraid will never learn. Children with totally risk-averse parents will struggle in an uncertain world.  Children are in general not afraid of looking stupid and they are therefore much more adaptive than adults. Just look at how easy they learn a new language. But you cannot be totally fearless but have to accept risk as a part of the equation for success.

IMO, risktakers are not looked upon very much in the Norwegian society. In our paternalistic country politicians and bureaucrats seem to have only one goal: to limit risk. In the not to distant future you will probably see a lot more rules and laws for proper conduct to limit risk. Is this the way we will face the future? No doubt the recent reduction of the risk tolerance bands in our society may inhibit much new learning on many fronts...What would the world look like if the Orwille brothers did not risk their health when trying to fly? Louis Pasteur had to fight religious dogmatism to create new and better drugs. There would be no improvement in living standards without risktakers. I, for one, have a tremendous amount of respect for those who are willing to go different paths than the traditional ones. You need courage to do that.

In order to succeed you have to face risk, no doubt about it. It takes perseverance and courage while enduring pain to keep moving forward towards success. Remember Napoleons famous saying:

Pessimists never won any battle. Forward!

31st of August, 2004
82% of the daytraders lose money

There is an interesting article in Business Week about daytraders from Taiwan.

They found that 82% of the traders lose money and conclude that this is a too low probability to be worth starting. Really? Is the success rate higher in any other business endeavour? If you start a pizza shop, is the success rate any higher? I have no proofs but I strongly believe it is not any better. On the contrary, there are several positives about daytrading, the most important being there is basically no fixed costs neither any sunk costs (but of course opportunity costs).

The top performing group made on average 251 USD, five times the annual per capita income. IMO, not bad considering this is a low cost country. 

18th of August, 2004
Real costs, hidden costs and opportunity costs

There is an interesting article in Capitalism Magazine this week about the costs of "free" services provided by the government.

This story illustrates the real costs with free services, but it also illustrates all the "hidden" costs which we cannot "see" because it is not a direct consequence. There is also the opportunity costs by doing something more expensive instead of producing cheaper and more rational.  Obviously, there is nothing free in this world, someone has to produce what whoever consumes, and this article illustrates perfectly what happens when we all have to pay taxes to pay "free" services provided by the government.

When we start giving free services there is no end for what the government is supposed to provide us. There is a noble thought to give us free healthcare and eduction, but by doing this by force (and no choice) it is inevitable that the costs increase. In the end the productive persons will be levied more taxes and the result is less incentives for production. The marginal tax rate for self emplyed is already close to 60% in the top bracket (from 140 000 USD), and at least 39% for any income for labor related income (capital gains are taxed flat at 28%). Add to this VAT and all other small taxes, and most people pay 60-70% of their total income in taxes. Please enlighten me what is "free" by this.

11th of August, 2004
Resources and creativity

The start of August has been terrible for those long stocks (I am long too, but only for my pension - an account I check once a year). S&P 500 is down about 5%. Still, I have had some of my best days ever solely daytrading and swingtrading pairs. This is one of the advantages with market neutral strategies, in general it does not matter if the market goes up or down. Pairs have become increasingly more efficient lately, but the game is simple: innovate or die! I have changed some of the pairs, trading them as a basket in different ways, and my holding period has increased substantially. I think my creativity has paid off. In the July 31st edition of The Economist there is an interesting article written by one of the former leaders of Mossad, Efraim Halevy. That article tought me a lot:

• Superior resources is no guarantee for success: "Yet Israel's most costly and fateful failure was its mistaken estimate of Egyptian and Syrian intentions on the eve of the Yom Kippur war in 1973 ... At the time Israel had it all : superior intelligence ... excellent human resources, high level dialogue with more than one Arab or Muslim leader ...but despite all of the above, we got it wrong." It is the same in the stock market. A huge pile of information will not help you if you miss the essential trigger. There is so much information in the stock market and it is easy to miss the essential elements.

• "Intelligence officers must be gifted with imagination and creativity, enabling them to peer behind the curtain of apparent reality." You need to think creatively to get an adge. The obvious is already implemented by the masses. You have to do something unique. Be a contrarian.