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The Day I Lost a Shit-ton of Money, Part I
- jeffreyrogers 12y agoNot sure why the title has (2011) in it. This was posted today, November 11, 2014
- auntienomen 12y agoI think this is the part of the story about his experiences in 2011.
- cortesoft 12y agoNah, the story starts in 2013
- dang 12y agoWhoops—not sure what happened there. Fixed.
- peterkto 12y agoJust for clarity, the loss in question occurred March 2014.
- quasse 12y agoAnd here I was hoping the meat of the blog post would actually be in the post. Nope, just a teaser for part two. Also, why is this submission marked "2011"? It was apparently written today.
- cortesoft 12y agoThey removed it now... must have been a typo
- deleted 12y ago[deleted]
- jbuzbee 12y agoNo surprise to me that these guys win some and lose some. All they are doing is trying to predict the future of a stock with absolutely no knowledge other than a graph of price movement. If it's going down, it will continue to go down. It it's going up, it will continue to go up. It's a fools game.
- peterkto 12y agoHey Jbuzbee, This is what I thought as well when I was initially introduced to the idea of technical analysis and day trading. I was very skeptical. I don't want to call myself a probability expert but after studying poker theory and reading mainstream works like Fooled by Randomness, I bought into the idea that it was just a bunch of a guys throwing darts and the "winners" whom were trying to sell all their BS were simply benefiting from survivorship bias. But after seeing the numbers themselves first hand, there's just no way it's random chance. Being net positive 80% of all days traded with all your winners and losers falling in a relatively tight distribution -- luck can't create highly specific, repeated outcomes like that. There is virtually zero tails risk since 99% trades are intraday only. My loss was a failure of discipline. I froze like a deer in the headlights, failed to execute like I normally do and paid the price. Hope you keep reading to find out what happened!
- ISL 12y agoThere is virtually zero tails risk since 99% trades are intraday only. Unless something meaningful happens to the business while you're exposed, no?
- peterkto 12y agoI suppose you're right and that's why I wrote "virtually zero" and not "no chance whatsoever". Not only does significant breaking news have to happen while you are in the position, which is already very rare, it has to happen in a way in which you cannot respond and cut it off -- like the stock getting halted. Most intraday stock halts that occur are not exactly a shock (like a biotech or a stock under investigation of any kind) so if you are highly leveraged on that stock to the point where your entire equity can get hurt, that's on you. If something big like GE or AAPL halts, the move proably won't be extraordinarily huge like 20%+, unless it's an Enron scenario.
- peterkto 12y agoWow. I just saw my pageview count go up like a rocketship and saw that HN was the reason why. Kinda cool.
- differentView 12y agoGet out now! It'll crash any second now.
- junto 12y agoNah, just short the server!
- joshu 12y agoTechnical analysis doesn't work. Big surprise you lost money. Those guys that you thought were good at it? They lost their shorts at some point too.
- peterkto 12y agoI'm wrong all the time and lose money all the time. The big difference here is I let one get away from me instead of keeping it small/manageable like I always do. It was a situation where I could have controlled it and I didn't. I'm still up more than 4x what the final realized loss was in my trading career. I used to think TA was a joke. I was very skeptical before using it. I have never bothered to explain why it works intellectual to non-believers. But I do think someone who understood probability and saw the compiled statistics of practitioners would concede that there's 0 chance of non-randomness.
- joshu 12y agoYeah, no. That's called anecdotes, because when you do understand probability and backtest these strategies, they are known not to work in the large. Stat arb is what happens when you actually do statistics, and these days it's got only a slim to nil advantage.
- tjradcliffe 12y agoTrading is like the Israeli nuclear program: those who talk about it don't know about it, those who know about it don't talk about it. If technical analysis actually worked, you'd be able to find the "Technical Analysis Toolkit" for on GitHub, and... technical analysis would no longer work. A little bit of grepping around yields: http://ta-lib.org/ http://ta-lib.org/ (Technical Analysis Lib). Ergo: if technical analysis ever worked (there is some evidence it did before about 1990 when personal computers became ubiquitous) it almost certainly does not today. The only way market timing approaches can work is if they embody significant information that is not generally available. A successful market timer has to be smarter than everyone else in the market at the time of each trade. Anyone claiming technical analysis works is claiming that there is an inefficiency in the market that has been well-documented in public for decades, to the extent that an open-source BSD-licensed tool for identifying the inefficiency exists, and yet the inefficiency still exists. This is simply contradictory.
- consz 12y agoReading this sort of stuff from manual prop traders makes me laugh. It sounds so amateur hour. How in the world can manual traders ever compete against a short-term stat arb or HFT strategy? It just sounds like pure luck that any of them will make money. Also, is 130k really a huge loss? I run HFT strategies, and while it would definitely be a big loss even for one of my strategies, it wouldn't be a phenomenal outlier. How small was this guy trading before?
- Tyrant505 12y agoI also think it's an important lesson to learn... I'd rather gain that young then older.
- throwaway7808 12y agoNow you are just bullshitting. A 130k is a huge loss and a phenomental outlier. You've never had even a 100k loss on your strategies. And by current standards your strategies are not even HFT. I've seen you talking milliseconds. Nowadays people are talking sub-microseconds.
- consz 12y agookay
- throwaway7808 12y agoDuh. Common. Describe me just one automated strategy for which $130k would not be a phenomenal outlier. And you were talking multiple strategies...
- consz 12y agoI was talking about 130k in any one strategy. I'm sorry you misunderstood me. A single strategy is easily capable of losing that much. Any bond futures or cash bond strategy post-FOMC. Any equity index futures strategy during Twitter "flash crash". Any strategy taking large size in a big future during early-mid October this year. Any strategy taking large size in a big future during August 2011. Any Nikkei futures strategy right after the recent QE announcement from Japan. All of those are easily capable of dropping 130k in a day.
- jmckib 12y agoI guess this is only written for other traders? I couldn't make much sense of it and got bored pretty fast.
- bdcravens 12y agoThat's how most of us feel when we see articles about SF real estate or politics :-)
- jmckib 12y agoWhy are you telling me? I don't post articles about SF real estate or politics, I just like to comment on them. In fact, I haven't posted anything so far :-)
- bdcravens 12y agoRelevant to your comment: "I guess this is only written for other San Franciscans? I couldn't make much sense of it and got bored pretty fast."
- deleted 12y ago[deleted]
- advertising 12y agoWhen's part 2 slated for? That was annoying to just get into the meat of the story and then...
- yelnatz 12y agoHe got me reading the whole thing and then it stopped abruptly. The guy basically just posted the introduction.
- canadev 12y agoAnybody have a glossary?
- jzwinck 12y agohttp://www.investopedia.com/terms/h/hitthebid.asp http://www.investopedia.com/terms/h/hitthebid.asp - there's one term from the article defined for you. The site has lots more. If there are still terms you can't find, post them here and I'm sure someone can explain.
- jmgtan 12y agoYou can use investopedia for almost anything finance/trading related.
- Brandon0 12y agoWhat a tease! I want part 2
- mathgenius 12y agoI work in a small prop-shop doing HFT. Most of the guys there are manual traders, and I've seen the same guys there for several years making steady money. I don't think this is bs or amateur hour, let me explain why. It is essentially the small (independent) traders that can make a win when the big guys (hedge funds, pension funds) are moving their positions around. Imagine a dude on a surfboard enjoying the wake of an oil tanker and you get the idea. Just don't get too close :-)
- iaw 12y agoExactly, small moves that George Soros wouldn't blink at are the bread and butter of these guys. I think of it like a sea of fish, these guys are almost the smallest tuna out there and they find the food the bigger guys don't want.
- FLUX-YOU 12y agoAny suggestions for HFT programming reading material and background knowledge for that kind of work?
- mathgenius 12y agoI learned most of it on the job, from the masters. So I don't really know about the literature. The non-finance part of it involves alot of real-time stuff, which is found in game programming, and also audio software. Also, you could read up on networking, TCP/IP, etc. As for risk control (by risk I mean bugs) I often wonder if there are lessons from eg. the nuclear industry, on how to keep complex, highly-strung systems on track. That's another thing I learned on the job, and not always the easy way :-)
- kasey_junk 12y agoThe problem with using nuclear industry systems lessons is that the nuclear industry moves exceedingly slowly (for good reason) but trading needs to move fast. Opportunities exist for a very short time, so being able to find them, exploit them, and not blow yourself up in the process is the trick. A trick not many folks have proven they can do over the long haul.
- notastartup 12y agoDo you think technical analysis works? Look at the mountains, try drawing resistance lines, my god, you are able to predict when the mountain ridges are going to break through right past 9000! Are you Jesus?
- quink 12y agoDon't forget the magical term 'support'. Or 'Fibonacci levels'. Or 'resistance zones'. If I see another blog post by the brokerage firm I'm with about freaking 'supports' I'm going to hurl. Technical analysis puts everything from astrology through religion on to homeopathy to shame in its bullshittery. The most entertaining part is when they go on about the support levels between the currencies. "NOK-NZD is about to break the 5.30 support level and this chart indicates that NOK-NZD is going to go up." It just leaves me thinking WTF, how do you go from here to there? I think, more honestly, the actual example I saw was CHF to JPY. 'Butterfly patterns'? You sure you're not reading tea leaves? That said, I'm sure technical analysis works. Something like 0.5+ε of the time. And, if you find the right sort of TA, if it's just RSI or some MACD crossover with specific sets of parameters x or y for that stock you might beat buy and hold or whatever. 50% of the time, if you're lucky, before commissions. But I'm not even convinced, nor should anyone with half a brain be, that 365 days is somehow a magical interval over which we should compare in the long term or anything. Just buy and hold and index fund, people. Or something very managed with a very low level of turnover and low fees, keeping in mind an appropriate diversification period. When to buy? Today, or gradually over the next few months with dollar cost averaging. Holding period? Ideally forever. Simple.
- jrockway 12y agoI worked at an investment bank writing software for traders like the author. I never quite knew how it worked, but it somehow paid my salary. (It seemed a lot like crazy kids doing whatever they wanted. That might not be far from the truth.) What I always thought was interesting was that when the traders blew up like this, they became the PMs or support for the software :)
- onetimeusename 12y agoI lost a shit ton of money at the firm where I work right now almost a year ago. I wrote software that began issuing trades outside of where it was expected to and did not stop. In a panic, I forced the server it was running on to terminate its process but trades were still open in the market. They had to be manually closed. I feel sick to my stomach even writing this right now, that hour I was trying to fix the problems sticks out as the worst moment in my life. I am glad whoever wrote this can be so nonchalant about it, if you have a strategy for forgetting I would love to hear it.
- javert 12y agoWere you able to keep your job after that? (If you're willing to talk about it; if not, I understand.)
- lmartel 12y agoFrom his phrasing ("firm where I work right now") it sounds like he was :)
- ycombobreaker 12y agoIf the firm did not go under as a result, it doesn't make sense to fire the individual. An event like that is a valuable (and expensive!) training lesson, and a mistake that probably won't be made twice.
- j_lev 12y agoWell, for starters it sounds like you didn't act maliciously. You acted based on the sum total of your training and experience to that point. If your training or experience was lacking then this is an issue for which the company needs to take some responsibility.
- mathgenius 12y agoYeah, I think all of us HFT programmers have war stories like this. I got a friend that had his program take out the entire market... Usually it's best if the programmer is separate from the ops guy, but in this case it sounds like you got stuck doing both. That sucks. I've done a bit of trading myself and it's both boring and terrifying. The two worst emotions.
- gws 12y agoGuys, you are missing the mark on technical analysis. It's not about forecasting where the prices are going to be, it's about forcing yourself to follow a set of rules instead of following your emotions. There was an article on HN sometime ago about the practices of some old tribe to choose where to sow the crops for the next year. The practices were totally random, like watching the clouds, where a bird would fly, etc. Well, researchers eventually realized that those practices actually ensured a truly random selection and that was the best strategy. A non random selection, that is any possible bias, could have exposed the tribe to the possibility of a negative bias in selecting terrains and the risk of multiple years of bad crops which would have led to extinction. A random strategy would led to a bad year here and there and offer better chances of survival. But humans cannot make decisions truly randomly so they need a rationale system that helps them make random decisions. We are not that different from computers in this respect, but I am going astray now, so back to topic. The markets are full of people trading based on their emotions. A stock is going up, greed and fear of missing out kick in and people buy high. A stock is going down, panic and fear of losing kick in and people sell low. People are psychologically wired to make bad decisions in the stock market, they have a negative bias. If you can find a rationale system to follow you will make better decisions than the crowd following their emotions and take their money. Traders know very well that the first rule in the market is that everything can happen. They also know well that for any chart there are TA "rules" that say buy and other that say sells. They also know that a method will beat the guy with no method. This at least is my theory, I have never practiced TA but I saw my father throw away tons of money with it and invariably the losses were caused by a few trades where he did not follow his rules but convinced himself to bend them a little. And he preached all the time that following the rules was the only way to win. You are your worse enemy in the markets.
- ohsnap 12y agoTrading with emotions is definitely bad (and all too human) --- but it's best not to trade at all. Technical trading in particular is highly irrational if you know what your up against.
- phyalow 12y agoYou do realise that the human mind is incredibly good at "recognising/identifying" "patterns" in random data.
- deleted 12y ago[deleted]
- PhasmaFelis 12y agoEvery time I try to read about trading, a little Baron Munchausen in my head starts going "Your reality, sir, is lies and balderdash, and I'm delighted to say that I have no grasp of it whatsoever." :-/ I dunno. (This goes double for HFT.)
- kasey_junk 12y agoI feel the same way every time I read a story about a startup trying to put a web front end on some service industry. This goes double for when I'm reading about their valuations.
- wazoox 12y agoI can't help but think of confidence and the illusion of control: http://www.nytimes.com/2011/10/23/magazine/dont-blink-the-hazards-of-confidence.html?pagewanted=all&_r=0 http://www.nytimes.com/2011/10/23/magazine/dont-blink-the-ha... "Mutual funds are run by highly experienced and hard-working professionals who buy and sell stocks to achieve the best possible results for their clients. Nevertheless, the evidence from more than 50 years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. At least two out of every three mutual funds underperform the overall market in any given year. More important, the year-to-year correlation among the outcomes of mutual funds is very small, barely different from zero. The funds that were successful in any given year were mostly lucky; they had a good roll of the dice. There is general agreement among researchers that this is true for nearly all stock pickers, whether they know it or not — and most do not. The subjective experience of traders is that they are making sensible, educated guesses in a situation of great uncertainty. In highly efficient markets, however, educated guesses are not more accurate than blind guesses. "
- porker 12y agoTo me this is depressing as my future pension is invested in funds. Given the rest of the comments: how best to invest it for long-term grown above the rate it'd have in a savings account?
- im2w1l 12y agoInvest directly in stock and bonds. And if that is not available, than invest in low fee funds.
- kasey_junk 12y ago"Invest directly in stock and bonds." That is pretty much the opposite advice you should take from those findings. In general, investors now have the widest array of low cost, diversified instruments available at any point in history. Most advisors who know what they are talking about, will tell you to take one of these options (a non-managed index fund, a highly diversified etf) and invest in that. Rebalance once a year and don't worry about beating the market.
- madaxe_again 12y agoLong story short: Guy makes living watching dead cats bounce, and correctly realising when it's bouncing and when it's peaking. One day, he misses the peak, due to some SNAFU. History. I made a living doing exactly such for a little while, until I lost the whole damn lot due to having to reboot in the middle of a big position. Own damn fault, should have had another screen spare.
- peterkto 12y agoHey guys! Thanks again for all the interest. Since this site was responsible for more than 90% of my traffic, I thought I'd address some of the comments in this thread. Hope you all enjoy. http://ptotrading.blogspot.com/2014/11/a-message-to-all-non-daytraders-and.html http://ptotrading.blogspot.com/2014/11/a-message-to-all-non-...
- deleted 12y ago[deleted]
- peterkto 12y agoHere's Part II! http://ptotrading.blogspot.com/2014/11/the-day-i-lost-sht-ton-of-money-part-ii.html http://ptotrading.blogspot.com/2014/11/the-day-i-lost-sht-to...