
The Day I Lost a Shit-ton of Money, Part I - jonnyy
http://ptotrading.blogspot.com/2014/11/the-day-i-lost-sht-ton-of-money-part-i.html
======
gws
Guys, 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
Trading 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.

------
onetimeusename
I 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.

~~~
collyw
To me there seems to be a certain sort of karma in this.

HFT doesn't really add value to anything in my opinion (cue the arguments that
HFT somehow adds real value to our society). Yet HFT creams a profit by
shuffling money around very quickly. So if there are sometimes big losses like
this from a bug, then it seems to even things out somewhat.

~~~
phyalow
To me there seems to be a certain sort of karma in this.

Momentum prop trading doesn't really add value to anything in my opinion (cue
the arguments that momentum prop trading somehow adds real value to our
society). Yet some momentum prop trading creams a profit by shuffling money
around very quickly. So if there are sometimes big losses like this from a
bug, then it seems to even things out somewhat.

~~~
tomp
"Anything of value" is a subjective measurement - you could say that stock
markets don't add anything of value, or you could say that they enable more
investments, since you're able to liquidate your investment whenever you want.

Trend following, and mean-reversion following (what this article describes)
are techniques that counteract the basic human irrational/emotional biases.
Ideally, they should prevent bubbles and stop crashes. They make markets more
rational.

~~~
collyw
"They make markets more rational."

Said during the greatest economic downturn since the great depression.

~~~
ycombobreaker
They don't help with long-term behavior, but they definitely can make markets
more rational on a shorter time scale. You can think of HFT market-makers as
adding friction to a system. They will generally take positions against the
trend, reducing (or maybe just delaying) price impact of the trend traders.

EDIT: I should point out: _all_ market-makers provide this benefit to the
market. The difference now is that HFT is automated, and like most forms of
automation it has out-competed most manual market makers, for better or for
worse. AFAIK, the last bastion of manual market-making is NYSE, where the
humans have information and discretionary powers that are not granted to any
of the robots.

------
consz
Reading 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?

~~~
throwaway7808
Now 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.

~~~
sillysaurus3
Sub-microsecond transactions seem impossible unless you're physically jacked
in to the trading datacenter's network. If you try to transfer a message (like
a string buffer) as quickly as possible from program A running on core 0 to
program B running on core 5 on your server-grade computer, the best benchmarks
I could achieve were "99% of measurements executed in fewer than 150
nanoseconds." And I worked hard on this problem. It seems like _maybe_ you
could execute a trade in ~400 nanoseconds at best, if you have a server that's
connected with 10GigE directly to a NASDAQ (or whoever) box and you're
bypassing how Linux normally does packet handling, but I wouldn't be surprised
if the overhead of the other party's server pushes that to at least 1
microsecond in all cases.

But... now that I've examined the facts, I admit what you say may be true. Are
HFTs really operating in sub-microsecond time for trades nowadays?

~~~
throwaway7808
Yes, you are correct. On an average Linux box to have a single cache line data
transfer between the cores under 150ns 99% of the time is about the best that
you can get. Especially if you are running stock kernel that eats this 1% and
creates huge outliers ;). There is some talk though, about crazily-expensive
switches with integrated FPGAs...

~~~
foobarian
Light moves at 1 ft per nanosecond... I sure hope you're close to the NASDAQ
data center :)

~~~
sillysaurus3
It's 1ft/ns in a vacuum, but my understanding is that it's closer to 0.5ft/ns
in a wire, so what you say is doubly true. But I think HFTs are running on
servers close to the NASDAQ datacenter, and that people pay buckets of money
for such privileges.

~~~
TrainedMonkey
Pretty sure NASDAQ rents servers directly on site for serious dough, so
distance is not that much of an issue.

~~~
kasey_junk
Yes and No. Nearly every electronic exchange now offers co-location services
(including NASDAQ).

The "serious dough" part is a little harder to quantify. I've not looked into
NASDAQ specifically but server colocation is usually on the order of a couple
of thousand dollars a month. This is a drop in the bucket compared to the real
costs of a professional trading outfit (namely employees and margin/risk
costs).

Anecdotally, it's also almost exactly what I paid for a tier 1 co-located
server at my first job in a startup during the first dotcom boom.

------
wazoox
I can't help but think of confidence and the illusion of control:

[http://www.nytimes.com/2011/10/23/magazine/dont-blink-the-
ha...](http://www.nytimes.com/2011/10/23/magazine/dont-blink-the-hazards-of-
confidence.html?pagewanted=all&_r=0)

"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
To 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
Invest directly in stock and bonds. And if that is not available, than invest
in low fee funds.

~~~
kasey_junk
"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.

~~~
im2w1l
Well I do not advocate stock picking to beat the market. Just to construct the
index tracker yourself instead of paying a fee for someone else to do it.

~~~
kasey_junk
That is still phenomenally bad advice. You aren't paying index funds or etfs
for their stock picking, heck most of that is in publicly available documents.
What you are paying them for is their operational capabilities and economies
of scale.

I would be amazed if a retail consumer could put together a balanced,
diversified portfolio with the same cost as an actively managed fund. To try
and compete with an etf or non-managed index fund is crazy.

------
mathgenius
I 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 :-)

~~~
FLUX-YOU
Any suggestions for HFT programming reading material and background knowledge
for that kind of work?

~~~
mathgenius
I 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
The 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.

------
quasse
And 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
They removed it now... must have been a typo

------
jrockway
I 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 :)

------
joshu
Technical 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
I'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
Yeah, 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
Trading 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.

~~~
javert
An economics professor is walking down the street with a student. The student
sees a $100 bill on the ground and tells the professor. The professor says,
"Nonsense! If there were a bill on the ground, someone would have picked it up
already!"

I actually think that in this case you are probably right, though. But I
wouldn't bet my life on it.

~~~
enoch_r
I love this joke, because on the surface it's making fun of economists whose
theories blind them to an obvious reality. But how often does _anyone_
actually find a $100 bill on the ground?

~~~
jonaldomo
My wife found one once on a very windy day in Denver.

~~~
swah
Maybe Bill Gates dropped it
([http://www.netfunny.com/rhf/jokes/97/Jul/gateswealth.html](http://www.netfunny.com/rhf/jokes/97/Jul/gateswealth.html))

------
jbuzbee
No 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
Hey 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!

~~~
nandemo
> _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._

Yes, it can. E.g. you could sell deep out-of-the-money puts and collect a $1
premium day after day, say 99% of all days. Until one day a {terrorist attack
in the US, humongous earthquake in Japan} happens and you lose more money than
you ever made.

~~~
encoderer
Which is why it's good to have net-short deltas (when beta weighted against
the SPY), to protect against tail risk.

It's also why it's important to trade small, and have a large number of
uncorrelated positions.

You can go on believing that nobody makes money doing this sort of thing over
the long term. That's fine. But it's definitely not true.

Derivatives have no more risk than the underlying. What makes them more risky
is the leverage. Selling 1 option w/ a 0.5 delta is no more risky than selling
50 shares of the underlying.

~~~
nandemo
My comment is an example of why the reasoning below incorrect. My comment does
not say "it is impossible to make money by trading stocks/derivatives".

> 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.

------
advertising
When's part 2 slated for? That was annoying to just get into the meat of the
story and then...

~~~
yelnatz
He got me reading the whole thing and then it stopped abruptly.

The guy basically just posted the introduction.

------
peterkto
Wow. I just saw my pageview count go up like a rocketship and saw that HN was
the reason why. Kinda cool.

~~~
differentView
Get out now! It'll crash any second now.

~~~
junto
Nah, just short the server!

------
peterkto
Hey 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-...](http://ptotrading.blogspot.com/2014/11/a-message-to-all-non-
daytraders-and.html)

------
madaxe_again
Long 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.

------
PhasmaFelis
Every 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
I 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.

------
peterkto
Here's Part II!

[http://ptotrading.blogspot.com/2014/11/the-day-i-lost-sht-
to...](http://ptotrading.blogspot.com/2014/11/the-day-i-lost-sht-ton-of-money-
part-ii.html)

------
canadev
Anybody have a glossary?

~~~
jzwinck
[http://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.

------
Brandon0
What a tease! I want part 2

------
notastartup
Do 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
Don'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.

~~~
joshu
When I saw the post I was worried that HN would eat this crap up. But this is
the appropriate level of revulsion. Whew.

~~~
kragen
I'm glad you're here to back up the other revolted skeptics.

~~~
quink
I've just had a revelation.

MACD has three days as parameters, 12, 26 and 9 being commonly used for
completely arbitrary reasons.

Biorhythms use 23, 28 and 33 for similarly arbitrary reasons.

Maybe if we found the right magic numbers we can establish a link between
these two highly reputable sciences.

------
jeffreyrogers
Not sure why the title has (2011) in it. This was posted today, November 11,
2014

~~~
auntienomen
I think this is the part of the story about his experiences in 2011.

~~~
cortesoft
Nah, the story starts in 2013

------
jmckib
I guess this is only written for other traders? I couldn't make much sense of
it and got bored pretty fast.

~~~
bdcravens
That's how most of us feel when we see articles about SF real estate or
politics :-)

~~~
jmckib
Why 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
Relevant 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."

