Harnessing Energy Using Frictionless Platforms

I met Aris David on the StockTwits platform. I don’t remember when and how the interaction started, but our trading relationship was born within the chaos of the Twitter ecosystem. He is known on Twitter as @fledglingtrader.

Although Aris operates out of London, we collaborate seamlessly (or easily) on trading technologies for the Bigger Capital ecosystem. To date, our symbiotic relationship has produced satisfactory trading results.

All our achievement has been made possible by available and free collaboration tools and technology platforms such as:

• Cloud IT and virtual private servers IT infrastructure
• Gmail
• Skype
• Twitter and StockTwits
• Google+
• Google Docs
• Oracle Virtual Box hosting several operating systems, including Linux
• Screenr
• SquareSpace
• Interactive Brokers
• And so forth…

We use the same frictionless platform to create trading tools such as our Spread Analyzer, which you can find right here.

Anyone located anywhere in the world who has access to a browser can use this free tool.

@AsymmetricRisk, a trader residing in Panama, tweeted a few days ago:

@biggercapital pls take a look when u get a chance, bit.ly/sHtbrJ vs bit.ly/vtenzW only change is switch 1 and 2 leg

I got the tweet on my Droid Bionic and was able to open the exact same spread using the embedded links. I responded:

@AsymmetricRisk let me think about it. First thought is rounding impact right at the boundary condition

After talking to Aris about this tweet, I replied:

@AsymmetricRisk After talking to @fledglingtrader, $MSFT (at cointegration theshold) drives $INTC not the other way around

Because @AsymmetricRisk permutated the legs of the spread in the analyzer, he asked a good question, and we all benefited from it. Microsoft drives Intel changes at a cointegration level, but it is less than ideal the other way around.

If you think about the value we all have derived since my first interaction with Aris, it is just amazing. And now, we interacted with @AsymmetricRisk, and the energy from that interaction will follow its own course, hopefully in a value-added type of way.

This is how I think traders and investors will increase their value toward infinity in the future.

I am in awe by what you can accomplish on the chaotic frictionless platforms. Aren’t you?

Written by Michael Bigger and Aris David. 

How to Use Our Spread Analyzer

The Spread Analyzer can be found right here.

Produced by Jennifer Galperin. Follow me on Twitter and StockTwits.

How to Use Matlab for Trading

This video is an introduction to Matlab for trading purposes.

The resolution isn't the best, but you can get the source codes from here.

Guest post by Jev Kuznetsov. Kuznetsov runs a quantitative volatility strategy for Bigger Capital. You can find his blog right here.

Why should I learn a programming language?

Guest post written by Jev Kuznetsov. Kuznetsov runs a quantitative volatility strategy for Bigger Capital. You can find his blog right here.

 

People are bad at math. Some are better than others, but who can calculate ln(sqrt(345)*34)^3.4 in less than 1/1000th of a second? Even the simplest computer can calculate at a rate million times faster than a human, in fact this is the main reason computers have been invented. To use the full capacity of a computer the user should learn how to progam it.

 

People are quickly bored. Imagine you'd have to download around 1500 excel sheets of stock data and then combine them together? Unless you have an autistic disorder you would probably get bored to death. A computer would not mind doing the task, but you'd have to program it.

 

Another example is reaction speed.  It takes ages measured in computer time, for a human to see a price change in a stock and then just press a button.Curious about how fast you can react? Take a test here. Your reaction speed should be around 0.2s,  while even a simple microcontroller (the ones you’ll find almost in any electronic gadget)  will do the same task in 0.0000001s.  Want to compete? If you know what action should be taken in a certain sitiuation, a computer can do the job for you a couple of million times faster, but still you need to tell it what to do by means of programming.

 

Still, even with all that raw computer power nowadays, measured in gigahertz and terabytes, the 'heart' of computers haven't changed much since their invention: they are still not much more than 'calculators'. Yes, we've come a long way in terms of size factor, power consumption, user friendliness and price, but still, computers are incapable of creative thinking, adaptation to new environments and unpredictable situations. A cockroach is more intelligent measured by these standards than the most advanced computer. By combining the human power of creative thinking with the raw processing power of a computer a trader can become supertrader, achieving a consistent return.Financial markets are just like nature, the smartest ones with the best skills for the current (and ever changing) environment survive. The ones that do not adapt get extinct at some point.

Using computers for trading today is a fact of life, and a trader has got no choice but to adapt. Who does not use some form of charting tool to find entry and exit points or an excel sheet to keep track of performance? Not much algorithm here, but it is already a form of computer-assisted trading. Another level is to purchase special purpose software, like spread trading tools. Often it includes some form of 'black box' logic, so you can only hope that it works and continues to work in the future. But why not move to the top of the food chain and learn how to process incredible amounts of data, design own algorithms, backtest strategies, automatically place hundreds of orders and analyze trading performance? By writing your own tools and programs, you'll be able to quickly adapt to every new market environment.

 

Your time invested in learning programming techniques will have a ten-fold return in time saved from doing boring daily trading tasks.

 

Coming next: which programming language to choose?

 

Jev

 

Apple versus Amazon.com

I just wanted to share with you that one of our traders has done very well trading the $AAPL versus $AMZN spread. These two companies don't leave traders indifferent as to their respective valuation, momentum, technical analysis, and management. We have our own opinion as well about how to trade these two stocks against one another on a short time scale. We add statistical methods to the traditional toolkit. The additional information is very helpful in the pursuit of trading profit.

The image below displays the relationship between $AAPL and 2* $AMZN. On a five year time scale the spread exhibits strong mean reversion.  

We have web enabled our spread analyzer. What that means for you is you can use our spread analyzer tool for free right here.  You can use the tool to analyze how the $AAPL $AMZN behaves at different time scale. You can also use the spread analyzer to analyze a combination of stocks of your own choosing. The analyzer will not work with Internet Explorer (IE) because of how Microsoft handles security within IE. This will be resolved shortly. The tool works fine in Chrome.  You can download Chrome right here.

Go out for a spin and let me know what you think!

Written by Michael Bigger. Follow me on Twitter and StockTwits.

   

Small and Large Cap Stock Brawl

At Bigger Capital we like to trade the $SPY- $IWM spread. In addition to being a great spread to trade for profit, this spread measures to a certain degree the amount of risk being added or taken out of the market. The spread movement indicates the state of the money flow between small cap and large cap stocks.

The behavior of the spread was particularly interesting in September. This is what we have noticed, and this is how we have used our own interpretation to trade the market:

• The spread increased in value overall throughout the month indicating risk being taken out of the system (trend line).
• Despite the increase in the value of the spread, $SPY rallied last week. We took this opportunity to initiate a short position.
• Notice the sharp spike up in the spread on September 2nd, followed by a sharp drop in $SPY on September 3rd.
• On September 22nd, the spread had a strong move downward indicating that someone might be willing to take more risk out there (could be an aberration). On September 22nd, we traded from a long bias in the afternoon and made good money on that basis.
• Could the spike indicate a rally coming ahead? Maybe or maybe not, but I am looking to short the market aggressively if the spread spikes back up. If the spread continues declining and the spread hold its own we will be active from a long perspective (small size) with a very short term horizon (a few hours).

 

 

Does this sound like a good game plan?

Written by Michael Bigger. Follow me on Twitter and StockTwits.

Big News Creates a Big opportunity

Check out the trade we did at 8:30 am last Friday as the employment data news hit the tape.

We bought the spread 8 * $SPY – 13 * $IWM at a level of $33.94 which was about $10 below the level it was trading just before the release. I am talking about a fraction of a second.

Our ability to make money in this situation depended on the following three components:

• Major news that can move the market big time.
• Fast technology to capture a very short term liquidity gap that was almost invisible to the naked eye. Fast computers are great. Embrace them.
• The appropriate low delta spread. You wouldn’t want to trade this with an open delta.

We wish we could have done more of this but it was just too fast.

Have you ever taken advantage of a situation like this one?

Written by Michael Bigger. Follow me on Twitter and StockTwits.

Halliburton Rockwood Spread

  Yesterday we bought the spread $HAL-$ROC as part of our statistical strategy.  We thought we’d give a brief description of the main statistics we looked at before implementing this trade.

1. The $HAL-$ROC spread is cointegrated with at least a 90% confidence interval over both short term and long term time periods.
2. The spread is just over 2 standard deviations from the mean for the periods we look at.
3. The half life of the spread is under 50 days.  We don’t like to hold positions for long periods.
4. By just looking at the graph you can see that the spread didn’t make a significant gap to get to the entry point.  We worry when we see a big gap because it might indicate a change in the relationship.

Written by Norm Winer. Follow me on Twitter and StockTwits.
hal roc 8 29 2011

How I Use Spreads in Volatile Markets

The volatility in the markets this month has reinforced for us the huge value of trading spreads.  With spreads, you are betting on relative performance rather than on absolute performance.  This means you can express a view without taking on unwanted risk.  When the markets are moving with 10 to 15% volatility, market risk is minimal.  However, when the $VIX is at 40, eliminating unwanted risk is so important.

As an example, we bought $TGT the morning of August 17 when it reported good earnings.  To hedge out market and sector risk, we sold an equal amount of $XRT the Retailers ETF.  Here is the chart of $TGT over the two days August 17 to 18:

As you can see, $TGT traded down during August 17 and opened lower the morning of August 18.  However, the index traded down more over the two day period, so our trade was profitable.  Here is the chart of the spread $TGT-$XRT over the same 2-day period.  We bought the spread at 4.3 and sold it at 6.2:

This is a very different picture, isn't it?

Written by Jennifer Galperin. Follow me on Twitter and StockTwits.

5 Things We've Learned about Spread Trading

• Avoid Spreads Which Have Recently Gapped – Sometimes a spread will meet your criteria because it gapped.  Be careful of these.  It may indicate the spread relationship is broken.

• Your Target Profit and Stop Loss Should Be Symmetric – If you are right more often than not you will make money.

• Time Limit – Set a time limit for how long you hold a spread, ideally not too far away from the half-life.  There is a risk and opportunity cost to holding positions too long.

• Know How You Made or Lost Money – Are you making more from your shorts or longs?  Is there a catalyst involved or are the spreads just drifting back to the mean?

• Track the Spreads after You’ve Unwound Them – Are you unwinding too early or too late?

Written by Norm Winer. Follow me on Twitter and StockTwits.