How We Use The One Good Trade Framework

I just started reading One Good Trade: Inside the Highly Competitive World of Proprietary Trading (Amazon affiliate link). This is a great book. In fact, it’s more than great—it’s fantastic!

One of the big ideas the author, Mike Bellafiore (Bella), utilizes is to trade one good trade, then trade another one, and then continue this process. Bella’s firm, SMB Capital, employs many top-notch traders to execute the firm’s trading strategy as a process.

At Bigger Capital, we use a similar process. We have a one-good-trade framework based on our own recipes and we use technology to multiply the do-another-good-trade-and-another-one-etc. model.

So the idea here is to find that one-good-trade framework that works for you. We are all different, so your framework will be different from mine, and mine is different from what Bella and his colleagues have developed.

Developing your framework is where the creative part comes into play. Shape that framework as if you were sculpting until it is perfect for you. If you are stuck, just break down the task and iterate until you get to the desired outcome. For more information, read Break Down Your Algorithm Plan into Smaller Parts.

Once you have a solid framework in place, then it is about applying the processes consistently, neurotically, and obsessively. While you’re at it, reduce the friction in the process as much as possible.

Good luck with it, and let me know how it goes.

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Your Trading Business @ Web-Scale

Written by Michael Bigger. Follow me on Twitter.

Amazon.com operates at Web-Scale: fast, accurate, web-centric, networked, customer-centric, trustworthy, lower prices, etc.

Amazon.com removes friction from old business models and enjoys torrid growth rates because its model offers customers advantages they can’t ignore.

Can a trader remove friction out of his trading business?

Before I started a blog that discusses trading ideas and algorithms, I would jot down my ideas on paper, incorporate some in our algorithms, and then stack them in a filing cabinet. The ideas never saw daylight again. They were stuck in the mud.

A year ago, I freed these ideas via this blog. I decided to put them out there and see what happened. Over one year, traffic to the blog increased more than 20 times. The blog has allowed me to start insightful conversations (some…profitable) with some great traders. There are many other benefits as well, all of them being the results of lowering friction.

How do you remove friction from your trading business and run it at Web-Scale?

Let me give you an example. I enjoy reading technical chartist Greg Harmon (Great Stocktwits Participant, worth a follow). Greg produces a torrent of charts on a daily basis—so many of them that I can’t keep up. Recently, I asked him to include his charts and trading signals in a shared Google spreadsheet. Google has quote functionality embedded in its spreadsheet. The laziness in me just wants to wait for Google to trigger an alarm when, according to Greg’s thinking, a stock price reaches a critical level. Using an API framework would remove even more layers of friction.

Running a trading business at Web-Scale should allow you to turn that “One Good Trade” into multiple “One Good Trade” to generate bigger trading profits.

These are some of the tools I use to remove friction from my trading business (in no particular order):

1. Moving from one-on-one discussion to one-to-the-world discussion: Connect using Stocktwits and Twitter. If the information is valuable, the ants will pick it up! You are the catalyst. Learn from the best traders.

2. Application Programming Interface (API): Expand from trading a few securities in the United States to trading thousands across the globe. Bigger Capital uses the Interactive Brokers Java API: Kick Ass!

3. Your own media property: Start your own blog. Put your ideas and thesis out there. Seek feedback.

5. Capturing and storing trading ideas: Use Evernote to track information so you don’t have to remember it.

6. Cloud database: Lose the paper by employing OfficeDrop and Amazon S3.

7. Pre-built algorithms and sandbox: Test out the Scale Trader and Accumulate/Distribute algorithms on the Interactive Brokers platform. This is the best tip of this post. Thanks for reading this far.

I hope you discover many more. Let me know.

Recommended Reading:  One Good Trade: Inside the Highly Competitive World of Proprietary Trading (Amazon Affiliate Link).

What Are You Trading—Direction, Volatility, or Correlation?

Written by Michael Bigger. Follow me on Twitter.

Let’s start with the first one. Let’s assume you are long in the market. It is pretty obvious that you are trading direction. But you could also be trading volatility.

Example: You decide to incorporate stop losses in your directional strategy. If the market sells off and your stops get hit, you sell. The same situation happens with your short positions if the market rallies into your stops. Your stop losses will trigger an unwinding of your short positions. You buy high and sell low. That is a typical short volatility trading profile.

Let’s take another situation. You are long and a massive bear market develops like it did in 2007–2008. You use no stops. With the market down 50% and your portfolio down 60 to 80%, you panic and sell some stocks. You bought high and sold low. In this situation, you are short volatility because of your sensitivity to a big negative market move.

Now let’s assume that the market is up 20% this year and your portfolio is flat. Your spouse asks you to explain the portfolio’s underperformance. If you take action to remedy the situation, you are trading correlation.

What are you trading?

Incorporating StockTwits and Twitter Lists into Your Listening Station

Written by Michael Bigger. Follow me on Twitter.

 

 

Recently, Jeff Bezos and renowned investor Wilbur Ross discussed information. Their views about information made us think about how to incorporate information into our trading strategies. Let’s examine what they said and then examine the meaning of this for traders. 

 

In this blog post, I discuss "Innovate the Amazon.com's Way". In the Harvard interview, Jeff Bezos made the following observations about information 

 

1. Information perfection is on the rise.

2. Information costs are going down.

 

In the March Issue of Fortune Magazine, Wilbur Ross, in addition to reinforcing the points made previously, adds his own observations:

 

1. Market information is timely.

2. Market information is abundant and overwhelming.

3. Market participants have not demonstrated more ability to gain meaning from more information.

4. Therefore, the value of the expertise and ability to interpret this mountain of information goes to infinity.

 

The implications these statements have for trading are profound. Embedding the expertise and ability to input and interpret a vast amount of information on a timely basis into an investment and trading strategy will be a significant source of value creation. It has never been cheaper and easier to access the internet information reservoir. The big value will be derived from developing some astute ways to interpret it.

 

At Bigger Capital we have developed technologies to listen to the market using electronic means such as the Twitter Streaming API. But that is not enough. The human element is missing in this process.

 

Currently, I am pushing the human element further by running an experiment about incorporating talented individuals' opinion into our financial interpretation. I am building a list of StockTwits and Twitter users who can help me interpret information better and trade more profitably. I got this idea after the following interaction:

On August 2, 2010, Twitter user @TrendRida, one of the traders I follow, posted a tweet about Barnes and Noble (BKS) saying that he was thinking about bailing out of his short position for a profit. I am short as well. I did not heed his advice. On August 3, BKS announced that it would evaluate strategic alternatives. That news sent the stock up 24 percent. That was a terrific call from @trendrida.

As I am writing this paragraph, I just learned that BHP Billiton has made an offer to acquire PotashCorp for $130  a share. Twitter user @paulwoll was very bullish on $POT. @paulwoll is on our 'adding value' list.

There are many smart traders using StockTwits and Twitter, and I intend to listen to them more often. You? There are many smart traders that I don't know of. That is one of the reasons I like posting our ideas openly on the internet. I am happy having a vigorous debate about these ideas and in the process find individuals that can help us enhance our interpretation.

Recommended reading: Blog post by @optionradar: My Rules for Who to Follow on Twitter

Cockroach Theory and Levy Flight

Written by Michael Bigger. Follow me on Twitter.

Seth Godin wrote a fabulous blog post about a cool mathematical concept called the Levy flight that shows up in nature (Wikipedia: Levy Flight Description).

It also shows up in finance.

A journalist finds an interesting story to write about. Think about Merck and Vioxx. That was big business news, and it stirred up emotions. Many people took a stance on both side of the issues related to this event. Writing about Vioxx generated good readership and sold advertising. Eventually, readers got bored with the story and moved on. Our journalist had to find other news. The journalist’s path follows a Levy flight from one random walk to a cluster followed by the same process over and over again, as depicted in the image (Source: Wikipedia).

Or you can think about it this way: the path between each cluster is a stochastic directional vector and the cluster is a manifestation of the cockroach theory. This theory states that if you find a roach in the cupboard, more than one is usually crawling in the same location. Using Godin’s example, once an animal finds food along its random walk, the animal will rummage in the same area because the likelihood of finding more food is elevated.

For traders, investors and algorithmic traders, a few things are of interest here:

1. What is the relationship between a cluster and volatility?
2. As journalists migrate from one story to the next, is tension being released on the system? Is that a form of catalyst (value trading and volatility trading)?
3. What are the roles of traders or investors in these situations? Do they also become news amplifiers within the cluster? Do they contribute to the catalyst after the cluster disintegrates?
4. When a news cluster starts forming, could monitoring social media, finance groups, or other venues help predict entry into a cluster or an exit from it?
5. If so, could we use Internet message analysis to incorporate jump function into a Brownian process?
6. If the cockroach theory is such an important part of behavior, do market participants under appreciate it?
7. If so, how do we exploit it?

The Levy flight is worthy of further analysis. I can see a few ways to incorporate this concept into our algorithms right now.

When the next “Vioxx” crisis erupts, I will remember that journalists will eventually walk away and let it go. The news will subside as it always does. Benjamin Graham once said this: “This too shall pass.”

Since I wrote the original post, we’ve used this mental model to sell volatility on Goldman Sachs when the fraud scandal erupted in April 2010. You can read more about it here: Levy Flight, Truffle Diggers, and Goldman Sachs. The trade was highly profitable, and we unwound this trade in early July after the truffle diggers got bored and moved on to another story. The Gulf of Mexico became a much more powerful story to cover.

Recommended reading: Linchpin: Are You Indispensable? by Seth Godin (Amazon Affiliate Link).

Let me know what you think.

The Amazon.com Flash Crash and Creative Flow

Written by Michael Bigger. Follow me on Twitter.

 

 

 

On July 22, 2010, Amazon.com reported second quarter earnings of $0.45 a share, which the Street expected to come in at $0.54. The stock experienced a precipitous drop of 16.5 percent following the news. On July 23, the stock rallied 18 percent. Round trip, the stock price ended basically unchanged.

 

I posted many tweets on these days. See the list at the bottom of this post. The last tweet I wrote on that episode was that this movement represents a big insight into the mental state of market participants, and therefore we needed to call a psychiatrist.

 

Remember the May 6, 2010 stock market crash? I wrote a post about it: Remembering the 2:45 pm Stock Market Crash. This event is another manifestation of the mental state of market participants. When people act crazy like this, there is big money to be made by trading the liquidity gaps.

 

In the case of Amazon.com, I made very good money by buying the gap, but I could have made much more. I just got caught up on the excitement of things and traded away. I am an options trader by background, and I did not even think about using July options, although I had a big conviction. That is not good. 

 

On Friday morning, before the market opened, I should have remembered points 2, 3, and 4 of my blog post, How Traders Achieve Creative Flow. I should have meditated about the Amazon price movement and considered all the tools at my disposal. That I didn’t was a failure. Not to allow a misstep to go to waste, we decided to add code to our algorithm that will alert us when things of that nature happen. Code is permanent and consistent. If events like that happen again, and they most likely will, I will isolate myself for a few minutes and think. What process do you use to incorporate thinking permanently into your trading activities?

 

Tweets (the discussion starts at the bottom). @thelidlives, @paulwoll, @icojones are traders worth a follow on Twitter.

 

10. biggercapital 

 

$amzn 28% trajectory. 15 billion of mkt cap trajectory. Big insight on mental state of market participants. We should call the psychiatrist

12:35 PM Jul 23rd via TweetDeck

 

9. biggercapital 

   

@thelidlives thanks. the last piece was very very small. Crazy 25% absolute move on @$amzn from top to through to 110. Insane crowd.

9:49 AM Jul 23rd via TweetDeck  

 

8. biggercapital 

 

unwound another slice of $amzn . One more left to go. Will do above 110.  

9:47 AM Jul 23rd viaTweetDeck

 

7. biggercapital 

 

would be worry if $amzn was not investing like crazy for anticipated growth. Best guidance you can get about where this biz is going    

8:16 AM Jul 23rd via TweetDeck

   

6. paulwoll 

 

@biggercapital - Nice job trading $AMZN after hours. :) I like them long term will look for good entry for some vert call spreads or leaps.

6:42 PM Jul 22nd via web in reply to biggercapital

 

5. biggercapital

 

sold my 100.81 $amzn more to sell much above here

5:26 PM Jul 22nd via TweetDeck

 

4. biggercapital 

 

@paulwoll $amzn lowest price I paid 100.81, will continue buying if it goes lower.

4:36 PM Jul 22nd via TweetDeck in reply to paulwoll

 

3. biggercapital 

 

@paulwoll between 102.18 and 104.5 $amzn will buy more if it goes lower

4:22 PM Jul 22nd via TweetDeck in reply to paulwoll

 

2. biggercapital 

 

unwound $amzn in the futz around account, will buy back on a pull back

10:11 AM Jul 22nd via TweetDeck

 

1. biggercapital 

 

@icojones will unwind trading position in $amzn before close. Small left. Big position in Investment portfolio bought in 2001. keeping that

9:44 AM Jul 22nd via TweetDeck 

 

 

Building a Trading System Is Derivative

Written by Michael Bigger. Follow me on Twitter.

 

Corbett Barr explains in this blog post that “Everything is Derivative.” Barr points out that “Innovation drives business, and innovation is an incremental process. You take something that exists and push it a little further.”

 

Building a trading system is no different. In our business, people get stuck because they think about D. E. Shaw when they hear the word "algorithm." You don’t need to build a D.E. Shaw system to make money. Build your own system starting with your current knowledgebase, following your own path, and using your own recipes. Okay?

 

Want to learn more about trading recipes? Check out my Trading Recipes post.

How Traders Achieve Creative Flow

Written by Michael Bigger. Follow me on Twitter.

 

 

I recently came across this fascinating blog post: The Hidden Art of Achieving Creative Flow. 

 

Everett Bogue, the author, cites “9 simple ways you can bring yourself into flow.” This is how I think about each of them from a trading perspective. I add the topics of listening and the sandbox to the discussion:

 

 

1. Pick an enjoyable, challenging activity: This is easy. I have a passion for financial markets, investing, and trading. You probably share the same passion since you are reading this post. I have a bachelor's degree in physics and an MBA in finance. Because of my background, I love to tinker with trading concepts and systems. You might be into charts, day trading, or anything else that floats your trading boat. 

 

2. Eliminate distractions: Anyone who develops a trading system is continuously focused on the market. I eliminated market distractions by working on our strategies outside market hours. I am the most productive before 8 am. Most mornings, I am in the office at 5 am.

 

3. Listen and think before you do: When I first sat down to create our trading system, I thought I wanted to exploit single stock fluctuations. I was not sure how to go about it. I was stuck. I was listening though—listening to my trading beliefs, other successful traders, and hedge fund customers. One afternoon, I was spending time with Alex Perelberg, an accomplished trader and a colleague, when I stumbled onto the insight that completed my puzzle. I listened to what Alex had to say about how he trades, and it hit me between the eyes. With this insight in hand, I started building our system. I used Jeff Bezos’ iterative approach and started walking along some dark alleys with my discoveries. This led me to additional insights about Brownian motion, Levy flight, cockroach theory, ant communities, sharks' feeding behaviors, pheromones, Twitter, information theory, and things of that nature. At the beginning, I had no clue I would combine various approaches in the strategy. One thing led me to the next in a never-ending process. I came to these insights because I listened to the people I admire but also to some people I did not know much about. If it sounds intelligent and interesting, I want to meditate on it and play with it. This strategy can lead you to a beautiful insight. 

 

4. Isolate yourself: Our operations are located in Cold Spring Harbor, NY, which is far away from the hustle and bustle of New York City. Isolation breeds artistic discoveries. If you work on a big trading floor, you must find some time to isolate yourself to waste time. 

 

5. Let go: I let go of our expectations when creating strategies. I let go of my preconceived notions, and nothing is out of reach. I am not married to a particular idea about making money. I start from empty and I let it go. Some ideas flow out. Not all are good, but some are.

 

6. Sandbox: Revert to your inner child by playing in the sandbox. I’m sure you must have been able to do this at some point. Throw pasta on the wall and see what happens. Go crazy.

 

7. Give yourself a time limit: The listening, thinking, and tinkering part of the process is perpetual. I limit the amount of time I spend testing a trading idea in the market. Most of the time though, I incorporate the idea into a strategy on a small scale and I see what happens. If it does not work, I iterate some more.

 

8. Keep moving: When you are achieving, the creative flow keeps on going. Don’t interrupt the flow of creativity. Pursue it until it stops.

 

9. Don’t think: When Twitter user Ash Rust sent me a link about the behavior of sharks, I started jotting down ideas about the implications this had for financial markets. The ideas just flowed out of me and I wrote them down. Most of these thoughts were of no value, but the rest were quite insightful. 

 

10. Practice:  Practice regularly. Even better, just do it. Okay?

 

 

 

Recommended reading: Flow: The Psychology of Optimal Experience (Amazon Affiliate Link).

 

Trading Recipes

Written by Michael Bigger. Follow me on Twitter.

 

 

My wife and I were recently invited to a dinner at a friend’s house. This friend has a beautiful home with a nice pool, which is to be expected in our neighborhood. However, when he showed me around the house, I was quite surprised to find a beautiful Ferrari in his garage and a wine cellar stocked with stellar wine. Bottom line: this gentleman has created super wealth.

 

What did he do to achieve this? He built a vitamin manufacturing business.

That got me thinking about why his vitamin business rocks and how it is creating value. 

 

I concluded that vitamin manufacturing is a recipe business: the proprietary potion drives the creation of wealth.

 

This is no different from Innovative Fibers, the fiber-optic business my partners and I sold to Alcatel in 2000 (Link to the story). Innovative Fibers owned some potent recipes (technological processes) to make dense wavelength-division multiplexing, the backbone of high bandwidth. Alcatel needed these technologies and gladly paid $175 million in cash for them.

 

Some other recipe businesses you know:

 

● Coca-Cola

● Crocs

● McDonald’s

● Tempur-Pedic

 

So, the bottom line to this story is this: one way to become stinking rich is to own a recipe people need.

 

For traders, that means owning proprietary trading methods and algorithms. Do you own trading recipes?

 

If you don’t, you can start by overlaying pre-built algorithms over your strategy (I show you how here). Start working on your concoction now. Why not? 

 

 

 

Recommended reading: Nerds on Wall Street: Math, Machines and Wired Markets (Amazon Affiliate Link).

Enough Whining about HFT. Start Connecting the Dots

Written by Michael Bigger. Follow me on Twitter.

 

 

Which investing group do you belong to?

  

• Technical 

• Value 

• Momentum 

• Algorithmic Trading 

• Day Trading 

• Swing Trading 

• Follower (Social Media Trading) 

• High Frequency Trading (HFT) 

• Zero Beta/Pairs Trading 

• etc.

  

I am puzzled why so many investors put barbed wire around their activities. These days, you hear plenty of investors whining about HFT. At other times, people complain about others using different strategies. 

I think all of that is a pure waste of time and money. What if you decided to learn more about the other methods? What if you combined the best from every group and came up with something different that is not so easily replicable? 

 

Example: A technician could investigate zero beta charts. Looking at a stock chart that excludes the market could reveal some new insights. How different would charts look from that perspective? Is there something to gain or to learn? 

 

At Bigger Capital, we will use anything worthwhile that can make us money. We are not married to only one way of making money. We investigate and experiment with all these methods. Usually, this is a waste of time. “Occasionally, though,” as Frank Oppenheimer said, “something incredibly wonderful happens.”

 

What do you think?