Oct 24 2009
I hope I am not the asshole in the game of arbitrage
The whole game of arbitrage is spotting who the asshole is. If you can’t spot the asshole — well, then you’re the asshole.
Last week my day trading strategy passed my pre-defined go/no-go metric for devoting real capital. However, I have refused to do so until November 2nd. These extra two weeks of forward testing were intended to give my day trading strategy one last chance to fail miserably before I actually devote capital.
It has been one week. My day trading strategy went 5 for 5 this past week. In the combined 3 weeks of backtesting and 5 weeks of forward testing, my day trading strategy went 5 for 5 three times, 4 for 5 four times, and 2 for 5 only once. The strategy’s limit order and stop loss parameters are such that I need to win 65% of the time to break even and my winning percentage is far above that.
I have one week left. In a sense, it doesn’t matter what happens next week with fake money. I am already convinced I should devote capital to this day trading strategy. If anything, the point of this final week is to mentally prepare myself for what I am about to get myself into.
If you are a tennis player and you get a certain setup, that is, the ball comes to you a certain way and your opponent is on one side of the court, you have to trust your swing and hit the ball the other way, making it land 2 inches in. It does not matter what stage you are in the game, whether you’re up or down, or if it’s match point, you have to trust the swing that you’ve developed. You have to do it every single time you get that exact setup because it is the high percentage play. In the same way, if you are a trader, every time you get the exact setup that you want, you have to execute the trade. You can’t chicken out the next time the setup appears because it failed the last two times, because over the long run, the statistics of that particular setup are such that you will be in the green over many trades.
I’ve already gotten myself beyond that. I have woken up every weekday for the last 5 weeks to forward test this strategy and I’ve executed the strategy with fake money the exact same way every single time. The problem that I have right now is this: this is way too good to be true.
The reality of the situation is that although the day trading strategy supposedly “works,” all this talk is meaningless until it is proven with cold hard money. And the cold hard money test is where this kind of stuff fails. The big question that I need to answer is have I spotted who the asshole is? I believe I have, but if I am wrong, then I am the asshole.
The implications of the success of this day trading strategy are enormous. Give me two to three years of running this day trading strategy day in and day out, and after that I will not need a full-time job. I will be a professional day trader who spends virtually no time on trading.
The implications of the failure of this day trading strategy are also enormous. By the time I give up, I probably would have blown a large hole in my trading account. On top of that, all this effort invested since June to transform myself from a swing trader to a day trader would all be in vain. And there would also be no point in buying the trading computer.
I am struggling to wrap my mind around what I am about to do in November. Let me tell you what I am about to do and you tell me if I have lost my mind.
1. I am going to trade the opening bell every single day the market is open for a whole day. (I won’t trade the opening bell on half days.)
2. The trade typically will not last more than 10 minutes and it takes virtually none of my time other than to enter the order and set an OCO limit/stop loss order. I can also probably program in the trade beforehand so if I oversleep the opening bell, it won’t matter, the trade will still go through.
3. I am going to leverage up 10 to 1 on each and every trade via the E-mini S&P 500 futures contract.
4. And to top it off, I actually expect to make money.
Completely ridiculous. And I actually believe this fairy tale.
Best of luck with the strategy. One thing I’m curious about — once you graduate and supposing this process works such that you won’t have to work more than 10 minutes per day … what are you going to do with the rest of your time?
I have no idea. I wish I knew. Sometimes you wouldn’t know what to do with free time until you actually get it.