Nov 20 2009
What’s wrong with this picture?
It has now been 3 weeks (15 trading days) since I’ve started day trading the opening bell. Tell me what is wrong with this picture.
Week 1
Monday: Loss
Tuesday: Win
Wednesday: Win
Thursday: Loss
Friday: Win
Net points: -0.5 (-$25)
Commission flushed down the toilet: $35
Week 2
Monday: Loss
Tuesday: Win
Wednesday: Win
Thursday: Loss
Friday: Win
Net points: -0.75 (-$37.50)
Commission flushed down the toilet: $35
Week 3
Monday: Loss
Tuesday: Win
Wednesday: Win
Thursday: Loss
Friday: Win
Net points: 0
Commission flushed down the toilet: $35
Total loss: $167.50 (Still relatively painless)
The difference in the weekly net points is from the slippage after the stop loss. If the market blows right by your stop loss, you’re going to lose an extra 0.25 point or 0.50 point. I lucked out in week 3 with no slippage on my stops.
The weekly periodicity is absolutely astounding. Imagine my frustration starting each week with a loss on Monday, making the loss back by Wednesday, and then having Thursday’s trade die on me? My day trading strategy needs to win about 65% of the time to be profitable and 3/5 per week just isn’t going to cut it. Take any one of my 6 losses in 15 days, flip it to a win, and I would be profitable. The market works in ways to take the most money away from you as possible. It starts with a slow nosebleed, but not enough to make you quit, and then eventually you’ll get wiped out in one fell swoop.
As I was backtesting and forward testing my strategy, I had suspected that due to the nature of the strategy, Mondays would fail more often. However, Mondays always seemed to luck out when I used fake money and the luck ran out when I started using real money. I guess my prior sample size back then just wasn’t large enough. One of the problems with black box trading is that you know it is stupid to try to override the black box because you know that you are emotional and the black box isn’t. If the black box says the trade is going to be a certain way, then you just have to follow the black box, because with all the information you have, you know that statistically speaking the black box is right, assuming that you set the black box up correctly.
As it stands now, with more data points, it is statistically unprofitable to run my day trading strategy on Mondays and Thursdays. Therefore I will have to modify my black box to not execute the strategy on Mondays and Thursdays. Wednesdays and Fridays have a failure rate of 8% and 15% respectively. Tuesday’s failure rate is also low, but not that low. Going forward I think I will execute the same strategy only on Wednesdays and Fridays, I will develop a new strategy for Mondays and Thursdays, and I may tweak the existing strategy just a bit for Tuesdays.
My biggest concern with doing what I just said is that one of the core principles that I believe in for the market is that of mean reversion. Wednesdays and Fridays may seem to be doing well, but one day these days may suck. Picking optimal days to run a day trading strategy is similar to chasing hot stocks. I don’t think the two are exactly equivalent, but the danger is there.
I’m not trading next week due to the odd week (market closed for Thanksgiving, open half day on Friday) because I am not sure what it does to my observed weekly periodicity. I also now refuse to trade the first and last days of the month as those are also statistically losers so I won’t be trading again until Wednesday, December 2nd.
[...] had previously mentioned that I will not day trade until Wednesday, December 2nd and I really have sat on my hands this week. The rationale was that I [...]