Friday, March 30, 2012

Mega Millions Lottery

The Mega Millions lottery is being drawn tonight for a record(?) 500-600 million.  Most people say that playing the lottery is a tax on the stupid.  But ignoring the life-changing effects of winning which could cause utility changes in excess of the dollar amount, the expectation is not always negative. By the numbers, you have a 1 in 175,711,536 chance of picking the winning numbers tonight.  Without taking taxes into effect, your expected return if you played today (assuming 540 M jackpot) is (1/175,711,536)*539,999,999 + (175,711,535/175,711,536)*-1 = 2.0732.  Actually favorable odds, although the actual after-tax, lump-sum option is considerable lower.  Regardless, I will still buy my (one) ticket - you never know.

UPDATE: the winner actually had to share the prize with several others, so I guess you would need to factor that into your calculation on these big prizes.

Spell Checker

Has anyone else noticed how awful Microsoft Word's spellchecker is?  Maybe I have more trouble with it than most people because my spelling is atrocious.  However, I remember back in the day (mid 90's) when spellchecker was considered to be the achievement of mankind.  These days, I often have to type my misspelled, gibberish-like words into Google just to spell-check it properly.  Funny how much more effective a search engine is at spell checking - too bad there wasn't a plugin available that would just do that for me automatically.

Systematic Forex Strategy

Spot forex has always been an alluring asset class to me - high leverage, symmetric short/longs, high liquidity, 24 hour trading ... However, in the back of mind I have always been a bit scared of trading forex to the bucket-shop like nature of the brokers.  I think those concerns are less pressing today with the more respectable and regulated brokers (IB, MB Trading, Oanda, ...).

That being said from my analyses, it is hard to come up trading strategies in forex on shorter-time frames that persist which is what tempts most traders.  So lately I have been looking at longer-term, daily strategies.  Here is one that is both simple and effective over the past two years - mean reversion in the USD/CAD.  I like to have a backstory to go along with my strategy and the theory is that the US and Canada have economies that are on similar paths and are married to one another through trade therefore, their currency should not get too far out of whack in normal times.  As usual, this relationship would probably break down in a crises (regime switch) so proper risk-management is needed beyond these simple rules.

Here is equity graph from a simple Bollinger Band trading strategy where one goes short at the top band and long the lower band starting in 2010.  The parameters are daily 12 MA, 2.2 std deviations, 1 lot per trade (spread of 2 pips) and take profit of 120 pips (a bit optimized).  Note that there is no stop-loss in this example.  Some results from this strategy: win/loss ratio of 0.84 and max equity drawdown of 28.7%.

One final thing I like about this strategy is that since it is contrarian, you can do the entire strategy using limit orders.  If you are using MB Trading, you get paid a small rebate for this which would lower your transaction costs slightly (also MB Trading has "real" limit orders since it is ECN, so you can guarantee that you would get filled at your price or better, which makes this back-test more realistic).

Thursday, March 29, 2012


UNG is an (infamous) ETF that tracks natural gas futures.  Unfortunately for UNG, natural gas has been in one of the biggest bear market since 2008.  Moreover, UNG invests in the front-month future contract that continuously needs to be rolled to the next month.  If the futures are in a state of "contango" this will eat into the returns on the ETF.  Here is the chart of UNG which shows a recent break out to new lows.

Commodities tend to be trending assets, so this could be a good time to reenter your short.  Contango for natural gas futures appears to be high and fundamentals appear to be awful according to this WSJ article due to horizontal fracking.  Despite this supply it is very difficult to transport natural gas outside of the US unlike crude oil.  Basically, UNG is a falling knife from what I can tell.  Although as usual with trading - caveat emptor.

Disclosure: Short UNG

Trading as a Career

I took a class on entrepreneurship, and I think that stats are like 2/3 of all start-ups eventually fail.  At first, that sounds like an awful proposition except if one plans to become a trader.  Most statistics I have read peg trader (retail) failure rates at around 90%.  I always wondered how that could be - you would expect 50% of traders to succeed merely my chance right?

Ignoring all the hundreds of other reasons why most retail traders fail, lets look at the distribution of pure luck on portfolio returns.  In this simplified world, traders either gain or loss 50% of their portfolio every day (this isn't meant to be realistic but just to show a point - think of leveraged ETFs).  After 10 days, here is the cumulative distribution of returns of 1000 traders.

The interesting thing to note is that over 80% of the traders have a portfolio less than their starting capital (1). A small amount have tripled their portfolio while a small minority have made a killing (>20).  This very contrived example shows through the nature of geometric returns the odds are very against you.  So if you think becoming a trader will lead to quick riches, you might want to re-evaluate your plan.

Wednesday, March 28, 2012

New Blog

Let's see if this blog lasts.  Contrary to the name, the blog is mostly about markets, programming and whatever piques my interests.

As a side note, I surprised about how many sub-domains under blogger are already taken.  I was just typing random characters and about 50% were taken even if they were gibberish.  Funny how artificially scarce resources become valuable.