my journal 3

[Yamato]

I've printed the pdf of the first chapter of vince. It is too dense. Right now I can't handle it.

Now I have a choice of what to do with my time, among these different choices:

1) 5 portfolio theorists (which I'll analyze here below)
2) khan review (always will do them)
3) AP Stats at Stat Trek (will do slowly, and looking things up as in a glossary - but no commitment)
4) Statistics and Probability Quizzes and Trivia -- Fun Trivia (from time to time - but no commitment)

In the meanwhile the account should keep increasing, after a whole three straight negative weeks.

5 portfolio theories:

1) The Mathematics of Money Management by Ralph Vince. The book I am reading right now, and it's "only" 200 pages long.

2) Active Portfolio Management by Richard C. Grinold and Ronald N. Kahn
I might work on khan (math) and kahn (portfolio theory) simulteaneously, and the book sounds very wise right from the start, but, dude, 621 pages!

3) THE KELLY CRITERION IN BLACKJACK SPORTS BETTING, AND THE STOCK MARKET by EDWARD O. THORP. Only 45 pages and it is the basis for what Chan wrote in his chapter 6 of Quantitative Trading. I might end up reading this one.

4) Universal Portfolios By Thomas Cover. This book, like all the previous ones (with the exception of the next one, by Chan), is full of formulas as complex as the ones used by Markowitz in his 15 pages 1952 graduate work. It's not going to be easy. It's going to be fun, provided my eyes allow me. I might have to finally get some glasses to embark on this endeavour.

5) Quantitative Trading by ERNEST P. CHAN. He's the one who told me to get all the books above except Vince. So I'm definitely going to have to read his chapter 6.

Pretty funny how I'll be studying Chan, Khan and Kahn, all at once.

I'm gonna stick these five books in my signature so I can remember to do them. It is time to replace the math links with what was my original objective: reading the portfolio theory books.

In these almost five months, and almost 10 thousand problems solved, I did not remove most of my math ignorance, but I did successfully fill most of my highschool gaps, and I definitely removed most of my fear/phobia for math and formulas. I still ignore a lot of what I need to know, but, after solving all these problems and learning all these things, I have the confidence needed to learn more. And the confidence is that I know I am capable of learning math, whereas, five months ago, with my phobia for math, I'd look at a complex formula and panic. This disables your learning skills.

For once I have something I know won't desert me.

 

[Yamato]

time to go to sleep

And now would be the time to go to sleep, but as usual I can't make myself go to sleep, I can't turn off my mind, because I don't know if I'll get restarted again, tomorrow. That's why it always bothers me to go to sleep. In Italy we say that sleep is a bit like death.

Only if you're not aware of this, you're going to go to sleep as if it were the easiest thing. But I am aware. Je suis aware.

If ****ing sucks. David Letterman is on, and I can't watch - it's not funny enough.

And I am frustrated once again. And I feel like eating.

I have to devise a way to quit my job at the bank. I am going to let my capital reach 20k, which is the safe neighbourhood, where i can start spending something, and then I will really work on something to get me out of there.

That's another thing that is keeping me from falling asleep. Because what awaits me is another day just like today, so I feel that if I go to sleep, and turn myself off for 8 hours, the moment I will go to work is only one minute away. It suddenly becomes immediate. If instead I stay up, that moment is 8 hours away.

Irrational or rational? I can't really figure it out.

This makes a lot of sense to me. I don't want to turn myself off, despite being tired.

 

[Yamato]

Still awake and frustrated.

What I need to think about is something that will ennoble me. They say here in Italy that "work ennobles man". Well, instead I need to decrease my hours of work to ennoble myself, because I am working with idiots, and so to the contrary work does not ennoble me, and I feel demeaned by it.

I've been reasoning on this.

First of all, with my probable future profits, of a few thousands per month, I will add to the present capital, and I will spend a small part of them, not to treat people to lunch, unlike in the past, but to do the following:

1. take trips on weekends
2. take taxis to the swimming pool
3. finance ideas for websites, so I could become a small web entrepreneur (I'll start useful websites - i used to be a web designer).
4. drugs
5. beer

These things, along with making more money from trading than from the banking salary, will ennoble me and reassure me. I will not feel as stupid as I feel now, for working side to side with these idiot colleagues of mine (who in turn might think I am the idiot), hearing them talk about soccer, laugh about nonsense... I deserve much better than this, for having broken my back for all these years, for being more intelligent and for a lot more (being more honest, hard working, etc.).

I am better than them, I deserve better, and yet at the moment I am getting worse. Worse ranking even, and worse salary - because I do not kiss up like they do. Because I do not socialize and go on coffee breaks with the boss.

So basically i need a few months of profit to make this happen and make myself feel better about who I am and where I stand on the monkey scale.

Otherwise i'll keep being frustrated, and staying awake because of it.

For a while longer, a lot longer, I still will not be able to quit my job, but taking all these measures might enable me to feel better despite the fact that I'll continue to work.

So, now it all depends on the profit coming in.

For the first month it has happened: I made over 100%.

If I'll keep making a few thousands per month, I'll be able to make this (smaller) dream come true. Now I have two more weeks before the second month expires, after which I'll know if I had a second consecutive profitable month. I am well aware that i could still blow out the account, and that probability according to my estimates is right now at about 10%.

Regarding quitting my job altogether, my parents do not give me their blessing unless I have made 1 million dollars, so that seems to be quite far away on the horizon, or even on the other side of the earth, so it's not in sight.

Until that happens, or at least until the small-scale dream happens and i start using the profit to feel better about myself, I'll keep coming here and complain as i will right now about this long list of things:

1. neighbour bitch slamming her door
2. neighbour child screaming
3. roommate talking to me and boring me
4. stupid people asking me "how are you?" when i cross them in the hallway
5. insomnia due to frustration of going to work with such people
6. insomnia from not living at the house by the beach
7. insomnia from having to get up and shaving every day at the same time
8. other complaints I still haven't come up with

I could start feeling "safe" (never really safe with trading) once I reach 20k of capital. So, considering an optimistic, 3k per month, I will get there in... 4 months. Damn, that is a long time. Until then, I can't spend anything except taxis and I can't even rush things or I'll blow out the account.

4 more months of math and portfolio theory:

 

[Yamato]

having terrible problems with IB

As if all the math I've been doing weren't enough, and the portfolio theory struggle, and the standing against probability, and against my job and family (there are just so many obstacles to overcome in order to become a profitable automated trader...), here's the latest problem in my way:
Forums - IB TWS security token asked after disconnection

In some cases (rarely but it is definitely a problem) I start my automated trading and, a few hours later, within the same session (within those 24 hours that do not have the forced disconnection), presumably after a disconnection, I get asked again for the login code from the IB security code card authentication.

What happens is I connect to my server, and see the popup window asking for the security codes, and since my trading is automated, this also means that the DDE data feed to excel has stopped (sometimes for hours) and my daily automated trading session has been compromised.

This has been happening for the past two months, at the frequency of once every two weeks, so it has happened already four times. Does anyone (from IB or forum users) know what I could do to fix this problem, which is not just my problem presumably? This is a very recent problem and before this, disconnections did not cause it, and IB TWS could get reconnected without the need for me to fill in the security codes again.

But luckily someone has already helped me on EliteTrader, which is another awesome forum, together with this one, but it's better for this type of question, due to the fact that the automated trading community here just cannot meet, due to it being dispersed and spread across the 100 forum sub-sections (mostly dead, precisely because of being too many).

[...]

People are replying to the thread I started, which is just great. I am not the only one with this problem, and hopefully, with all these unhappy customers, they'll solve it, sooner or later.

 

[Yamato]

QG and NG March contracts being surpassed by April ones

Today it's February 22nd, and, after many days of being alert, the day has come when the March contracts have nearly the same or less volume than the April ones, especially on QG:
E-mini Natural Gas



I was going to go long on QG, but I'll wait to see if it falls another 100 ticks. Too bad if I miss a good opportunity.

 

[Yamato]

The IB problem has been partially solved (cfr. this thread). The good thing is that everyone is having the same problem. Here, too:
http://finance.groups.yahoo.com/group/TWSAPI/message/25555

The portfolio theory, despite all the math I did for the past five months, is not going to be a piece of cake. I am going to have to take it easy, and do it very slowly. It will take as long as math took.

At least now I know what I need to read. A lot of work ahead, but I know more or less what I need.

The material cannot be covered as quickly as doing math exercises. It's too dense for that. I will be able to post less, because I will get to the end of the reasoning much more slowly. I will need a lot more reading and a lot less posting. Reading these books one sentence at a time and each time posting thoughts about it will make the task impossible to complete. I will have to read and reason but this time without reporting it on the journal.

 

[Yamato]

Not too exciting but getting closer to what I need to focus on, and it's a video, so it's not that as tiring as reading, for me, right now:

Portfolio Theory - YouTube

 

[Yamato]

Kelly Portfolio Analysis
Wolfram Demonstrations Project

Kelly Portfolio Analysis - YouTube

http://demonstrations.wolfram.com/AssetAllocation/
http://demonstrations.wolfram.com/TwoAssetMarkowitzFeasibleSet/
http://demonstrations.wolfram.com/ThreeAssetEfficientFrontier/

I am still far from understanding these links, but it's good to start investigating them. At least now I am not afraid of them anymore. I still don't understand jack ****, but the same went for the ten thousand math exercises I just did in the past five months.

Probably these guys can't build a trading system (I hope so).

 

[Yamato]

Ok, starting to speak my language again...

Paul Wilmott on Quantitative Finance, Chapter 17, Kelly criterion - YouTube


But this is much closer to my language, knowledge and understanding (right now):

Understanding Kelly Criterion - YouTube

Justin's Mailbox 6-02-09 - various gambling topics - YouTube

I really like this guy. Believe it or not, maybe too much work, too little sleep, but he made one point in the first video (minute 1:40) that will get me thinking for days...

...despite having a profitable situation, you're going to be losing money long-term

I've understood it years ago, when I studied kelly, and now, believe it or not, the logic of it escapes me, yet maybe it explains why i've been losing money while having profitable systems. Also, with the investors, we did not use kelly at all. But that is not to say that we did things wrongly because of this.

This world of portfolio theory is so complex and yet so fascinating. In one way it makes me feel like puking, all this knowledge forced down my throat cannot be digested so quickly, on top of having my daily menial job at the bank. I'm going to take it easy, because I am tired and burned out.

If I can't understand this friendly and very clear dude... then I am definitely burned out. This is the clearest explanation ever... on the other hand he does speak fast. Anyway, I am going to focus on kelly until i figure it all out again. Also because all these authors in my signature mention kelly: vince, chan, thorp... everyone. In fact kelly is more popular than markowitz himself.

If on the one hand I am almost to the point of puking this knowledge, on the other hand I feel challenged, and I know this is useful for my trading, so I will probably keep going. And wait for a while, to keep myself from puking.

 

[Yamato]

The fascinating concept of expiring and rolling over

I've been watching it for a few weeks now, and, despite people everywhere warning me and the web that... watch out... it is about to expire... you need to roll over... and TWS telling me, with several days in advance, you need to roll over this contract, dude...

Despite all this drama, the March contracts for NG and QG , today on February 23rd, are alive and kicking, and they still have an advantage compared to their April counterparts.

Henry Hub Natural Gas


E-mini Natural Gas


This is just to say that IB and others kind of exaggerate the rush to roll over.

 

[Yamato]

more kelly...

Kelly Criterion in detail

Many people will tell you to bet less than the Kelly formula says to bet. Two reasons are generally given for this. The first is that gamblers tend to overestimate their odds of winning and so will naturally overbet. Betting less than the Kelly amount corrects for this. The other is that the Kelly formula leads to extreme volatility, and you should underbet to limit the chance of being badly down for unacceptably long stretches.

It is true that gamblers often overestimate their odds. However gamblers tend to misjudge the odds as well. If you do that, you'll lose consistently. If you're taking your betting seriously, you owe it to yourself to become as good as possible at estimating the odds...

Man, do they know me: "...gamblers tend to overestimate their odds of winning...".

[...]

This is the reason why I let go of kelly:

Introduction

The Kelly Criterion is well-known among gamblers as a way to decide how much to bet when the odds are in your favor. Most only know a simplified version. We will show why that holds, but our main goal is to explain the full version. And to give some numerical tools to play with it.

The simple version didn't let me calculate things for my trading, where a loss doesn't mean you lost everything, like the simplified formula. And the complex version was too complex for me. So I just set it aside and forgot about it. Because a few years ago I was afraid of formulas. Hopefully now I'll manage. There's no way around it. I simply cannot move forward in any of these portfolio theory books unless one way or another I start digesting these formulas. The big question for me, as far as these formulas, always has been: do I have to figure out the whole thing and understand it fully or is it enough if I use it and learn it without fully understanding it and all its parts? To me it always seemed that I had to understand it thoroughly, but I could never get to do that, so I always quit. Now I either give up on understanding these formulas thoroughly, and at best memorize them, or I wonder if I will be capable of applying myself and figuring them out.

I mean, I don't know if I will be able to, because even a simplified kelly formula as simple as the one here, 2p -1, does not make full sense to me. I mean, I would expect myself, if I say I "understand" something, to be able to reproduce it (not out of memorization) and I definitely cannot say that this (beautiful) formula kelly discovered is something I understood so clearly that I could get to it by myself in case i forgot it. My brain doesn't respond... there's emptiness in it about this kind of reasoning. I wonder if everyone is smarter than me or if people just memorize this stuff. It's disturbing. I thought I was intelligent, definitely above average, but when it comes to this language and reasoning, maybe it's not the case.

Or maybe by getting into this stuff, I mixed with the above-average crowd, and obviously I turn out to be below average when compared with a bunch of above average people. I think this could have something to do with it. I went from Humanities where I felt intelligent, to Science, where I am the most retarded student in the class. I am just remembering now that I had in my dorm a few engineering students and that each time I saw them, I thought they were from another world. And now I am just beginning to venture into their world, but I am not even good enough to be a freshman yet. I recently finished the math that you're supposed to cover in high school. This is going to be an enormous feat for me. Comparable to learning English all over again.

But finally math is fascinating. Finally I see the purpose of it. Making money.

 

[Yamato]

good short opportunity on GBL

The GBL in the past has rarely been this high, and, given that it isn't a stock and it can't keep on rising forever, I am seeing a good short opportunity on it. A trade that could last from one day to several weeks. I don't know if I'll do it, but if I had a capital of 30k, I'd definitely do it. I'd open a short position and keep it open for a month.

I tried this morning but I didn't have enough margin (there were 3 ongoing trades).

For sure, once I get home, I'll enable all the GBL systems i have but only as far as the short trades. This will probably give me the capital I need in order to breathe a little bit.

If I could get above 11k, I'd be set.

 

[Yamato]

more kelly

I am advancing. I don't care how slowly I have to go, but as long as I am advancing it is ok. Here's my latest effort:
View attachment kelly_criterion.xls

This is only good to verify if Kelly works with a probability of success of 75%, because of the way the table is built. I'd have to build a whole new table in order to get this simple setup to work with different probabilities.

[...]

And on top of it, it doesn't work, because something is wrong. Feel free to ignore it.

I am tired, my eyes are tired, I am not familiar with formulas... but I am not giving up. I am taking a brea, with the intention of coming back to it. Whenever I'll do something in trading, portfolio theory is the first thing on the list. As i said, there's no way around these formulas. I need to get into them. One way or another, I must be able to break into this code and understand it.

 

[Yamato]

Getting screwed by IB's security card authentication

The usually wonderful (but not in this case) IB fellas today made me lose 800 dollars (it would have been the best trade of the week) with their crappy new TWS build, which logged me out for the umpteenth time, and ultimately forced me to opt out of the security code program (they've created a specific "trading platforms security code card opt-out" page, since I am definitely not the first one), along with many other unsatisfied customers, by signing a waiver where I accept being screwed (no compensation in case of people messing with my account) in order to not be screwed worse (automated trading virtually impossible due to daily token prompts):
Forums - IB TWS security token asked after disconnection

It really really sucks. And it didn't use to be like this, and it doesn't have to be like this. We are all getting screwed for no reason.

[...]

I just got out of the bath tub, and, while in the water, I was wondering: what if their objective... was, instead of making our accounts secure (as they claim), to simply force us all, by making our automated trading impossible (endless token prompts at the slightest network problem - ours or theirs) to give up on the security code card and sign those damn waivers? They achieved it perfectly.

Yeah, I think that's it. Because as soon as I complained about the "token prompt" problem, the answer was readily served to me: hey, just "opt-out" and your problems will end. Then when you go to the opt-out page, you are forced to sign a waiver that says "I am giving up all my rights to complain if anything goes wrong with my account". Sleazy *******s.

"Secure Login System" my ass. "Secure Logout System" they should call it, because that's what it became for us automated traders.

I know - I went from saying - for years - that IB is the best broker and I advised dozens of people in dozens of posts and emails to open account with IB. But now we're all getting deeply screwed. This is too unfair to pretend it is ok.

Well, at least I started that huge thread on elitetrader.com and wrote them a ticket, so my conscience is clean. Making money is important to them, but if you lose your reputation, you also lose customers. I know I am not a precious customer, because i am so poor, but they're screwing pretty much all automated traders - which kind of surprises me, so maybe after all they're not being sleazy but just stupid and disorganized.

[...]

There. I wrote them a review on elitetrader.com, on top of the thread regarding the token prompt problem:
Ratings for Interactive Brokers
My review still recommends them as a broker, but it also says that in the last 3 years they have been increasingly getting worse and it tells about the security code card problem. I did my share of complaining.

 

[Yamato]

Edward Oakley Thorp

You know what? One of these books I am planning to read is by Edward Oakley Thorp, "The Kelly Criterion in Blackjack, Sports Betting, and the Stock Market".

And i was remembering some movies about something similar, so I looked it up and here it is:
At the Blackjack Ball, Card Counter Dr. Edward Thorp Is King - The Daily Beast

Blackjack Names | PlayBlackjackOnline21

Both the movie "21," starring Kevin Spacey, and the book "Bringing Down the House," written by Ben Mezrich, were inspired by Thorp. Born in 1932, Edward Thorp was known to be mathematically talented from an early age. He got his PhD and taught math at MIT 'til 1962...

21 (2008 film) - Wikipedia, the free encyclopedia
Bringing Down the House (book) - Wikipedia, the free encyclopedia

Card counting - Wikipedia, the free encyclopedia

American mathematician Dr. Edward O. Thorp is considered the father of card counting. His 1962 book Beat the Dealer (ISBN 0-394-70310-3) outlined various betting and playing strategies for optimal blackjack play.[28] Although mathematically sound, some of the techniques described no longer apply, as casinos took counter-measures (such as no longer dealing to the last card). Also, the counting system described (10-count) is harder to use and less profitable than the point-count systems that have been developed since. A history of how counting developed can be seen in David Layton's documentary film, The Hot Shoe.

Even before the publication of Beat the Dealer, however, a small number of professional card counters were beating blackjack games in Las Vegas and casinos elsewhere...

 

[Yamato]

It's time to stop messing with my systems and their trades. I am not just saying this to IB but also to myself. Today I closed a QM trade early and missed out on another 500 dollars of profit. Yeah, there was a lot of profit, and a lot of missed profit (1300 dollars). Partly my fault and partly IB's.

I am now at a capital of 10k, having started with 4k just a bit longer than a month ago. Awesome performance.

I think my fears of blowing out are now gone and I can focus on just relaxing and letting my systems trade.

I still have two discretionary trades open, GBL and QG. They're going to get closed soon.

After those I'll just rest. I should try to be a normal person for a few days, someone who doesn't work all the time.

Smile, Charlie Chaplin , Modern Times, 1936 - YouTube

 

[Yamato]

NG QG expirations

March is still alive and kicking and it's already February 24th. But probably today is really the last day, judging from the volume and from the fact that today is a Friday.

Henry Hub Natural Gas


E-mini Natural Gas


It is a real pain in the ass to get a warning by TWS almost two weeks in advance, and to be encouraged to roll over so early, when the volume on the next contract is still very low, and the spread is higher. So they basically make you lose one or more ticks of spread for an entire week (unnecessarily so) on all your trades on all the expiring futures. Considering CL and NG expire once a month, this is a really expensive alert. I wish they could just postpone it by one week. Because right now the choice is to either get warned too early or to not get warned at all.

[...]

Fascinating. I am noticing that the March contracts are falling more (or rising less) than the other months. This might be due to the fact that, being the expiration so close, a lot of people are closing their positions.

Look, it happens both on NG:


and QG:


It cannot be a coincidence. It has to be the way I say. People are closing contracts and so the contract being closed is falling more. I guess some money could be made on this concept, but it's too rare and too complex for me to exploit right now.

I am burned out, my brain is burned out and no grass can grow on it, for a long time. Too much work on my own, and with the investors in particular. I have started working like crazy in June 2010 and haven't stopped yet.

At the start what made me work so much was being stimulated by the investors (for better and for worse - I learned a lot but I also got burned out). Now instead, in the last... 7 months (since I stopped working with the investors) what gave me the urge to work hard was the fear of spending my entire life at the bank to never reaching any objective in this field. It's okay to not succeed after a year, ok after two years, 3, 4, 5... then after 14 years, you gotta do something about it. If it can be done, and it can, then you're gonna have to find a way to make it happen.

That's why i don't give a **** about my colleagues any more, and I just come in the morning without saying hi to anyone, and I leave in the afternoon (70 more minutes to go for today) without saying bye to anyone, except my roommate, who wasn't here this week.

I feel pretty lonely, but I know the only thing that matters is that I focus on Math (this morning I had 17 review exercises at khan, what the **** - and they'll give me more tonight), on portfolio theory, on running my systems... and still doing my daily tasks at the office. I have to worry only about this. Total focus, and no distractions. I cannot afford to spend one minute talking about soccer like these people do here, all day long. I don't care if they'll say I am "weird", "crazy", "loner" or similar. Actually these terms are pretty much compliments compared to what could be happening right now, such as being fired for not interacting with the rest of the idiots here. I only interact when there's work to do, so maybe I guess they can't really find grounds for firing me, no matter how much they dislike me. Probably they can even tell how much I despise them. That would make them dislike me more.

Not that I ever tried to hide it anyway.

 

[Yamato]

weekly update

This week the systems made 1700 but I only made 500 or so, because both IB (with the security token prompt, cfr. previous posts) and I messed up on some profitable trades.

Weekly table:


On the other hand, the systems from the start would be slightly higher than 7k, whereas I am 2k higher, so overall my tampering has helped.

This is the daily chart, with the arrow where I started trading the systems:


Today I had hoped to get to 11k, and instead I find myself below 10k.

I went to the movies, watched The Artist (pretty good, not excellent), and hope to continue my relaxation period, with the only commitment of doing the daily Khan Academy review exercises.

I really hope that next week the systems will go beyond 11k, because I still do not feel safe at all, nor confident that I will not blow out this account.

Hopefully the mentioned IB problems are gone now (simply because I opted out of the damn secure login system, being forced to - otherwise the automated trading would not work). The problem is so frequent and so upsetting to automated traders that my thread has reached 40 posts and 1500 views in less than 48 hours:
Forums - IB TWS security token asked after disconnection

[...]

Oh, great, finally. As reported by Catoosa on the mentioned thread, things are starting to roll at IB, after all these people complaining:

IB has their software development team "all over" this "unexpected popup challenge box" disconnection problem. I think IB will have this problem fixed before the markets open next week.

 

[Yamato]

Martin Sewell

I was looking for Kelly Criterion xls files on google (awesome search string), and I came across this incredibly intelligent person:
http://www.martinsewell.com/cv.pdf

What's more is that a lot of the stuff on his website is totally related to the things that I should know, would like to know and understand, and he covers all of them:
Martin Sewell's Web Sites

As if it weren't enough, he's been an academic, a researcher, a trader... pretty much everything. Damn, do I wish I had his brain.

And he has an academic page, which is different and yet just as rich with useful information:
http://www.cs.ucl.ac.uk/staff/M.Sewell/

I won't even have time to sift through this very useful material unfortunately because my eyes are tired. But let's just write it here for when I'll get the opportunity to do it.

[...]

What I really would need, precisely, is "portfolio theory for dummies" and "kelly criterion for dummies", but these things are beyond the dummies' reach, so maybe I am not a dummy, or maybe, being a dummy, I am supposed to give up right here, but, since I am making money, maybe I am not a total dummy, or maybe all these ****ing formulas I've been reading in the past two weeks are totally useless and rule-of-thumb methods, given all the things I already know, might work better than a univocal formula.

 

[Yamato]

All these years I've been working on edge, but the foundation of a trading career should be money management, which begins with money, therefore it begins with counting cents and knowing how you spend your money. I've always been a spendthrift so I wasn't gifted in this area. You see, the bigger your capital, the less you need an edge, and the less you need an edge the easier it is to be a profitable trader, to make money, to increase your capital, which in turn will allow you to need less of an edge, which in turn will allow you to make more money, in a virtuous circle.

Instead if you're a spendthrift, you don't even know how you spend your money, and you'll always have less money than you need, and therefore you'll need a very very strong edge, which you won't even be able to achieve, and therefore you'll keep on blowing out your account, not because you don't have an edge, but because you need a stronger edge, due to being a spendthrift.

So the basis for becoming a profitable trader is being stingy or at least moderate in spending. You must not need more than you can make: you must have extra money, you must not be used to spending all you have. And you must not rely on money that you haven't made yet, because that will push you to overestimate your edge, then you'll lose money, and it will become a vicious circle. The poorer, the more you'll need an edge, the more you'll lose, the poorer you'll get. That's why you should never react to a win, by saying "let's celebrate" and treating everyone to the restaurant, which I did several times. Your capital is everything. The more you spend of it, the riskier your trading will be. Your capital is more of a tool than your trading systems are. It's comparable to... the motorcycle of Valentino Rossi:



I used to the think the motorcycle were my systems, my edge. Instead my motorcycle is my capital. And I've always had this motorcycle:



My systems are equivalent to my skills in riding that motorcycle. But if the motorcycle sucks, you can only go so far with your skills, systems, edge.

Your capital is your motorcycle, your edge is your driving skills. A guy with a crappy motorcycle (or a minibike) will be surpassed by a guy with a better and bigger motorcycle. It doesn't matter how hard he tries. And I have a crappy motorcycle, because I've been a spendthrift, paying dinners for everyone, for years... wasting money. This is my punishment. I've been a spendthrift in trading and I've been one in daily lifestyle.

Why have I been a spendthrift? Because I've been taken care of, never had to rely on myself - had a father who looked after me. I now pay for my being carefree by having to stay at the office. I could have been out of there for so long already: yes, in the past my edge was much worse than now, but my capital would have been so high, by saving and investing wisely, that a small edge would have been ok. What I should have realized earlier is that, whereas a good money management can compensate for a small edge, no edge (unless you're right all the time) can compensate for a poor money management, and you can't just put all your eggs in one basket. You have to be stingy and count every cent to realize this. If instead you're after pride, success, and performance, you only think of the edge, and not of your capital. You're only thinking of driving, but not of the motorcycle you're riding.

What a pity. But hey, you can't always get what you want and especially what you don't want: I had to be really unhappy with my job, to realize that I had to become stingy. If you write a journal you can keep track of your journey, and realize your mistakes and maybe this journal will witness a new me.

Austin Powers 2, Dr Evil + Mini Me - Just The Two of Us - YouTube

So, recapitulating, the first step for every trader should not be to look at the markets and study technical analysis, and not even backtesting on tradestation. The first step should be to make sure he's not a spendthrift. Being cheap/stingy is the most important ingredient for a trader, because he'll want to preserve his capital, and that in turn will make him implement all the other necessary steps: trading when he has an edge and diversifying.

And instead this was the last step for me: becoming cheap and stingy. And how do you know if someone is ready to become a trader? He must look at his account balance. He must not hope to make with trading money he needs now. You should be so stingy that you're capable of saving money and increasing your capital even if you don't make any money with trading. You cannot have a break-even monthly budget. You cannot be relying on just trading to increase your capital. I don't even know if I have all the right attitudes. For one reason of for another I am still weak in this area. I am still counting on profit from trading. I am still hoping too hard, to be secure from the risk of trying desperate trades to increase my capital faster, and those sooner or later blow out your account.