psychology

The making of reality

The making of reality

Lately, I came across a weird and disruptive idea: some scientists that study the human mind have determined that we do not see what “enters” into our eyes, but instead we “project” through our eyes what our brain is expecting to see. Some scientists call this holographic reality and this process can easily explain some difficult-to-be-accepted aspects of our common experience, as we often do not see something unexpected, or, on the opposite, see just the details we already know (in a person, in a picture, in a text or in an event).

No need to say that if you apply this process to the trading and investing activity it is somehow explosive: yes, we all project our knowledge of the markets into our expectations and then we fund on our opinions to trigger decisions. And we all make mistakes, as our decisions are what we want to see in the market, what our minds project on the reality and we think that this is reality. Delusion is just behind the corner.

Is there a solution? Yes, more than one. You must train your mind to be as free as possible and to accept every possible aspect of reality. Accepting does not mean embrace, but recognize. You must study your field of interest and collect any point of view, slowly building your own. Always take note of the opinions you do not share. In the field of trading, you may use some agnostic techniques as technical analysis – that is not foolproof – to reduce some macroscopic errors. And then you can take profit from artificial intelligence tools, that, if well designed, offer an unbiased view of reality through pattern recognition. It frees you from the necessity to always have an opinion on everything (such a burden!) and so your mind is much less solicited, calmer, more open to recognizing reality as it is.

Posted by Luca in educational, free, generics, psychology

Gamification

If you think that the trader’s activity is similar to a game, I would like to first say it’s not. For many reasons. What makes to someone the trading activity similar to a game is a misconception of the bet. The novice tends to see a buy of a stock share as a bet, and, well, it somehow is a bet if you know nothing of what you are doing. Because it’s not a game.

But staying with the game analogy, I would prefer, to much adrenaline-driven action games, the more time related Virtual Regatta Offshore, a provider of oceanic regattas simulators in real-time with real conditions, here in the current RORC 2019 where I participate as minushabens. In this case, it is a 16/17 days ride from the Canarias to St. George’s Island. We are about 4 days from the arrival and I’m placed quite well: I was lucky, indeed!

 

Let me explain: the player have to decide its route considering the present condition of the wind and the future evolution of the wind, based on some known performance of the boat we are racing with (known as the polars of the boat, simply the speed of the boat at different wind speed at all angles). So, the player relies on the weather forecasts to evaluate its alternatives. While in real-world regatta you may apply a wide sort of tactics against your opponents, here you just race against the wind. No need to know the real sailing (it helps), we race against a worldwide huge number of participants. Here, at the RORC 2019, we are 37.000 and counting.

Now, I can guarantee you that my choices are not bets. Sometimes, as it is now, the choice has been more favorable, others are not so exciting, but if you want to appear in the first third of the ranking you cannot trust the simple bet. You must change your mind: you are challenging a force of nature, much bigger than you and good forecasts for 5 or 8 days ahead may easily change in 2 or 3 days, not much certainty around. Is anything sounding familiar? Now, if you substitute the word wind with the word stock market (the S&P 500, in this case), is it clear the analogy of the behavior of the player of the regatta and the position trader on the index?

If you see the game as a be-there-at-that-time-to-be-elsewhere-at-another-time dynamic, it’s not difficult to place yourself in the first 700, possibly between 300 and 500, where I often find myself at the arrival. A bit of luck today is appreciated. Obviously, you bet, there is a number of route calculators available as apps and websites. Every service is based on one of the available forecasts, then provides different best paths, but the game platform has often slightly different conditions and there you are gaming. You must be well placed in the space and time of the game to fully take advantage of the suggestions from the routing software. Here, as well, a bit of luck is largely appreciated. To remain once more in the game analogy, you are requested to dominate space and time, always need to consider the two as a whole. This is a common analogy with adrenaline games.

End of August. r.Virgeel is already positive for two days and gives a projected rv.Target around +3%. Great time to jibe!

The target was then reached at around 3000 in 10 days.

 

PS. Update – The RORC 2019 finished with me at 787th / 39101

 

 

Posted by Luca in educational, free, generics, performance, psychology, selected primer, 0 comments

spxbot limits

Different trading and investing styles

I’m fully aware of the basic fact that every trader and investor has it’s own style. Many school of thinking, but everyone is really different, particularly in the private sector. If a private trader survives the first 18 months without being wiped out, then she/he may have the possibility to play on. It’s a sad and real statistics: 95% of traders are wiped out in the first 12-18 months of activity. So, if you are a private trader since years, you are in the 5% and you have built your skills with iron and steel, it’s not easy to approach a new language.

In effect, a.i. tools are very comprehensive: the result is there, fast, precise, direct. You just have to pay attention, when required, then to act if necessary. The whole decision process that makes the foundations of a trading system is questioned. It’s not an easy process, it will not be.

 

Mind changer about traditional tools as t.a.

Artificial Intelligence tools, not only r.Virgeel, implies that you change your mind about the instruments of analysis. Are you there with any of the technical analysis tools, or with a realtime CFD, you plot your oscillators, you backtest an optimal setting and decide, based on a unique line of data and a monodimensional analysis. A.I. can analyze many different correlations concurrently, sorting out with surprising results. It is obviously different, it is much different.

If you are totally unaware of a.i.. and neural networks, you do not need to read huge books to understand. You use Excel, for sure. Read this, then it will be easier. Made simple, supercharge and megapower a spreadsheet and you have a neural network. Then you have all the a.i.: image recognition, diagnostic, speech recognition, text recognition, and you name it. Once you understand the brick, then the wall makes sense.

The fact is that an a.i. robo-advisor makes the dirty work for you. Collects data, builds tables, generates logic, connects correlations, normalizes the resulting cloud of data and generates the output data. Whooo! All in one. And it’s fast!

Low adrenaline, stress reducer

People love adrenaline, excitement and, basically, confusion. In the long term, this attitude generates deep stress, that reflects into bad behaviours. If you are a few minutes ticker trader, r. Virgeel is not for you, probably. Well, as it¬† gives a daily trend, it may help, but…

Once you have a good robo-advisor, you need less to have opinions about everything. It monitors the data, it makes the loops, it builds the report. You must trust it, follow the suggestions and pull the triggers. Stress is highly reduced. Instead of needing to have an opinion about everything, you just have to evaluate a very well documented “opinion” generated by the a.i. model. You know, I like to say, it’s different.

For what I can see, robo-advisory is taking shape as large (and expensive) premium sites with a large choice of instruments, with applied different forms of analysis and previsions. I argue that the neural analysis is often simplified and this can be a good thing, overall. In other words, these sites offer a large set of instruments and an automated training.

Here at spxbot it’s a completely different music (well, it’s a premium site, but it’s cheap). First, just one instrument – the S&P 500 – here. Then, the correlated instruments are hundreds, to represent the global finance world. All for one, we may say ūüėČ More, r.Virgeel is highly deparametrized, meaning that it work by brute force and not by rules. Finally, r.Virgeel is trained “personally”, bar by bar. Total human supevision on the training of the model. You know, it’s always the same old story: you put rubbish in, you get rubbish out.

 

 

 

 

Posted by Luca in a.i., educational, free, psychology, selected primer, 0 comments

Riding the wave and then… splash!

 

Following my previous post, I would like to point out that approaching the a.i. advisory, you have to change your mind. With most probability, you are trained in technical analysis, various techniques to train your eye and numbers to correlate the stream of data. With an extended application to chart reading and some discipline, it’s not hard to avoid largest mistakes and trade with some results.

What happens is that your carefully brewed technique, a certain day, blows up. You where riding the wave and … splash! All technical analysis let you ride one wave, if well set up, but you are bound to splash as soon as the new wave comes in.

Try to experiment with volatility and then you begin to see how impredictable are the consequences of human behavior. And that is just one dimension. So, if you are so expert to radically change your trading attitude and timely, no need to read further.

I have to say, I’m not in the group. I tend to stick to that particular solution and trust and be deluded. And lose money. I do not really trade with t.a. any more, except a minimal account where I experiment and keep updated the relation from the a.i. model output and t.a. charting. There, I trade using the a.i. daily forecast as a long term preview and I use a 2h bars chart with my beloved modified DMI plus Parabolic and Hi-Lo Activator. In other word, these are momentum and stops. I activate them manually, but following indicators notifications. Shaking all information, it’s not hard to catch good opportunities, always in the direction of predominant trend. If in doubt, stay out.¬†The account is growing.

So, if the use of a robo-advisor is in your future, prepare to radically change your trading and investing behaviour. Sit down, try to imagine all the things that you can do in your spare time and start. Yes, you will have a lot of spare time, embarrassing lots. You need to fill that time and with periodicity, every day, or even every week, maybe every 4 hours? (it will depend on the advisory you will adopt, there are many around, they are popping out massively), you will just peep, take note and check and take few, very few triggering decisions. Than, fast back to your gardening, to your fitness training, to your passion with motors, to reading as there is no tomorrow. In my spare time, I develop the spxbot a.i. engine and this website.

Just a final note: anytime I tried to use t.a. indicators (and I tried many) inside the model, the result were disastrous. The one dimensional constraint that they introduce conflicts with network correlation ability. In effect, I’ve earned from my really first experiments in neural networks modelling with BrainMaker down in the late ’80s, neural networks work good with the data as raw as possible. Any transformation introduces a field of possible wrong solutions and divergencies proliferate. The neural networks do not need to be perfect, they need to see just a little bit better than you and to discriminate using details that you cannot even imagine exist. That’s not perfection, that’s sharpness.

Keep in touch.

 

 

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Posted by Luca in a.i., free, model insights, psychology, selected primer, 0 comments

Psychological consequences of a.i. advisory

If you are a happy trader, you can avoid reading this post. You have your instruments and techniques and take home your living. You are in the 5%.

This post is written for the other 95%. Yes, 95% of traders go broke, in the first 12-18 months of activity. The market is merciless with the fool and his money. Being in large company does not help.

It’s not easy to manage a losing position. Taking position requires a lot of opinions and more your position is on the loss side, more opinions are required, in conflict with the original ones. It soon becomes a mess. The psychological stress then goes wild and compromises not only your account, but also your relationships and your social attitudes.

Many famous book writing traders say that you must plan your trading activity and strictly stick to the plan. This undoubtedly reduces errors, but requires a very rational attitude that not everyone has. Usually, a plan is related to technical analysis (t.a.) indicators that nowadays are largely insufficient to guarantee you from errors. Some are better than others, but market is ever changing and the analysis of a single price line on a single time frame is unable to catch the full complexity of what’s going on. Whenever you back test a t.a. system, you are enclosing in such a number of constraints that soon the system will go broke. Maybe some exception is running out there.

Financial markets are complex, being the sum of a huge number of actors. What sorts out is that market is moved by anticipation of future events, through counter opinions and this phenomena globally unfolds in trends. And you see the trends follow one another. Where there is repetition, often you have patterns in action and pattern are generated by interacting frequencies. As a trader, in front of charts, you soon develop the ability to recognize repetitive graphic patterns and maybe you also have some tools that helps you classify the patterns. Charts are fantastic for a fast global opinion and worth nothing for suggesting the correct intervention. The chart is just a slice in the ham of the market: for as good as it is, you are missing the most.

Now, suppose that you have near a good relaxed trader, one in the 5%, and you do not understand very well how he acts, but you see him opening and closing positions, earning money and reducing losses to ridiculous phisiological amounts. You will just follow his steps, soon stepping aside of you opinions, recovering self esteem, reducing stress. It is now much easier to manage losing positions: sometimes hedging, sometimes holding, sometimes taking the (small) loss.

I have begun to build the robo-advisor long before the word was even coined, in early ’90 with the first experiments and in early 2013 with the actual running model. The model is pure brute force pattern recognition and it is under evaluation, by my subscribers and me, no back testing of any sort, since two full years and it is acting nicely. It is a much better trader than I am, so I seat behind and peep. I see it may occasionally be blind or wrong, sometimes late and sometimes early, but, you know, nothing is perfect in this world. It recovers very fast, it is adaptive, it is unbiased, it is responsive and a bit conservative. It keeps you on the sunny side of the road. Stress is over. I see to the charts and it’s easy to recognize the opportunities, manage the positions and trigger the orders. Since long without a name, I now call my robo-advisor r.Vergeel.

PS. a kind reader has made me note that, out there, the number of websites offering a.i. advisory is exploded: I just want you to be aware about many very superficial analysis. Please, make your due homework and consider that single data line analysis is available through well known software and largely insufficient to represent the complexity of the market.

 

 

 

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Posted by Luca in a.i., free, psychology, selected primer, 1 comment

The Lazy Investor and A.I.

 

Artificial intelligence is for lazy investors and this for two orders of reasons: it reduces the frequency of trading actions and it relieves you from the necessity of having an opinion.

Any of our action requires an opinion and, in trading, our opinions are, usually, like TNT in the hands of a chimp. It’s a big problem. A lot of opinions to have, on gold, on oil, on the stocks, on the banks, on EVERYTHING!! A Correct Opinion!

I Must Have A Correct Opinion On EVERYTHING!
Otherwise I Will Lose Money!

In fact, it ends up that we lose money, confidence, respect, with rising tensions and crisis of any kind around, and still we  have a very confused opinion on something, ignoring all the rest. Our frequency of trading rises to syncopated and the crash is near.

Now, what A.I. provides is the possibility to setup an environment that classifies data autonomously, large bunches of data without human intervention. You can say that it “learns”, that it “recognises”, that it “sees”. Sometimes, these pieces of code do something that seems magic, as the possibility of reading and forecasting the bars of the S&P 500 into the future.

spxbot.com does this. Far from being perfect, I manage the art of being approximately correct. Neural networks does a reverse reasoning: they find the result as the less improbable value from the data it has been fed with. So, if you can manage a nicely huge amount of data and you can setup the code environment to accomplish the analysis and you have some years to spend on research, I guarantee that you may get some very interesting results. Or, you may subscribe to spxbot!

The brain has passed more than four years of development and it is now nicely working since a while. Signals have a validation sequence, then acting is suggested. Always, it is suggested the day before, to act on next day market. I record market opening as the execution price, just for having a fixed schema. You may act as you prefer, following your trading habits and indicators and even timeframes.

I consider our portfolio having two components: a part dedicated to long term investments and a part for playing trading. Signals from the a.i. indicators should cover both. I say should, because the “brain” is running since less than two years, so it’s behaviour in a falling market is still to be seen. Long Term speaking, the model is still long at the moment.

Since it’s inception, dating back to¬†02/12/2016, the DTS has taken 12 closed positions, 9 positive and three negative. The three negative position where closed at -0.28%, -0.84% and -0.04%. The global performance of these twelve positions amounts to +34.52%, compared to the SPX +30.80%, during the same period.

 

 

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Posted by Luca in a.i., free, psychology, selected primer, 0 comments

Artificial Intelligence is different

Almost one month ago, this daily forecast was correctly warning of the incoming A-B-C wave. Does your tools do something even similar?

Trading is one of the easiest activities around: few seconds and you are in position, few seconds and you are out of your position. Making it profitable is a totally different discourse. Libraries are plenty of technical and fundamental analysis books and the internet is plenty of websites that offer amazing returns. All of them (except some you can count on one hand’s fingers) do the same one dimensional analysis, based on the tape, the fluctuating price of the chosen instrument. The variety of tools available is confusing, but basically they all work on moving averages and momentum, sometimes volatility. So, you have, basically, one dimensional analysis based on momentum. And you lose money.

Two very common profitable trading techniques are insider trading and front running. Both are illegal, and you must be inside the financial business to be able to put them in practice. And if you are not, are you aimed to be stripped? Probably, yes.

Today, artificial intelligence offers an edge for common investors and traders: opposite to the plethora of tech analysis software, it makes a totally different analysis, it needs years to be developed proficiently, it sees things that the human eyes cannot see.

Here at spxbot, I have taken this totally different approach: the model crunches long term data from dozens of different inputs, and when I say dozens I really mean an approach that is impossible for a human to even imagine. The daily model, that forecasts the daily time frame, has 87 basic inputs, at the moment, that cover almost every aspects of the financial markets: stocks exchanges, commodities, rates, bonds, metals, currencies. The world spins and the data gets in, then the data is prepared for the model, trained, tested, verified… well, it’s a long process, but computers are fast and after years of development the code is well fitted. After data preprocessing, we are talking of a “brain” with millions of neurons at work.

What sorts out is stunning, something that makes momentum trading appear as old as a sumerian cuneiform clay tablet. Artificial Intelligence is able to recognize real patterns inside the market hidden (and evident) disorder and give back an unbiased, unemotional reading of the future events. Believe it or not, A.I. can snoop incoming events, in advance. The spxbot model is designed to be adaptive and responsive, and built to accomplish its tasks without any human opinion intervention.

 

 

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Posted by Luca in a.i., free, model insights, psychology, selected primer, 0 comments

Do we need Artificial Intelligence?

I’m wandering: do we need Artificial Intelligence to recognize that we are in a bull market? When you are inside a trend, corrections are our friends and the fear of the top (or bottom) is our recurrent trouble. But, surfing is easy with a trendy market. Stay hungry, stay long.

 

 

Posted by Luca in a.i., free, psychology, 0 comments

The hidden disorder of the market

Often, you read someone that has the key of the “hidden order” of the markets and is so kind and altruist to share such a knowledge with you. Can you trust? Can you believe?

In my opinion, after years of testing and developing the artificial intelligence model that powers this site, there is no hidden order of any kind around the market, but, on the other side, you do not need any (hidden or explicit) order to profit from markets. You need to be logical, to reduce risk by knowledge and to act with proper timing and then profits will come.

The inner disorder of the market is generated by the interaction of thousands and thousands of humans concurrently acting on the market, moved by many different passions, from different locations, with different habits and all with just one idea in mind: profit. Trying to reduce this mechanics to the oscillating move from fear to greed and back is simplistic, as many passions act at once in each one of the participants to the market.

This chaotic and never ending activity may be analyzed in terms of correlations and this can achieve great results: simple correlations can be managed by single humans, but complex correlations cannot, only computers can put everything together and try to follow the path of correlations. And correlations change in time, as everything else, and so even computers have hard times to complete such a task. Are rising rates bad for stock market? Maybe. And maybe not. So many factors contribute to our opinions, that our opinions are always weak. The great and, at the moment, irreplaceable feature of computers is that they remove passions (hidden or evident) from the analysis and they can correlate so many different inputs that no human can even imagine to do such a thing.

 

Posted by Luca in a.i., free, model insights, psychology, 0 comments

Noise

Noise is everywhere.

We could even argue that trends are made out of noise. Inside massive markets, volatility can be your worst enemy: psychology again comes on stage. Every turn in the price creates uncertainty and uncertainty accumulates. Your confusion grows. It’s difficult to make correct investment decisions and timing when in confusion.

If you approach a technical analysis platform, you get confused by the quantity of tools available. Wise designers batch all similar indicators, so that you can have some categories available. More common and old indicator to reduce volatility is the moving averages family. It is impossible to build a proficient trading system using just moving averages, but they remain the basic tool to every trader. Build your set of indicators reducing their number as much as possible. Since years I use just one momentum indicator, a modified DMI, and two volatility stops.

the lrDMI in action

Doing all this, we are immersed in noise: home, streets, commuting, workplace, public places, noise everywhere. Sounds, clamors, rattles, visual rubbish, flashing lights, advice, signs of every kind, noise.

Can you manage noise? Can you hack the noise and view the layers it is composed of? This is a point of a certain relevancy. I myself have a serious problem managing this matter because I do not want to be overwhelmed by the effort of having always the right opinions. As everyone, I’m weak and confused. This is why I developed the Amodel, or the brain that analyze the S&P 500 and that powers this site, using tools that are mostly not affected by noise, pumping it’s brute force energy and teaching to “it” how to read the market. The project is now about four year old, it is surprisingly efficient and under continuous development.

The Amodel is different. ¬†It looks at the markets in terms of correlations, dozens and dozens of markets, simultaneously,¬†and, to be sincere, it has in mind just one idea. The basic ultimate assumption is: “markets are all correlated and the S&P 500 is¬†a part of these correlations”. The model does not read news, does not watch tv, does not navigate social networks. Just numbers. In fact, a huge amount of numbers. Just one simple statement and a lot of data, these are the basic ingredients of the recipe. Then add code, some various thousands lines of code. Agitate. Stir. Fry.

 

 

 

Posted by Luca in educational, free, psychology, 0 comments

Two or three words on risk

 

For the trader or the investor, the word risk is one of the principal keywords. Nobody knows what risk really is, so relax. On the other side, everybody knows what risk means: as animals, we continuously react to external stresses under a risk based strategy, intended to minimize the possible negative consequences. It’s something we have written in our dna, so no way to escape.

When we come to financial markets things get complicate: we put in place our relationship with money, and even something more: our future, our wealth, our possibilities. Yes, that’s it. And you really accept to take the risk to self manage your money and invest in the S&P 500 index? Are you… crazy?

What is ¬†risk? It takes many forms: volatility, opinions, timing, liquidity, rates, exchange, … and ¬†none of them really defines risk. They all knot themselves in a bullet that is pointed towards you.

I’ve been enlightened about risk reading Jim Slater’s “The Zulu Principle”. The explanation is simple and perfectly demonstrated: risk is ignorance. Risk is directly related with ignorance: more ignorance, more risk. More knowledge, less risk. In a topic that you manage easily and deeply, with years of experience, your risk is near zero. At this¬†point, if you concentrate your attention of your real field of knowledge, where you are experienced and learned, ¬†there you can find the key for making good investments with a near zero risk profile, whatever instrument you use. Otherwise, you may study the object of your interest, in my case the index S&P 500, and study for as long as you can manage it confidently. It may be a sector (energy?), a country (Japan?), an exchange rate (eurusd?), a commodity (gold?), etc.¬†and¬†you must master that topic, than your risk is really reduced at minimum.

So whenever you will find yourself drowning in a bad position and with losses, do not blame something or someone outside, just blame your ignorance and learn from the lesson. Knowledge is the key, a serious updated skilled knowledge. It’s not something you can boast of. To trade or invest proficiently you must be honest, first with yourself.

 

upcoming: opening the position

 

 

Posted by Luca in educational, free, psychology, 0 comments

The Realm of Imprecision

27072016 112027

Shown in the chart: 1 daily bar forecast comparison with actual close. I get confirm that there is a widespread one day lagging in computations. Need to work on it.

Except bars projection, all other indicators read the realtime status, now. They do not project future values, they just get a reading of the edge.

But bars projection goes further, goes into the future and project latest price into next bars. Something impossible happens: you see the wave coming in. You see it, in advance.

As future bars are calculated by the neural networks, it is impossible to know what really happens. It does not depend on the sequence of experiences you submit to the network, it does not take in account the rumor, the huge amount of rumor that lies inside the market. It works as Pattern Recognition. The model is set up to see and it recognizes.

 

Posted by Luca in a.i., free, psychology, selected primer, 0 comments