finance for newbies

Avant snow apres sky


Trading is like skying. You always make the same simple moves (start, end, turn right, turn left)  and the same tracks, but never in the same way. Never the same weather, snow condition, visibility, temperature, and so on: every time it’s different.

Imagine that the neural network knows the track. It does not guarantee that you arrive downhill integer, but it can avoid a lot of errors.  Just the track, with slopes and boundaries and gradients all around. It has already descended that track and even some variants and similar. It can guide you. I should call the model r.Virgeel.

Now, in effect r.Virgeel knows also the condition of the snow, the visibility, the temperature and parameters, so it can even tell you that it’s better to stay home and sip a cordiale.

Mr. Market, as any good skier, will never do the same path twice, no matter how well r.Virgeel knows the track, but Mr. Market, as any good skier, will stay inside the track. Different paths on the same track. A matter of patterns, with a lot of variables.

A human can hardly conceive that this is even possible, while the neural networks crunch numbers. It’s a matter of data. Well collected and trained data.

By some extent, we can say that r.Virgeel can see into the future. Actually, he can show how market reacted under conditions similar to current ones. It’s not a superpower, it’s brute force. Something that a computer can do, not a human. So, r.Virgeel can show the bars into the future as the less improbable path that Mr. Market is going to run, inside the current track, under current conditions.





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


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

Closing the position

You are holding your position and then, at a certain point, you decide to close it.

Deciding to close is very different from deciding to open. In the latter case you are starving, you want to chase. In the former case you have a background of days collecting gains, often a sparkling kind of magic that gets you nut.

You will soon decide that you need an exit strategy.  Not an easy task: it involves many different approaches. There is a practical consideration that induce you to close when a nice profit is there to be capitalized. Another approach can use an indicator to trigger certain market conditions and then enter in closing mode. Some sophisticated technical analysis indicator can track volatility and help you close better. But you are looking for market extremes, innit? Identifying the market extremes is the final object of every system. Find it and money will completely lose value for you.

Whatever the strategy you are adopting, here comes the time to trigger the order and input the execution. Same as the Buy procedure, you press the Sell button instead, if you are holding a long position.  You may decide to sell all-in, in one single execution, or dilute in different orders. In this case, just reverse the Buy strategy. Same effect: just a few seconds and what remains is just the adrenaline and a deaf monitor. As for the Buy operation, conduce the Sell procedure with care, attention and double check any step.  Archive the data and you’ve done. Always evaluate the psychological effect of your actions and search for confidence in your trading platform.

When you are out, you are out. You will often be tempted to reenter the position as new (potential) gains appears. You must resist the temptation, almost always. Market is continuously wavy and a new open position trigger will soon appear. Also, I guarantee, having a relax time between position is positive.


coming: Finance for newbies: noise




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Opening the position

You have done all your homeworks and training and paper trading and you are now ready to open your real position. As instrument we will use an etf on the S&P 500, plain and edged, so that we focus only on the variations of the reference index.

Before opening the position, there should be some kind of analysis that gives you an idea of how the market is moving and highlights some peculiar moments when the risk/reward blows into your sails. Let say that you are investing on the daily time frame. You may move on a shorter time frame, let’s say one hour, and get signals from a combination of technical indicators (the simpler the best, usually) that helps you to catch the turning point.

Now that all the setup are triggered, you get operative.

On you trading platform you pick the instrument (here the etf on the SPX), you setup the quantity (100), the price (17.70)  and you press the BUY button. Usually you will see a confirmation screen to approve the action. Say ok and you are the happy owner of 100 etf payed 17.70 for a total invested 1770 $ (or euro, or yen, or any other currency). Game over. All the adrenaline is in circulation and the thing has lasted 7 seconds? Yes, it’s that simple. It’s so damn simple. Always treat your BUY and SELL buttons religiously.

After the execution you are watching the one hour chart and you may setup a stop loss alarm, because it is always possible that the market turns out your position and goes furiously opposite and you always must put a limit to your losses. Let’s say, being this a virtual etf, that a stop loss can be placed  at 17.50/45, with warnings at 17.60 and 17.55. Such a stop loss implies that you close your position (by hand or automatically) when price clears the stop, in this case a bit more of a 1% contrary move. Stop losses have an enemy: volatility. A peak of volatility can wipe out your stop and get you a loss even if then the position would have gone positive. This is why I prefer to have warnings from the price ticker  and than execute the order by hand. You, just use the procedures that best fit for you.

Now abandon the one hour charts and return to the one day, that is your terrain. Do not get fascinated by the fast moving short term market more than necessary: it’s hypnotic and mentally exhausting. If you are suitable for short term trading, you will discover soon.

You may estimate that you have a time window when you open your position and you may dilute your global position in more successive buys. It is probably better than my habit to promise to dilate the position openings and then use an all in technique.

The physiology of trading says that every time you open a position you have a – hopefully short – subsequent period of losses. If you are in a good position, this time is short and you see the light quite soon. If otherwise, probably your position is not so good.


upcomingFinance for newbies: closing the position




Posted by Luca in educational, free, generics, 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

How to choose your trading platform

Once you decide to self manage your money, first of all you need to have a trading account at a bank or a broker. Nowadays, almost every bank offers a trading platform on line, where you can trade a huge number of instruments, mainly stocks, futures, options, cfd, etf, etc and investement funds. A lot depends on the country you are based in, but is easy to have access to foreign exchanges and exchange rates.

Even if you restrict your object to one single stock index (let’s say the S&P 500?), you have a large offer of different instruments with which you replicate the movement of the index. If are newbie, stay away from futures and options. Both are highly risky and you may loose the entire capital much easily. They require some experience. Even experienced traders do avoid trading futures and options to not rise their risk profile.

If anyway you are attracted by futures, you can try a cfd broker. Cfds are replicas of futures, but you can trade them with very small amounts, using margination. Be sure to fully understand the meaning of “leverage” if you want to use these instruments. That’s the key to an infernal mechanism that can go you broke faster than you can imagine.

My suggestion is to nose into the etf world: there you can find a large quantity of instruments dedicated to almost any aspect of popular finance. Etfs cover indices, sectors, regions, rates, forex, you name it. With the brother Etc dedicated to commodities you can trade almost anything.

But we are restricting the field of interest to S&P 500. So, if you browse the list of available etfs, you may identify a batch that refers to S&P 500. They may have different construction, tipically: 1:1 replica of the index, 2:1 replica of the index, 3:1 replica of the index or 1:1 hedged against the exchange risk you assume if you are not trading in dollars. 2:1 and 3:1 exposures double o triple the action of the invested capital, and you can lose a lot. The less risky is the 1:1 hedged for it gives you the net gain or loss of the index, without any exchange leverage.

Almost any platform for trading online offer you a trial period and a training account (usually with a sound 100,000$ ready for you!) to let you evaluate the platform. Do it. Try them and try the ones that offer you a more comfortable platform, maybe extended to mobile, graphically intuitive, easy to use. It will take some days and you will have a clear idea of the best for you around. Ask, read about it and finally open your account for real at your chosen broker or bank. The word that can guide you is “confidence”.

Online trading platforms are rich full of features, with the possibility to use and customize indicators, alarms, charts,  automated trading systems and more. Personally, I hand execute all the orders, but I can see the attraction for automated execution and systems.

Once you get confidence with your new interface, and this is the real and only boring task of the  matter, read carefully on the platform user manual the section that explain order execution and all the option you have to manage your order. You may want delayed execution or an event driven one. You must master it. You must understand deeply and fully how the operation is cleared and you must have the perfect control of the interface. Make exercise with the training platform.

The platform usually let you create a group of instruments for easy access: group the etfs that go long and group the etfs that go short and chose to trade the most traded ones and with a smaller spread. Liquidity is always our best terrain. Platform offers a variety of charts and a plethora of indicators that you can setup to have a good chart at hand. Often, a chart is really worth a thousand words. Some offer  Elliott’s wave analysis and /or tools, neural network analysis, automation tools and programming languages. No doubt that if you can program, you may setup a real good working desk.

A final word: when you begin to trade you enter in an arena where anyone else identify you as the chick. You are going to lose money. Yes, broke and badly. That’s for sure. So be prepared and plan your losses. Losses are the best way to learn, with your losses you pay for your learning and your attention. Now you may focus on how it’s important to protect you capital. Plan that after a certain amount of losses you stop (and you do it!), then study and relax. You can lose 10% of your money in few days and sometimes even in few hours, then it may take some months to recover.

Ready? GO!

upcoming: two or three words about risk



Posted by Luca in educational, free, 0 comments

Introduction to money self management

This is the first of a series of posts dedicated to individuals interested in investing and trading, but without experience, where I try to explain the basics of money self management.

A lot of people is intimidated by any discourse about money, for various reasons the first being the total lack of formation and experience. Others have followed the suggestions of relatives, friends or even professional advisors and lost money. These are very common  situations that may motivate a person to consider to self manage its own money.

There are a few things that I want to make clear immediately:

  1. about 95% of people that begins to trade stocks or other speculative financial markets go broke in 12-18 months, this is the statistic. Your first attention must be on not losing money.
  2. every financial instrument has its own price and there is absolutely no meaning in the relative values: i.e. the fact that General Electric share price is today at 31.74 and Caterpillar is 92.02 has no meaning in itself – some meaning may stand in market capitalization (the global value of the business) that is for GE near $281 bil and for CAT around $56 bil
  3. the value is continuously fluctuating and there is no limit to gains and primarily to losses
  4. always consider percentage variations and not absolute ones

The market is composed by thousand, millions of individuals that consider correct buy or sell every particular instrument at the current price: none is right and none is wrong, anyone is just acting following his own evaluations and attitudes and expectations.

Always invest or trade into very liquid instruments, being “liquidity” measured by the price spread. Every instrument in every single moment has a buy price and a sell price: the difference is the spread and the higher the spread the less liquid is the instrument. So, do not invest in non liquid instruments.

Cut losses and let your profit run: this is the most widely confirmed Wall street adage and money management rule and its really true, mostly for the first part – always cut your losses before they eat up your capital. You can easily recover 2%, 3% or even 5% losses, but not a 20% or more loss.

Never buy a stock because you read a positive note on a newspaper or because its name is sounding or because the logo is graphically beautiful. Finance is about numbers, just that. Always make your homework before a trading decision.

There are two main classical approaches to market analysis: fundamental analysis and technical analysis.

Fundamental analysis looks at the value of a business in terms of capital, revenues, profits and so on. Technical analysis looks at the value of a business in terms of the chart of the price, considering that price encapsulate every possible (even hidden) information available.

Both the approaches have a good side and a bad one: I’m not here to judge what’s better, but I may say that if you want to invest long term some fundamentals are better to be taken in account, and if you want to speculate short term some charting tools can be indispensable.

About fundamental analysis, you may read Benjamin Graham and Warren Buffett manuals, among others, widely available in bookstores. I did find very useful an old book “The Zulu Principle” by Jim Slater.
About technical analysis, the basic author is Martin Pring; many others authors are available and one principal magazine at offers a continuous update on the topic.

A third way is rising in latest years and it is Artificial Intelligence applied to the markets (it is the main topic of this website!) that offers the possibility to bypass either fundamental or technical analysis with totally different instruments. Many academic papers on this topic, but  it is still a frontier activity, open to research and innovation.

A final word: never ever blame someone else for your losses. Never. Always put yourself into the conditions that you are the real unique responsible for your choices.


upcoming: how to choose your trading platform



Posted by Luca in educational, free, 1 comment