Wednesday 26 July 2023

Another dabble in trading

I was browsing through Youtube videos (anything to procrastinate working on my PhD literature review or making cold calls to find prospects for my financial planning 'business') and came across an interesting talk about trading psychology by Dr David Paul. Despite being 4 years old, it still had some good point about needing to stick with a simple trading strategy, execute the plan with discipline, and use careful money management to ensure the position size is in line with the amount you have available to put at risk.

He gave a simply example of a bet on a coin toss where the payoff for a win is $2 for a $1 bet, and if you lose you forego the $1. Now, despite a 'win' paying out twice as much as a 'loss' (so the expected average return is positive), you can easily go broke due to a random string of losses. If you start playing you will have a 25% chance of having two losses in a row, a 12.% chance of three losses in a row, and 6.25% chance of four losses and so on. So, if you play this 'game' long enough, you are quite likely to encounter a string of 10 or more losses. Since each loss costs you $1, you should not play the game if you only had a 'kitty' of, say, $10 (you can no longer play if you run out of money, despite there being a positive expected return in the long run). A similar situation arises if you engage in card counting to make money playing Blackjack at Casinos -- despite have a positive expected value (EV) in the 'long run', you have to start off with a large enough 'bankroll' compared to the bet size.

So, armed with a reminder of how important trading discipline and money management is for a 'day trader' I decided to dabble again with a bit of trading for fun. This time I decided I'll simply take long positions on the Australian share market when there seems to be a positive run. I opened a new trading account with Moomoo (since they were offering a few months of 'no fees' for a new account, plus a random draw of some US shares as a bonus if you deposit some initial amount and keep the balance for a month or so. I funded the trading account with $5,000 and bought 54 VAS for $90.96 at the open (the fact that the US market had been positive overnight also seems to improve the odds that the Australian market will open on a positive note -- and my order was filled before the major up-tick happened (probably due to the staggered open used for Australian share trading?). For my $5,000 'kitty' I should close the position when I either make 2% ($100) for a 'win' for when I have lost 1% ($50). So I have set alerts to notify me if the price of VAS rises above $92.78 or drops below $90.05. If I manage to 'win' roughly half the time I *should* end up making some profit (how much will depend on trading costs in the long run I suppose).

I'll track how things go for the first 30 or so trades, and see if I manage to stick to my 'trading plan' (and can sell close to the trigger prices). I'm still trying to decide if I might not need to actually close my position if I 'win" as long as the overall market trend still seems to be positive at the time. Instead I could just close my position 'virtually' (on paper), and set the new price alerts as if I had just bought the stock at the new 'entry price'. Not sure if my logic is correct about that, but I'll see how things work out in practice.

As I am only risking a $50 loss on each bad trade (assuming I can close out close to the trigger price if there is a market crash!) it would take a long time to lose my entire $5,000 'kitty' if things go horribly wrong. I do a monthly update on how my 'day trading' is working out.

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