Essence of Trading: What You Want Isn’t What You Need

A dilemma I often witness from my unique position in talking to potential investors and hedge funds is that people often do not know what they need. I have several interesting stories to share addressing this issue. You may find the story relates well to someone you know.

A Small Hedge Fund Doing HFT

The fund manager wants to develop HFT algos and solicit clients based on a sales pitch that his fund can do great with their HFT program. The fund has several models ready and have been seeking opinions from others whether their models are good enough for deployment. The models of course are showing great performances on the historical data.

I pointed out that their models are not even close to what HFT is. Having technical indicators applied on tick data assuming the best fill possible do not produce HFT and they do not work in general anyway. I directed them to read the basics on HFT and told them nicely these models will not work even if they have co-location servers at the exchanges.

Being the only opposing voice obviously does not help. Last time I heard about them was from a friend who had not been able to collect his coding fees of the models from the fund.

What the fund need are slower daytrading models that they have experience working with. After all, a fund has to be profitable. I understand that the fund has no marketing buzz to sell to the high net worth potential clients. Being profitable in the hedge fund space is not enough to get clients these days.

Entrepreneur Turns Daytrader

A successful entrepreneur who made it in the import/export business sold his business and retired in his early 50s.

Out of boredom he started to daytrade the financial markets. First he tried out forex and gave up shortly after. The volatility during the 2008 crisis cost him dearly. Next he set his eyes on the stock market indices. He made a killing at the peak of the financial crisis in 2009 but he has been losing money since. He bled most of his winnings by the end of 2012.

Some mutual friends learned about his frustrations and introduced him to meet with me.

He asked for trading signals to short the stock market top. What he wanted was that the stock market to top out and keep falling. He also wanted people to agree with him that the stock market was going lower.

I pointed out that he was living in the past. He was replaying the history in his mind so often that a rare event like the financial crisis became something that he thought would happen again easily. Every news or event became a sign that the stock market would top out.

He is still learning to snap out of the past and pay attention to what is happening now. A good sign is that he no longer short the Emini S&P blindly just because of some supposedly negative news hit the media. And yes, I convinced him to learn reading the charts and control his risk.

What this guy really need is the truth about the stock market. He is a pretty smart person who was able to grow a business into decent size and have it sold for good profit. Once he started to see the risk side of the trading business he can teach himself to control the risk as he has the discipline necessary. From there it is just a matter of time for him to find his own profitable way.

Retiree Wanted To Become A Daytrader

I met with this retired lady pretty much out of the blue. She is a relative to one of my old buddies in my hedge fund days. She has been very frustrated with her saving and her money has been chipping away for several years. She called one day asking directly if I can manage money for her. It is a surprise call because not that many people know about my side business.

In short, she wanted a very significant return from her limited risk capital. She was willing to risk up to $50,000 and would like to get a return of 50% on that annually. She was and still is a very conservative person. She understands the importance to protect majority of her money so that her basic living cost is covered. Thus the $50,000 is indeed risk money she can part with.

I explained that it was very difficult for me to do this for her because I no longer taking new clients. It would also be very difficult to find an advisor who can promise her the kind of result she is looking for. At the end, I also declined her request to learn daytrading from me because her character will make it very difficult for her to take on risk routinely.

Funny how things turned out. I managed to convince her to take on a part-time job doing things she loves to do. She is now a sommelier, resolved the cash flow problem and a happy person again.

What she need was a solution to her cash flow problem, not money management service. The angle she was looking at was restricted by her past. Hence she was not able to find a solution to her own problem until she has someone open her eyes to other possibilities.

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