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The Day-Trader’s Credo & The Bagel List

Relying on day-trading as one’s sole means of daily income possesses several financial implications.  One of which is that your bank balance and daily/weekly/monthly cash flow can be highly unstable and uncertain.  I’ve only been day-trading for five months but have already been forced to endure lengthy down-stretches.  Statistically and historically, the models almost always tell you that your positions will recover.  But believing that –especially during huge rocket rides or death slides– and practicing the discipline to hold your positions in the face of unrelenting onslaught are two totally different things.

It’ll be useful before proceeding further to first clarify a few points though.  Again, these are simply the practices which have worked for me.  These are not recommendations, etc.

Since income from day-trading is always uncertain, it engenders both “save for a rainy day” and “if we got it, spend it” mentalities.  There is nothing more frustrating than being frugal and saving tons of money over a long period of time (say, many months) only to have those hard-earned savings all incinerated in a single swoop by an unexpected market downturn in a single day or week.  Conversely, because sudden plunges could happen any time, that’s also why I’m not extremely leveraged (2:1, at most, and only for short periodicities).  Remember, assuming you’re leveraged even at a modest 2:1, if your holdings decline by 50%, then you’re entirely wiped out.  (For reference:  LTCM was leveraged as 25:1 at the time of its collapse).  Also, generally speaking, even if you’re not leveraged, if you lose 50% one year, you’ll need to make 200% the next year just to get back to even.  Thus, whenever I see a hedge fund manager having a terrible run, losing 30% or even as much as 50% during a bad stretch, I’m never impressed when they rebound 40% the next year.  If you lose 30% in one year, you’ll need make 150% just to get back to even.  Only coming back 40% means you’re still down by a lot.

So back to spending patterns:  I essentially have a target profit number I aim for every month.  I currently do not set aside any profit that I make; I instead plow it all back into my account because my capital scale is currently so small that the more money I keep in my account, the less interest I’ll need to pay when I leverage up and enter a position with borrowed money.  If I can enter and exit a position within two days, I can essentially use that money interest-free.  But when things occasionally go sideways (which of course they do), I’ll then get stuck in a hold.  And at that point I begin hemorrhaging interest money daily which can quickly accrue if you’re careless.

Prudent Me:  I’ve kept the same strategy and tranche-sizes over the past five months.  Yes, I could increase my tranches each time I make a bet (ie. Scaling position-sizing as a function of my total capital, AUM), but I’ve –at least for now– decided not to.  This is one form of caution.  My thinking –which has yet to be tested and validated– is that if I continue to do well, I should (at least theoretically) increasingly reduce risk as my AUM grows.  My daily interest will decrease over time as the total money I have to “play with” grows larger since I’ve been using the same tranche-sizes and strategies.  Obviously, this’ll negatively affect growth –making $1,000 is much less impressive when you have $20,000 vs when you had only $10,000– but I’m fine with that atm.  Again, my long-term goal here is to simply devise a system (if possible) to make a consistent, comfortable living each month.  I don’t need to knock out home runs every time I step to the plate; I’m perfectly happy with cranking singles and doubles provided that I can obtain them consistently.

Prudent Me also practices frugality when it comes to daily living.  Back when I was working at the bank, I truly led a coddled and sheltered life. I’ll be the first to admit it.  It was always brand-name household products like Bounty and Kleenex.  When I bought cases of bottle water, it was always Aquafina or Dasani.  For food, I loved eating Kettle chips and Eggo Waffles.

Now I’m on my own in the wild, no more.

Bounty and Kleenex have given way to whatever I can find at ALDI or Dollar General.  I’ve invested in a Brita filter carafe.  (I know, right?  What decadence!)  And on the occasion that Bagel and I do buy bottled water, it’s some generic, Safeway Select grocery chain label.  Same thing goes for cereal, waffles, paper towels, tissue, basic desk supplies (envelopes, paper, tape, etc), and allergy medicine.  If there’s a generic label for the exact same thing, I now buy the cheaper option every time.

Do I actually save significant money by buying these off-label goods?  No, I do not.  Furthermore, the quality is often lacking.  The tissue is thinner and rougher.  The envelopes are flimsier and the office tape less sticky (than the real Scotch tape version).  Generic cereal frankly doesn’t taste as delicious (Apple Bombs instead of Apple Jacks or whatever) and the same goes for chips and crackers too.  But I choose to live this daily ascetic life because it’s a useful reminder for me that I am unemployed and am not a productively gainful member of society.  I am a scourge of global markets and the modern economy.

Sure, there may be days when I make money in the markets day-trading.  Sometimes it’s accidental. And sometimes you bet it all on black and you happen to luck out.  But the primal, primitive, unavoidable truth still remains:  I don’t have a job.  I don’t contribute to society.  I don’t create a good or perform a service that I exchange for an honest wage.  I have no wages.  But yet, through this activity called, “day-trading,” I’m occasionally able to make money to pay my bills, put a roof over my head, and place food on the table.  Despite being a mercenary and doing not an iota of good for anyone, I’ve been able to –at least so far– make this work.

But that doesn’t mean I’m proud about it.  If anything, I feel I possess a healthy degree of shame and self-loathing.  I’ve, at least for now, found a way to make money given my current suboptimal circumstances.  But I fundamentally don’t respect what I do.  Instead of analyzing historical data to forecast weather patterns to save lives from hurricanes, floods, and earthquakes, I’m instead using statistics to forecast future price probability distributions.   Instead of using mathematics to help SpaceX build reusable and self-landing rockets or help develop self-driving cars and moving humanity towards a more environmentally sustainable future, I’m using linear algebra to forecast pricing trends and earnings anomalies. Whenever I think of my discovering day-trading and the stock market as a means of making daily income for basic necessities, I always think of Tom Hanks in this scene of The Terminal.  It’s my favorite scene in entire movie.  :  )

The Day-Trader’s Credo
I am a Day-Trader.
I provide no value to society
and contribute nothing to humanity.
I am a bottom-feeder.
I choose to use my abilities in selfish, mercenary fashion.
Even on days I do happen to guess right and make money,
I recognize a large part of that was just dumb luck.
I am not proud of who I am or what I do.
In fact, I feel great shame.
I am a Day-Trader.


Cavalier Me:
  There is tremendous temptation to spend an unexpected windfall.  To be honest, I haven’t yet figured out a way to judiciously manage my finances when things actually go well.  This emotional tension has been true since time immemorial for day-traders everywhere:  I’m essentially torn between two driving, diametric forces:  Fear and greed.

As aforementioned, keeping additional funds in my account is beneficial because it decreases daily interest when I’m caught and stuck after a bad trade.

OTOH, hard-earned savings can literally evaporate any day.  Any given day can be the next Black Monday.  Any day can be the next 9/11.  Literally, globally, anything anywhere could happen and send markets into freefall so long positions are never safe.  Of course, if you’re short, that’s no safe haven either.  Companies can get acquired, or cure cancer, or invent the internet, and then their stock prices rocket through the stratosphere.  Being caught in a short on a big market rally day is one of the most depressing experiences you’ll ever have as a human being.  Everyone around you is celebrating and you’re just staring into your computer monitor at a sea of red.  Nowhere is safe and it could all blow up on you in spectacular fashion any minute, any hour, any day.  The danger is real.  The challenge is managing that risk and fear caused by that danger.  To paraphrase the wise Will Smith, “Danger is real.  Fear is a choice.”

At my heart I am a utilitarian and a functionalist.  I generally do not engage in a behavior or initiate an action unless I possess a clear understanding of what is at stake and what are the risks involved.  And generally, I prioritize my spending on tools over experiences.  I think this is largely inspired by my own upbringing.  Growing up, my parents rarely took me and my sisters traveling.  But while we seldom went on trips, when I was very young, my father got us our own computer– one only for the kids.  He had his own computer he used for work upstairs and we were relegated downstairs to the basement to our own machine.  So while many of my friends were telling me about amazing family vacations that they’d had to Europe or elsewhere abroad, I had staycations over spring and winter break when school was out.  Staycations with our computer.

This bias towards prioritizing things over experiences has held over into my adult life.  I’ve developed a habit to maintain a list of tools that I believe I need that will help me with my day-trading.  It’s basically a priority queue.  And as soon as unexpected windfalls roll in, I begin popping items off the queue to purchase.  Differentiating between what you want and what you need has been one of the hallmarks of my adult life.  So, an example: I currently have a car.  It’s not a fancy car but it’s fine.  It gets me from A to B and even has Bluetooth so I can listen to podcasts when I drive.  I’m in no rush to replace this car.  But my computer monitors are over ten years old.  Computer monitors are expensive.  But the next time I make an extra thousand dollars, that money is going to directly go into improving my trading setup.  The thinking being:  With better tools, I can then make even more money.

I suppose I should provide an addendum here though:  After meeting Bagel, my Priority Queue of Spending has expanded its parameters.  I think the spirit of my philosophy still holds but things are definitely different now.  Meeting Bagel, and keeping her happy, is now another dimension of the challenge-space.  A good portion of the Priority Queue is now dedicated to “Gifts for Bagel.”  These are items that she has never explicitly requested but are material goods that I know she would appreciate, find useful, and make her happier.  And if she’s happier, I’m happier.  Everyone likes receiving gifts, right?  Anyway, without expounding upon it too much, believe me when I say there are multiple motivations to knocking items off the “Bagel List”– for example, last year I was able to buy her an iPad.  The device then succeeded in keeping her occupied for many days (weeks, actually) watching Gilmore Girls which gave me time to sneak off to read up on the stock market and study Ruby on Rails.  Money may not buy happiness but it certainly buys time and freedom.

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