Design Decisions

I have looked around at the various off the shelf trading system and execution solutions like NinjaTrader and eTrade and none of them meet my needs completely. So I have decided to write my own software solution.  I know the saying about trying to re-invent the wheel. Depending on the quality of the final product I will decide if the code is of a high enough quality for release or not.

Requirements

Whenever I write software I first write down a list of core requirements and then I decide what tools or language to use. For this project the quick back of the envelope requirements are:

• Fast Execution.
• Code portability.
• Separation between data acquisition / warehousing, trade execution and strategy testing.

Data Acquisition Requirements

• Run on custom compiled GUI less Free BSD or Linux system.
• Hardware requirements: Large physical storage, large RAM,  average dual core CPU and gigabit ethernet (remember PCI bus speed may slow down transfer).
• Code written in C/C++, allow strategy testing module remote connection, configuration controlled by text file and separate IPC monitoring/reporting thread.

Strategy Testing Requirements

• GUI written in C/C++or Java, connect to data store, node based editor, run on UNIX/Linux based OS and nodes contain standard API functionality.
• Report generation.

Execution Engine Requirements

• Speed, Written in C/C++, GUI less, co-location ability, load compiled strategies,  error recovery and separate IPC monitoring/reporting thread.
• Report generation.

These requirements are all fairly vague and will be refined much further during the initial design phase. This quick brainstorming exercise helps get a bigger picture of what I am looking to achieve with this development project.

Data Acquisition Engine

This is the first component that I will be working on. The best way for me to develop the engine will be via the use of a virtual machine. Virtual machine technology with current CPU hardware support means I can develop  at near native speed. Anyone who has done any database design or worked with financial data sets will understand the tedious nature of this component. Time to evaluate different data warehousing and schema design that will allow for speed and scalability.

• Ten lessons I have learned about trading from poker.
• My Favourite poker Game.

There is a lot of debate about poker is it a skill game? Or is it simply gambling? My view is that poker is a game of skill with a luck component. I enjoy playing poker it I would consider it  an excellent hobby that has helped me increase my knowledge of applied probability. At the moment I am learning to play HU Sit & Go’s, these are really fun games which require a unique set of skills.

Poker Luck Meter

In both trading and poker you can lose a lot of money in the short run making correct decisions. In poker however there are several ways we can analyze or decisions to see if they are “correct”. Today we are going to have a look at an excellent free online tool called the poker luck meter. You simply upload your hand history files and sit back and let the analysis begin.

Poker Luck Meter in Action

In the past week I have played very little poker about 1600 hands. This is of course a very small sample size I did however felt happy with my play and for the most part I was pretty sure I got my money in good. It was a losing week for me. Lets upload my hands and see if I was played well and were unlucky or I was just playing bad.

Statistics

As you can see my expected all in winnings and my actual winning varied quite a bit. Also the likelihood of my having such bad luck into the future is around 7%.

Expected vs. Realized Winnings

Showdown vs. Non-Showdown Winnings

All-In Expectation vs. Realized Winnings

Conclusions

It would be foolish to try and draw any concrete conclusions from such a small sample of hands. I am sure the more hands I play the closer my realized profit will be to my expected profit. In poker and trading to be successful:

• You have to be a good loser.
• You have work on strategies to control your emotions. 
• Understand you will lose between 49% – 40% of the time (If you have an edge).
• Never stop learning.
• Connect with other traders players.
• Keep good records.

Next week I will go through the poker software I use and how it helps my game. Would love to get some feedback if you find these posts interesting or not please leave a comment below.

“I never looked at the consequences of missing a big shot… when you think about the consequences you always think of a negative result.”

Michael Jordan

“I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times, I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”

Michael Jordan

“Every adversity, every failure, every heartache carries with it the seed on an equal or greater benefit.”

Napoleon Hill

“Don’t be afraid of missing opportunities. Behind every failure is an opportunity somebody wishes they had missed.”

Lily Tomlin

What is The Risk of Ruin?

In it’s simplest form the risk of ruin involves losing so much of your trading capital that you can not recover or trade your way out of a draw down. To make this more concrete I used a few different risk levels to see how many consecutive losing trades one would have to make at each level before losing all there trading capital.

Note: Approximate numbers based on a $15,000 account size, assume ruin occurs when account balance less then $500.

A graphical view of the risk of ruin is shown below:

Money Management – Avoiding the Risk of Ruin 

I know you have heard it all before that the key to successful trading is money management. As you can clearly see from the above you could have the best trading instincts or system in the world, but without money management you could be out of the game in ten trades. An excellent resource on money management can be found  at Turtle Trader.