Guide to Day Trading, Volume 1

Conventional wisdom says that the movement of stock prices is a random walk. Roughly speaking, at any given time, the likelihood that the price will rise is equal to the likelihood that the price will drop.

However wise this conventional wisdom may be, it cannot be completely true. For one thing, the price of a stock cannot drop below zero even though a random walk can. Likewise, it is possible that there exists some kind of upper bound on the stock prices. Unlike the lower bound (zero), this upper bound is unknown. The nice thing is that if stock prices go higher than we've ever seen them before, at least we're not losing money, using the strategy I'm about to describe.

The following plot shows the simulated price (1000 observations) of an imaginary stock that starts out at price = 50. The up-and-down price movements are random but biased. The bias is designed so that when the price is below 50, increases in the stock price are slighly more likely than decreases, and when the price is above 50, decreases are slightly more likely than increases.


The horizontal dotted lines are drawn at Price = 40, 45, and 50. Here is the strategy:

1. Set aside 40 + 45 + 50 (dollars, any unit of value ... ) for stock investments. Put this money into three funds: 40 in fund A, 45 in fund B, and 50 in fund C.
   
2. Whenever the price of the stock hits 40, buy it using the funds from fund A (if available).
   
3. Whenever the price of the stock hits 45, sell it (if you own any), putting the proceeds in fund A. At the same time, buy it, using the funds from fund B (if available).
   
4. Whenever the price of the stock hits 50, sell it (if you own any), putting the proceeds in fund B. At the same time, buy it, using the funds from fund C.

This strategy could seem silly at first glance. Why would anyone buy and sell stock at the same time? In practice, maybe I wouldn't, but nontheless this strategy illustrates the potential to make money off the of the stock market based on volatility alone. Note that the ending price of the stock is about the same as the starting price in the plot. But if you count up the number of times that you buy at 40 and sell at 45, and the number of times that you buy at 45 and sell at 50, you notice that the profit is about 80.

There are several reasons why it is not so easy to make this work in the real stock markets. The success of the strategy depends on stocks rising and falling again with sufficiently high frequency and also depends on the long-term stock price swings being reasonably small compared to the short-terms price swings.

Farmer's Lung

I've been spreading mulch on my garden. The mulch is old and full of mold. When I stir it, a fine white dust rises and I breath it. The first time I spread mulch I don't remember what happened. The second time I got a terrible cough and felt a bit feverish for a few hours, but was totally recovered within 40 hours. The last time I spread mulch was yesterday. I tried to avoid breathing the dust and worked with the mulch for only a short time. Then I had trouble sleeping and I got an ear ache and I lost about 30% of my appetite.

The causality is pretty obvious, and the symptoms are a near-perfect match. I have Farmer's Lung:

Farmer’s Lung is a noninfectious allergic disease. Basically, an individual becomes allergic to dust and mold. With Farmer’s Lung, the immune system cannot adjust to the mold spores. Farmer’s Lung has these symptoms:
• Fatigue
• Chills [almost]
• Shortness of breath
• Tightness in the chest
• Headache [not so much]
• Irritating cough
• Loss of appetite

Respiratory symptoms vary with the amount and intensity of exposure. After a first reaction, a worker is likely to develop an increased sensitivity. Then, a worker can have a more severe reaction with fewer exposures.

... Organic Toxic Dust Syndrome has similar symptoms but does not involve the immune system. Organic Toxic Dust Syndrome goes away after it runs its course. It often hits all the workers in a group at one time.

Source: http://ohioline.osu.edu/aex-fact/192/pdf/0192_1_11.pdf

Update: I spread mulch a few more times with no symptoms. False alarm? Maybe. Or the dust composition of the mulch pile has changed due to decomposition.

A most dangerous game

My first gamble with the stock market was not as nice as my first time gambling in a casino. In the casino, I won a few dollars, but my investment in Ford (back in '06 or so) put me back about $200. But gambling is addictive and I'm addicted.

Here is a plot of the S&P 500 with green lines drawn where I bought and red lines drawn where I sold:



You should notice that there are more buy/sell lines near the right end of the graph. That's because I'm buying and selling more often now. Soon I will be a day trader. Let's zoom in on the end:






















The last day on this plot looks like the price was just going up and up, but actually I was buying low and selling high. To see how this could have worked, you can check out the detailed intraday prices here.

The Black Plague Strikes Downtown

Just kidding. The dots are reported estimated bus positions near bus stops (one dot per bus trip per stop) during a 6 day period in December 2009 in downtown Pittsburgh. The red dots are buses on a particular route: the 61C. The buses seem to be having trouble staying on the road.

Gas Tax Facts

(most of the inspiration and ideas on this topic come via Mankiw)

Here is why a gas tax makes more sense than legislating fuel efficiency requirements for cars. Making a super fuel efficient car is expensive. You might have to pay an extra $5000 for your car. This means that you're going to get the car only if you really mean to use it. And if the car is fuel efficient, you'll use it to death. That is, under fuel efficiency legislation,

• Cars cost more.
• It costs less to drive them.
• People with cars drive more.
• Overall, there is very little reduction in fuel used.

Only a gas tax will hit the problems (carbon emissions + dwindling fossil fuels + oil wars) square betwixt the eyes.

Oil Spill

Each of the top ten biggest oil spills in history were greater than 30 million gallons (my calculations based on the wikipedia oil spill page). As of a few hours ago, the leak in the Gulf of Mexico has released less than 4 million gallons. The same source also has this interesting tidbit:

... several senior BP staff members, including its vice president for Gulf
drilling, were on board the rig during the accident because they were
commemorating 2,500 consecutive days without a significant safety incident on the Deepwater Horizon.