The Online Investing AI Blog

Bitcoin has gone through its second bubble, and it is interesting to see how it survives. Although many people thought that the price would crash to a small fraction of its high of $262, it seems to have stabilized in the $100 to $120 range.

Image courtesy BitcoinCharts.com

The popularity of Bitcoin has exploded over the last 6 months, and it was clear that the bubble would burst. However, it seems that Bitcoin has gained enough traction to make it survive through the price crash. The chart looks quite strong at the moment, but only time will tell if Bitcoin continues to rise in value.

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If you notice some of the terminology of investing, you’ll see a connection.

Bet. Hedge. Loss. Long-shot. Odds. Risk.

All of these terms are interchangeable with gambling parlance. There’s a connection between the two — and while most investors will tell you that they aren’t gamblers, the words they use give them away. If there is a connection between gambling and investing, it follows that investing can have some addictive features, just like gambling does. Gamblers, after all, can go to Gambler’s Anonymous. Should there be an Investor’s Anonymous?

Investors may want to look at signs of addiction in their own trading behavior. Gamblers who become addicted to game of chance rarely are in it for the money, they are in it for the emotional jolt they get from betting. The rush.  If they win, that money goes into more bets and, usually, bets with much higher risks. Then, the crash.

All investors feel that same sense of exhilaration when a stock they bought starts to soar, or when a stock they shorted starts to drop. But, what do you do after the excitement. Can you take money off of the table? Can you wait until the market settles?

You may also want to look at how your emotions have fluctuated through the years. Do the “good times” of your life also correspond with bull markets — and the bad times of your life seem to be bear markets?

Asking these questions aren’t easy — and it’s hard for addicts to self-assess — but becoming more aware of whether we’re investing for fun or profit, or whether we’re just addicted to the rush of winning and losing, is important.

You may also find that you’re not addicted. But, this can still help you see how emotions can change your outlook on the market and directly influence how you invest — sometimes for good, but mostly for bad.

Automated Trading, Business Strategy, Investing, Money addiction, gamblers, gambling

Entropy by Jef Safi

Entropy has a bad rap.

When you hear about entropy in science class it’s usually described as a messy bedroom, a completely disordered state. It has nothing to do with intelligence, in fact, it looks like the complete opposite of intelligence.

But, according to a Harvard computational physicist, entropy holds the key to intelligence and — defying the bad reputation thrust on it by millions of high school science teachers — entropy is more like a state of exploration, or even play. It’s an insight that could lead to new technologies and has important implications for econophysics and stock trading, believe it or not.

Alexander Wissner-Gross, who is part of both Harvard’s Institute for Applied Computational Science and MIT’s Media Lab, recently published a paper called, “Causal Entropic Forces,” which, using cosmology as its inspiration, seeks to reveal the “deep connections between intelligence and entropy maximization.”

And that gives us a clue to how it works in finances and trading. Wissner-Gross sees entropy as the universe’s way to explore possibilities and to seize future possibilities as possible. As he tells Io9, it’s a lot like playing Go.

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Accelerating Technology, Automated Trading, Investing, Money, Online Investing AI AI, Alexander Wissner-Gross, entropica, entropy, software

The market is broken and the free market system is not fair — it’s a sham.

I hear that all the time. And it’s absolutely correct.

The free market is not fair. In fact, it can be downright mean.

There’s plenty of evidence that this is correct. You only have to look at the recent economic meltdown to see that the market has failed millions of people in the world. Hard workers have lost jobs. Dishonest investors have screwed honest investors. Businesses and money evaporated overnight.

It’s difficult to tell people who have endured some of the pain of this crash this, but it’s true: the market doesn’t work and that’s why the market works. In other words, systems that can’t fail on their own, never grow on their own. This is adaptation at its finest.

Despite the pain of deep economic corrections, people are struggling back on their feet devising new ways to handle the problem. I don’t know whether Bitcoin will ever be the next currency — but it’s a sign of that innovation process and it’s a process that is happening all over the country.

The ability for the market to readjust is why it continues to be the worst — and best — system we have. Socialism, at best, subsidizes poor economic choices and ideas for as long as possible, then it collapses in a heap. Most countries that are embroiled in socialism rarely see this. It’s just a modern twist on feudalism. There are a group of lords — mainly industrialists and politicians — who provide the bread and circuses; in exchange, the citizenry doesn’t threaten their castles with torches and doesn’t threaten their entrenched businesses with competition.

It can be much worse.

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Business Strategy, Internet, Investing, Money, Online Investing AI

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You are on a hot streak.

Each trade you make is a winner. The money in your trading balance begins to pile up. You reach the obvious conclusion…

You are good. Real good. You have the skills and knowledge to dominate the market. Or do you?

The biggest problem that traders and investors encounter is the difficulty of separating skill and knowledge from plain old luck. And, just as a coin can flip to heads any number of times before it eventually balances out into the 50-50 range, so, too, can trades inconveniently arrange themselves in lucky — or unlucky — streaks. This “streakiness” can lead to over-aggression during lucky bursts and despondency when the trader faces a series of losing positions.

How can you separate your skill from the random nature of the market.

There are a few ways to test — all, of which, take time and patients, which is unfortunate for the get-rich-quick trading set.

Counter-Markets

One way to test your level of skill above luck is to measure your performance in poor trading markets. As the saying goes, all ships rise in the tide. But, during bear markets can you find winning stocks?

Significant Results

While there are always going to be lucky streaks and unlucky streaks, if you consistently out-perform the market, you can be more certain that you’re not just the beneficiary, or victim, of luck. This should be measured in years — nor days, weeks, or even months.

Risk Management

This isn’t so much of an indicator of luck as it is a way to manage luck. Traders should use proper position sizing. Both traders and investors should manage their portfolios. Some more advanced techniques including taking short positions to balance long investments.

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Automated Trading, Investing, Money, Online Investing AI

I’m reading Van Tharp’s latest book, Trading Beyond the Matrix. I just started it so this will not be a complete review — expect that in the future, though.

But I am already intrigued.

Tharp believes that you don’t trade or invest in the market; you trade or invest in the beliefs of the market. Those beliefs are yours to control, or to allow them to control you. Hence, trading for Tharp is almost a yoga, a mental connection between brain and spirit. Indeed, there are yogic paths that stress mental exercises and meditation exercises.

But we don’t think of trading as a spiritual act. In fact, it’s treated almost as an act of defilement. Our society has twisted views on wealth and earning wealth. We praise and hate the practice. The structure of our tax system treats earning money as a sin by punishing — not rewarding — you for earning more money. It’s the ultimate sin and deserves the ultimate sin tax. Notice: there’s no progressive sales tax on cigarettes or alcohol based on use or over-use.

Tharp though approaches it almost as a Zen philosopher, who sees the extraordinary in the ordinary and the ordinary in the extraordinary. By consciously watching your thoughts and beliefs, the trader is learning about himself. As he learns about his mind, he is learning about the universe.

I sort of saw this coming from Tharp. The last book of his that I read — Super Trader — contained the prerequisite number of charts and graphs, along with trading tips, but did not shy away from spiritual matters. Tharp believes they are closely connected.

Once I’m finished I’ll try to post a review, or summary, of Trading Beyond the Matrix.

Resources:

Tharp Institute

Trade Your Way to Freedom

Super Trader

Dreams Come True, Great Books, Investing, Money, Online Investing AI, Success beyond the matrix, spirituality, tharp, trading, van tharp

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We’ve just witnessed a historic event.

Last Tuesday, the Dow — a benchmark for stock market strength — cruised to 14,285, well passed the former record set in Oct. 2007. As of Friday, the Dow rested at 14,397. And there was a collective shoulder shrug.

That reaction was in contrast to the heady days of stock market gains in the 1980s and 1990s when each Dow and Nasdaq record was reported breathlessly for days. It was a moveable feast.

So, what’s different about this record?

First, people are paranoid because the last record in Oct. 2007 was soon followed by an almost complete economic collapse. Within months of this record the Dow plummeted, losing half of its value and bouncing along those bottoms for years. Investors are wary of the same happening again.

They have statistical reasons to be wary. Raw economic numbers — GDP growth and employment, for instance — are not even close to the strength that led up to the rally in 2007. The housing market? It’s still a basket case. Also, the stock market gains are based a lot on government — especially the Fed — tampering with the numbers. Cheap dollars have fueled the rally.

However, it may be a mistake to hold this view on the economy exclusively. Remember fear can be just as damaging to your portfolio as greed. Also, remember that time has a way of balancing prices. What was up, might come down a little; what was down, may end up higher.

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Internet, Investing, Money, Online Investing AI crystal ball, Dow, gdp, inflation, Investing, market, stock market, stock trading

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The whole philosophy of using machine learning and artificial intelligence in investing is that machines can make trades quickly and without being burdened by emotions.

It’s the last bit that I’ll talk about today. Emotions — like fear and greed — skew the decision-making processes of the investor, causing him or her to but too high or sell to low based purely on feelings. A good example: you would probably pay more for food if you’re hungry than if you just had a big dinner.

Therefore — and this conclusion is inescapable — machines that do not have emotions can trade better.

Except, this logic is totally wrong. Well, not wrong. But it forgets the most important variable. The market and the economy runs on emotions. Even if every investor was an emotion-less cyborg, the rest of the economy, which underlies all stocks and commodities, runs on desires and emotions.

A successful investment system can not possibly rule out emotions. In fact, the most successful investment system would totally understand emotions, but not ruled by them. This system would understand how desire for something quickly turns to the desire to not lose something — fear. Likewise, it would be able to sense when the momentum of fear turns into a buying opportunity. It could sense that the greed in the real estate market was becoming too frothy, or that the fear of a recession was starting to bottom out.

In short, the best investment system understands emotions. It just isn’t ruled by them.

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Investing, Money, Online Investing AI AI, artificial intelligence, emotions, fear, greed, human, Investing, loss, machine learning, markets, predictions

Any scientist will tell you that when you see a pattern, there must be an underlying cause.

In the past few decades and especially the last few years, we’ve seen a pattern of businesses, governments and institutions that were too big to fail… fail.

AIG. GM. Fannie Mae and Freddie Mac. Greece. Spain. Do I need to go on?

Remember, if there is a pattern, there is probably a cause. In fact, there are a few reasons why groups that can’t fail inevitably do fail.

One reason that too-big-to-fail become most-likely-to-fail is because these organizations believe these organizations take on unnecessary risks because they are convinced that their bigness or smartness — or whatever other belief backs their infallibility – makes them immune from the consequences.

Most of the leaders of these organizations also believe that if they are too-big-to-fail, someone will bail out their bad decisions. If you believe that packaging risky mortgage loans has no consequence, or that you will eventually be bailed out, why not take that risk?

Too-big-to-fail organizations don’t do their homework. It’s like the student who whizzes through a few easy courses and then is suddenly confronted with completely new material. What do they do? Usually, they fail those first few tests until they either spend more time and effort on the new material, or they drop out.

Some groups also believe that they can predict the future because their a series of assessments proved accurate. But market conditions and economic realities are always morphing — for good and for bad.

The truth is, when we fail to let people fail, we create the seeds of even greater failure.

Just ask Joe Schumpeter.

Investing, Money, Success, US Economy economics, fail, failure, Joseph Schumpeter

It has been quite interesting to watch Bitcoin as it has gone through one bubble, and consistently risen since. Many people thought that Bitcoin was finished after its stratospheric rise in 2011, and it’s subsequent collapse to $3. Can Bitcoin survive such a massive devaluation?

Image courtesy Bitcoin Charts

Recently Bitcoin has achieved quite a bit of attention, because of WordPress.com announcing that they will accept payment in Bitcoin. More recently, Reddit has decided to accept Bitcoin. The more interesting (and perhaps) exciting development is that you can now buy pizza with bitcoins.

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Accelerating Technology, Dreams Come True, Internet, Investing, Money, Success, US Economy bitcoin, currency, debt, defense, future, gold, government, Medicare, Money, silver, social security, Success, technology, wars