The Online Investing AI Blog

It has been theorized that the TV, computer, DVR and internet will converge into one unit. The question is, how will it all work out? This fascinating analysis about Hulu online video service shows how popular the service has become.

I guess that’s part of the interaction between capitalism and technology. Each company does its best to exploit technology, gain market share, develop new and revolutionary products, and ultimately maximize profit. It may not be a perfect system, but it is the best we have, and seems to work pretty well.

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When the internet first started to develop, some entrepreneurs decided that there should be a currency just for online transactions. It made sense. People didn’t trust conducting transactions on the web and, of course, cash wouldn’t work.

Internet currencies, like Flooz and Beenz, were introduced. And dot-bombed.

Despite good intention and good ideas, online currencies never were adopted.

So that’s the end of the story, right? Not according to an article from Wired.

New currencies are starting to bubble up again. One currency is based on wireless phone minutes. Technology is literally becoming a currency. With less faith in paper currencies and a lack of malleability and portability of other forms of currency (gold and precious metals), a new currency–or new currencies–are more possible. In tightly controlled economies (China), new currencies will find a ready market, too.

And, if technology can create a currency, it can create technology to trade this currency.

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The current meme is that investment bubbles are unpredictable. These black swan events are random.

I agree that the exact timing of market crashes can’t be predicted, but there is nothing unnatural about a market crash, nor, as hard as this is to believe at our current point in economic history, is there anything unhealthy about a market crash.

The market crash seems to be hooked into psychological approaches to adoption and rejection of trends.

But a quick look at past bubble-bust tandems show a completely predictable pattern. They’re fads.

Look at the trajectory of Crocs–the ugly (at least to me) foam shoes.

At one time, they had a select following among boaters and water sport lovers. They were comfortable and tight-fitting. It was a following, kind of like those first few dotcom IPOs.

Then the shoes were kicked into mass consciousness. Everyone from Presidents to Rock Stars were wearing them. Just like everyone was investing in real estate a few years back.

Now, it appears that the Crocs company is declaring bankruptcy. Demand has plummeted and expenses have skyrocketed. Sound familiar?

The pattern of clothing fads follows almost exactly the trends of music fads, like boy bands. Cult following. Breakthrough album. World tour. Sophomore jinx album. And then, it’s onto the amusement park circuit.

As traders, we can draw a few lessons from this.

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Everyone seems to running around complaining about the economy and unemployment and lamenting the fall in the stock or housing markets. Let’s stop running for a second and ask an important question.

How did we get into this situation?

The markets did not suddenly decide to go down by themselves. They are simply going down after going up for a long, long time. Markets go up and markets go down. It’s part of the grand scheme of things.

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As the stock markets have made a big rebound, some people think that we are out of the woods. Has Obama’s massive plan averted financial disaster?

I think that it is way too early to tell. The fact that the markets have come back to nearly previous high levels is a great sign. The problem is that nothing has changed fundamentally in the economy. Unemployment is still high, and there is no reason that it will come down in the near future. Domestic automakers are finished, but the American people are left holding the bag. Demand for goods and services is not rising, and businesses have little ability to grow in the near future. Housing prices are falling, and I don’t think Obama’s plan will be enough to keep them from continuing to fall.

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The economy has taken a big hit in the last nine months, and where it goes from now is quite uncertain. It looks like the housing market will continue to drop, but the stock markets are a big question mark. What is an investor to do?

Many people say that you should buy stocks now because the market is down and is recovering. But what happens if it goes back down again? They say,

It’s OK. It will come back sooner or later.

That’s probably true. There is just one problem with this advice.

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As I mentioned in a previous post, finding good financial advice is a big challenge. And, it’s probably just as hard to find good trading advice. Most people trade based on tips passed on from their friends or that they find on the internet. This is probably the worst kind of trading advice you can find.

But even better trading advice, such as analysis of technical indicators is only marginally useful. This is because trading advice can only be used effectively under the right conditions. It takes more skills than the ability to read technical indicators to become a successful trader.

Imagine a finely tuned Porsche. It’s all tuned up, and running well. The tires are set to the right air pressure, there is gas in the tank, and the brakes lines have been bled. It’s even washed and shining in the morning sunlight. What happens if you take someone who has never driven a car and put them behind the wheel?

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Since most people have never even heard of an Automated Trading system, I thought it would be a good idea to take a moment and explain some of the benefits.

An Automated Trading system is a computer program that buys and sells stocks, options, futures or currencies based on specific rules. These systems are also known as algorithmic trading systems. Since they use a specific set of rules (the algorithm), they have some benefits over human traders.

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Futures contracts are one of the most traded markets. Many traders love them because they offer high leverage. That means that it is easy to make a lot money very quickly. And it also means that it is possible to lose just as quickly.

Most traders don’t think about the possibility of losing money. They love the game. It’s exciting when you win, and painful when you lose. They may not win all the time, but at least they are entertained. It’s better than sitting in an office typing emails and suffering through boring meetings.

We need to consider the possibility of losing money if we want to make money consistently. And, to really do this effectively, we need to measure risk. That’s why Automated Trading systems are well suited to trading futures contracts. They use statistical analysis to measure the risk of any given trade. And, they can use this risk measurement as an input to an Artificial Intelligence system.

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At this time, mutual funds are the default investment vehicle for most Americans. This is because the mutual fund industry relies on the concept that you need to be an expert to buy and sell stocks. What most people don’t realize is that virtually all mutual funds underperform the market over the long term (20+ years).

We expect that in the next few years, Automated Trading will replace mutual funds as the most common investment vehicle. Most people have never heard of Automated Trading, and would not trust a computer to manage their investments. This is because Automated Trading is largely unknown, and is a new and unproven technology.

Automated Trading has many advantages over mutual funds. In some ways, it has less risk. With a mutual fund, you turn your money over to another company to manage it. The problem is that some of these companies are nothing more than Ponzi schemes. Bernie Madoff has made this abundantly clear in the last few months.

In contrast, an Automated Trading system can trade your account, but you are still in control of it. The Automated Trading system does not have the authority to take money out of the account. So, at least in this way, users of Automated Trading systems are protected from fraud.

Mutual funds tend to move up and down with the market. Since a mutual fund holds a position for months or years, when the market goes down the mutual fund goes down as well. People who have invested in these funds see their accounts go up and down with the market.

Automated Trading systems can have much shorter holding periods. And, some of them sell stocks short as well. Therefore, the direction of the market movement does not necessarily affect the accounts of people who use Automated Trading systems. It seems a bit silly to tie my wealth to the ups and downs of the general market.

These are just a few of the differences between Automated Trading systems and mutual funds. We believe that Automated Trading systems will ultimately largely replace the well established mutual fund. It will be interesting to watch and see how this new technology works out.

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