I don't have much fresh data analysis of late as I am currently working to put together a new trading system. This system trades every 7½ minutes, using data I that I capture directly from my broker for pricing. Changing from the once-per-day style of the Compact Model Portfolio and A Poor Man's Hedge Fund is requiring quite a lot of work, particularly on the operational side.

I'm a great believer in getting into the market and letting the reality of the world sort out which of your ideas are right and which are wrong. For me, a critical parameter is the probability of executing a trade in which one attempts to buy at the current bid or sell at the current ask.

In this day and age, particularly in a world full of predatory high frequency trading algortithms, whos business is to run you up or down and fool you into paying a penny more than you would otherwise — and a strategy that makes pegging an order to the best bid or best ask particularly foolish — one needs to be very disciplined and cautious when designing a limit order trading strategy. The fastest players can cancel their bid and send an offer to sell to you within microseconds, leaving you having been stepped up the overpayment ladder one cent at a time.

Thus I do some experimental trading, by hand, as a man with a mouse and Excel™, to see what the market's really like. At a 7½ minute cadence, this leads to a tiring day of clicking.

And while I click, I try to think about the pattern's I'm observing. With this frequency of operation, I have about 50 opportunities per day to learn something — and fifty is equivalent to 2½ months on a daily basis — so there's sufficient statistics to learn a little in one day.

Yesterday, I found it difficult to get fills in the first fifteen minutes of the day. I immediately fell into the magical thinking trap of supposing that these fifteen minutes were somehow special; and more, in fact that the whole system was spuriously contrived around that period and was there becuase one cannot trade it during that time; etc. — as if a regression result that is driven by just 4% of the data is also weak enough not to be seen by the naked eye.

I find that quantitative traders can be quite prone to this kind of magical thinking. Despite building our systems, supposedly based on science, we all know that the NASDAQ is not the LHC and that our models are not reality but representations of reality and we fear that they may be just luckly flukes of the data. Thus we think that if we don't follow our prescriptions literally byte by byte, we will break a system that, in our hearts, we feel has no business being real in the first place. Even though our analysis suggests general descriptions such as industry groups tend to trend intraday, we end up feeling that really they trend from 9:34:34 am to 15:34:23 pm and any trespass into that first four minutes of the day is the moral equivalent of breaking a Faustian Pact.