Wednesday, September 07, 2005

Catching Fish

I received a rather funny comment last night from my post, "New Broker and Atlanta."

Here's the comment:
Do you realize that using an Ameritrade company that you're doing nothing more then emailing your orders in and they're pooled against other client orders? Amazing the lack of knowledge.

I guess the anonymous fellow didn't like my recent choice in brokers. Ha! And don't you just love the final stab, "Amazing the lack of knowledge." Since the pooling of client orders are just one of the many reasons why I've always liked Ameritrade as a broker. As I've mentioned in several of my posts...I don't require direct access and the like to trade my systems. Like Livermore who grew up and prospered in the bucket shops...I've learned to trade in the Ameritrade-type environment. I'm comfortable there and all my systems are geared to that environment. When I step away from that environment...many of my advantages are gone. And perhaps like Livermore's return to the bucket shops to rebuild his grubstake...I've always returned to the Ameritrade's of the world.

Could I do better with learning direct access? Changing my style and systems up? Perhaps this article by Scott Barrie will better address the question. Read Wonderful Fishing here.

My favorite quotes in the article?
I took my trusty fly rod, my brother used a spinning rod and a spoon as did my son. However, my daughter Katherine (aka "Kallie Pally") was set up with her little $5/Barbie fishing rod (a pink push button caster with pictures of Barbie on it, reminiscent of an old Zebco), a bobber and a worm... really to include her and keep her busy while the boys fished. Well, after about 20 minutes of getting nothing - in one of my favorite childhood holes - her bobber went under water, while the boys had not even gotten a strike. She reeled in a beautiful 13" brown trout, and taught the rest of us to fish. She taught us a lesson... not the tackle but the tactics (bait) which makes fish bite.

The lessons learned fishing in a river or on the world's bourses are similar, but the one I walked away with this time is that the tackle and equipment is not that important as long as one can find the right bait and present it where the fish are.

Perhaps I'll explain a bit more as to the type of fish I'm trying to catch in regards to trading. I'm not looking to throw myself into the pit where people are smarter, faster, and frankly more talented than I am. And more importantly, have more money and better resources at their disposal than me. My goal is to avoid those crowded stomping grounds. I'm constantly in search of the places the big boys and girls can't get to. That's why I trade low volume stocks which are often times low priced stocks. I only trade the Nasdaq stocks because of the type of orders I enter. Then I develop & trade strategies that take advantage of the conditions present in these types of stocks. After many years of trading this way you begin to see all the different things an Ameritrade type of environment will present and you learn and adapt. You also discover new strategies to take advantage of this limited environment.

So, if I liked Ameritrade so much why did I switch to a direct access broker? The reason? A new system and the need for less than $5 commissions to trade it. With my Ameritrade commissions above the $5 mark and with a failure of them to come down to reach that area...I was forced to switch. I didn't know about Izone at the time and the only places I could find that would reduce my commissions were direct access brokers like IB and MB Trading. But, at a cost...at least half of my orders would be filled at the same cost Ameritrade was charging in commissions. I was hoping some would be charged below Ameritrade due to the share price and quantity bought/sold.

After real-world testing the system I quickly began to see that #1 the system's performance depended more on the commission costs than my backtests showed, and #2 the majority of my commissions were pretty close to the Ameritrade cost level. So, I was forced to decide...shut the system down or find cheaper commissions. Luckily I found Izone and after trading with them for three weeks I'm happy to report my system is back to profitability.

Here's my equity curve showcasing the effects commissions and trading environment can have on a system:


As you can see, once I switched...profitability returned. Not because the market improved or better fills. But, because commission costs were reduced significantly.

Again, this is not a diss on MB Trading. I was treated very well by MB Trading and I strongly believe they're one of the good guys in this industry. Perhaps one day I shall return to direct access and if I do I would choose MB Trading again. But, for now I'm content with my current fishing equipment. As the article I linked to above mentions...the tools aren't as important as catching fish. And I'm catching plenty of fish...despite the amazing lack of knowledge. Ha!

Later Trades,

MT

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