Friday, May 3, 2013

Eve Knowledge Applied to the Real Stock Market


I started a new 30 day challenge, this time on the real stock market. Follow along at Trading by Price Action.  

A Personal History

I know a lot of people still read this site, and I figure I would post a little bit of an update as to what I've been up to in the past few years.  Well, it turns out that the two to three years I spent trading in EVE-Online actually taught me a LOT about the dynamics of markets, supply and demand, support and resistance, etc.  If only there was a way to transfer what I learned in-game to something productive and useful in the real world.

I cut back on my Eve-Online time severely. I got a boring midnight security job (yay for being underemployed!) with a lot of free time, and I started studying and saving cash.  I did everything I could to raise as much capital as I could.  I mean EVERYTHING.  I worked all the overtime available, used coupons, and basically penny pinched.  I even started doing stuff on a stupid site called SwagBucks, well I can't really call it stupid.  I made 500 bucks on the site over the course of a year just using their search engine, watching videos (well letting the videos run in the background), and various other stuff that wouldn't drive me nuts.  Its sorta tedious.

I also spent the next year studying the stock market, every day, till I got a good understanding of what all the technical indicators meant like SMA, EMA, MACD, Slow and Fast Stochastic.  Once I got a good understanding, I started trading.  I really should have started paper trading, but it's lacking that emotional element that you must get used to when you have real money on the line.

I lost some money, not big, but I could see that my method wasn't working.  The stock market just seemed completely different then the Eve-Online Market Place, but I was determined.  As completely different and complicated the Stock Market was, there was just this aura of familiarity.  I couldn't really put my finger on it, but I went back to the basics.

The problem I had with all these technical indicators was that they are all LAGGING.  They move AFTER the stock has already moved.  They look great and amazing when you are studying though! 

Applying Eve-Learned Knowledge

I was a pretty damn successful trader in Eve-Online, but I just couldn't really get it all to click together.  That was until I watched a stupid Youtube video some idiot posted about how Market Makers manipulate the price of stocks.  I started thinking, that's so stupid the stock market is not just one great big manipulation attempt, but then I realized that's exactly what I did in Eve-Online in certain situations.  I have on occasion manipulated the price of items in a region to get more isk per trade! 

It was at this moment that everything just sorta clicked together, not really about the whole manipulation attempts, but instead I realized something.  In EVE-Online, I was the Market Maker! I was the person setting the spreads and profiting simply from the spread.  Only in EVE-Online, the spread per ship was usually a few million to a few hundred million isk depending how expensive the item was, and on the real stock market the spread is literally a penny in most cases.  So I had to remember my old days, when did I change the price on my supply?

I remembered there was usually a decent supply of an item in EVE on the market within a million isk of each other, but every once in a while there was a bit of a lack of supply.  It usually happened when the cluster of supply would be bought out for whatever reason, and then the price would pop up.  This was fairly common, but sorta hard to explain.

Let's do a quick example, let's say that in the Lonetrek Region there was 300 Drakes for sale. They were priced pretty fairly with 10 being up for sale at 25 Mil (the cheap ones out in God knows where), 200 scattered about at 26-27 mil, and 100 scattered around at the 28-29 mil isk range.  Well when the Drakes for sale at the 26-27 million range would run low the price would usually pop up to the higher 28-29 million range before supply would shoot it back down again.  This happens on the stock market as well.

Time To Day Trade

Now comes the tricky part, figuring out the supply and demand of a real stock.  You can try looking at the level 2 and seeing how many shares they have for sale at a specific price.  The problem is market makers lie and manipulate.  If they show a heavy bidder on either side of the bid/ask spread, then it can force the price in the opposite direction.  They usually do a good job masking just how many shares they want or have for sale.

So this is where it gets a bit more difficult.  I knew what I wanted to look for, but I really wasn't sure how to look for it.  I took off all of the indicators, since they are lagging anyways, and focused solely on price action and volume.  It wasn't long before I knew what I was looking for, and it was fairly common! I was looking for a clear resistance line on the chart, the more times that it is tested the better.  As long as the stock has a chance to consolidate before it breaks that resistance line, then it should continue higher at a faster and faster pace until it reaches another source of supply.

It took a bit of trial and error to get this figured out, and it is by no means perfect.  It is not a system because it involves a lot of human interaction and judgement, not some sort of indicator when this line crosses this line and its above the trend line you buy the stock.

The Future and The Results

I've started doing this sort of trading almost every day for the past 3 months (this would be the start of the 4th), and I've had a pretty decent success rate at it.  When I started doing this my first two months weren't too hot.  I was down almost one thousand dollars the first month! The second month I broke even, and in the third I was up two thousand!  In each month I learned to cut my losses early when a stock fails to break out, and I've gotten much better at identifying the patterns.  In each month, I've made more day trades then I did in the month before it.

Well, I want to start up another 30 day challenge sort of blog, like I did with EVE-Online, but this time it will be about the real stock market.  Instead, I will be looking to make it year long thing, or maybe a goal oriented sort of deal.  It would be kinda fun to do a 25,000 to 250,000 challenge, but I haven't decided exactly yet.  I know that I'll probably announce my buys and sells on twitter or something as I make them to prove that it's all legit.  Anyone have any thoughts? Anything anyone would like to see?