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April 1-5, 2003

 

Questions

Answers

Date: Sat, 5 Apr 2003


Consider the Particles

see Mathematics and Causation

I don't agree with the Newton formulation of cause and effect. Differential equations are pretty descriptive, and the mindset difference you attribute to Newton versus Euler seems forced.

But here is my take on the problem.

The traditional mathematical approach to physical systems to to take an outsider's view and describe the system, then to solve the general equations. The problem with this approach is that it doesn't mesh with our understanding of how the individual particles are reacting (where "particles" can be atoms, gas molecules, people, stock prices, or whatever the system is modeling). In most of the real world, particles are pretty dumb: they simply react to the forces impinging upon them. So a better modeling technique is to model what it looks like from the perspective of the individual particle: take an insider's point of view.

This is what modern swarm theory, automata theory, chaos, complexity, and related approaches are all about. You model the individual, and the rest follows. Our mathematical tools are usually inadequate for this task, which is why most of the really interesting work is being done through simulations. See Wolfram's book. See Johnson's trade book for a popular account of some of this work: Johnson, S. (2001). Emergence: the connected lives of ants, brains, cities, and software. New York: Scribner.

I agree, models that take a view from the outsider can miss the essential behavior of the particles.

 

 

 

Swarm Theory

 

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Illustration: Mike Reed www.winternet.com

Sat, 05 Apr 2003

 

Manhattan

Hello Ed,

I am interested in joining/starting a group here is NYC. I was wondering if you have received other requests from the NYC area?

I have a office which I share with others, its on Broadway and Houston St in Manhattan, in the NE corner of SOHO. This office is available after 6PM if anyone is interested in holding TT meetings, it can probably hold about 6-8 people comfortably.

You are in the Directory.

 

 

Manhattan

 

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Map: www.yahoo.com

Sat, 05 Apr 2003

 

Mathematics and Causation

see The Ones of Things

Mr. Seykota,

I have a Bachelor's degree in Physics and a MSEE, and I have been a professional engineer for 23 years. I have recently started trading, I have read Market Wizards and I find your FAQ very interesting.

Having said that, I must beg to differ with your recent remark that differential calculus "makes no sense". It only makes no sense -to you-, because you do not look at it correctly.

Example: you quote the equation F = dL/dt as the equation representing the flow of liquid into a container. First I start by correcting this to F = K * dL/dt, where K is a conversion constant which depends on the shape of the container. Now, as for your objections:

1) You state that this equation "implies that level causes flow".

Not true. It implies nothing of the kind. An equation implies only one thing, namely equality. This equation says "The rate of change of the level of liquid in the container is proportional to the flow of liquid into the container". Or equivalently, "The flow of liquid into the container is proportional to the rate of change of the liquid level in the container".

I could dump some apples into a basket, and call the number of apples "A". Then I dump some more apples into another basket, and call this number "B". I start counting apples, and I discover that A = B. Does this mean that B caused A? Or that A caused B? No, of course not. Mathematical equations just show equality. Cause and effect is not an issue.

2) You state "there is no way to exactly measure the instantaneous rate of change".

Well this is basically true, but then again there is no way to exactly measure -anything-. Even when you measure the air pressure in your automobile tires, you have to let out a little air in order to do it. The quantity dL/dt can be measured just as accurately as anything else can be measured. I can write dL/dt = 1/K * F, and then dL/dt can be measured as accurately as F can be measured.

I even think you might be tempted to like the second form of this equation better than the first one, because you might think it says that "the change in level is caused by the flow". I caution you that this would also be an incorrect interpretation, for the same reason as above.

3) You then state that the equation L = Lo + R * dt makes more sense.

But, what is R? Like it or not, R is simply dL/dt. You have not gotten away from the instantaneous rate of change, you have merely disguised it.

4. I find it strange that while you do not look for causality to do your trading (fundamentalists do that) yet you insist on looking for it in your calculus equations. This must say something about the way you view the physical universe as opposed to the universe of trading.

Now having said all that, I want to add that I basically agree with your explanations of lift. The use of the Bernoulli principle to explain airplane wing lift never made sense to me either. Long ago I discovered that the angle of attack is the real issue, and I see that you have also discovered the same thing.

5. A word of advice though. If you really write a paper about this, your SVO-p method of speaking will -not- go over well with academicians. You need to search your paper for all occurrences of "I" (as in "I use the following notational conventions") and change them (i.e. "The following notation conventions are used"). There are a lot of academicians who will simply trashcan your paper as soon as they see "I" anything.

1. Current convention in computation languages puts the arguments on the right and the result on the left.

 

2. Difficulty in measuring flow is deeper than accuracy of equipment. You can measure a level since it exists in the moment of now. Rates disappear a snapshots. To estimate a rate, you have to compare a now memory of a level with the now current value of the level, and then now estimate the rate over the interval.

 

The change in level does not cause the rate, it merely provides a way to estimate its value.

 

3. You can compute a flow rate from it's motivations, such as gravity, viscosity, aperture and pressure ... these are things the guy with the bottle determines.

 

4. I prefer models in which the equations reflect flow-consistency. The levels integrate rates and the rates reflect decisions about the relations between levels. The behavior of the model reflects a continually evolving moment of now, as the elements inter-relate in feedback system. Euler follows this plan.

 

5. My colleague has several successful scientific publications. The caution you suggest about casting the paper into science language is one of our concerns.

 

 

The liquid appears to pour endlessly from the tap suspended in mid-air into the mug below.

 

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Photo: www.copernicustoys.com

Sat, 5 Apr 2003

 

Compass and Small Rooms


Hello Ed,

I keep both the market wizards books in the smallest room of our house and read a section for a few minutes every day! I was wondering who do you admire as a trader, not just for their technical ability but also for their grasp of the trader psychology? Who is your North Star by whom you set your trading compass to? Thanks

Maybe I can publish FAQ on a roll.  I admire many people for many qualities and virtues, and although some have heavenly bodies, I set my trading compass to the markets.

Law of Simultaneous Exhaustion

 

Side by side holder does not, by itself, solve the problem of running out; people draw from the larger roll, so both run out at the same time - unless they are fundamentally different products.

 

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Photo: Don Norman Article

Sat, 5 Apr 2003


The Ones of Things
ref: 10 Mar 2003, Pandora's Box.

I know this is long for the forum; nonetheless, I wanted to share the following with you.

"It's an experience like no other experience I can describe, the best thing that can happen to a scientist, realizing that something that's happened in his or her mind exactly corresponds to something that happens in nature. It's startling every time it occurs. One is surprised that a construct of one's own mind can actually be realized in the honest-to-goodness world out there. A great shock, and a great, great joy."
- Leo Kadanoff

The Ones of Things


Your forum has touched on topics that have occupied humanities consciousness for eternity. This forum is not only theoretically and extremely interesting but melds together many subject matters. I would like to take a step back and look at this forum from a somewhat wider perspective. You have discussed various topics ranging from Psychotherapy & psychology, Money Management & proper trading, Momentum relating both to trading and physics, etc.

There are some subtle points I won't be able to capture very well because of the very nature of the subject matter and space/time restraints. I could be misinterpreted very grossly. Nonetheless, the parallels which I would like to draw between the topics that you have presented, the view of the world (ultimate reality) given by modern physics, System Dynamics & Chaos, and that given by the mystics (religious philosophies of Hinduism, Buddhism and Taoism) and the view of the markets given by Trend Followers as you've presented are similar.

 

I've always felt and believed intuitively that not only that all of these fields of inquiry are related but also that everything flowed. (One of my mentors Fritjof Capra presented some of these ideas in his writings, which you're probably familiar with.)

Scientists want to understand the ultimate reality and express or explain them through equations and models, while the spiritualists want to understand by attaining the same through meditation. It is difficult to make a comparison between an exact science and spiritual disciplines. The former are expressed in highly sophisticated language of mathematics, while the spiritual disciplines are mainly based on meditation insisting on the fact that their insights cannot be communicated verbally and do not emphasize on expressing or talking about it *see below. As Fritjof Capra pointed out this problem is solved by addressing the issues of the "nature of knowledge'' and the "language in which this knowledge is expressed''.

Science as we know belongs to the realm of rational knowledge. The eastern mystics insist on the fact that the ultimate reality can never be an object of reasoning or of demonstrable knowledge. This is so because; it lies beyond the realms of the senses and of the intellect from which our words and concepts are derived.


The second issue, as you've pointed out, is the language of expressing that knowledge, through our common verbal day-to-day language, including the language of mathematics and the various limitations it produces.

 

I now fully believe as traders and as people, pure dependence on rationalization breeds difficult abstractions. The issue of rationality to the eastern philosophers is less extreme; they are effortlessly able to give into the flow.

I would postulate that besides your trading experience, because of your love for physics and engineering, the nature of atoms might have played a part in your realization that our common language is not only inaccurate, but also totally inadequate to describe not only the atomic and subatomic reality but also our trading experiences.

 

Quantum theory and relativity theory have made it clear that reality transcends classical logic and that we cannot talk about it in ordinary language. I would like to note down three quotes, one from D. T Suzuki, a philosopher of Buddhism and another one by W. Hinesburg, an atomic physicist and one from you.

"The contradiction so puzzling to the ordinary way of thinking comes from the fact that we have to use language to communicate our inner experience which in its very nature transcends linguistics'' - D. T Suzuki.

"The problems of language here are really serious. We wish to speak in some way about the structure of the atoms... But we cannot speak about atoms in ordinary language'' - W. Heisenberg.

"How long is the present moment? Try to substitute another word for "long" in your question, one that actually describes a property of the present ... and you may notice you have no such word''. - Ed Seykota

I have absorbed from you and else where that mathematics is nothing but an abstracted and compressed language. Many mathematicians and traders believe that mathematics is not just a language to describe nature, but is inherent both in the markets and in nature.

 

However, in the Eastern view, mathematics with its highly differentiated and well-defined structure must be seen as part of our conceptual map and not as a feature of reality itself.

 

A line of thought that runs parallel with your view. Fritjof Capra points out that the predictions or explanations given by Einstein's theory are not so accurate. This is where Quantum theory fits in. It seems there was a contradiction between the particle and wave nature of matter and it was solved in a completely unexpected way, which called in question the very foundation of the mechanistic world view-the concept of the reality of matter. At sub atomic level, matter does not exist with certainty at definite places, but rather shows 'tendencies to exist' and similarly atomic events shows 'tendencies to occur'. In Quantum theory these tendencies are expressed in terms of probabilities. All the laws of atomic physics are expressed in terms of probabilities. The authors point regarding Quantum theory reveals the basic "oneness of the universe."

This Forum has reinforced my personally held world-views, namely, the futility of deterministic approaches, the absolute basic ones of the universe, and that scientific inquiry, and the wisdom of seeking truth through mediation, contemplation and "honoring feelings." In the framework you've presented, I find honoring feelings resolves tension and creates harmony.

"Philosophies based on going with the flow, taking responsibility and realizing things are about as important as you make them ... seem well suited for trend following. Serving others seems to help with staying in balance.'' - Ed

As I mentioned earlier it's impractical to mention every relationship and parallel relation between Eastern philosophy, western science, and Trend Following. As a last example:

Non-action does not mean doing nothing and keeping silent. Let everything be allowed to do what it naturally does, so that its nature will be satisfied. - quotation from the "Chuang-Tzu"

While it's good to use your head to enter and exit trades, you make the big money using your other end ... sitting tight on winning positions ... and sitting out choppy markets. - Ed

In this note, I'm merely attempting to point out the parallels between Trend Following, Modern Science and the Eastern Mysticism. I do not suggest any directions from which a trader could work towards. But the emphasis is on the parallels and their profound implications on trading (and personally, spiritual growth).

Thank you for reinforcing my beliefs and in the process find a better fitting hat.

*I agree with your advise below, and I've heeded the advise. Verbalizing and talking about it in the manner you have laid out with emphasis of SVO-p language is extremely helpful and constructive for spiritual growth and trading performance.

"If you don't include the organic part with your system design, it may very well include itself later, during actual trading, with surprising results''. -Ed

PS. I'm neither a scientist nor a physicist. I'm a student of Philosophy, and a Trader.

The differences between Trend following and Fundamental analysis seem to extend  into philosophy and language.

For example, consider filling up a glass of beer.

Since Isaac Newton (1643-1727), physicists tend to describe this event as a differential equation.

F = d(L)/dt

The Flow Rate (F) into the glass is equal to the instantaneous rate of change of the level (L) in the glass.

While, in theory, this is correct, the implication of the equal sign can be  misleading. An equal sign can be a test for equality, and in this sense the equation is true. An equal sign, however, can also indicate sequence, and computers compute the term on the left from the term on the right.

This L <-- R sequence has problems:

It  runs against experience in which the Level motivates the guy holding the bottle to vary the Rate, and the Rate integrates into the Level.

There is no such thing a single cause for the event; all the elements interact in a feedback system to produce behavior.

While we can measure a level (with a ruler of a scale) we can not measure a rate of change. We have to estimate it, by comparing levels; trend followers measure trend by comparing moving averages. Such methods result in a delay.

If one differential equation runs counter to gut feel, systems with  many become so intuitively obscure that gut understanding is impossible.

Leonhard Euler (1707 - 1783) uses a much more intuitive (pro-flow) mathematical language, the Integral Calculus, with step-wise solution.

His equations all go with the flow of life and make intuitive sense.

L = L0 + R * dt

R = (Ld - L )/ T

Here, the Level in the glass (L) is the original (L0) plus the change in the level that occurs over a computation interval (dt). The flow integrates into the Level; this math follows the flow of life and soothes the gut.

The second equation, shows the Rate is, for example, the difference between the Level and the Desired Level, divided by the adjustment time, T.  If you simulate this system, per Euler, you get the level rising asymptotically to the top. You can perform this calculation on a spreadsheet.

Many current econometric models, use differential calculus, have little accountability to gut understanding and drift from reality.

Differential calculus is counter-flow while Integral calculus follows the flow of life. Differential calculus obscures rather that illuminates understanding. Integral calculus supports gut understanding.

This applies, even in physics. A popular theory of lift in fluid dynamics follows what I feel is a mis-application of Bernoulli's Principle. It misleads us to think that a Rate (fluid velocity) causes lift. A model of lift based on Euler's method correctly associates lift with the degree of radial expansion of the fluid.

As a test of these methodologies, I am currently collaborating with a very bright Russian scientist on a paper about cavitation effects  I notice in the levitator. He uses differential calculus, I use integral. Somewhere along the line, we have to reconcile  deeply different viewpoints in order to publish.  I am enjoying riding along the interface.

 

Fri, 4 Apr 2003

 

When all else fails ... use Depends.

see reference

Ed,

As an active Trading Tribe member I must confess that in my limited research & back testing I find that Depends are useful during Limit moves against me - as a special "stop" order when my system fails.

Also, useful for protecting shorts.

Dollar Shorts

Fri, 4 Apr 2003

 

Pit vs After Hours Electronic Access


Dear Mr. Seykota,

I really enjoy this website, lots of thought provoking comments. I have a question for you that I believe would help me understand the mechanics of futures trading.

There are many futures markets that trade both in the "Pit" and after hours via "Electronic Access". Since we live and trade in a global World, it seems many important price moves may happen after normal pit traded hours.

 

If I have a certain price level at which I want to enter a trade, should I place the trade in the after hours electronic access market? Or place the trade in the regular pit traded market? Or Both?

Pit trading tends to be more liquid while electronic markets tends to be a bit thinner.  Big moves with high volume can occur in both.

You are in a better position to answer a question about what you "should" do, since you know what you want to accomplish, what market(s) you track and what type of order you like to enter.

6, double, 5, at 4 ...

A large trader dominates the Pit at the La Brea Tar Exchange, then gets stuck with his position, while another trader looks on, awaiting a chance to get in lower.

Fri, 04 Apr 2003

Turtle Trader Program

Ed,

What do you think about the TurtleTrader program for sale. You are talked about quite a bit in it. Is it worth the money? Thanks.

A thing is worth what the buyer pays the seller. 

The TurtleTrader site provides a lot of trader-related material, and links to other sites; it seems to keep evolving and improving.

FAQ does not endorse products. See FAQ policies.

The best traders, and the best trading courses all seem to be works in progress.

Fri, 4 Apr 2003

 

The Long and the Short of It

 

Ed Seykota,


Some money management systems attempt to balance Long Positions Vs Short Positions, or Long Risk Vs Short Risk, or Long Group Risk Vs Short Group Risk.

 

Assuming that I have no correlating markets (positive or negative) in position, is there a negative effect of carrying all longs or all shorts in a given group or multiple groups?
Thank You.

Balancing positions is less important that making sure positions are trending in your favor.

If you have as much long as short, and all your positions move 50% in your direction, you wind up with three times as much long as short. 

If your positions correlate closely, you do not enjoy the benefit of diversification.

Trend Trader, seeing he has a profit on his stock, puts on an Oklahoma Hedge ... he doubles his position.

Fri, 4 Apr 2003

 

Orange / Rockland  New York



Thank you for your insight. Thanks for everything. I am off to sleep now. I will digest my new FAQ when I wake. Or maybe while I sleep ... all results are intentional ...

Thanks again.

Deep learning seems to integrate during deep sleep.

Trend Trader has sweet dreams about never-ending trends ... until his broker calls and wakes him up with a fill on his stop.

Date: Fri, 4 Apr

 

Stop The Losses


Dear Ed Seykota,

1. I want to ask you something about stop-losses. Let us say that you initiate a position at 20.00 and put your stop-loss order at 18.00. After you get the position the market starts to go down and now it is at 19.00. Do you start to unload some of your position at this level or do you wait till the market goes to 18.00 in order to leave this position.

 

In my opinion waiting till the market reaches to 18.00 is against the logic of trend following. Because in that way you predict that the market would not go to 18.00 which means to apply fundamental analysis to trend following.

 

Is my logic correct or should I wait till my stop loss is hit as one of the most important rules of trading is do not break your rules once you have decided your stop-loss points.

2. After your advice about living the "now" moment, my trading has started to become less stressful. Your another important advice of creating your own metaphor about trading in line with your psychology has added value both to my trading and my life.

Thanks for your help.

Regards.


Your top loss placement flows from your trend trading system.  If you follow it, you eventually stop your positions out.

If you apply hybrid fundamental - trend thinking to your system, you come up with interesting conundrums, like viewing the distance between the market price and the stop as a virtual "prediction" that the "future" price "will not"  hit the stop.

Traders with unresolved regret typically play mental games of second guess and shoulda - woulda - coulda ... in order to justify their feelings.

As you come to terms with regret, and discover its positive intention, you can release the chatter and simply follow your system, or not.

 

I coulda had a V8

Hybrid Trader sees the price at V3 and has a stop at V2. He over rides his system and sells at V3, and then watches it go right on up to V11. His system eventually woulda stopped him out at V8.

Thu, 3 Apr 2003


The importance of entry?

There are many important tools to a trader including ...

- money management
- dealing with  emotions and feelings
- the long-term trend
- the chart pattern
- the entry
- etc etc etc

Is "the entry" of the strategy more or less important than everything else? Thanks.

The entry is a big concern before it happens, a small concern thereafter.

A lot of the experience depends on which end faces you.

Thu, 3 Apr 2003


Application to Attend

see previous

Dear Mr. Seykota,

My understanding of the Trading Tribe is a group of men and women come together with common goals in mind. The Trading Tribe does not focus on the individual person's system and the positives or negative there within, but focuses on the emotional aspects of trading and life. The individual occupying the hot seat is prepared to bring forth to the group a problem with his trading, and the group listens and will share his feelings. I will not ask him questions, I will instead share his concerns with him and help him to work through his feeling.

I believe in my system of trend following, and have had much success with my trading. I have also experienced discretionary failures due to my lack of confidence in my system at random times. For example, maybe I am long crude oil and I have a feeling that I must liquidate a winning position because of war concerns and the inevitable decrease in prices coming, thereby costing myself thousands of dollars in profits. I come up with these scenarios more often than I would like and have trouble 'celebrating' my thoughts.

I do believe that by helping others overcome there apprehensions and concerns I could also better understand myself and where my fears come from. I believe I could be a valued participant of the Trading Tribe. This is something I want to participate in, so I will commit to flying out to Lake Tahoe every two weeks since attendance policy deems so, and other members depend on my consistent attendance. Thank you.

"I will commit" is placing the act into the non-existent future. "I commit" is something we can take to the bank.  SVO-p syntax forces clarity.

Some other members are calling you to help clarify your intentions to commute to Nevada from Georgia on a regular basis.

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Feelings to buy or sell do not come from the war or from the war ending; they come from your gut.

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Good Fundamental Analysts have a grip on all factors that might effect the price of oil, from the well head to the whale head.

Oil: A Whale of A Market

The name  Physeter macrocephalus  refers to the Sperm Whale's large head. It has a very large brain, up to 20 pounds. Many Sperm Whales therefore become excellent Fundamentalists, a possible factor in their decline as a species.

The case, the largest organ in the head, contains straw-colored oily wax called spermaceti or case oil. Below the case is a tissue-filled junk chamber that also contains high grade spermaceti oil. Whale oil serves as a illuminant in lamps and as candle wax.

Over a span of 35 years embracing the Civil War, whale oil ranges from 30 1/2¢ per gallon to $1.92.

 

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Photo and Information:

Samuel T. Pees www.oilhistory.com

Thu, 3 Apr 2003

 

Have What it Takes


Dear Mr. Seykota,

I would like to attend the Trading Tribe meetings of April 24 and May 8 (possibly the April 10th meeting). I have read your site and believe I have what it takes to be a quality member of the Trading Tribe. I will be flying in from Atlanta, and I am willing to make the fortnightly commitment to the Trading Tribe as often as possible. Thank you.

If you intend to attend, follow the instructions on the Directory page.  Following instructions can provide good practice for following your system, following a trend, even following a cam if you can take the stress.

Cam Follower

Thu, 3 Apr 2003

 

Coordinator Appears for

Orange and Rockland County NY



Thanks Ed.

Reading my post on FAQ has clarified much of my concern. I am learning to experience my regrets directly and joyously. It feels awkward to enjoy sadness. Although It can be a wonderful feeling. Many great works of art have been created through the expression of sadness and regret.

I am working on my use of SVO-p. Are there any good references you could recommend? I find the use of SVO-p clarifies my feelings and expressions. It also provides me more confidence to express my feelings.

I find myself setting barriers to my success. I allow myself to get close to completing a goal and then I will sabotage myself. I have noticed it many times. For example, I run my system off of Trading Recipes. It is a great tool and has provided me with enough confidence to start trading. It lacks much of what I am looking to test (portfolio rebalancing and optimal heat parameters) now that I am actively trading. I am frustrated by computer programming. It overwhelms me.

I have a general knowledge of programming. I am studying C++. I gave up for a while because I relocated. Now when I go to put code down I get frustrated and abandon the project. I thought about taking a programming class. It has been about 5 months and I have not followed up on this. I have made attempts to outsource the programming. I find I am not comfortable with that.

All I need to do is learn to program. I understand and have written down the working parts of my system. I have applied the system in real-time with good results. The quality of my life would improve immensely if I were to develop my own system testing engine.

If we live in the now, can we learn from our mistakes? Do we still make mistakes?

I will be the contact person for a group in Orange & Rockland county, NY. I promise not to sabotage that.

Thanks again.

You are on-line in the Directory.

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In the Trading Tribe, there are no errors, mistakes or accidents.

In an un-responsive system, in which people avoid taking responsibility, an error is an act that unintentionally deviates from what is correct.

In a responsive system, in which people take responsibility, you can tell intentions by results; all results are intentional; errors do not exist.

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Mistake or Intention?

Educational researchers at the University of Saskatchewan chose this logo to symbolize cooperative learning. It appears on each page of the printed materials they designed to encourage healthy dynamics within cooperative groups. If this diagram is symbolic of the results of three students working together, the cooperative learning isn't dynamic, but static — at a complete standstill. The gears bind and can't turn.

See Mistakes and Intentions on Links Page

Thu, 3 Apr 2003

What Is Is

Do you know what the meaning of  "is" is?


High sources say it all depends on your meaning.

Depends

Executives and Interns, young and old, endow their garments with lots of meaning.

Thu, 3 Apr 2003

How "long" is Now?


Ed,

Some physicists and/or mathematicians theorize that there are an infinite number of "points" between two moments in time. If I were to walk across the room, I would have to cover an infinite number of points between point A and point B. If there are an infinite number of points, wouldn't it take an infinite number of increments of time?

Yet, in practice, it does not.

In theory, there is no difference between theory and practice. In practice, there is, especially in trading.

Halves and Halve-Nots

The mathematician knows that he would have to halve the distance between himself and his girl an infinite number of times to reach her, and gives up. The engineer knows he can soon get close enough for all practical purposes.

Thu, 3 Apr 2003

OPM

Hello Ed,

What are your thoughts on managing other peoples money? Some traders who after grazing in the dry wilderness of losses, finally make it to the greener profitable pastors; then they start thinking of ways to milk their rich relatives friends for some money. They usually start a friends & family fund and then move on to more structured hedge fund & commodity pool, they get their monthly results published at some hedge fund web site for the world to see.

I recall from your Market Wizards interview, you had mentioned that your investors have a measurable effect on your psyche. I'd like to hear your thoughts if you feel its worth pursing the money management business?.

You might like to examine how you view your clients before you take them on.  Some need a lot of care and feeding, and can kick. Also, find out how they view you.

Got Cookies?

Thu, 3 Apr 2003

Hi Ed,

Is every human being who has ever lived a trader? Is every living thing a trader?

 

A Trade is an exchange of one thing for another. Your body trades 

CO2 carbon dioxide / O2 oxygen

with the plant kingdom. Both enter this trade to stay alive. In society you exchange goods and services with others to stay alive.

You manage most trading naturally, automatically, on your feelings and on going with the trend, without trying to figure it all out.

Hardly anyone uses fundamental analysis to manage breathing, eating, or commerce in their community.

In some areas, like trading stocks, people try to apply fundamental analysis, to figure it all out, and get into trouble.

Even Anvils Follow Trends

Fundamental Trader notices an anvil falling out of a window, right above him. He makes some quick stochastic calculations, and decides it's going to turn around and go back up. Luckily, he lives in a world of cartoon physics, so he quickly recovers.

Wed, 2 Apr 2003

Now

How long is the present moment?

You want to apply a measure of length (long, short, near, far, one foot) to quantify the ever-evolving infinite moment of now. 

 

Try to substitute another word for "long" in your question, one that actually describes a property of the present ... and you may notice you have no such word. 

 

Western Culture believes in Linear Causality. Fundamentalists believe there must be some logical way to link the past and the future.

I have seen no evidence of success  accessing the past or the future. Nor have I seen any direct measurements of time. Clocks show position of the hands or a number. None of them show any actual stuff you could identify as time.

 

Staying in the now supports trend following.

 

 

The Cheshire Cat


I wish you wouldn’t keep appearing and vanishing so suddenly; you make one quite giddy!" “All right,” said the Cat; and this time it vanished quite slowly, beginning with the end of the tail, and ending with the grin, which remained some time after the rest of it had gone. - from Alice in Wonderland, by Lewis Carrol

Wed, 2 Apr 2003

Pat Hearne


Ed,

You da' man. Trading isn't that hard. Follow a plan, cut losses, ride winners, always think you can win. And you will ...

Pat

P.S.

I think I am the reincarnation of Pat Hearne from Reminiscences. My method is sound and I win and that's all that matters.

You may differ from Pat Hearne. I don't recall him thinking himself anyone's reincarnation.

 

 

From Reminiscences

I recollect Pat Hearne. Ever hear of him? Well, he was a very well-known sporting man and he had an account with us. Clever chap and nervy. He made money in stocks, and that made people ask him for advice. He would never give any. If they asked him point-blank for his opinion about the wisdom of their commitments he used a favorite race-track maxim of his:

"You can't tell till you bet."

He traded in our office. He would buy one hundred shares of some active stock and when, or if, it went up one per cent he would buy another hundred. On another point's advance, another hundred shares; and so on. He used to say he wasn't playing the game to make money for others and therefore he would put in a stop loss order one point below the price of his last purchase. When the price kept going up he simply moved up his stop with it. On a one per cent reaction he was stopped out. He declared he did not see any sense in losing more than one point, whether it came out of his original margin or out of his paper profits.

"You know, a professional gambler is not looking for long shots, but for sure money. Of course long shots are fine when they come in."

In the stock market Pat wasn't after tips or playing to catch twenty-points-a-week advances, but sure money in sufficient quantity to provide him with a good living. Of all the thousands of outsiders that I have run across in Wall Street, Pat Hearne was the only one who saw in stock speculation merely a game of chance like faro or roulette, but, nevertheless, had the sense to stick to a relatively sound betting method.

Wed, 2 Apr 2003

 

Toronto


Hi Ed,

Thanks again for calling in last night; the group enjoyed the opportunity to put a voice to your name.

I thought you would appreciate a quick overview of the first meeting.

After introducing myself, providing an overview of the agenda and listening to your welcome, we went around the table and had each person introduce themselves and check-in to the meeting. This was very useful and helped to open everyone up as we learned more about one another.

The purpose of the group was defined as follows: “The group intends to help uncover and promote great people within the trading community through positive interaction and member support.” Some of the characteristics of “Great” could include responsibility, integrity, independent thinking, clarity, awareness, confidence, discipline, being at ease.

We then addressed the importance of emotions. I reviewed a few Ed Seykota and Jesse Livermore quotes and I also included the following from my recent reading of Zen Golf:

“When our intention is to avoid embarrassment or protect against making mistakes, we make what we think is a careful swing and try to guide the shot where we want it to go. This prevents us from making a free, full swing and usually produces a poor shot.”

“The more awareness and less judgment that takes place between action and response the better.”

The next step was the hot seat. We reviewed the process and the communication model and worked on understanding the theory of group pacing. We then had one very courageous soul volunteer to take the hot seat as the teacher. He feels anxiety about missing opportunities. Using the present tense, phrasing responses as though you were on the hot seat and avoiding direct questions were the greatest challenges for us. However, with a little practice, we began to witness how the process facilitates expression and understanding. It will be interesting to observe how the hot seat process evolves with further practice and experience.

Finally, we went around the table again and each person checked out of the meeting by giving their thoughts and feelings about the evening. I am grateful for the opportunity to spend time with these traders and look forward to working and growing with them further.

Our next meeting is scheduled for Tuesday April 15th.

Thanks again for all of your help and guidance.l

Congratulations. Sounds like you are off to a flying start. Keep up the good work. Your contact information in on-line.

 

 

All Men are Created Eagle

 

 

 

 

Wed, 2 Apr 2003


Web Site


Dear Ed:

I wonder if you could set up a link for a printer friendly version of your FAQs, so readers could print the Q and As and read them away from the computer.

Thanks.

To print a section of FAQ:

 

select the area you want by left-click and drag

select print

choose (+) print selection.

HP DeskJet 995c

 

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Photo: Hewlett Packard

Wed, 2 Apr 2003

Paths to Now

Dear Ed,

A question then a comment if I may ...

I am starting a project to learn programming which will allow me to accomplish testing that retail software platforms cannot produce at this point. I believe in a previous FAQ post you stated your preference for C++ as your language of choice. Could you give me your opinion on VB. Why you would encourage or discourage its use over C++. Also any pros or cons therein.

I saw you mentioned and spoke to the power of now philosophy and would like to if I may recommend some reading for you or and your FAQ readers? They are two different, almost polar opposite approaches but are nonetheless very interesting. Many of your readers have read these books but perhaps not in how the subject matter applies to trading or the trading life. If my recommendation agrees with you here they are.

The Road Less Traveled by M. Scott Peck – Wonderful book overall. However, the first 60 pages or so define and discuss the different “types of discipline” pain and suffering. Peck tells us how to problem solve using this philosophy where by we first identifying the “type of discipline” that is at the root of our specific and identified problem. Then through pain and suffering we attempt to correct that type of discipline and thus our problem. The theme here is to embrace pain and suffering as a tool to enacting discipline.

The Power of Now by Eckhart Tolle – Very different but quite good. This is a very deep and thought provoking book that in a nut shell says that if you are able to “Live in the now”, for example able to say “there is NOTHING I would rather be doing and there is NO PLACE I would rather be”, a “perfect” state if you will where your essence, your being and you tasks flow without hindrance. In stark contrast to Peck this perfect state of “Now” there is no pain or suffering felt or needed only perfection.

Again thank you for your help and input.

Best regards and good trading.

Depending on your application, you might use Java, C++, VB, Basic, Excel, Calculator, Back of an Envelope,  Pebbles on the Beach, Fingers and Toes.

Define your project and the right tool appears. Questions about the tools indicate uncertainty about the project.

-----------------

Embracing the moment, celebrating the pain, and finding the positive intention, tends to transform pain into wisdom. 

Trying to avoid the bad stuff only tends to institutionalize it, and miss it's positive intention.

If running out of gas is a bad feeling, you might be tempted to put masking tape over your fuel gauge ... and miss out on the positive intention of that information.

Friends used to borrow Mark Oliver's pickup truck and bring it back empty ... after the gas gauge broke, they always returned it with an full tank.

Wed, 2 Apr 2003

Distinctions in Ownership

Concerning the psychology of trading, and one's utility function - I've heard of a technique of money management whereby one tries to maximize returns by risking a conservative percentage of their initial stake, and, if wins occur, they risk a much larger percentage of those, such as Kelly; effectively making a distinction between one's initial stake, and "the market's
money"
.

In a not-unrelated vein, I remember the quote from William Eckhardt "I know of
a few millionaires who started trading with inherited wealth. In each case, they
lost it all because they didn't feel the pain when they were losing
." I'm in a position where I've inherited a chunk of stock, which, of course, ran up and then down in the last 6 years. My feelings were rather ambivalent during the whole episode, whereas the money I've actively traded has occupied much more of my attention, perhaps to its detriment. How do you handle, and perhaps take advantage of, these distinctions of ownership?

 

I half expect some quip here about me sending you some money to think about it ...

You are the only one who knows the difference between your money and market money. 

To the extent it matters to you, it can influence your trading.

If pain helps you address losses, you might consider including it.

Trading Assistant

To Help with Cutting Losses.

Wed, 2 Apr 2003

First Toronto Meeting

Dear Ed:

Thank you for helping us organize the first Toronto meeting. Getting together with similar minded traders is a great idea. I now understand the value in your format, especially the hot seat teaching concept.

Congratulations !

 

The Beat Goes On

Tue, 1 Apr 2003


Trading and Mentoring

Mr. Seykota,

Referring to my first letter to you.  The reason I wrote to him many years ago was to get a mentor. Npoleon Hill's teachings recommend getting mentors who have had proven long term successes in their chosen careers.


Boy do I have to clarify my writing! When I read it on your website I did not like or realize the negativity I conveyed in my second paragraph.


Yes I did manage my losing OVTI trade awfully. I usually cut losses very short and I will not let a big loss happen again.


I was surprised to see you did carefully read my e-mail and that is just what I need. A little time to ask questions and get answers from a mentor.


I think your site could be improved if you put a site map on your website. Your site would be much easier to navigate.


I have a website with my friend. The address is www.universalking.com 
It contains links to our favorite pages. We just thought of what people might need everyday .It is just a fun hobby now and I use some of the chart and business news links to see what is going on ... not that it would make me fight a trend or anything.

Mentoring seems to work well for the mentor as well as the student.

 

One of my mentors, Jay Forrester, was a stickler for clear writing, a sign of clear thinking. Another, Richard Donchian, was not.

 

Thanks for the feedback on site navigation.

 

 

Jay Forrester (1918 -  )



Jay Forrester was born in Climax, Nebraska. His early interest in electricity was spurred by the fact that the family ranch had none. While in high school, he built a wind-driven 12-volt home electrical system using old car parts.

 

In 1949, he invented core memory, the dominant form of computer memory until the late 1970s. He also invented the Whirlwind Computer.

 

He used computer simulations to analyze social systems and predict the implications of different models. His method came to be called "Systems Dynamics."

 

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Photo: MIT

Tue, 1 Apr 2003

 

Portland - Olympia

I am more than willing and able to organize and be the contact person for a group in the Pacific Northwest. Portland or Olympia.

See Directory.

The Great North West

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Map: Yahoo

Tue, 1 Apr 2003

Toronto Meeting

Hi Ed,

I just stumbled across your web site. I live in Toronto and I would like to attend a meeting.


I have to tell you that after having read hundreds of books on trading, meeting hundreds of traders and trading, your comment in the 'Market Wizards' is the best comment, in my opinion: "Traders get what they want". I would add, "just like everything else in life". I also heard that you once responded to a trading seminar participant's question asking how to trade, by holding up a mirror in front of them. I loved that.

The markets are human psychology. The game is trying to understand your own
psychology and the psychology of others that make the market (the game).

I forwarded your email to Toronto, perhaps in time for you to attend.

I wonder if, in your trading, you can find instances of stumbling across trades at the last minute.

 Mirror Mirror

The trick is to become so transparent

you can look into a mirror

without seeing yourself in it.

Tue, 1 Apr 2003


Ed,

What time frame in your opinion is suited for trend following strategies, is trading off the daily charts the optimum time frame? I remember from your market wizard interview that watching the market during the day is like feeding a slot machine all day, do you still hold that opinion?

I know day trading became very popular at the height of the NASDAQ market, however now seems to be loosing its luster. What do you think of swing trading, which is trading of 60 minute charts and holding positions 1-3 days?

Thanks

Price action tends to be fractal; the same patterns show up at all degrees of zooming in and out on the charts.  Transaction costs, however stay the same. So shorter term strategies suffer a higher ratio of transaction costs to gross returns.

Nano Trading

Nano Trader buys at P and doubles up 1/5 of a second later at Q. He feels euphoric during the 1/100 second run up, a little concerned during the 1/100 second collapse down to S and eventually exits with a small profit about 1/4 second later at T. For relaxation, Nano Trader likes to paint Hummingbirds in flight.

Tue, 1 Apr 2003

 
Hello Ed,

 

i have been visiting seykota.com for about a year. I read FAQ each day. I find it to be inspirational, educational, and encouraging. I have been trading actively for about 6 months. I use a long-term breakout system.

my returns have been somewhat volatile due to my lack of diversification ... in the first few months I would often experience the feeling of regret. for example, I had a problem maximizing my risk. instead of matching my risk to the market volatility, I would under-purchase.

When I had my first winning trade I realized what I had done. at first I felt physical symptoms of stress (muscle tightness, sinking feeling in the abdomen). the emotion ate away at me for a few days. I compromised by purchasing as much as I could without overextending myself.

Another trading experience in which I felt regret was a missed breakout. When I would lock in a profit in one market I would take a small risk in another market.

Well, I missed a signal... intentionally. the chart didn't make me comfortable. it had "too many" sharp reactions over the last 2-3 years. but, as I learned in an earlier FAQ. if comfort is what I seek then I should stop trading. so I  did the same as before, purchased as much as I could. This is now the only position I have left from this last movement and could end up being my best performing.

Does the feeling of regret play a role in price movements?  I can see how hope could become despair if a trader does not cut their losses (and then lives with the regret of it). This is not my problem. I enjoy cutting my losses. but, can fear become greed if a trader misses a signal? This is what I believe may have happened. I accepted less profits because of fear. I became greedy in an attempt to play catch-up with the market .. all of this resulting from a feeling of regret.

I have been playing a lot of music since starting my fund. I find it helps me with emotional control and provides me with an outlet for creative impulses.

I have moved from an emote profusely attitude to a what-me-worry attitude with my trading. I find it suits my personality better.

I would also like to suggest a group in Orange County, NY.

Regret is a feeling of sadness about something you wish were different than it is. Many people would agree that missing opportunities can lead to regret.

Some see the opposite is also true.

If you have a chronic pattern of regret, a lot of regret stored up and a judgment that feeling regret is wrong, then you might not be so joyous in your expression of regret.  Indeed, you might only allow yourself the feeling of regret if you have a really good excuse, like missing a market or two, accidentally on purpose.

So, in an interesting way, learning to experience your regret, directly and joyously as a feeling, might reduce your market missings.

Eventually, you might even learn to stay in the now, where neither the past, nor regret about it exists.

 

Missing a Bus Saves Airman’s Mom

Senior Airman Greg Valentine waits several hours on September 11, before learning his family is safe. Valentine says five minutes probably saved his mother's life. "She was running a little late and missed the express bus she usually catches. That meant she  had to get on a regular bus." That bus was subsequently halted and passengers could see smoke rising from the towers. 

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Photo: HQ Air Force Materiel Command Public Affairs Office www.afmc.wpafb.af.mil

Tue, 1 Apr 2003

 

The Grail Within

 

Dear Ed Seykota,

After I read the FAQ materials, I have been able to solve most of the unclear issues in my mind. I want to share them. I hope I am on the right track.

When I read most of the materials about trend following, it has come to me that this is the most logical strategy to apply to the markets. But at the same, I thought if everybody knows the rules of trend following then everybody applies this strategy and the expected benefits of the system would be zero. But now I know that although the rules are known because of investor psychology, (as you say the organic part of the system) the results would be totally different if two traders apply the exactly the same rules about a mechanical system.

This leads me to the conclusion that instead of searching for the grail, if I work on my own psychology (what will be my reactions if I win or lose this or that much amount of money) than I will be on my way to create the positive expectation for the future.

Even identical twins have trouble sticking to the same gum.

 

 

Jayne and Joan Boyd

 

Two identical twin models appeared in a series of 12 chewing gum commercials from 1959 through 1963 playing tennis, riding bicycles, and sliding on toboggans as they touted the company's jingle. When Joan became pregnant in 1963, they were dropped from the campaign. In later years Joan worked as a receptionist in Chicago, while Jayne lived in Beverly Hills with her TV producer husband.

 

A critical and unanswered question: How do twins park their gum.

 

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photo: Wrigley

Tue, 1 Apr 2003

 
Fear of Mathematics

Hi there, Mr. Seykota

You have probably heard this a million times by now, but here it goes...I really admire you and look up to you. You are a real source of inspiration.

You are a math whiz and have no problems with writing programs for trading purposes, such as back-testing, simulations etc. Do you think that people who are not so mathematically inclined are disadvantaged in trading? I don't mean people who are totally illiterate in math, but those who are not so adept.

You have repeatedly made the point that discipline and psychology (plus cutting losses) help a trader. Is it possible to succeed in trading (ie., make profits) if one is not able to understand advanced math? I mean, there are people who can introduce concepts like ATR and other indicators. Even the very concept of money management would never have occurred to a math-dummy like me had I not read about it in books and on the net. And money management is really just simple algebra ...

Just some sharing:
I know my own limitations in math but since I got into trading, I have re-discovered a love for math I never knew I had. I still have incredible difficulties in understanding and applying the concepts but at least I am no longer a math-phobic. If I have an edge at all, it won't be in math, but even learning to like math is an achievement in itself.

Thanks and have a nice day!

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Vanitas vanitatum, dixit Ecclesiastes; vanitas vanitatum, et omnia vanitas. Ecc 1:2

Here is some math you might enjoy:

 

addition - take an amount equal to your account size, and add that to your account size every month for five years.

exponential compounding - increase your account by a fixed percent, every month for five years.

 

 

Your scripture, Ecc. 1:2, that all is vanity, might mean:

 

nothing really matters

everything results from attachments.

 

As you ponder this existential conundrum, you might conclude, like Peggy Lee, that that's all there is ... so we might as well learn math and trade well.

Peggy Lee - Existential Vocalist

Is that all there is? Is that all there is? If that's all there is my friends, then let's keep dancing. Let's break out the booze and have a ball, if that's all, there is.

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photo: www.peggylee.com