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April 6-12, 2003

 

Questions

Answers

Sat, 12 Apr 2003

Circuit Breakers


Ed-


How are you doing? You may recall (me from the) mid-nineties as a trader and that you and I had a protracted fax dialogue concerning the controlled risk plunging techniques I employ in my discretionary bet sizing and trade selection.

I must say your advice and coaching have been invaluable to me over the years. I am forever grateful to the knowledge and wisdom you have passed along to all of us. Thank you for that so much.

As my trading is a constant work in progress I would like your advice on something.

I was thinking of implementing some procedures; call them circuit breakers if you will, to aid me. My questions are two fold:

1. Do you have any thoughts on implanting this type of technique?

2. Do you have any suggestions as to how I could approach calibrating these procedures to compliment the type of ride I take?

Here are the numbers I came up when I looked through my stats. However, I must admit that I did not apply any mathematics when coming up with these.

Circuit Breakers

bullet

Loss limit of up to 5% initial risk or less on every single trade; liquidate trade if breached.

bullet

Loss limit of 12% of total equity on any day; liquidate all positions and stop trading for the rest of the week.

bullet

Loss limit of 25% of total equity per month; liquidate everything and stop until next month.

I am also interested and often entertained with the impressions you have. So please feel free ... comments you may want to make.

Forever grateful for the wisdom you lend.

Hoping to continue to learn and improve.

Warmest regards.

For emotion-intensive trading styles, like plunging, circuit breakers seem to protect the trader as well as the system.

 

Plunger's Helper

 

Clip: www.science-city.com

 

 

Fri, 11 Apr 2003

Tribe Topics

Hello Ed,

As a contact person for one of the remote tribes, I am pleased to report that there is quite a bit of interest out there for joining the Trading Tribe. However the majority of those interested are short term day trader types.

The second and somewhat related question is I believe one of the goals of the trading tribe is to promote personal growth through interaction of the members; Are we strictly focusing on the psychological aspects of trading or are we also exploring trading philosophy, for example an exploration of different styles?

Trading Tribe meetings provide opportunities to resolve personal issues around trading. Discussions focus on feelings.

For example, discipline and rules are central to following trends and also to playing golf; a lot can depend whether a trader views himself as the golfer or the ball.

Discipline with a Club

 

Clip: www.teedoffgolf.com

Fri, 11 Apr 2003

 

Software


George Soros didn't know much about programming. So why would you sometimes put so much emphasis on it? At one FAQ you say "learn some programming ..."

If your premises are correct, and if you want to turn out like George, then avoid learning programming.

George Soros

Clip: http://www.soros.org/gsbio

Fri, 11 Apr 2003


Economics for Trend Followers



The uncertainty of the future is already implied in the very notion of action. That man acts and that the future is uncertain are by no means two independent matters. They are only two different modes of establishing 'one thing'. -Human Action, The Economic Opera of Ludwig Von Mises

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. -Ed

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

As you've mentioned in your answer on Sat, 5 Apr 2003, I agree many current econometric models, which use differential calculus, drift from reality. The history of every branch of knowledge records instances of the misapplication of the calculus of probability proposition about an expected outcome couched in arithmetical terms. You've made clear the affinity of human psychology possess for imaginatively identify an abstract object with another object that can be apprehended directly by the senses.

Many, including trend followers, are dismissive of economics because 1) its dismal history of prediction and 2) the idea that economics in general derives its conclusions from a phony conceptual framework.

For many years, I'd wondered: What exactly constituted Price Action? And what was involved in price formation? Mind you, I wasn't looking to predict, as you refer to it, the none-existing-future.

It seems, in economics, physics and other sciences the fundamental deficiency implied in every quantitative approach consists in the neglect of the fact that there are no constant relations between what are called dimensions. For example, in economics there is neither constancy nor continuity in the valuations and in the formation of price and opinions between various commodities and participants. Every new data brings about a reshuffling of the whole price and opinion structure deeming price action unpredictable. Thus, current econometric models run into all kinds of problems.

And today, economic thinking is broken into many schools of thought: the Keynesians, the Post Keynesians, the New-Keynesians, the Classicals, the New Classicals (or Rational Expectations School), the Monetarists, the Chicago Public Choicers, the Virginia Public Choicers, the Experimentalists, the Game Theorists, the varying branches of Supply Sideism, and on and on it goes….

Also part of this mix, but in many ways apart from and above it is the Austrian School. It is not a field within economics, but an alternative way of looking at the entire science. Whereas other schools rely primarily on idealized mathematical models of the economy, and suggest ways the government can make the world conform (counter-flow), Austrian theory is more realistic and follows the flow of life. As its most basic foundation, Austrian economics accounts for the psychology of perception. Austrians view economics as a dynamic tool for understanding and feeling, how people both cooperate and compete to form price.

If the hallmark of conventional economics is unrealistic models, the hallmark of Austrian economics is a profound appreciation of the price system. Thus Austrian economists point out, it's not necessary for consumers to know, for example, that a disease has swept the cattle population to economize on beef. The price system, by making beef more expensive, informs traders and the public of the appropriate behavior.

For the trend follower, the problem of probability is a primary concern of the study of human conduct: Price Action. Understanding Austrian economics is understanding price action and thus human conduct. It's my experience that one will better be able to understand the nature of price, as well as build stronger confidence, faith and gut-feel not only for price action but also for the systemic biases that inevitably sustain large trends.

Austrian economists utilize praxeological reasoning, which takes into account the categories both of time and of causality. It is an aprioristic and deductive system. It is a system out-of-time with change as one of its elements. Anteriority (occurring before in time; earlier) and consequences are essential concepts of praxeological reasoning.

Time as we measure it by various mechanical devices is always past, and time as the philosophers use this concept is always either past or future. The present is, from these aspects, nothing but an ideal boundary line separating the past from the future. But from the praxeological aspect there is between the past and the future a real extended present. Action is as such in the real present because it utilizes the instant and thus embodies its reality. -Human Action, Ludwig Von Mises

In general, Austrian economics doesn't dwell on one-sided solutions with its many limitations. It focuses on the many interrelated and interconnected elements of psychology and human action. I believe it's in step with gut-feel and the overall truth of the way things are. Nonsensical mathematics not needed.

In the field of economics, Austria produced some of the best theorists; Ludwig Von Mises is representative of a tradition and erroneously known as the father of this school of thought. They've been theorizing regarding human action within the framework of dynamic economic systems for over 150 years.


I would be highly grateful for your comments, in regard to the above.

Different schools justify different political structures. The Austrian School tends to justify Capitalism. None of these schools predict prices very well.

As you seem set on understanding and predicting things, I suggest a puzzle for you: write down a description of your own feelings about how come you want to predict things and send it to FAQ.

If you can't do it, you can stop trying to describe larger systems; if you can, the insight might set you free from your obsession to predict the future.

 

Under-Standing

 

Standing under an F-16, VP Cheney talks with an Air Force pilot in Qatar, March 17.

Clip: www.whitehouse.gov/vicepresident

 

Freedom

Living in the Now

Clip: www.gr8dls.com 

 

Fri, 11 Apr 2003

 

Intentions and Meta-Systems


Ed,

In my previous posting, I asked a question (deliberately seemingly) about psychology. And got an humiliating answer that made me uncomfortable. Uncomfortable, as it was true.

My intention was getting a feedback from you about the meta system approach;
the approach of getting an edge through systems of systems. I think you have discovered my hidden intention of getting an assuring feedback (assuring in a sense that simple systems don't perform well and the competition is in the meta-system level) without revealing this concept to the other participants of the FAQ.

It's also remarkable of your discovery of my lack of assigning value to people and seeing them as a distraction on my path. Here is a sample from my previous post:

"I read Market Wizards maybe 6-7 years ago in the university library. I was particularly attached to one figure in that book."

There is a book that has made; sorry, I have been very much affected from the market wizards book and still I mention from the book as "that book".

I have a deep belief, especially enforced after the loss due to death or other reasons of a few important people in my life:

THE HIGHEST POINT ONE CAN ACHIEVE IS THE TOTAL LACK OF ASSIGNING VALUE TO
HIS LITTLE PRECIOUS LIFE.

We are, who we are, by a great deal of chance. There is a million cases where
our fathers could not have met our mothers. There is a thousand of cases where our parents could have killed themselves before we were born.

So, I pose here my question in an open form:

What do you think of analyzing trend following systems like moving average
crossovers or others, with the purpose of designing meta systems?

When you can allow yourself to feel the humiliation directly, you might not have to set up dramatic excuses to justify it.

The best measure of your intention is the result you get.

If you assemble systems into a meta-system, then the meta-system is your new system.

Meta-System: Volvox

Volvox is a spherical colony of green cells clinging to a semi-transparent hollow ball of mucilage. A single colony may consist of over 500 cells, each one with a tiny pair of whip-like tails (flagella). All cells undulate their flagella in unison, propelling the colony through the water. 

 

Clip: © Ken Jones

Fri, 11 Apr 2003

 

True Beliefs

Hi Ed,


How can I recognize if my beliefs are true.
Thanks for the guidance.

To find out if your belief is true or false, you have to compare it to a standard; if you want your belief to be true, find someone who agrees with you.

Charles K. Johnson

 

"The facts are simple," says Charles K. Johnson, president of the International Flat Earth Research Society. "The earth is flat."

Photo: www.lhup.edu/~dsimanek/fe-scidi.htm

Thu, 10 Apr 2003

Getting It

Hello Ed,

Regarding my April 8th question on gaps. My sentence that you highlighted and your response helped me to me see something more clearly.

My trying to guess the future caused me to sell a certain stock. If I held on to the stock I would have made a 500% gain from November 6th 2002 until March 2003.

The stock was CELL. My preconceived opinion made me sell the stock several days after I bought it at about $3.50 per share on November 6th. I bought it because it gapped up and looked like a new trend might be forming. I should have let the trend tell me what to do but I have always heard "most gaps get filled". I need to be more in the present with my trading and get rid of my prediction type ideas.


Well I don't know if it is the market or this clarification you have helped me with, but I have been pulling the trigger a little more when it comes to buying stocks lately.

Wait it is the present change of trend in the stocks not clarification or anything else ... Caught myself that time. Man I have to stay in the present!

I just bought DCLK, EQT, EVG, ITXC, and USAI today. I was thinking USAI will outperform the other stocks as I was writing this. I still have to get rid of my notion that USAI will outperform the other stocks.

I really have no idea what stock will perform the best or the worst. They all could go down and cost me money. I should just follow the trend..... Old habits are hard to break!

Things are getting too clear now. Oh my God I might be a successful trader / investor! There I go again trying to predict. Too awake now ... how will I sleep ... look at charts. Sorry for the mess at the end here ... its just me hopefully getting better. Thank You

Trend following systems that use stops automatically stay in in the now moment and react just when the trend changes.

 

 

 

George Ivanovitch Gurdjieff

(1872-1949)

 

 

 

P. D.  Ouspensky

(1878–1947)

 

Gurdjieff and his student, Ouspensky use various ways to remember to stay in the now, like alarm clocks.

 


Photos: www.gurdjieff.org 

Thu, 10 Apr 2003

Book


When will your book be published?

Already publishing, a little at a time.

Incremental Interactive Publishing

Thu, 10 Apr 2003

LA


Hello Ed,


I would like to form a group in Los Angeles.

 

LA !

Welcome! 

You are in the Directory.

 

 

Los Angeles

Map: www.yahoo.com

Thu, 10 Apr 2003

 

Hooked on FAQ


hi ed


I hope it's healthy to be hooked on FAQ.

So do I.

To get off the hook, go with the flow.

 

Clip: www.vmchooks.com/perfection.html

Thu, 10 Apr 2003


More on Tribe Theory

Ed,

I am enjoying your website immensely - the insight, the humour & of course the tales of your extraordinary success. If I understand it correctly, you place great emphasis on a trader exploring in depth the so-called 'negative' feelings to reveal their positive intention, thereby making the experience of such feelings supportive, rather than destructive, to the trader's environment.

I would be very grateful for any further examples you might care to publish both of Tribe transcripts and your teaching, as I continue to work on the psychological challenges of trading. I live in Europe and do not presently choose to fly to the US on a regular basis.

I trade commodities EOD & YM intraday, always looking to go with the trend. Some trends, like currents in the sea, are weaker than others, but can still be profitable...

Come over here & I'll take you out for some wonderful food !

PS. Your FAQ reminds me constantly of the NLP maxim "The meaning of the
communication is the response that it elicits". Wonderful stuff !

Yes, you seem to have the theory correctly. Still, the difference between that and mastery is, well, something like the difference between sex-manual and sex.

 

 

Educational Art

Japanese Edo period, 1600-1868

 

The Kinsey Institute (The Institute for Sex Research) has around 20,000 books of all sorts as does the British Museum. The Vatican Library tops them all with something like 25,000 volumes.

 

Clip:

www.world-sex-records.com/sex-155.htm

Thu, 10 Apr 2003

 

Volatility


Dear Ed Seykota,

As far as I understand, volatility is a big concern for a trend follower.

I want to know how do you measure volatility in your system. Is moving averages enough for you or do you use some other filters for this. Regards.

No matter what kind of math you use, you wind up measuring volatility with your gut.

 

Volatility Detector

 

Clip: www.gutfeelings.com/stomach.html

Thu, 10 Apr 2003


Drawdowns of Losing Systems

Dear Ed, 


As perhaps many traders, I feel some pain when I lose on a trade. The pain is far more intensified if I have a string of losing trades.

 

At first I thought the pain was caused by the loss of money, which made sense since the longer the string of losing trades the more money lost and hence the greater pain.

 

However, on further reflection, I believe the pain is really caused by the thought that my trading system is just not working/has ceased to work rather than losing money (after all, I may just be in a drawdown phase and will recover the money lost in due course).

 

Is it possible to distinguish early between a losing period and a system that does not work? Thanks.

Several feelings might be in play: the feeling of losing money; the feeling of losing faith in you system; the feeling of losing faith in your ability to trade a system; the feeling of not being able to understand your feelings.

Likely it is the same feeling, showing up in several inter-relating dramas.

Rather than start with the dramas,  just jump in to the feeling and start exploring it directly; it tends to explain itself as you reconcile it.

Once you reconcile your feelings you can proceed to trade your system or not, without all the chatter.

Thu, 10 Apr 2003


Un-Reconciled Feelings

see: Studying the Markets

Hi Ed,

Thank you for your insightful response to my inquiry regarding studying the markets. The most important lesson I have learned through this FAQ is the importance of understanding and embracing my emotions. Although I asked a question about studying the markets, you responded with a very perceptive answer regarding my “un-reconciled feelings.” You are correct in that I have a tendency to test boundaries, but I was unaware I was doing it through my email message to you.

I am beginning to see a distinct correlation between my prior life as a tennis player who competed at the division 1 collegiate level and a brief stint on the satellite circuit. My primary weakness then was, as you put it, my tendency to test boundaries. There were times when matches were going my way and I obviously had the correct strategy for my opponent, but I would often times change my strategy, so that the matches would be more of a “challenge.” Although by many accounts, I was a successful tennis player, in terms of reaching my full potential, I did not achieve my external goals…Now, maybe I ultimately received what I wanted out of my tennis experience, but I think I will need additional self-reflection to further clarify this. It is clear now that I was testing not only the boundary of winning vs. losing, but also the boundary with my collegiate coach (authority). I also see that, as was the case in tennis all along, my opponent in trading is my inner self and I must master my feelings and emotions to be successful.

Do you have any recommendations on how to best reconcile my feelings towards “law, authority, forgiveness, permission and justification?” I am dedicated to resolving these issues as part of my still nascent trading education. I appreciate your candid responses.

Embracing feelings can be a good way to resolve them and quiet the need for repeating the drama.

 

Perhaps you might like to join one of the groups in the Directory, or start one of your own.  Also, you might set up some buttons to remind you to honor and explore your feelings.

 

 

Press This Button

Feel the embrace - embrace your feelings.

 

 

 

Button: www.minibite.com

Thu, 10 Apr 2003

FYI Sherry Netherlands Hotel

Ed,

Just FYI - I recall reading in a travel guide when I was visiting New York a couple of years ago that the Sherry Netherlands Hotel was actually demolished and rebuilt (either in its original location or down the road - I don't remember) some time after Jesse Livermore shot himself there. Kind regards.

Jesse Livermore evidently killed himself in the hat check room.

Extreme Risk Control: Remove Trader

Clip: www.reiss.dk

Thu, 10 Apr 2003

 

A Poem


On FAQ a trader gets
All these little cute vignettes

Traders come and traders go
Wanting to know how to trade successfully so

They trade technical indicators, formulas, and physics
And when it does not work out they ask Ed which keeps him quite busy

They think that trading endless indicators and averages will get them ahead
When they should be trading simple price instead

How do we trade price they want to know?
Look with your eyes, and go with the flow

What is a trend they want to know?
It is the continuous breakout of a previous high or low!

Why do the traders want to analyze, what will be will be
Accept price for what it is, and be happy and free!

I can hardly wait for the rock video.

 

 

 

Eminem as Ed

 

It pays to get crude at the right time.

Wed, 9 Apr 2003


Article / Tribe

I read an interesting article and I like the part about Glenn Gould.

I look forward to attending my first group meeting, in Toronto, next week.

I wonder if you, too, play the piano with two radios going.

 

 

Playing Piano and Trading

Both require patience, practice and development of your own unique style.

 

Bench: www.pianoworld.com

Wed, 9 Apr 2003

 

Heads and Tails

Dear Ed,

I continue to enjoy reading your FAQ pages. I learn something new every update.

Two more questions:

1) I assert that trend-following, like any positive-expectation methodology, is predictive in a broad sense. Even though I don't know whether or not an initial movement in price will lead to a profitable trade, the kurtosis (fat tails) of financial markets will eventually reward me with large gains that offset smaller losses. In other words, if the market returns were random and normally distributed, then trend-following will not work. Comments?

2) I see a paradox in the Richard Dennis story, where a group of different people are taught essentially the same trading method and go on to make huge profits. Doesn't this story call into question the oft - quoted piece of advice to "think independently" and "don't follow someone else's system-you'll never stick to it?"

Thanks for listening.

Life is not random.  Living organisms decrease entropy (randomness) internally by increasing it externally.

Following someone's system doesn't work ... following trends does.

Thinking independently, dependently, co-dependently or inter-dependently all seem fairly unrelated to profits, as long as you don't do enough of it to out-think a good trend.

Normal Gaussian Distribution

Leptokurtic distributions have long thin tails, Platykurtic distributions have short flat tails, Mesokurtic distributions are normal, and give normal Trend Followers normal whipsaws.

Date: Wed, 9 Apr 2003

Simulation software

Hi,

I have read some of the FAQ contents on your site. I find them very interesting and often entertaining.

I am an EE with a background in modeling of dynamic systems.

 

As a side note, I am also making my third foray in trading futures. The first time I fell apart by trading by the seat of my pants after initial "beginner's luck" success. The second attempt was another seat of the pants approach that I thought I needed before developing a mechanical method that I hoped to base on a prediction technique. Then, I bought a trading course course. I am now trading a trend-following breakout system with a false breakout subsystem that is working well for me. My emotions are now under control even through drawdowns.

One of my favorite modeling tools is VisSim, from Visual Solutions ( www.vissim.com  ). You may want to check it out to see if it could be useful for your lift work.

I have not looked into what you are doing, but the general model formulation that VisSim uses is Laplace transform block diagrams. For example, an integrator is a "1/s" block. You can model nonlinear, time-varying dynamic systems quite easily. As far as I can tell from some of the discussion around integral versus derivative model formulations, this package fits the integral formulation.

I tend to naturally think this way from my control system and modeling background and hadn't really thought of the derivative forulation since graduation. In nearly all of my work these days, I rarely write any equations and work directly with the block diagrams instead.

Anyway, I know you don't endorse products on your site but I thought that this could potentially be useful to you.

While simulation models may indicate  behavioral modes, they don't predict very well.

The only computer that models the world accurately, is the world itself; it generates it's own solution in real-time as we ride along, hopefully in the same direction.

 

 

World-Sim 2003

Wed, 9 Apr 2003

 

Activity and Success


I recently visited a friend who is a day trader, he had eight monitors wrapped around his desk, has four computers with dual processes, has a T1 line, Cable modem and a DSL line as a backup. I only stayed for couple of hours, but I must admit after watching him trade for couple of hours I was exhausted!

What a sharp contrast day trading is to what I read about Warren Buffet. Peter Lynch, the famed mutual-fund wizard, visited Buffet in the 1980's and was struck by the tranquility in his inner sanctum. His archives, neatly alphabetized in metal filing cabinets, looked as files did in another era. He had no armies of traders, no rows of monitors, no price charts, no computer.

Why do you think we associate activity with success? Why do you think trend following is so difficult to do?

Trend Following is like being still - both can be boring and lead to dramatic, non-productive activity. Success seems to correlate better with emotional control, people skills and the will  to invest as well as consume.

Eat Some and Plant Some

Don't mess with it while it's growing

and work on your people skills.

Wed, 9 Apr 2003

Studying the Markets

Hi Ed,


Like everyone who contributes or reads the FAQ, I have learned a great deal from your often humorous responses. I am a very beginner trader who is reading and learning as much about the markets as possible.  I recently re-read your interview in the MW book and have a question about one of your comments.

 

You state (excuse the paraphrasing as I don’t have the book in front of me) that one of the reasons for your extraordinary success in the markets is the fact that you continuously study the markets.

 

When you study the markets, are you looking at historical patterns within the different markets or are you learning some of the fundamentals of what drives the price movements those markets?

 

Will you please provide additional insight what it is you are studying or learning from the markets?

 

I understand every trader is different and will often come to different conclusions given the same data set, but it would be helpful for a beginner to sneak a peak into the though process of someone as experienced and successful as you. 

 

Thanks in advance. I look forward to your response.

You mention reading and show you don't read carefully. You ask for an excuse for  paraphrasing, call me fundamentalist and go on to suggest being sneaky is helpful.

These patterns are consistent with boundary testing.

Before you graduate to testing your boundaries with the markets, perhaps you might look within for un-reconciled feelings about law, authority, forgiveness, permission and justification.

Acting these out in the markets can lead to very high-price drama lessons as the markets are not particularly famous for forgiveness.

 

Jesus, Famous for Forgiveness

His Holiness does not appear on the board of directors of any major stock, futures or currency exchange.

Illustration: www.sacredheart.com

Wed, 9 Apr 2003

 

Dynamic Mix Portfolios

see reference

If you've noticed, from the first day, the trend in our back and forth email has been: I 'assume' certain things to be given, you misinterpret the question, then I find myself clarifying, you eventually understanding the question, and the misunderstanding dissolves.

 1) assumption is the mother of screw-ups, nonetheless, its impractical to get into how every word is used within the grander context of every question. thus, miscommunication is easy to come by in the web world. I will do my best to be clear and concise.

2) if you assume, for example, in regard to my question of dynamic mix portfolios, that certain matters such as focusing a portfolio in a trending sector and discriminating tradables to be a basic given requirement, we wouldn't have to deal with the trend of our email exchange that seems to be in place.

Unlike a trade in the market place, at your FAQ: Ideas Exchange, the participants can cooperate to change the trend to their liking.

Indiscriminate: in this question refers to historical volatility as criteria of discrimination. I do not discriminate on tradables that end up in my portfolio based on historical volatility. I discriminate based on leadership, and recent efficiency of movement.

My plan is geared to jump on board the leading sectors and the leaders in those sector.

My portfolio is updated on a rolling basis. I'm looking to get your take on dynamic mix portfolios in general.

Your use of "indiscriminate" might be a bit, well, indiscriminate.  #1-4 are from MS Bookshelf 2002 and #5 is from your email.

 

idis·crim·i·nate adjective

1. Not based on careful distinctions; unselective

2. Random; haphazard

3. Confused; chaotic

4. Unrestrained or wanton; profligate

5. historical volatility as criteria of discrimination

When you take responsibility for communication, interpretation registers intention.

 

Feelings around mis-understandings might hold some clues about using language indiscriminately.

 

 

 

Lucille Ball

Little Miss-Interpretation.

Wed, 09 Apr 2003

Metaphor is Gain

Hello Ed,

I recommended a book recently to a good friend during a tough time of her life. She has benefited from it immensely, and I just ordered a copy for myself.

I notice my trading metaphor has me gaining wisdom and understanding from your site; perhaps most site visitors are there trying to also get what they want from the markets.
Accumulation may have side effects.

Bursting Balloon

Photo: G. A. Trammel

Tue, 8 Apr 2003


Gaps

Dear Ed,

What is the difference between a breakaway gap and a normal gap? I know what my definition of an exhaustion gap is (After a large move or multiple moves in one direction, a stock will gap up on heavy volume usually reversing several days after the gap.). What is your definition of an exhaustion gap also?

Your definition of gap depends on the future. I wonder how you identify one in time to trade it.

Dental Gap

Counting from left to right, you only notice the gap after you pass it.

Tue, 8 Apr 2003

Dynamic Mix Portfolios

Can you please comment on various options of creating indiscriminate dynamic mix portfolios?

Indiscriminate mixing is pretty easy; many random programs work.

Focusing a portfolio on a trending sector takes some discrimination and skill.

Random Art

For The Indiscriminate Collector

Art: www.gs2.sp.cs.cmu.edu/art/random

Tue, 8 Apr 2003

 

The Trader's Window

Greetings Ed,

In the second Market Wizards book, Jack Schwager includes a story regarding a student of jade. This is quoted as having come from one of your writings entitled The Trader's Window. Can you tell me where this piece could be found? Thank you!

The Trader's Window is a book in progress. I am thinking to include some of the FAQ material.

 

 

Jade Altar Bowl (Smithsonian)

Sometimes glassy, sometimes oily.

 

Jadeite (glassy to the touch), a silicate of sodium and aluminum is a pyroxene. Na (Al, Fe) Si2O6Nephrite (oily to the touch) is a silicate of calcium and magnesium belonging to the amphibole group of minerals.

Tue, 8 Apr 2003

 

Changing Views

 


Hello Ed,


I am enjoying my frustration as a feeling. This has allowed my subversive behavior to disappear. Since I acknowledged my intentions were to feel frustration, I have:

1. Hired a tutor to teach me C++.

2. Outlined my system again ... and again.

3. Purchased MS Visual C++.

Because this is a public forum, I would like to clarify: I enjoy taking responsibility for my trading. I always take full responsibility for losses ... as well as profits.

I did not realize my frustration was an excuse to avoid responsibility. The idea that all of my results are intentional has had a profound affect on my behavior. I sort-of believed this before when I read that "everybody gets what they want." Now that I am committed to the idea, it has changed my views on life.

Thanks for everything.

Commitment focuses ability. An Eagle can see a Salmon from miles away and dive directly to it.

 

American Bald Eagle

See ++.

 

Photo: Peter Weber

Tue, 8 Apr 2003


Join Tribe / Interview


Ed, I'd like to apply for The Trading Tribe. Separately, may we interview you for our trading site?

You might examine the difference between "I'd like to apply for the Trading Tribe" and "Here is my application." See if that difference also shows up in your trading. How to join is on the Meetings Page.

 

FAQ encourages traders to examine trading issues, does not make recommendations. See FAQ ground rules.  If you or your readers have issues, send them to FAQ.

 

 

Ready Aim, Aim, Aim ...

Commitment manifests at the release.

 

Photo: www.archery.org

Tue, 8 Apr 2003

Games and Trading


In the NCAA final game, a team dominated by freshmen, beat a team with senior leadership, primarily due to that team's inability to shoot free throws. Any lessons for trading or life? Second, I used to play chess quite a bit. I've read that many successful traders are good at games. Is poker your game? Why the correlation?

In a Trend Following world, reasons are optional.

 

Reasons often accompany the ritual of farming out the guilt, say for betting on the losing team.

 

Reasons don't even have to make sense. For example, Kansas actually  sinks free throws and Syracuse misses two critical ones in the final moments ... curiously, you don't mention a really good reason, namely:  Hinrich's ankle.

 

You might check over your trading to see if you also manufacture reasons for markets that don't behave, rather than deal with losses in a systematic manner.

 

I also notice you like to ask "Why?"  Why is the standard invitation for others to manufacture reasons.

 

 

The RICE System for Ankle Sprain

(Rest, Ice, Compression, Elevation)

Take action and make up reasons later.

 

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Illustration: www.sportsinjuryclinic.net

Mon, 7 Apr 2003

Limit for Mechanical Returns


Hello Mr. Seykota,

I am a systematic trader at XXX Bank in London. I have been trading based solely on models for over ten years, and have a reasonable track record. I have come across your name in various places and I wondered if I might ask you a question?

My subject is the risk/reward profile, Sharpe ratio etc. that is achievable using a systematic approach. My research, on historical simulation, suggests that there is a limit to how 'good' your returns can be for a given market mix. I trade only currencies and interest rate and bond futures. With this mix it is my belief that the maximum Information ratio (Sharpe ratio without the risk free rate) I could attain tops out at 1.2. This implies that I could make average yearly returns of 20% for an annualized volatility of 17%. Under this scenario, the 99% confidence level for my max. yearly drawdown is (20% - (2.33 * 17%)) = 20%.

That means that my potential for loss on the year, and my average yearly return, are the same 1:1!

Yet, when I read the anecdotal evidence (I can't see the track records) some traders (yourself included) manage a considerably higher yearly return, without the need to accommodate such a substantial loss.

I would be most grateful to have you thoughts on this subject.

You results seem consistent with other studies I know for static mix portfolios.

Your fixed currency & debt portfolio misses NASDAQ, petroleum and other recently hot sectors that account for recently hot returns.

I do not know of a way to aim your portfolio at only the hot markets, without resorting to using a trader who has a feel for the market.

Your experience that anecdotal track records have sharply sharper Sharpe Ratios is logical; only the successful stories circulate.

For example www.loser.com has a host yet no demand for content.

 

 

 

Losing May Lead to Growth

Yet Rarely Inspires Marketing

 

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Photo: www.european-schoolprojects.net

Sun, 6 Apr 2003

Newton's Beer


The guy holding the beer is watching the level, not the flow. He's being very careful because he doesn't want to waste any, and more important he doesn't want to make a mess!

 

The little woman is watching because this Bud's for her, which is causing him considerable stress!

 

He realizes that the most efficient way to internalize that beer is straight from the bottle, which would solve his containment problem, lower his risk, and bring the Physics to a level he has understood since high school!

In fizz-ics things are not always as they a beer, even in ice-cool.

Life in the Pour House

 

Sun, 06 Apr 2003

 

Changing Road Conditions

Mr. Seykota,

In one of the Q&As, you mentioned that there is no "best car", but there might
be a "best car" for a person.

After some researching on the popular models and soul searching within, I have
now chosen a car.

However during the back road testing I find out that I need to adjust my driving behavior depending on the road conditions already.

For example, I need to break much sooner going down a steep mountain road
covered with snow, than I would if I were driving on a smooth highway in good
weather.

Adjustment due to road condition seems common sense to me, but I am hearing
several little conflicting voices inside:

1. Yes: I am a road follower with the street smart to adjust to road conditions. Driving needs to be modified based on road conditions and how it slopes. I would just incorporate these factors into my evolving system (car + driver).

2. No: I am a discretionary driver because I overwrite the driving plan. A road follower should have the faith to follow a simple system and stick to them. Popular mechanical systems don't mention the need for such adjustment.

3. May be: I haven't gotten the best car for me yet. When I need to change the
driving style or have to keep on adjusting the car, I should overhaul the car or look for another one (or stop driving until ready).

Please shed some light on my impasse. I feel like getting stuck between "Follow the rules without questions" and "Know when to break the rules".

Your system includes a mechanical part and also an organic emotional part. When you have these in tune with each other driving flows. 

 

Sometimes you can steer with your knees, eat a sandwich, use your cell phone and perform other neocortical tricks; sometimes you go limbic.

 

 

Driver Risk Management Test

The limbic brain engages.

 

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Photo:www.thesierraweb.com