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January, 2003

Questions

Replies

Jan 31, 2003

 

Don't post this

 

Just curious about something you wrote.  I would rather you not post this on your web page ...

FAQ enables you to interact with me and with others for free. if you wish a private audience, you might try hiring a consultant.

January 26, 2003

 

Keep the faith or lose the faith

 

I have one question in relation to the difference between faith and rational self-confidence. Question: Many entrepreneurs, visionaries, and/or traders have claimed that having "faith" in themselves was a key element in achieving success and maintaining their visions, especially in the early stages of their careers. Lenard Peikoff told me one should not have "faith" but rather "rational self-confidence". Clearly, the difference lies in ones own references. However, in the absence of objective references, how does one maintain a vision without an element of "whim-taking" or "faith". I would sincerely appreciate any thoughts you might have on this, especially in regards to entrepreneurship.

Faith in a system, rational self-confidence, sense of destiny, divine ordinance, life mission, dedication to a higher purpose, right livelihood ... all describe the feeling of traders for whom trading is not just something they do ... for them, trading is something that does them.  

Note that if you maintain the vision, the vision maintains you, especially during key events like run-ups and draw-downs.

January 24, 2003

 

Give us a real world example

 

Would you be able to display a chart of a recent trend that you traded with entries, additions and exits. Just to give us a real world example. I am trying to gain more knowledge in this area and their aren't many sources on the web. I want to see some alternate views. Any idea on a scheduled release date for your book?

(1) I do not discuss specific trades, in public forum, any more than a doctor might publicly recommend "the right type" of medication. 

When you develop a context of risk management and portfolio selection, compatible with yourself, an appropriate trade timing method will suggest itself.

(2) No date set yet.

January 21, 2003

 

Market Patterns

 

From your interview in the book "Market Wizards," Jack's question: What do you mean, "The stock market behaves differently from the stock market"? Ed's answer: The stock market behaves differently from itself in that easily identifiable patterns seldom exactly repeat.

1) What markets offer patterns that exactly repeat?

2) Is applying a trend following approach to the stock market a mistake, should my efforts be more concentrated on the futures and currencies markets?

3) Have you scheduled any dates for future Trading Tribe meetings? Any idea on costs?

(1) The pattern of suspended, closed and otherwise inactive markets seems rather repetitive and predictable.

(2) You might just be the best source for answers about where to concentrate your efforts. See if you can schedule some time with you, to talk it all over.

(3) No. Lots of ideas appear below.

January 21, 2003

Reversals

I have recently been reading some material on reversal traders... traders that are always long and short because they continuously reverse their positions with the trend. Can you give me your thoughts on the merits of this strategy. Would the strategy be prone to whipsaw losses?

The time constant of the system, such as length of moving average, is more important than whether or not the system reverses.

To avoid whipsaw losses, stop trading.

January 17, 2003

Living through drawdowns

I cannot agree more with you. Its all about knowing how to live through
drawdowns. That's why I am doing all this research after all. Only testing my approach in and out gave me the confidence to trade it in good and in bad times. That's why I wrote my own back testing engine. I wanted to be sure that my systems are robust under various market conditions and that my position sizing will give me a smooth touchdown during drawdowns. I also work myself day by day through portfolio tests to get a feeling for drawdowns. All those tests helped me a lot to remain calm during my last drawdowns. I even enjoy it if my real
drawdowns are similar to my back tests because this means that my
back testing assumptions are right and my trade execution is disciplined.

Good !

January 17, 2003

Presumably One Would Fade the System

I recall your earlier site had a section on Magazine covers, as an indicator of significant turning points.

If a trading signal is generated by a computer tested system, in the direction of the broad consensus ( i.e. magazine covers ) presumably one would fade the system generated signal. Wouldn't this then alter the back-tested system's performance, as well as the theoretical drawdowns ?

Do these interventions validate your trading rule - 'Know when to break the rules ...' ?

I wonder how to back-test your presumption.

January 16, 2003

Trading tips

Set stops.
Determine how much heat you can take.
Sell until you are comfortable with the size.
Don't buy what others think is good.
If you are not comfortable with the chart, move on.
Just because a stock is down a lot doesn't mean it's a good bargain.
If you want to buy, buy with a meaningful size.

I figured I was putting on 1-2% positions which were not meaningful enough. Now I try for 5% positions.

Sounds about right.

January 16, 2003

 

Ongoing Relationships More Meaningful

 

First, while a few hot dates are always a lot of fun, I have always found an ongoing relationship to be more meaningful. Thus, rather than two weekends and a follow-up, I vote for something longer-term. Paying a monthly or quarterly fee determined by the market sounds reasonable to me.

Second, What would you consider to be your most influential beliefs?

(1) I agree. That is the basis of the original Trading Tribe.

(2) I prefer influential beliefs to believing in influentials.

January 16, 2003

Does Not Like Very Much Heat

I understand that Tom Basso does not like very much heat (25% drawdowns max). Am I correct?. Still my portfolio would not have a drawdown bigger than 25% even if my portfolio risk is around 50% and my position risk is at max 5%. Those numbers have no linear dependency. It all depends on your approach, systems and so on. I've almost given up on trying to explain this to anyone via email since I get the feeling that my English is not sufficient enough to make things clear. All the peaces of the trading puzzle together are responsible for max drawdown and the probability of it, not just the portfolio or position risk.

Just don't try to take anyone's numbers for yourself (even if those people are market wizards). Run portfolio tests and monte carlo simulations to find your own optimum for your heat acceptance.

Arguing about how to estimate drawdowns is no substitute for knowing how to live through them.

January 15, 2003

Current Trading Strategy

I respectfully request if you could provide your insight into my current trading strategy. I am a pilot in "real life" and trader at night.

I currently use a 1/20 day SMA, plus OBV, plus RSI (all set to 20 days) to determine when trends will occur, or more correctly, if they have occurred. I also pay attention to the stock's group strength and also the trend of the overall market.

So far, this technique has worked pretty well. If you have any suggestions or opinions, they are highly desired.

Mr. Seykota, you are a "idol" and I follow your ideas and the works of Richard Donchian and other trend followers religiously. Even on autopilot at 30,000 feet, I read and re-read the Market Wizards and my TA books.

Committing to trading with the trend is an important step.

Choosing a consistent definition for "trend" is an important part.

Other parts include position sizing, managing risk and maintaining attitude.

Before you can get to auto pilot status with your trading, you might have to do some flight simulations, particularly ones in which you test your own G tolerances to the system.

Since you have practical experience with air flows, you might be able to give me an opinion on my theory of lift  at http://www.seykota.com/rm/ .

January 15, 2003

Gunslinger

This is out of the German magazine called Trader´s. Van Tharp wrote the article and I think it is just a bad translation. I think you used "gunslinger" in market wizards.

A community in which the citizens are allowed, even required, to posses guns might be a less risky place to live than one with gun control.

A portfolio with purposeful risk control might be less risky than one without.

January 15, 2003

Maximum Drawdown Defines Heat

 

I fully agree with you that heat is defined by max drawdown. Drawdown again is influenced by the position sizing approach. For example by the percentage risk for a trade. You made some statements (in the wizards interview and on a seminar mentioned in a van Tharp interview I read today) that anyone who risks more than 3-5 percent is a hazardeur. At this point I do not agree with you. This may be true for your personal systems\approach but it is impossible to make a general statement.

Here are just some points that lead to different drawdown numbers based on the same percentage risk.


1. Stop size. Small stops lead to a very low number of winners and a very high R-multiples. Such systems will cause bigger drawdowns over time


2. Timeframe: Intraday traders take more risk and might have higher drawdowns because of higher slippage. Worst case moves have a much higher impact.


3. How often do you really realize the maximum loss?. If you use very large trailing stops your average loss will probably be below 0.5 that amount.


4. The money management approach: You might take high risks between 0 and 20% drawdown, but reduce risk below 20% to insure a safe landing for example.

For me it is possible to put 10% at risk because only one trade out of 100 will really take a loss this big. And those trades are the ones with exceptional risk/reward ratios (normally entered at low volatility). I ran montecarlo simulations over my portfolio tests and even with a max. risk this big I have a chance below 95% to reach a 60% drawdown because of my very long term, highly diversified approach with very large initial stops. I also reduce risk during drawdowns.

I don't recall using the term "hazardeur," or even hearing it before today.  I would be interested in the exact source of the quote from me.

In general, a betting strategy based on a series of 3 % bets would tend to be more volatile than one based on 1/2 % bets.

I would consider the later to be about standard for the industry and the former to be on the risky side.

Of course, if your goal is to risk a lot in hopes of winning a lot, then a conservative approach might just be too risky.

January 14, 2003

 

Don't Post This

 

As I don't know any of the folks on your FAQ site, for now I would prefer not having any of my correspondence posted. Thanks.

If you do not wish to share your process with others, you might consider private coaching.
January 14, 2003

Commercial Economy and Gift Economy

As discussed, here are my first thoughts and feelings with regards to the Trading Tribe.

Generally, there are two types of economies
- The commercial economy and the gift economy. In one, reward and reputation are based on having and in the other, reward and reputation are based on giving.

I found the following quote by Pam Withers
to be interesting and relevant:

"The gift economy is a concept that
has been around ever since First Nations people held potlatches and their Caucasian neighbors held potlucks. At potlatches and potlucks, everyone contributes something; everyone takes something away. The more and better you bring, the more respect you command. More than bartering, the gift economy - like potlucks - implies a social context and is the basis of relationship building."

While there is no doubt whatsoever that there would be significant demand for commercial seminars, I feel that the spirit of The Trading Tribe lives in giving and collaboration on an ongoing basis.

I would like to be involved in a group that gathers quarterly as it will allow the whole group time to make progress towards their goals and be accountable to the group for their progress.

From a financial standpoint, I believe that while there is no "model" to determine how much one can earn from this type of group, the amount would far exceed anything one could earn from a typical seminar.

These are my first thoughts. My mind is wide open to alternatives and discussion. Let me know how I can help.
I wonder how you might propose to compensate the organizers and marketers who might bring such a group into being in the first place.

 

January 13, 2003

Passionate Niche Players

being able to reach so many people in so many different places around the world is a blast ... look at your site and it just started and people are there ready to connect with you ... big media firms are destined for problems as more and more people realize the power of inter-connected networks (Metcalfe's Law) ... big media guys can never compete with passionate niche players that love what they do ...

I agree ... although I feel there is a lot of value added by large central clearing nodes, that add quality control ... such as yahoo, google, drudge, turtletrader, etc ... fyi ... Metcalfe was a classmate of mine ...

January 13, 2003

 

Service and Giving

 

I have been thinking about this for a while. Service and giving imply that one has something to give. I think we recognize how much we have by just showing up in service. Giving is a great mirror of what is important at the end of the day.

Within a relationship between two people there will always be 2 perspectives, 2 realities. Something which I heard and like was, "All that is not mutual is dropped". The meaning that the other person assigns to my actions/communication is more important and interesting to me.

Suppose I walk past a homeless drunk on the street. He asks me for a few dollars to buy beer. I can:

1. Give him money - He will be grateful.

2. Not give him money - He will be disappointed.

Is it service to fulfill his request, whether I agree with his lifestyle or the "right/wrongness" of his request? I have been thinking on this question for a while, hoping to respond with an answer, hence the long delay.

It could be ones own spiritual growth that comes from giving him money regardless of my beliefs otherwise.

Who are we to judge the rightness or wrongness?

So I go down a logical level to "Is this useful?" Maybe it is most useful to him to have a beer. Maybe I think it is not useful for him to drink beer, because he lives in a box by the train station. That only imposes my values on him.

Are there universal values outside of our perception?

For me, I believe that we all have the right to life and free will, provided we do not impede others right to life and free will. It is his free will to live in a box and drink beer if he chooses to do so. So where do you fit in spiritual growth here?

Thanks for the dialogue, I appreciate bouncing these ideas around. Sorry for the long wait.

Giving something to someone may or may not be of service to either party. Then, when you consider having to guess what is right and wrong to give, the transaction becomes even more complex. I like the model of free exchange by consenting parties, so both parties perceive a benefit.

January 13, 2003

 

Calculating Flight Times

I have been trying to figure something out for a few years now and after I read your site on radial momentum I thought you might have some insight into my query.

On a recent overnight flight to Europe I couldn't get much sleep and started thinking about and calculating flight times. Looking at one of the airline magazines I noticed that it takes about 1 hour longer to fly back from Europe than going there. Thinking about this for a few minutes I came to the conclusion that is must be because of the rotation of the earth. Not satisfied with my conclusion I got up and asked if I could speak to the pilot. I asked him the question and his response was a little sketchy. He told me it was complicated and had to do with head winds/tail winds and flight speed. Again not being satisfied with the response I asked another pilot that lives in my community. His answer... has to do with wind.

I have tried to search for this topic on the internet but haven't had much success. Would you happen to have any knowledge of this topic? If so, could you share your thoughts with me.

Head wind would tend to slow the plane, lengthen the travel time while tail wind would have the opposite effect.

These days, depending how you do it, getting up from your seat and asking to talk to the pilot might have a very substantial effect on travel time.

January 9, 2003

Five Tools

Ed, Hi if you had to choose five tools to help you with your trading what would you take, use?

If I had to choose five tools for trading, I'd likely stop trading for a while, until this curious restriction expired.  So the tools would likely be recreational and amusing.

January 9, 2003

 

Seminar Formats

 

To the extent that you can train the participants in a structured manner, with each online seminar devoted to say one aspect of the trading life at a time, followed / interspersed by a session for answering selected questions; I think this will bring in a huge global group.

 

For example - The trading rule states ( I rely on your Wizards interview and from The Traders Window )- Trade the long term trend. Your definition of a long term trend is one making a historic high. This is one invaluable aid in stock selection for me since. I hope that I have been able to communicate effectively on this issue, for if this does materialize I have no doubt that the number of global participants will be staggering.

 

Furthermore, all these online seminar recordings can be frequently re-telecast; saving a tremendous amount of your time ( as well as taking care of different time zones ). Additionally, newcomers could view these recordings before signing up for live seminars too ( as a lower priced sample. ) I do hope you will find these suggestions useful. Congratulations on your great new website, and I do wish that the Physics section gets the maximum possible exposure. Great work.

My seminars mostly deal with the psychology of trading, within the context of a support group. The assumption is that most traders already know the basic principles of trading, and they appear at the seminar with the wish to develop the habit of sticking to the principles.

Much of the "information" communicates as facial expression, body posture, tone of voice and other personal expression. Much of the support comes from other traders who learn to detect alignment (or lack of it) between what the trader in the "hot seat" says and how he acts.

I would think some kinds of associations are best conducted in person, like marriages, AA meetings, New Year's Eve parties and my seminars.

January 8, 2003

 

Trading Tribe, Risk, Heat, Feelings and Market Selection

 

I looked through the Trading Tribe's FAQ and read XXX´s posting regarding heat. I think there is some misconception that heat can be expressed as a fixed percentage of capital. In my opinion that's wrong for two reasons. First different trading approaches need different risks assigned. A system with very wide stops might result in two loosing trades in a row while a system with very tight stops might lead to 10 losers in a row. If you would like to stay within a 10% drawdown you should assign 5% risk to approach one and 1% to approach two (just a simple example). If you trade both systems at the same time you cannot go with one number alone. Second: Some people might "feel" more heat taking 10 small loosing trades and others are more uncomfortable taking 2 big losers, even if the drawdown is the same. Another thing which I see seldom discussed is market selection. I think this is at least as important as heat. For example have you ever come up with a good system trading live cattle? I did not. And does anyone think that the live cattle market will start trending smoothly some day? Why, or why not?

I define heat as portfolio percent drawdown. I coined the term while writing a paper on risk management with Dr. Dave Druz. Heat, in this sense includes trading style, trading frequency and stop placement method.

A good system for trading cattle is to buy a lot of contracts before the big rise, and then to sell it all out at the top. And if it doesn't go up, well, then don't buy it in the first place.

January 8, 2003

 

FAQ format

 

(1) Is there a way of using the Trading Tribe site to interact with other traders? (2) Do you monitor quotes during the day, constantly watching the tape for the markets you trade?

(1) This FAQ site is like a talk show -- you get to share your views and questions, and read those of others. (2) No.

January 8, 2003

 

Wife Delivers Cure

 

That chair is great, but I've found out I fear a whack in the back of the head from my wife more than high voltage.

Then, if your goal is still to set up aversion therapy for an over-active trading-software mouse, and if your wife's whacking provides an appropriate level of aversion, I suppose you could connect the mouse to your wife..

January 8, 2003

 

On-Line Seminars

 

May I suggest that on-line seminars be considered by you, this will bring in many more enthusiasts who may not be able to visit Incline.

I wonder if you might suggest a structure for on-line seminars.

January 8, 2003

 

A Note from the Chair Man

 

Just when I wondering what I can do, currently being jobless, down with a flu, lost my last 4030 Singapore dollar shorting NASDAQ futures, my daughter school fee not paid, you send me an email with an electric chair. What a great way to start 2003!

In that case, no "charge."

January 7, 2003

 

Reasonable Heat 

One of the significant issues I need to clarify is how much ‘heat’ is optimal for my trading portfolio.   In some prior exercises you gave me, you suggested a good trader might expect to have 50% of his trades profitable and 50% unprofitable, and that he might also make 2x bet size on those winners.   As a novice, I am going to speculate that initially I will make 1.5x bet size on my profitable trades.   After running the simulation in excel, it suggests optimal heat of 17% (though 17% may not be attainable given the capital required for stocks).  Does this sound reasonable?

Matters of heat and risk have to do with your tolerance for risk, your fears and hopes and such ... how come you think there is anything reasonable about these matters ...

November 30, 2002

 

Comfortable Feelings

 

Can I ask you two simple question? (1) How long did it take you before you were comfortable in your ability to trade the markets? (2) When you felt you knew about you were doing.

1) If comfort is your goal, stop trading.

(2) Feeling you know what you are doing is optional.

November 14, 2002

 

High Voltage

 

Do you have anything that will send a high voltage current to the seat of my chair when my mouse finger gets too twitchy.

It's already in place. The motion of your finger sets up a high voltage static charge that communicates through your body to the chair. The current, however, is miniscule so you do not feel anything. If you want more of a jolt, you might like to try something like this ...

November 13, 2002

 

Tricks

 

Hey buddy. Are you Ed Seykota? I work hard all my life and still got retrenched. Read that you are a great trader. Can you teach me a trick or two? Cheers, Ho from Singapore

ps.superb.net/cardtric/tricks.htm