|Fri, 7 Mar 2003
I have a question for you regarding the use of system assist brokers. Iíve
been trading systematically for only 4 years. Most of that time was spent
with stock systems. About a year ago I started to trade a long term trend
following futures system. However, I decided that due to my full time
working schedule that I would have it traded for me by a broker. During
the time that I traded stock systems for myself, I found that I often
didnít follow the rules of the system. However, in the 1, almost 1.5
years of trading my futures system via a broker assist system I have never
deviated from the system. Itís been tempting a few times to call my
broker up and exit a profitable trade early, but I have resisted the
This method of trading has really helped me trade my system with total
discipline. Since that is an area that so many traders struggle with, Iím
surprised that more people donít ďoutsourceĒ the trade execution
portion of their strategies.
What are your thoughts about utilizing system assist brokers as part of a
traders trading strategy? I started it as a way to save me some time, but
Iíve grown to like the added benefit of total discipline.
a professional money manager is standard practice for many investors. Such
outsourcing tends to reduce anxiety for both parties by separating the
account ownership from the account management.
Your system-assist broker is acting
in the role of money manager. The cool part is that, so far, he is
providing this valuable service for free.
You might consider honoring the
contribution he is making to your performance by offering him some
fraction of the performance increase you enjoy through outsourcing.
Eventually, your broker might offer
his services to several customers, even start a fund.
Organized securities trading begins in New York
in 1792 when merchants and brokers, meeting under a buttonwood tree
on Wall Street, agree to buy and sell on a common commission basis. Some
offer extra services, in order to expand their businesses.
|Fri, 7 Mar 2003
Man In The Mirror
One of my favorite songs is Man in the Mirror, by
Michael Jackson. I just realized how much it applies to my trading:
I'm starting with the man in the mirror
I'm asking him to change his ways
And no message could have been any clearer
If you wanna make the world a better place
Take a look
at yourself, and then make a change
Yes, indeed, Michael
Jackson certainly provides inspiration to those of us who wonder if change
is really possible.
Jackson as a Trend Follower
Jackson as a Fundamentalist
|Date: Fri, 7 Mar
Using 3-D Patterns / System Metaphors
[ see earlier: Tue, 4 Mar 2003 Graphics and
Thank you for the revision. I'm glad to clarify. Can you please comment
what you mean by "Arranging bi-variable system test results in a
3-D pattern can provide a graphical representation of system
profitability and robustness."
And also, if you may please, comment on its implication
(if any) in shifting ones perception of an existing system. Thank you,
your wisdom is always appreciated.
Say you have a system with two
parameters, X & Y. These might be the lengths of two exponential
averages. And, say you want to optimize some function, F(x, y, ...)
that represents drawdown-adjusted return. Then you can run the
system with lots of values of X & Y to find F for each combination,
and arrange all the results in a table.
You can also arrange the results in
a 3-D graph and then, by inspection, determine (1) if there are values of
X & Y that produce good values for F, (2) how sensitive the system is
to X & Y and (3) if there are contiguous regions on the X-Y plane that
provide good values for F. A system that passes all three tests
would seem to be profitable and robust.
Once you find some good values for
X & Y, you can freeze them, and then test other parameters, say P
& Q. In this manner, you can step-wise optimize a multi-variable
system, taking just two variables at a time. You can even re-optimize X
& Y, in a second pass. Advantages of this method are that it is
relatively fast and that it gives you an interactive feel for the
sensitivity of your system to its parameters.
The alternative is to run all
combinations of all variables. For systems with many variables, this might
take a long time, and produce too much data to examine. For T
test-variables, each with V values, the number of tests is:
N = VT
So for ten variables, each with ten
values, N = 10,000,000 test runs. At a rate of one run through all the
data per second, the experiment would take about a third of a year.
Also, I prefer looking at graphs,
and can get a better feel for the terrain, than I can by just looking at
reams of tabular numerical output.
These days, you can find many good
software packages that can accept tabular output from your system and
produce 3-D graphics.
Traders tend to personalize the
relationships they have with their systems. Some might see an authority
figure, all full of arbitrary rules, or one who punishes and invalidates.
Others might see a caring, protective parent. Some might see a puzzle,
that needs continual re-solving and tinkering. Others might see an
enabler, justifying their whims. Some might see a prankster that keeps
tricking them into whipsaws. Others might see a cornucopia.
So in addition to yielding profits
and losses, a trading system also expresses a metaphor for relationship,
and enables characteristic and recurring drama.
I suggest you find out what
metaphor you hold for your system, and then make sure it in alignment with
stable and lasting adherence to sound trading principles.
The system as double trouble.
The system as firm and supportive.
|Fri, 7 Mar 2003
Books on Books
I wonder why nobody has thought of publishing a book entitled How I
made a million selling a book on the stock market.
books on the markets typically purvey market secrets, that really aren't
very secret after all. Some advise to trade with the trend, ride winners,
cut losers, and manage risk. Some recommend just the opposite. Some purvey
secret black boxes. There seems to be a healthy market for such books.
self-reflective book about such books might have to reveal the real
secret: namely, that there are no secrets, no easy ways, and that making
money requires a lot of self-discipline. There is likely a very small
market for that kind of disappointing news.
marketing non-secrets in a market secrets book.
|Fri, 7 Mar
You mentioned his book ... Do you know whatever happened to him
wrote How I made 2,000,000 in the Stock Market in April, 1986. He
immediately followed this up with Wall Street: The Other Las Vegas
in September, 1986.
I find no current information on
The Law of Inevitable Demise of
Self-Aggrandizing Authors: Guys who write their books to crow, can wind up
eating what they sow.
Rule for Chilling Out During Drawdowns:
don't have digital
don't have diddly squat
It's not having what you want
wanting what you've got
from Soak Up the Sun
|Fri, 7 Mar 2003
My regression to mean style trading is not working in
these unusual markets, while trends seem to be having a very high degree
Trading-Rule Rule: Everything works sometimes. Regression seems to work
best when trend-following doesn't. Knowing which method to use seems
obvious ... after the fact.
Trend is your Friend,
at the End, where it Tends to Bend.
|Fri, 7 Mar 2003
I was just re-reading certain sections of "Market Wizards", and
found your recommendations for Donchian's writings struck a cord with me.
My own researches led me to strikingly similar conclusions as yours on
trend following, from what little knowledge I had of Donchian's systems.
So, would you please be able to tell me where I can
find more original Donchian materials? ( I live in Australia by the
way.) And also, would you please be able to expand on what you said about
the Donchian systems in "Market Wizards"?
Donchian wrote no book, to my knowledge. He wrote several articles and a
weekly newsletter in which he talked about trend-following and gave the
on-going results of his system.
He published his 5-20 moving
average system and his trading guidelines. See Resources link
above. I tested these in the early 70's and found them internally
inconsistent, full of loopholes, and, still, some of the most insightful
materials ever published.
I once asked him how he came up
with his two-week rule ... he said no one had ever asked that question
before ... it came to him while he was looking over some historical cash
|Fri, 7 Mar 2003
More on Beliefs
If you look closely, the subject heading was beliefs, to me the
realization that dynamic systems such as the stock market can be random in
and "deterministic in the long term" allowed me to go with the
flow. Why one cannot accurately predict the state of the system at a
future time was a liberating experience and allowed to use simple rules of
you for the clarification. I revised my comments to your earlier
send. Interesting that you came to the simplicity of trend-following
by discarding the complexity of prediction. My own researches
into fractals reinforce my belief in the futility of deterministic
Endless Detail of the Mandelbrot Set
|Thu, 6 Mar 2003
I got on the Trading Tribe website, I will fly out
from Maryland to attend one of your Trading Tribe meetings with other
traders ... tell me something essential to know about money management!!!!!
here's the essence of risk management:
Risk no more than you can afford to
lose, and also risk enough so that a win is meaningful. If there is no
such amount, don't play.
Down to the Essentials
|Thu, 6 Mar 2003
Can I have more information ?
OK, here is some nifty
information, from the 1917 Lake Pleasant Telephone Directory ...
Abrams House Piseco
Abrams House, Pay Station Piseco 19-F21
Aird Asa, r, L. Pleasnt 19-F41
Aird George C, r, L. Pleasnt 19-F42
Aird George C, Pay Station L. Pleasnt 19-F42
Aird James O, r, L. Pleasnt 19-F3
Brooks Clarence, r, Jessup's River L. Pleasnt 10-F14
Brooks E Perkins, Camp, Indian Lake L. Pleasnt 10-F4
Brown's Camp, Indian Lake L. Pleasnt 10-F3
Buyce John F, Store Speculatr 12-F1
Buyce Jno F, Pay Station Speculatr 12-F1
Call Edgar, Store L. Pleasnt 8-F3
Call Edgar, Store, Pay Station L. Pleasnt 8-F3
Old Timey Phone
Numbers - Note the Prefix for John Buyce
|Thu, 6 Mar 2003
You've always been truly inspiring. I was a consistent looser for two
years, when I took a four year break early in 97' to research and study
the ingredients needed to become successful. Having been involved in
martial arts since childhood, I new the problem was with me. I felt
inadequate and had a yearning to form a world-view; a
"philosophy" of not only the markets, and my behavior but also
to get a glimpse at the structure of life itself, if at all possible.
I arrived at trend following via mathematical chaos
theory and fractal geometry. Furthermore, I discovered the world was
too complex and I could never know everything there was to know about
anything. My world-view led me to implement simple systems. I have
been exceptionally profitable since 02-02, when I resumed trading.
My question to you is: To what extent did your
overall philosophy of (1) your own behavior, (2) the markets and (3) life
... have on your trading?
I sometimes catch myself wondering if I was lucky or its
the result of my years of research and hard work when a careful
examination proves otherwise. And that's not good.
PS. my system is complete with money and risk management etc.
at trend-following via fractal geometry ... is like arriving at McDonald's
via organic farming.
I find trend following in the 60's
and 70's, before the debut of chaos theory.
Nicholas Darvas' book tells how he,
as a dancer on tour, is able to place trades, and stop-loss orders, with a
simple technical system and run 10K into 2M.
Richard Donchian's weekly
newsletter from Hayden Stone shows a trend-following account in action.
Much later, my own fractal
studies seem to reinforce, rather than motivate my views.
Success seems to me to be a result
of clear intention, plus a lot of luck. Many traders who would be
successful seem to come to trend-following sooner or later.
Mandelbrot Set: x [-1.0,2.0]; y
Benoit Mandelbrot, IBM Fellow, in The
Fractal Geometry of Nature, 1982, uses computers to graphically
display the solution to a set of borderline-stable vectors. His work
|Wed, 5 Mar 2003
Regarding Simulation Software, I thought
you might like what Chris
Tate has to say about the Holy Grail.
Typically, those who
seek the grail for self-aggrandizement perish looking, while those who
seek to use the grail for the benefit of others find it easily.
Cattle Trader with Trail Grail
|Wed, 5 Mar 2003
The timing of information is often amazing
... I found a trading course on the web ...
does not endorse particular products or trades. FAQ does endorse the idea
of making your system specific, defining risk management and doing some
serious research before commencing actual trading.
After the Fact, it's Obvious
In 1879, after thousands of tests, Edison uses a
carbonized cotton thread filament; it lasts a record fifteen hours.
Further experimentation produces filaments that burn longer and longer
with each test. Although Edison thinks of using tungsten, tools to work
with it appear later.
Wed, 5 Mar 2003
Trading is a tough "game". Gives veracity to "only the
fittest survive." You must do the WORK!! If you want to be
cradled, call your mom. There are no free lunches here!!!!!
I appreciate all your replies....ALL of them ------ for they say so much.
A pocket-education and for FREE too!
can call your mom for other things, too, like telling her that you love
her, that cutting the cord validates both of you, and that you are not
going to hit her up for any more trading recommendations.
Educators appear, generally for
free, when the student is willing to do the work.
Pocket Mouse (Perognathus longimembris
pacificus), endangered species since 1994. In comparison, Trend
Traders (Traderus Specularus Trendus) have been an endangered species
since dinosaur meat futures first went on the board.
|Tue, 4 Mar 2003
Its been a while since we last corresponded. I am
still on my learning curve to become a trader.
Although I have not been trading actively for the last
couple of months, I continue to study and make notes
on the various aspects to being a good trader. Also
want to thank you for the pointers you gave me.
You are welcome.
C++ Pointer to Learning Curve
|Tue, 4 Mar 2003
Caring (see previous: Simulation
You wrote: "You might consider how your desire to be cared-for by
others might be interfering with your trading." Could you clarify
this point because I don't understand?
people like to fish, while others like to skip the hook and pole part and
just get some free fish.
If you wish to fish, then roll up
your sleeves, learn something about programming, study the markets, study
your own psychology and develop yourself into a trader.
If you prefer free fish, even
silver fish, then you may have co-dependent tendencies. If you carry this
to the markets, and look to MSFT, CSCO and QCOM for your emotional needs,
you might find yourself at a disadvantage. Breaking
Up is Hard To Do.
Silverfish normally live outdoors under rocks.
However, many are found in houses and are considered a pest, or at least a
nuisance, by homeowners. Usually they are found trapped in a bathtub,
sink, or washbasin. They crawl in seeking food or moisture and can't climb
|Tue, 4 Mar 2003
Hold the Sarcasm
I wonder if you can put a little less effort into trying to make FAQ
questions look foolish. If the questions are really foolish, then I
would rather you just ignore and disregard them. Don't get me wrong, some
of your sarcasm is humorous and deserved, which helps get your point
contributors write in, they do so for the benefit and entertainment of
You might consider how your desire
to appear foolish (or not) might be interfering with your trading.
I remove the email ID's so readers
cannot identify the contributors, unless, of course, the contributor tells
The word, "Sarcasm" comes
from the Greek sarkazein, to bite the lips in rage, from sarx,
Once I get this off, no more mister
|Tue, 4 Mar 2003
Graphics and Books
I'm rather impressed with your ability to produce a graphic
representation of almost everything you say. A question: is there
any literature (both technical and philosophical) out there in which
you would recommend to trend-followers apart from Reminiscences of a stock
From Paul Bourke's FracHill Program
Arranging bi-variable system test results
in a 3-D pattern can provide a graphical representation of system
profitability and robustness.
|Mon, 3 Mar 2003
Could you offer some solutions for simulation
programs, keeping in mind that my knowledge of programming is limited and
my area of focus is the stock market.
for programs for non-programmers on the shelf next to books for
non-readers and cigars for non-smokers.
Montecristo No. 4 (1959)
Perfectly pressed, this tan, streaky cigar
has a floral flavor with hints of light coffee. It's very cedary --
understandable given its more than four decades in a cigar box. It's lost
some strength over the years, and is soft and elegant, with a toasted
almond note on the finish. A lovely smoke -- www.cigaraficionado.com
|Mon 3 Mar 2003
I notice that Red Herring magazine is going out of
business. Could this be a signal the tech stock decline is near a bottom?
I notice the NASDAQ has been outperforming the DOW and S&P.
The demise of Red
Herring, founded in 1993, reminds me that the Harvard Economic Society
remained optimistic throughout the 1929-33 Stock Market Crash, and then
dissolved and stopped publishing bullish recommendations near the bottom.
Last Issue -- Breaking Moore's Law
Eric Schmidt, CEO of Google, when asked how the 64-bit
Itanium chip would affect Google, replied that it wouldn't ... this could
be devastating ... in essence, he said that Google, the hottest young
company in technology, had committed the ultimate apostasy: it had
declared its independence from Moore's law.
|Sun, 2 Mar 2003
Time Constant in Trend Following
I have read trend following literature which teaches that profitable trend
following systems are robust and NOT super-optimized. If this is the case,
is the time constant that defines trend really that important? As
an example, say we are using the high/low trigger method. Whether we are
using a 15 period high/low or a 20 period high/low shouldn't really make a
huge difference if the trend continues for a very long and profitable
amount of time. The only difference which I can spot is: the time
constant will determine the amount of signals the system generates and
therefore what probably should be optimized is the money management,
in relationship to the time constant that is chosen. I wonder if this is
why very profitable trend followers are so focused on the money management
in their systems and not the method of entering the market.
time constant of a system determines the type
of trend to which it responds, short-term
A radio tuner is an adjustable
frequency filter; it selects a signal of a certain frequency, and ignores
the rest. The reciprocal of the frequency gives the time constant of the
A short-term system tends to
deliver lots of quick trades while a long-term system tends to deliver
fewer slow trades. Both types of system can deliver strings of winners and
Simulations can reveal the
characteristic performance of a system over time, and can help the trader
to design risk management strategies so as to place the volatility within
the range of his own psychological stamina.
During trend markets, while trends
continue smoothly, most trend systems tend to register profits. Risk
management is for the rest of the time.
Dali's Clock Explosion
|Sun, 2 Mar 2003
Now Now Time
Your views on the importance of the present in trading is quite
unusual for me, but I think I understand your point of view. Nothing
really exists apart from the present moment ... perhaps our sensation of
time is nothing but a linkage from one moment to another, a bit like a
reel of film ... each snapshot depending on one another to confirm their
existence. I'm probably getting a bit side-tracked here, but I suppose
this is really the fundamental principle of trend following: not to be
concerned with the future, but protect oneself in such a way as to
minimize possible adversity to come (money management) and just go with
I assume this is why long-term trend followers are
expected to experience large drawdowns once in a while since they do not
deal with possible crashes.
Regarding your reply on the profitability of trend-following, I'm not sure
if you have answered the main point of my question as to whether
SIMPLE, but SOUND quantitative techniques, as opposed to advanced
technologies, are sufficient nowadays (or perhaps even preferred) for
implementing profitable (medium to long-term) trend-following strategies.
I have little doubt that trend-following is still profitable based on the
statistics given on various trading websites.
I do not completely agree with you that profits can
only be realized with a trend, since options can be used for
volatility play in directionless markets. I suppose this discrepancy is
only valid if you do NOT consider directionless markets as a form of trend
and also you are not considering options when you made the statement.
Can I also ask you one more question: According to my understanding of
your trading philosophy, can I assume that you generally don't, if at
all, place trades based on an opinion about the future direction of the
following is an exercise in observing and responding to the ever-present
moment of now.
Traders who predict the future,
dwell upon a non-existent place, and to the extent they also park their
ability to act out there, they can miss opportunities to act in the now.
Possible crashes are scary monsters
that live in the future. To avoid them, some traders have sophisticated
reasons for getting out of winning, strongly trending positions when they
just can't take it any more.
Actually, picking tops is really
pretty easy, since there are so many of them during up-trends.
The main difference between trend
systems is the time constant, that defines how
long it takes to register a change in trend.
If you trade options to capture the
time premium, then the options still have to trend for you to profit.
Trend following systems already
define trend. A trend system with an additional opinion about a future
trend, is like a fish with a bicycle.
woman needs a man like a fish needs a bicycle.
Steinem re-cycles Irina Dunns' quote in the 70's, then marries in 2000, at
|Sat, 1 Mar 2003
How do trend-followers deal with the possibility of
To your knowledge and experience, is it still possible to profit from
trend-following and money-management systems using reasonably simple,
but sound quantitative techniques or are working knowledge of advanced
technologies such as neural-networks, genetic algorithms, fuzzy logic,
statistical mechanics, etc. necessary to stay competitive in today's
I suppose, as you've said before, that anything can be made useful
depending on how we apply them, but I am wondering if you have something
else to add regarding these technological advances.
followers do not have to deal with, and cannot deal with possible crashes,
since they do not exist in the present.
What we can deal with in the
present is our feelings about trading and how we respond to our
To the extent we can learn to
operate with uncertainty, we can implement risk control and deal with,
even enjoy, the inevitable ups and downs.
Yes, it is possible to profit from
trend-following, indeed, impossible any other way; if a trade shows a
profit it is, by definition, in line with the trend.
Advanced technology for analyzing
the markets is interesting, entertaining, distracting, and even
counter-productive to coming to terms with emotional reactions to
uncertainty and volatility.
By the way, if you want something
certain about the markets, uncertainty itself almost certainly happens to
be one of the most certain things about the markets.