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March 1-8, 2003

 

Questions Replies
Fri, 7 Mar 2003

Using System-Assist Brokers


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 temptation.

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.

Hiring 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 Reconsidering

Jackson as a Fundamentalist

Date: Fri, 7 Mar 2003

Using 3-D Patterns / System Metaphors


[ see earlier: Tue, 4 Mar 2003 Graphics and Books ]

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.

Math

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.

Perceptions and Metaphors

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.

Many 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.

 

A 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.

 

 

Book him, Dano

for marketing non-secrets in a market secrets book.

Fri, 7 Mar

Nicholas Darvas


You mentioned his book ... Do you know whatever happened to him

Darvas 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 him.

The Law of Inevitable Demise of Self-Aggrandizing Authors: Guys who write their books to crow, can wind up eating what they sow.

Sheryl Crow

Crow's Rule for Chilling Out During Drawdowns:

 

I don't have digital

I don't have diddly squat
It's not having what you want

It's wanting what you've got

 

-- from Soak Up the Sun

Fri, 7 Mar 2003

Regression

My regression to mean style trading is not working in these unusual markets, while trends seem to be having a very high degree of success.

The 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.

The Trend is your Friend,

except at the End, where it Tends to Bend.

Fri, 7 Mar 2003

Donchian Materials

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"?

Richard 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 copper prices.

Richard Donchian

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 the short-term
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 thumb.

Thank 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 approaches. 

Endless Detail of the Mandelbrot Set

Thu, 6 Mar 2003

Risk Essentials

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!!!!!

OK, 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

More Information

Can I have more information ?


OK, here is some nifty information, from the 1917 Lake Pleasant Telephone Directory ...

Abrams House Piseco 19-F21
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


Beliefs


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.

Arriving 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 [-1.5,1.5].

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 popularizes fractals.

Wed, 5 Mar 2003

Holy Grail

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.

Live Cattle Trader with Trail Grail

Wed, 5 Mar 2003

Simulation Software

The timing of information is often amazing ... I found a trading course on the web ...



 

FAQ 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

Call Mom

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!



You 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

Learning Curve

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.

 

float *pfLearningCurve;

 C++ Pointer to Learning Curve

Tue, 4 Mar 2003

Caring (see previous: Simulation Software)

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?

Some 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 out.

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 across.

When contributors write in, they do so for the benefit and entertainment of everyone.

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 his friends.

The word, "Sarcasm" comes from the Greek sarkazein, to bite the lips in rage, from sarx, flesh.

Once I get this off, no more mister nice-guy.

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 operator?

See favorite books

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

Simulation Software

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.

Look 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

Red Herring

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.

The time constant of a system determines the type of trend to which it responds, short-term or long-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 tuner.

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 losers.

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 the flow.

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 market?

Trend 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.

A woman needs a man like a fish needs a bicycle.

Gloria Steinem re-cycles Irina Dunns' quote in the 70's, then marries in 2000, at Age 66

Sat, 1 Mar 2003

Possible Crashes

How do trend-followers deal with the possibility of crashes?

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 markets?

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.

Trend 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 feelings. 

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.

Certainly