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Ed Seykota's

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March 16-22, 2003

 

Questions Replies
Sat, 22 Mar 2003

Transition from Brokering

I almost fell off my chair this past Tuesday when someone told me a true "Market Wizard" lived up the road from me!!

I dusted off the old book and re-read your words of wisdom I hadn't read for years, and sure enough... it says right there we are almost neighbors. I really got excited when I found your website, and found out about your Trading Tribe meetings!!!

Can I join you this coming Thursday March 27? Do I qualify? Here is a brief introduction:

I am a futures broker / trader wannabe, growing everyday with every trade, that can't wait to grow up and be like you ... well, actually I want to make the successful transition from brokering to CTA / money manager.

I discovered this fascinating business 10 years ago while as a 40 year old world citizen (lived in 4 continents), father of 3 kids, living in a 35' travel trailer, I was broke, on food stamps and unemployed for 10 months (life was good, but HAD to get better)... And I never looked back... This is it for me. I love this entire industry (less the 'hype and lies' from the BS gurus). I have had over 1000 clients from all over the planet and have participated in their ecstasies, as well as their many agonies, countless times. I've made money and lost money... now I am starting to keep some of it more regularly.

In my quest to learn and participate in every facet of this awesome industry, but also in the hopes to becoming a professional trader, in 1996 I had a brief 7 months S&P pit trader adventure in Chicago. I loved it but got my butt kicked, and had to go back to brokering full time to feed the family (which was living in a house by now ;-).

Since then I started a small IB in 1997, then moved 1999. My wife and I operate our little firm from an office in our home.

Business is OK, but my goal is to make the transition from brokering for a living, to trading for a living ... permanently. And I think participating in your Trading Tribe meetings surely will enhance and accelerate the process, while at the same time as I share my many experiences in the trading arena, I should be a contributing factor to the growth of other Trading Tribe members.

I trust you will find that I can meet the 4 requirements for Trading Tribe membership, and should fit in with everyone.

The Trading Tribe seems to have helped people enhance and accelerate the process of finding the right hat.

 

Broker to Fund Manager

Trader to Golfer

Financial Advisor to Actor

 

Interestingly, no changes to broker, AE (account executive) or RR (registered representative).

 

 

 

 

One always looks neat,

in a hat made from meat.

 

-- Mark Twain (apocryphal)

Date: Fri, 21 Mar 2003

Another FAQ Entry


Dear Ed,

Thank you for your thoughtful and timely answers to my earlier questions.

I have another question that deals with the well-known "secret to trading success" - Spend 10% of your effort working on entry rules, 10% on exit rules, 40% on money management (position sizing, risk management) and 40% on psychology. The numbers change depending on the author, but the proportions remain roughly similar.

In one way, I interpret this axiom as "pick any trend following entries and exits, just make sure they fit your personality, because most of them work pretty well" I see how Richard Dennis and other trend followers appear to have reaped huge gains by trading 20 day breakouts and MA crossovers. I also see example trading systems that perform well on a variety of markets that use simple breakout and/or volatility stop rules.

However, I read articles about the same trend-followers who appear to have large quant analysis and computer programming staffs working long hours to adjust their systems due to "changing markets," which implies that finding a series of entries and exits that generate a positive expected outcome per $ risked is a more difficult task than simply figuring out which moving average to use.

Therefore, I have a conflict, a conflict which has limited my ability to actively deploy my trading strategies. I come up with a strategy using relatively simple indicators that seems to have a nice expected profit - and hesitate, because I cannot seem to get to the point where I am confident that the strategy will continue to be profitable in the future. Even out-of-sample testing doesn't seem to soothe me very much.

Is finding a profitable trading strategy really as easy as it sounds? I actually "get" money management - it makes perfect sense to me, and I understand its power. However, I am getting hung up on something that should only be occupying 20% of my time (entries/exits)!

Do I really need to be this critical about this part of my research, or am I overestimating the difficulty of entry/exit development?

A simple moving average system already adjusts to changing markets, by issuing buy and sell signals.

It seems easier for some scientific types to work on their math rather than on their psychology.  If their math is already at 95% and their psychology is at 25%, then I suggest they start working in the most effective area.

Sounds like you have a trend system, and hesitate to use it since you can't predict it will continue to work. This is what you get when you apply a fundamental mind set (predict the future) to a trend following (go with the flow) system.

I suppose you could hire athletes to play chess and system programmers to operate construction equipment.  You seem to have a fundamentalist (yourself) trying to run a trend following system.

 

White to Mate in 1 move

Fri, 21 Mar 2003

 

Doctor 's Parable


"Doc, will I be healthy?"

 

"Health is not a guaranteed thing in life. If you have a positive mental attitude and good personal habits, you can greatly increase the odds though. You are the best person to ask whether you really want to be healthy and have the determination for it."

"Doc, what is the best exercise?"

 

"It is different for different persons. The best exercise for you is the one that you love to do and have the persistence to follow through."

"I think running is good. Should I run 5 miles or 20 miles per day? Should I stop running if it rains one inch or two inches in the morning?"

 

"That depends on your stamina inside and the weather outside. You might try to experiment for a while and decide which is best for you."

"I have been looking out there all these years with my eyes closed. It is a shocking enlightenment to see that the truth can be found from within. Thanks for guiding me to real learning and where to fish for the answers. Doc, you are a great teacher."


PS. Your FAQ has a lot of valuable advice. I feel like I'm traveling on a whole new journey within.

Hmmm ... a self-contained FAQ, complete with  questions and answers. Hard to think of any matching parables.

 

 

 

 

 

Find the matching pair of balls.

 

 

Fri, 21 Mar 2003

 

Trend Following in Stocks

(1) I was wondering if you ever applied a systematic trend following approach to stocks and/or equity options and what your observations were (if not, the reason for not doing so).

(2) If you have, in your back testing or actual trading experiences, did this multi-market approach reduce the overall volatility of the portfolio?

Trend following is basic to life.  Frances Bacon noticed runs and consolidations 400 years ago. The aim of diversification is to cancel out the short term noise and enjoy the overall signal.

 

 

 

Sir Francis Bacon. (1561–1626)

 

For honor is, or should be, the place of virtue; and as in nature things move violently to their place and calmly in their place, so virtue in ambition is violent, in authority settled and calm.

Fri, 21 Mar 2003


Just for Your Amusement

Check out this market call. My accountant sent me this email yesterday. Check out the PS at the bottom. Look at the what industry group is the leading gainer today. Airlines are up 4.6% as of 12 AM EST. Non-trader market calls seem to be one of the most reliable entry signals.


----- Original Message -----
From: xxx
To: yyy
Sent: Thursday, March 20, 2003 8:38 AM
Subject: Market Update for March 20, 2003

Why aren't we shorting airlines?

Non-trader calls are almost as good as those from professional advisors.

 

 

 

CNBC Market Dispatches

 

Jon Markman

 

2/26/2003 4:09:41 PM

Oil prices spike, stock prices sink


The commodity hits $37 a barrel. Could American Airlines go bankrupt by May? Hewlett-Packard strikes fear into tech investors. Markman calculates where the sinking S&P might find support.

Fri, 21 Mar 2003

 

Accuracy

 


I missed to clearly point out that even though I accept the futility of prediction I have built my money management rules so that I'm able to remain with in a given threshold of the magnitude as well as the frequency of correctness over the long run.

 

I normally stop trading if that level of correctness drops below sixty-percent in the long run (for me, that is part of my money management rule).

 

I also find my money management rules to be more effective at this level of correctness. I feel this gives me a level of comfort allowing me to relax and just flow with whatever is happening, including accepting a very high level of heat.

 

I just don't feel the need for a standard trend following method with less than a forty percent level of correctness accompanied by the inevitable un-proportional level of heat.

 

My point was I'm still able to hit big home runs with a high probability system, and yet accept the high levels of heat which accompanies such a system.

 

It's strange that talking about the above makes me feel uneasy. nonetheless, I felt the urge to get my point across. It is as though a normal person describing how he actually breathes! That will immediately choke the breath out of him when he consciously describes the process. it actually arrests and interrupts the flow of life?

 

Like you said the trend should give me all the answer, no more fuss. I will simply breathe.

PS Thanks for the tip on Grof's Holtropic breath  work, looks like its right down my alley. It Should add to my personal growth.

PPS. I didn't know that what my siblings and I were doing would qualify as a TradingTribe since they are involved in a different field of endeavor.

Seems you have a concern about correctness, accuracy and being right about things. 

 

Sometimes you can do far better without a burdensome emotional attachment to rigorous accuracy. 

 

I made no mention of your siblings as having to be traders, or being in the Trading Tribe.  It seems consistent with your progress with your accuracy issue that you might demonstrate some imprecision.

 

 

 

 

Tasty Treat for Heat Handlers

Fri, 21 Mar 2003

 

1. Can you please rank the importance of a) Your trading psychology, b) your trading system, c) your money management approach, d) your years of experience in markets, according to your trading philosophy.

2. Do you use only moving averages as an indicator in your system or do you prefer to use more complicated indicators.

 I suppose you could rank the importance of your brain, heart, liver, kidneys and lungs.  Then again, you could make sure they are all healthy and support each other.  I prefer simple indicators.

 

 

Ranking Body Parts

to find the really important one.

Fri, 21 Mar 2003


Deer in the Headlight Syndrome

Is there any pill for DITHS ? If you make one, you will be biggest drug company in the world !

Until such time there's a pill for DITHS, you can practice enjoying the feeling and eat jelly beans. 

 

 Reagan Beans

Fri, 21 Mar 2003

Framing: the good, the bad and the ugly


As to your answer regarding my earlier question, I will be paying more attention to what the trend says. Knowing the only truth I can count on is
the trend is truly liberating.


How does the way one frames the world and experiences affect feelings? If you could please touch on the good, the bad and the ugly.

For example as I mentioned sometime ago, I absolutely believe that since one cannot accurately describe any situation with the detail necessary, one cannot accurately predict the state of any system at a future time. Would this belief affect my feelings at some level in my trading?

Your beliefs and attitudes frame your world, the way you trade.  Beliefs tend to come true, and everyone, including Blondie, Tuco & Angel Eyes tends to get what they want.

 

 

Clint Gets the Last Shot

Fri, 21 Mar 2003

 

Book Recommendation

I have recently read this book and thought it provided excellent techniques for self-control and discipline. I think the FAQ might find it interesting. Hope it isn't against the ground rules.

Way of Warrior Trader: The Financial Risk-Taker's Guide to Samurai Courage, Confidence and Discipline by Richard D. McCall

FAQ responds to questions and first-hand reports of the experience of trading.  FAQ does not endorse people or products. 

 

Books generally present a metaphor for trading: a dance, a puzzle, personal growth, a river, helping others ... You have to find your own personal metaphor for trading.

 

 

Trading as War

 

Fri, 21 Mar 2003


Feelings


You wrote:


For example, consider the feeling of being lonely and having others tell you are wrong. When the market is trending nicely, it's a feeling good traders might especially enjoy, even use as a signal to add to a position.

The feeling of everyone telling you that you are right, might actually be the scary one.



I didn't understand the positive intentions of feelings until your last response. Thank you for using an example to clarify. Over the course of the last few weeks, your responses have been much easier for me to understand. Now I have to figure out why?.... or maybe I will just go with the flow.

 

Feelings

(of a sold-out bull)
 
Feelings, nuthin' more than feelings,
Tryin' to forget my,
Feelings of love . . .
 
Teardrops, rollin' down on my face,
Tryin' to forget my,
Feelings of love . . .
 
Feelings, for all my life I'll feel it,
I wish I'd never met you girl,
You'll never come again . . .
( You'll never come again, never, never ! )
 
Feelings, Oh Oh Oh feelings,
Oh Oh Oh feel you,
Again in my arms . . . ( Again, again! )
 
( Feelings, feelings like I've never lost you,
And feelings like I've never held you again in my arms! )
 
Feelings, for all my life I'll feel it,
I wish I'd never met you girl,
You'll never come again . . .
( You'll never come again, never, never ! )
 
Feelings, Oh Oh Oh feelings,
Oh Oh Oh feel you,
Again in my arms . . . ( Again, again! )
 
Again in my arms!

 

Thu, 20 Mar 2003

 

Siblings

 

I've also been working, with my brother and sister who are in the real estate field but have basic mastery of trend following principles, on celebrating, embracing, experiencing and letting the feelings I don't like pass through.

I always come back to my earlier question regarding doubt and feeling lonely in a trading world where everyone seems to tell me my way is wrong.

P.S. interestingly, my siblings are enjoying the process very much and applying it in their respective field.

The feelings you don't like don't pass through. Feelings you do like pass through.  To get feelings to flow through, and not interfere with your trading, learn to like them.  Part of that comes from experience, part with identifying their positive intentions.

 

For example, consider the feeling of being lonely and having others tell you you are wrong.  When the market is trending nicely, it's a feeling traders might especially enjoy, even use as a signal to add to a position.

 

The feeling of everyone telling you that you are right, might actually be the scary one.

 

It sounds like you and your siblings are forming a group and are proceeding with the work.

 

 

Siblings

Your true family eventually appears.

Thu, 20 Mar 2003

 

Pyramids

 

1. In order to to have reasonable diversification, in how many markets should a trader be active assuming that the position risks are minimized at 1% of the equity.

2. You mentioned that before entering to any position you have to decide when and how much to add in order to form the position as pyramid, but as a trend follower you never know how high the position goes. I guess the idea of pyramiding with the maximum position size arranged before, may put you in an increasing position with a small bet size. How can I solve this issue.

3. When exiting your position, do you exit all the position at one price or do you exit step by step as a reverse pyramid.

1. Words like "reasonable" and "should"  inhabit the realm of fundamental analysis.

 

Curiously, they also award responsibility to someone else. Your use of passive language (risks are minimized) also gives your responsibility away.

 

Your point 2 asks for a solution, without claiming a problem. Your point 3 asks how to handle unwinding a position.  The answer is different for different trading systems. You can run simulations to find out which is best for you.

 

As an experiment, for a week, you might try to begin all sentences with I (I want ... I feel ... I minimize the risk ...).  To the extent this is uncomfortable, learn to enjoy that feeling. This is to begin to  dissolve the emotional baggage around taking full responsibility for trading with the trend.

 

Once that lightens up, you may be able to  solve your specific issues.

 

Baggage

Too much baggage can interfere with scrambling up and down pyramids.

 

Thu, 20 Mar 2003


Bug


In regard to Wed, 19 Mar 2003 Volatility, I was specifically, referring to the contribution of the chance of a series of losses in a row or the theory of runs to the deviation of returns; that's what I meant by 'eat a lot of (downside) volatility to get to the big winners.

 

My question is does one have to experience a series of losses to get to the big winners?

 

There is enough ink splashed in the printing press, including Market Wizards, telling me I can't have big winning trades and high-percentage profitable trades. Is that so?

 

I believe it was Tom Basso, if I'm not mistaken, who said reliability might actually be inversely related to profitability.

 

I was flowing until late November, when this bug was implanted in my head. Resolving this issue is paramount so I can flow in playing the game again. I'm currently trading 1/3 the size I was; I know I can be trading much bigger. You can call it a crises in confidence. Any suggestions?

P.S. My signals are very few and far between, but when they come they are highly reliable. I know even though I have some what touched on this subject previously, It was still left dangling, some what unresolved.

You seem to be asking for a way to get on the big trends without having to suffer through the drawdowns. Nice fantasy. This also gets to the heart of trading for many traders.

Markets are fundamentally volatile.  No way around it.  Your problem is not in the math. There is no math to get you out of having to experience uncertainty.

If you have trouble with the feeling of uncertainty, then instead of feeling it, you wind up cutting back and / or cranking up your trading at just the wrong times.

If you want to trade consistently, without the swings in confidence, then you have to learn to accept, even celebrate, the feeling of uncertainty. This is the work of the Trading Tribe.

After all, the really certain things in life, aren't really that much fun.

Sure Thing

Thu, 20 Mar 2003

 

Showing Up



I have agonized over the last week on the question of how to be consistent with my presence at the Trading Tribe meetings on Thursday evenings. Given my employment situation in SF, I may not be able to attend consistently and I may agitate the other tribal members. I gathered from our phone conversation that regular attendance is important to these meetings.

I did some research on Grof's Holtropic breathing and the other information you gave me as background to your work with the Trading Tribe. This is an absolutely fascinating approach to espousing wakeful trading and mastering the self in relation to trading. In doing the research I was reminded of Suzuki's Zen Mind, Beginner's Mind". Pioneering work!

I would really like to attend, but I would rather be upfront and honest about the possibilities of my failure to make it up to North Tahoe every week. Please let me know how you feel about this and if I can be excused from regular attendance.

Meetings are bi-weekly and consistent attendance is important. 

 

Woody Allen

Ninety percent of success is showing up.

Wed, 19 Mar 2003

 

3 questions/comments for FAQ

I have three entries for your FAQ pages - I don't mind if you publish any, none or all of them, either separately or together.

1. I notice that you use technical market information rather than fundamental information to develop your trading strategies, and seem to put little faith in any kind of methodology based primarily on fundamental research. How do you reconcile your beliefs with the stellar long-term track records of stock market investors who use only fundamental information? (i.e. Warren Buffett and other "Wizards of Graham and Doddsville" (see Appendix of The Intelligent Investor, by Benjamin Graham))

-My theory is that leverage is what kills even great fundamental commodity traders. Most stock market "value investors" are early - if you look at Mr. Buffett's track record, most of his stocks continued to drop in price well after the buy point. If he was regularly leveraged at 10 to 1 like most commodity traders, he would be wiped out before the stock turned. I think that commodities whose prices fall below the cost of production are potentially good buys - but the timing and strict exit rules must be there to ensure success. (No, I don't mean scale trading, which is suicidal)

2. In the world of commodity trading, there are many success stories, not all of whom use trend-following techniques. Linda Bradford Raschke is a swing trader, Paul Tudor Jones seems to trade intermediate swings (and also likes to pick tops and bottoms) and there are many floor traders who scalp a nice living. Do you espouse trend-following simply because you believe that it is the best of many good strategies, or do your beliefs carry further to the point where you think that other techniques are all bound to fail in the long run?

3. I know that you do not endorse products, but I would like to support an earlier comment from somebody who discovered a site with $1 minimum trade. If I understand which site he/she is talking about (it is currencies only) I second his/her views. The major handicap to small (<$100,000) commodities traders is the fixed contract sizes which make money management very difficult. This site lets you trade in one dollar increments up to $1,000,000, with about 20:1 leverage and spread-only (3-6 pip) commissions. Even a small trader can "dial in" exact position sizing. The only drawback is the currency limitation, which cuts down on the number of non-correlated markets (EUR/USD, USD/CHF and USD/JPY all look the same in the long term trend - cross rates help, but still circle back to one another)

1. By definition, if you make money in the markets, you are on the right side of a trend. No trend, no profit, period.

So it comes down to how do you get on and off a trend at the right time, and how heavy do you bet so you don't stub out during the corrections.

Buffett uses fundamentals ... and missed the great run up in tech stocks.  Of course, you can use many methods to miss markets, so I don't think he has any unique ability in that area. Mostly, Buffet has a great attitude; he has the seemingly infinite patience, courage and humility of, well, a Warren Buffett. Plus he has a secret advisor, below.

2. There are at least as many ways to approach the markets as there are traders. I feel every successful strategy has to exploit some or another trend.

Trend followers look for trends directly in the price (and get some whipsaws).
 Fundamentalists look to predict inevitable trends by looking at underlying factors (and are often early and / or wrong).
Arbitrageurs and swing traders feed on small imbalances (and sometimes find out these imbalances are just the start of a bigger trend.)
Contrarians look to take the opposite side from the public (and sometimes find the public just keeps the trend going and going.)

3. Correct, FAQ does not endorse people or products.

The Buffett Behind the Buffett

 

Trending Away to Margarita-ville

Searching for ... an order to sell

It's always the same, there's no broker to blame

'cause I knew ... only after it fell.

Wed, 19 Mar 2003

Crude Oil

I notice the price of crude is going down ... is this a good time to buy or sell? I am not a professional trader.

Trend followers buy up-trends and sell down-trends. Many trend followers had a good ride up the crude oil market, and then another good ride down.

You might like to recall, around the March highs, at least one magazine cover expressed a widespread feeling, that the market was heading higher. Contrarians view this kind of emotional abreaction as a signal that the jig is up.

I notice that the public (I am taking you as a proxy) is now noticing the price going down again, so contrarians might just be looking for a spot to buy back in.

Fundamentalists have yet other ways to view this very interesting situation.

In general, if you have to ask what to do, your best move is to stay far, far away.

April Crude Oil Futures

$28.25 at 8:15 PM, PST, March 19.

Equivalent May Crude 27.75, May Heating Oil 74.75, May Unleaded Gasoline 89.25.

If you don't like the price, just wait a minute.

Wed, 19 Mar 2003

 

Volatility

 

Why is it implicitly accepted by most trend followers that one has to eat a lot of volatility to get to the big winners? Is there something I'm not understanding?  I don't find that to be the case. I'm eager to hear your answer.

Volatility is the tendency to vary widely and often, as do the markets.  Hold a big position in an active market, and you can expect lots and lots of volatility.

Chicago Board of Trade Dining Room

Attentive and flawlessly trained staff execute the house specialty, Broiled Volatility, with Black  Scholes sauce.  Those who like to eat a lot of volatility, can always get a good fill at the Board of Trade.

Wed, 19 Mar 2003


Homer Simpson Picture

I have been getting a kick out of reading your FAQ. A solid mix of wisdom and humor. Thought maybe you could use this picture for your arsenal in a future post.

I would like to attend next week's tribal activities in Incline Village. Two-wheel drive weather permitting I will be there!


I wonder what aspect of your trading experience the picture of Homer represents.

 

 

The Simpsons

 

With over 300 episodes, this, the longest running  animated TV series ever, still has about half as many episodes as Gunsmoke's 633. (OJ, who had his own series for a while, is not shown in the photo.)

Wed, 19 Mar 2003

 

Group in Los Angeles

I'm interested in being part of a group. I'm located in Los Angeles, but I'm willing to drive to San Jose for meetings. Is there any interest in forming a group in LA yet?

By car, LA to San Jose takes about 5-1/2 hours.  LA to Incline Village takes about 8 hours. If you would like to organize an LA group, I can put your email address in the Directory.

Los Angeles to Incline, 500 Miles

Wed, 19 Mar 2003


Non-Proportional Risk Management

(see reference)

Do you mean do not reduce new Entry risk on drawdown, or reduce new Entry risk moderately?


Page 160 MW interview. "The manager still must decide...how aggressively to increase and decrease the trading base as a function of equity change."

 

Does 'trading base' mean the percentage of Total Equity Risk Per Trade, (ex. 1 - 5%). Or, does 'trading base' mean the Maximum Risk Exposure to Total Equity, (ex. 20 - 32% on all positions).

The trader has to maintain some level of trading appropriate for the equity.

You can measure trading base in various ways, depending on your system:

contracts
shares of stock
aggregate value
risk-to-stops
volatility

You can measure equity as:

liquidation value of the account
liquidation value less risk

The trader's job is to keep these well-proportioned.

 

 Specifications for Champion Great Danes

 

The female shall not be less than 28 inches at the shoulders. Thirty inches or more is preferable, providing she is well proportioned to her height. Danes under minimum height must be disqualified.

Wed, 19 Mar 2003

 

Formal Trading Education


I'm enjoying your website. I wish to explore your ideas on formal education and the markets. Could you comment on the most important factors your previous studies have brought to your ability to play the game better?

Suppose for a moment you are a Dean of Finance for an exciting new university. Your opportunities to fashion a program is wide open, you are given carte blanch. What are your thoughts on how you might fashion a masters degree in trading and the markets? How and what would you teach? On which subjects would you have your students focus? How would you conduct yourself in this hypothetical situation to maximize the returns you value?

As Dean, I would set up an interactive website about the real issues traders face, and invite people to send in questions.

 

I would read the mail very carefully, so I could reply to:

the formal question

the personal mask and / or trading metaphor the contributor uses

 

For example, say the item was all full of very open-ended questions, one after another.  I might model him as an owl.  I might suggest to the writer  that he go for a day or two without asking any questions at all, to find out:

 

how question deprivation feels

how a barrage of questions might make the other party feel

how else he might get information

what other masks he might try on

 

 

Masked Owl

Keeps asking the same question, over and over.

 

 

  Tatanua Mask

the New Irelanders of Melanesia take this mask as a metaphor for male power and aggressiveness.

Wed, 19 Mar 2003

Perceptions, Metaphors,

Dynamic Position Sizing

Thank you very much for the great site. I am seeing a lot of things clearer now. As I think about it I view my system as a part of myself which I brought from the inside to the outside.

 

If the system is not implemented correctly I feel an internal conflict or a kind of dishonesty to myself. Following the signals is quite easy for me since it gives me a feeling of going with the flow.

 

A problem arises in situations which I had not discounted for and for which I do not have specific rules. That’s why I am spending quite some time thinking about possible future scenarios …

I would like to add some comment to the Math is a Language post from yesterday. I ran extensive tests on dynamic position sizing and found out that none is really better than a static fixed percentage approach. I tried to limit my drawdowns to a specified number with the dynamic approach because I psychologically liked the false safety of it (“ Whatever I do my drawdown wont be below X% with a 99.8% probability”). Additionally to the reasons already mentioned by you it has the following drawbacks:

 

Drawdown periods get longer (What’s worse? Longer or deeper drawdown?)

After some losses you might reduce risk because the drawdown touched a certain level and get a huge positive move with a small contract size. For me that’s psychologically devastating.

Its prone to curve fitting

 

Ich hoffe dem Auge geht es besser,

Thank you for the additional information about problems with dynamic position sizing

 

Danke für Ihre freundlichen Wünsche.

 

 

 

Tubing

Getting the feeling of going with the flow.

 

Wed, 19 Mar 2003

 

Re-Reading


Sorry, having reread what I wrote ... it didn't seem to make much sense to me either. I have just thought of some tests I could do in order to answer my question.

If you start with an ambiguous design and try to translate it into computer code, you can easily get lost in math that just doesn't seem to work.

Solution: dump it all out and start over.

Coffee Mug

Instructions for filling: first, make sure it's empty.

Tue, 18 Mar 2003

 

March 13 Meeting Follow-Up

I've come to some powerful new awareness's already as a result of my first group meeting.

1) I feel profoundly more at ease in the world and less anxiously self-absorbed.

2) It became very clear to me over the weekend that my goal of selling my xxx and taking out a loan for $xxx to trade through xxx was a clear example of "swinging for the fences" and had the potential to be quite self destructive.

3) Literally within hours of letting go of needing to sell stuff in order to trade I came across the trading solution at xxx. Essentially, all the other firms dictate a minimum lot size of at least $10,000, base currency. What this means, is that with a 2% risk rule that you need at least $20-$25k in order to be able to open even single lot positions. With xxx, the minimum lot size is $1 and there are no fees except the bid-ask spread. I ran the numbers, and realized that I can go live with a $2500 "model" account. I'm shooting for the first of May.

4) I also realized that I can go live with great confidence in my system even in it's crude, lightly (excel) back tested form. The basic parameters are very simple and very robust, and if anything, I can refine it from more detailed back testing analysis going forward. In other words, I'm considering myself ready to trade, and not making a big deal out of having everything "just so" before I put live dollars on the line.


I'm definitely not in any big hurry to devote too much time to testing right now, my new focus is in devoting no more than a highly focused hour to my trading decisions each day, and getting on with the rest of living, focusing on my nutrition, fitness and most importantly having more fun.

Being at ease and letting go of what does not work are trend-following principles  and the basic work of the Trading Tribe.

Formulating a system, and back-testing are ways to optimize portfolio selection, trade timing and risk control.

Balancing these can help keep you on the middle path, between stuck and floating away.

 

Earth to Trader - Earth to Trader

Come in Please ... and Bring More Margin

 

Hello Enlightened One, this is your broker. Say, I'm really sorry to get you out of your flotation tank ... just thought you better know ... your contracts are heading down in a fast market. Yes, I know it's mellow ... it's just that we need you to put up a little more margin.

Tue, 18 Mar 2003

 

March 13 Tribe Meeting Follow-Up

 

It was nice to meet you last Thursday. I enjoyed the Trading Tribe meeting. Initially, it took a bit of concerted effort to put myself into XXX's shoes, but by the end, I had begun to grasp it. Many share the same problems, they just manifest themselves differently.

Putting yourself into XXX's shoes, going with the feelings wherever they lead ... is analogous to going with the trend of a market.

He's going that-a-way.

Tue, 18 Mar 2003


Trend Following Works Outside Trading

I wonder if the trend following methodology is also successful outside of trading. I have been sticking with trends in my everyday life a lot longer since I have been reading your web site, such as my different moods, the flow of auto traffic and more importantly the moods of people around me. Identifying these trends earlier has made my life more enjoyable. Thanks.

As trend following, going with the flow, expressing feelings and being pragmatic all merge, you become one with your system, the Laughing Buddha.

Siddhartha Gautama, 563-483 B.C.

The Indian mystic and founder of Buddhism at age 35: Follow the middle way ... accept that all things change, release all attachment, and kick butt in the markets.

Tue, 18 Mar 2003

Need Cash ?

Get Paid $25 to $125 an hour to work online - where your opinion is worth a paycheck!

Great! Send me a paycheck, and I'll tell you my opinion of your paycheck.

J. C. Hormel introduces Spam in 1937. Five billion cans later, it's still going strong. The newer email variety (item to the left) does not seem to have the same consistent quality.

Tue, 18 Mar 2003

Interested

I have sent a few emails expressing my interest in coming to Nevada and spending some time with you. My intent is still the same and will be following up very shortly. I am reading market wizards and reviewing other materials as well. I was told to do this first before going to Nevada.

I am arranging time towards the end of April. Is that a good time? I will also arrange to have funds sent. What is the amount please?
The Trading Tribe avoids passive language, such as I was told

We use SVOp - Subject, Verb, Object, present tense, so we know, for example, who is telling you to read first, travel later.

Still in Style, Since 1918

Section III, items:

11. Use the active voice
12. Put statements in positive form
13. Omit needless words

Tue, 18 Mar 2003

Anticipation


(1) From your experience, does using different trend-following strategies for different markets reduce down-side volatility of the portfolio's P&L?

 

(2) Also, does a trend follower need to be in the market all the time in order to catch the big move?

On a different note, you said that trend followers do not try to anticipate anything, but does the strategy not anticipate indirectly that a trend will continue? I suppose all strategies anticipate the future in some ways.

1. You might clarify what you mean by "down-side volatility of the portfolio's P&L." This particular word bunching seems ambiguous, particularly the part about the downside profit (P&L means profit and loss).

 

2. No, he just needs to be in for the big moves, and it's also nice to be out during choppy whipsaw markets.

 

3. The trend following strategy does not anticipate anything. The trader might anticipate a top or a bottom, and stick to his system anyway.

 

 

Howler Monkeys,  c.1848

 

The trouble all started when a million of these guys got a hold of a million computers and started coding their trading systems. Typical result: "To be or not to be, that is the ... downside portfolio P&L volatility."

Tue, 18 Mar 2003


Math is a Language - see prior send

Me' puedes dar un vaso de agua? Didn't understand? Let me clarify. Could I have a glass of two parts hydrogen one part oxygen?

 

Risk Exposure - Measures max risk to Total Equity if all positions are stopped out.

I will use this to determine if I can accept a new signal and position.

 

Program Volatility - Measures the drawdown of Total Equity. I will use this to reduce risk as the drawdown increases. As Total Equity increases after drawdown I will use this to increase risk back to original levels.

 

Me' puedes traducir esto en matematica? Could you translate this into math? Al fin encontre' lo que queria, pero tuve que andar de la Ceca a la Meca. At last I found what I wanted but I had to look high and low. Gracias.

Mé puedes dar translates to Can you give me. Could I have translates to Podría tener.

 

You could also stand a little more precision with  risk, drawdown and volatility.  From precise definitions, the math follows easily.

 

In this and in your prior send you suggest  non-proportional risk management. This raises problems:

Different position sizing for two equal size accounts, if they start on different dates and have different performance history.

After a drawdown, prohibitively small risk allotment, effectively suspends trading altogether.

 

Me parece que mucho dinero de nuestros impuestos anda de la Ceca a la Meca. (Seems to me that a lot of our tax money goes all over the place.)

 

The pun is on the old Spanish slang phrase,  Ceca a la Meca, meaning, literally from the Mint to Mecca, also all over the place, or not staying in one place very long.

 

 

The Philadelphia Mint presses the first U.S. coins, copper cents and half cents of 1793. The presses run by hand and with horsepower. 

 

 

Mecca is the most holy city in Islam.

Tue, 18 Mar 2003

 

Typo


I found a typo on your site.


Thank you for the heads-up.

 

 

Maybe it's time to upgrade.

Mon, 17 Mar 2003

 

A Long Strange Trip

When I was in college I heard the siren call of Stochastics and Bollinger bands. An older man I met at church studied this thing that nobody talked about, technical analysis. He had many books from impressive sounding people dating back to the 60s and 70s which I devoured with enthusiasm.

 

I can remember sitting at the back of my useless graduate human resource class, looking at patterns and learning rules about trading. It was 1992 and at the sunrise of online trading. My path was clear, I would go straight from graduate school to retirement.

 

The fact that my mentor lived in middle class housing, worked in a factory, and drove old cars didn't seem to grab my attention. $250,000 later I took a real job.

 

I was fired from my job as a "market facilitator". The only thing worse than losing your own money is losing your friends' and family's money. Fortunately my father viewed it as a lesson learned, and a cost of learning the business.

 

Over the next 5 years I read and studied everything. My mentor, myself and some other friends regularly discussed charts, often meeting over breakfast to talk about the market or our positions.

 

More and more I found myself questioning their decisions in my mind. None of us had a plan of any kind regarding risk, despite the fact that everyone I read ranted about the importance of "money management", without necessarily explaining in specifics what that meant. Over time

 

I became a breakeven trader. Time and again I would watch my friends get "hot" and have strings of successful trades. Inevitably followed by holding on to an over-leveraged position and blowing up. Then they would switch to a new indicator or method.

 

I came to see learning to trade as learning to sculpt. You have to remove all the junk to find the truth. I suspect learning truth about any subject is similar. Last year I earned over 20% in my account and 16% in my father's.

 

Now I find myself farther down the learning curve, and in an uncomfortable position. The people I'm surrounded by, my friends and family, don't share the same view of trading as I do. My father, although supportive, sometimes questions my styles and decisions. My "mentor" still likes to swing for the fences.

 

Have you ever found yourself in such a position? Where you've outgrown the people around you?

 

In a personal note, I like your site. Could you please shed any light in the [XXX] vs [YYY] situation. I have contacted the people that run both sites and they claim the other are crooks who will steal your money, lol.

People who support and celebrate your growth are rare, delightful and precious gifts. Those who don't keep up can still be valuable teachers. Mentors can go either way.

 

FAQ does not endorse people or products, or get in the middle of other people's fights.  See FAQ policies

 

 

 

Big Fight: Forest vs. Mayorga

 

Since both gentlemen were evidently familiar with FAQ Policies, neither one bothered to approach FAQ for mediation or adjudication services.

Mon, 17 Mar 2003

 

Money Management

Thanks for your last send it was reassuring and helpful. Especially the part about pyramiding.
These are my base assumptions about money management and parameters I will be testing.
Money management is the adjustment of position size as it relates to;

EQUITY - risk 1/2 - 5% of Total Equity on any one trade.

CURRENT MARKET VOLATILITY - Exit stop at 15 day exponential ATR * 2, 3 or 4.

RISK EXPOSURE - (if all positions are stopped out) Total Equity Max Risk is 10-32% (TE * %Max Risk) - [(settlement - exit stops)($ per point)] = $ Risk available / TE = % TE Risk available if < 2% then No New Position.

PROGRAM VOLATILITY - For each 10% drawdown from highest Total Equity reduce risk by 20%. (ex. begin with 2% risk on any one trade, then 10% TE loss = 1.6% risk, 20% loss = 1.28%, 30% loss =1.02%). After a 30% Drawdown for each 10% gain increase risk by 25% (ex. begin 1.02 then 10% TE gain = 1.28%, 20% gain = 1.59%, 30% gain = 2%)


I am having difficulty expressing Risk Exposure and Program Volatility in a formula. Could you help?


I realize your site is about teaching traders to maintain emotional balance while executing a well thought out plan.

 

However building a well thought out plan can be difficult without support and a math background.

Math is no substitute for clarity.

 

If you are having difficulty expressing elements in a formula, good chance you are not clear about the definitions of your terms, such as "Risk Exposure" and "Program Volatility."

 

To test your clarity, try to explain your thinking to someone else, preferably an angelic child.  If you can't get it across easily, it just isn't clear enough to program.

 

To clarify your thinking, you might start by specifying how you intend to use these factors and what they intend to measure.

 

 

Quality Control for High-Level Thinking

 

Mon, 17 Mar 2003

Taking the Hot Seat


I really enjoyed the meeting last Thursday. I am looking forward to the next. Hopefully I will get to take the hot seat that time. During the meeting, I realized how important and crucial this type of work (on oneself) can be for me or any trader that takes the hot seat.

I was thinking that some time in the future (it would be a while), I might start my own group. Not sure if I can find enough traders here, but we shall see.

So far, I know of interest in forming groups in Reno, San Jose and Toronto.

 

Typically, many apply, few are called to occupy important hot seats.

 

 

Royal Throne / Coronation Chair

 

 

 

Speaker's Chair, House of Commons

 

 

 Trading Throne

French Merovingian, 8th century, majestic style with gothic-arch top and full armrests, candle holder, hand painted earthenware ash tray, poetic inscription on the seat back by a French poet, snug-fitting cover and pull cord that rings a bell.

Mon, 17 Mar 2003

Discipline

I would like to thank you for inviting traders to send you questions.

I have been trading for a number of years now using a trend following system (albeit a short term one). My discipline of taking all the trades that the system gives has diminished of late probably in response to a drawdown I experienced in January of this year where I experienced a large string of losing trades. Although I maintain a three-quarters of a percent loss on any trade, the actual money amounts represented are significant (to me anyway).

This lack of discipline has meant that I have not taken a number of trades which included a lot of losers, but also contained a couple of winners, the net effect being that instead of being up 2% for the year to date, I am actually down 5% instead.

I have noticed this diminished sense of discipline in other areas of my life as well.

My question is therefore, how can I increase my discipline and maintain it?

You seem to like to break your own rules.

 

You might try to "go with the flow" and happily break some rules on purpose for a while, preferably in an area where consequences are not large.

 

You might get a coloring book and joyously color outside the lines. 

You might enjoy breaking some rules of grammar while you are speaking with associates

You might like to take a walk around the block with only one pant leg rolled up above the knee.

 

All the while, see if you can notice how you feel about rules. Typically, this has to do with parents. 

 

As you allow yourself to experience these feelings, even communicate about them to others, and start to enjoy them, they tend to disappear.

 

Then, you can either follow your rules or not, without all the emotional overlay.  Good rules, like not touching wet paint, are easier to follow without the baggage.

 

 

Wet Paint Sign with Ripping & Graffiti

 

In NYC for the past 10 years instead of using "wet paint" signs intact, workers have been ripping them in half, ostensibly to double the number. Result: more locations for Mike to express his feelings about Christine and about authority.

Sun, 16 Mar 2003

About Stocks

So, according to Market Wizards, you sometimes take time off from trading. The news says that the market will be in for a wild ride this next week due to the threat of war - will you not trade in anticipation, or will you give it a try and figure you can surely beat the predictions of the media? It seems that they rate right up there with the weathermen ...

Well, if it's on the news, then you can bet on it. Of course, you might very well lose your bet, or miss a good one.

Trend followers do not trade in anticipation of anything, nor do they try to figure things out. They simply go with the trend.

Figuring-out and anticipating events are things that fundamentalists, and weathermen do. They engage the processes of analysis and anticipation, with similar results.  The best ones learn simply to predict the trend will continue for a while.

 

Weather Prediction Device

 

Put the device outside and check it every so often. If it is wet, it predicts rain. If it is all white, it predicts snow. If it is on it's side, it predicts high winds.

16 Mar 2003

Stuck

Quote: "I'm contemplating hypnosis as treatment in order to get at those feelings that might be stuck."

Treatment referred to celebrating and embracing those feelings. I referred to it as "treatment" because It seems I've become very adept at suppressing the feelings I don't like; finding out what those feelings are, I thought, amounted to treatment. I've come to realize that it will take a lot from me to learn to celebrate and find out the feelings I don't like. The problem lies as you said deep in my unresolved issues. Furthermore, I don't know what these issues are. This is quite new and foreign to me. I wanted to know if I could utilize hypnosis to get to know and find out what those feelings are so I can celebrate, embrace, experience them and let them pass through. I'm grateful that you are shading light on such an important issue.

Feelings are feelings, and many of the important ones don't even have names. For trend followers, some of them arise at the time of placing stop orders, getting stopped-in or stopped-out, and watching their own performance curves.

Analyzing feelings, even giving them names, is an intellectual, logical process, and may be yet another way to avoid the real work of feeling them and communicating them.

Feeling the feeling of trying to figure out the feeling of trying to figure it out.

Sun, 16 Mar 2003


Trade Long-Term, All Markets 

It bothers me that traders devise a system, back-test it, and then choose to only trade the markets that it works on for the past (10 years or so). This seems like over-optimization to me. It even seems worse than over-optimizing to the best parameters associated with a particular market. At least with the latter, a trader will most likely participate in a big move. If one is not even looking at that market, then one will not be able to participate by definition.

My philosophy is to trade long term enough break-outs that will assure few trades per market per year, but make sure that I am looking at just about every market available. This way I am assured that I can have a big gain when that big move comes along.

What am I am missing or what is faulty with this line of thinking?

I realize that I am exposing myself to markets that, historically, have offered little in the way of trend following profits. (Not because they don't move in trends, but because they tend to do so in a choppy manner.) However, this classification seems rather temporal to me. The British Pound has been tough on trend followers for much of the nineties, but had some great moves before that. Soybeans often confound my systems for recent data, but what if a trader missed the move in the seventies? It only takes a move like that to make a huge impact on equity.

Long-term trading has an advantage, in that the transaction costs are small relative to the average move.  Some traders might find it difficult to sit tight through prolonged corrections.

Sounds like you are coming around to the idea of trading moves, rather than markets. Some traders hold on to a position, and keep changing their systems to fit it - other traders hold on to their systems and keep changing their portfolios to fit it.

Most markets creep along most of the time and then make a nice move, sooner or later.

Edible Snail

The fastest snails are speckled garden snails which move up to 55 yards per hour compared 23 inches per hour of most other land snails. May 24th is National Escargot Day.

Sun, 16 Mar 2003

Flying Glass

I am looking at buying my wife a Subaru AWD because our winters in Canada are very snowy. I have a question ... I was looking at the frame-less window at my local dealer and it didn't look very safe. I have read a few reviews about them but they only talked about sealing problems. 

To control for risk of flying glass, try a vehicle with window-less frames, or maybe the SUV below. You might like to take a look at your feelings about risk.

FAQ does not endorse products. See FAQ Ground Rules.

Armored Suburban, Bullet Proof Windows

$110,000

Sun, 16 Mar 2003


The River and the Lion

After the great rains, the lion was faced with crossing the river that had encircled him.

 

Swimming was not in his nature, but it was either cross or die. The lion roared and charged the river, almost drowning before he retreated. Many more times he attacked the water, and each time he failed to cross.

 

Exhausted, the lion lay down, and in his quietness he heard the river say, “Never fight what isn’t here.”

 

Cautiously, the lion looked up and asked, “What isn’t here?”

 

“Your enemy isn’t here,” answered the river. “Just as you are a lion, I am merely a river.”

 

Now the lion sat very still and studied the ways of the river. After a while, he walked to where a certain current brushed against the shore, and stepping in, floated to the other side.

Nice story.  Yes, the easy way is often best. Of course, it usually doesn't hurt to check the river for down-stream volatility.

 

Hakuna Matata means no worries for the rest of your days ... it's a problem-free philosophy.

 

 

Niagara Falls means remember your risk control.

Sun, 16 Mar 2003

System Assist Broker ... Follow-Up

Thanks for answering my March 7 question regarding the use of a system assist broker. I wanted to follow-up on that question, because part of your answer did not make sense to me. You stated that, “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.”

I’m not sure that I agree with that statement. My definition of a money manager is someone who invests (or trades) my money on my behalf in a manner of his/her own discretion, in accordance with my risk/reward comfort level. This however, is not how I use the system assist broker.

The system assist broker is simply executing trades following a set of rules that I provide them for trading my account. All decisions are made by me (through the rules that I provided the broker). This does not fit my definition of a money manager. With that further clarification, does this still seem like an account owner / money manager relationship to you? I don’t see the reason of cutting them a share of my profits for simply following my rules.

Do you see this outsourcing of the system execution function of my system as a valuable way to reduce the risk that psychological tendencies may at times block me from following the signals? Is there a downside to this strategy? (other than higher commissions?)

Thanks for your time. I appreciate all your efforts on the FAQ

My understanding of the function of your system assist broker is to insulate you from the order entry process, and from jumping your system.

This work-around indicates you have a very real concern about handling an intimate relationship with orders. You might like to take a look at your feelings in and around the area of sharing wishes.

As the assistant accepts more responsibility for handling the feelings of trading, he becomes the trader, and develops entitlement to trader fees.

Tiger Woods

This world-class athlete is actually Ed's system-assist golfer. Ed delegated the job of entering tournaments and generating strokes, all on Ed's behalf. So far the arrangement is working very well. As compensation for this service, Ed allows Tiger to keep 100% of the fame and fortune for himself. This agreement is so secret that even Tiger Woods does not know about it.

Sun, 16 Mar 2003

See ++

I'm sorry to hear you suffered the eye injury and now am praying for your recovery.

Thank you for your prayers and wishes. They seem to be working.

Retinal Detachment

 

In a whiplash situation, the vitreous gel, that fills the central cavity, can separate from the back of the eye and pull the retina with it, like wallpaper. Vitrectomy replaces the vitreous gel with a gas bubble, allowing the retina to re-adhere to the back wall. Over time, the body replaces the gas with fluid. No evidence exists that the procedure enables the patient to see into the future.