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April
6-12, 2003
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Questions
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Answers |
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Sat, 12 Apr 2003
Circuit Breakers
Ed-
How are you doing? You may recall (me from the) mid-nineties as a trader and
that you and I had a protracted fax dialogue concerning the controlled
risk plunging techniques I employ in my discretionary bet sizing and
trade selection.
I must say your advice and coaching have been invaluable to me over the
years. I am forever grateful to the knowledge and wisdom you have passed
along to all of us. Thank you for that so much.
As my trading is a constant work in progress I would like your advice on
something.
I was thinking of implementing some procedures; call them circuit breakers
if you will, to aid me. My questions are two fold:
1. Do you have any thoughts on implanting this type of technique?
2. Do you have any suggestions as to how I could approach calibrating these
procedures to compliment the type of ride I take?
Here are the numbers I came up when I looked through my stats. However, I
must admit that I did not apply any mathematics when coming up with these.
Circuit Breakers
 |
Loss limit of up to 5% initial risk or
less on every single trade; liquidate trade if breached.
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Loss limit of 12% of total equity on any
day; liquidate all positions and stop trading for the rest of the week.
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Loss limit of 25% of total equity per
month; liquidate everything and stop until next month.
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I am also interested and often entertained
with the impressions you have. So please feel free ... comments you may want
to make.
Forever grateful for the wisdom you lend.
Hoping to continue to learn and improve.
Warmest regards.
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For
emotion-intensive trading styles, like plunging, circuit breakers seem to
protect the trader as well as the system.
Plunger's Helper
Clip: www.science-city.com
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| Fri, 11 Apr 2003
Tribe Topics
Hello Ed,
As a contact person for one of the remote tribes, I am
pleased to report that there is quite a bit of interest out there for
joining the Trading Tribe. However the majority of those interested are
short term day trader types.
The second and somewhat related question is I believe one of the goals of
the trading tribe is to promote personal growth through interaction of the
members; Are we strictly focusing on the psychological aspects of trading
or are we also exploring trading philosophy, for example an exploration of
different styles?
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Trading Tribe
meetings provide opportunities to resolve personal issues around trading.
Discussions focus on feelings.
For example, discipline and rules are
central to following trends and also to playing golf; a lot can depend
whether a trader views himself as the golfer or the ball.
Discipline
with a Club
Clip: www.teedoffgolf.com |
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Fri, 11 Apr 2003
Software
George Soros didn't know much about programming. So why would you sometimes
put so much emphasis on it? At one FAQ you say "learn some programming
..."
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If your premises are
correct, and if you want to turn out like George, then avoid learning
programming.
George Soros
Clip: http://www.soros.org/gsbio
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Fri, 11 Apr 2003
Economics
for Trend Followers
The uncertainty of the future is already implied in the very notion
of action. That man acts and that the future is uncertain are by no means
two independent matters. They are only two different modes of establishing
'one thing'. -Human Action, The Economic Opera of Ludwig Von Mises
Differential calculus is counter-flow while Integral calculus follows the
flow of life. Differential calculus obscures rather that illuminates
understanding. Integral calculus supports gut understanding. -Ed
Many current econometric models, use differential calculus, have little
accountability to gut understanding and drift from reality. -Ed
As you've mentioned in your answer on Sat, 5 Apr 2003, I agree many current
econometric models, which use differential calculus, drift from reality. The
history of every branch of knowledge records instances of the misapplication
of the calculus of probability proposition about an expected outcome couched
in arithmetical terms. You've made clear the affinity of human psychology
possess for imaginatively identify an abstract object with another object
that can be apprehended directly by the senses.
Many, including trend followers, are dismissive of economics because 1) its
dismal history of prediction and 2) the idea that economics in general
derives its conclusions from a phony conceptual framework.
For many years, I'd wondered: What exactly constituted Price Action? And
what was involved in price formation? Mind you, I wasn't looking to predict,
as you refer to it, the none-existing-future.
It seems, in economics, physics and other sciences the fundamental
deficiency implied in every quantitative approach consists in the neglect of
the fact that there are no constant relations between what are called
dimensions. For example, in economics there is neither constancy nor
continuity in the valuations and in the formation of price and opinions
between various commodities and participants. Every new data brings about a
reshuffling of the whole price and opinion structure deeming price action
unpredictable. Thus, current econometric models run into all kinds of
problems.
And today, economic thinking is broken into many schools of thought: the
Keynesians, the Post Keynesians, the New-Keynesians, the Classicals, the New
Classicals (or Rational Expectations School), the Monetarists, the Chicago
Public Choicers, the Virginia Public Choicers, the Experimentalists, the
Game Theorists, the varying branches of Supply Sideism, and on and on it
goes….
Also part of this mix, but in many ways apart from and above it is the
Austrian School. It is not a field within economics, but an alternative way
of looking at the entire science. Whereas other schools rely primarily on
idealized mathematical models of the economy, and suggest ways the
government can make the world conform (counter-flow), Austrian theory is
more realistic and follows the flow of life. As its most basic foundation, Austrian
economics accounts for the psychology of perception. Austrians view
economics as a dynamic tool for understanding and feeling, how people both
cooperate and compete to form price.
If the hallmark of conventional economics is unrealistic models, the
hallmark of Austrian economics is a profound appreciation of the price
system. Thus Austrian economists point out, it's not necessary for consumers
to know, for example, that a disease has swept the cattle population to
economize on beef. The price system, by making beef more expensive, informs
traders and the public of the appropriate behavior.
For the trend follower, the problem of probability is a primary concern of
the study of human conduct: Price Action. Understanding Austrian economics
is understanding price action and thus human conduct. It's my experience
that one will better be able to understand the nature of price, as
well as build stronger confidence, faith and gut-feel not only for price
action but also for the systemic biases that inevitably sustain large
trends.
Austrian economists utilize praxeological reasoning, which takes into
account the categories both of time and of causality. It is an aprioristic
and deductive system. It is a system out-of-time with change as one of its
elements. Anteriority (occurring before in time; earlier) and consequences
are essential concepts of praxeological reasoning.
Time as we measure it by various mechanical devices is always past, and time
as the philosophers use this concept is always either past or future. The
present is, from these aspects, nothing but an ideal boundary line
separating the past from the future. But from the praxeological aspect there
is between the past and the future a real extended present. Action is as
such in the real present because it utilizes the instant and thus embodies
its reality. -Human Action, Ludwig Von Mises
In general, Austrian economics doesn't dwell on one-sided solutions with its
many limitations. It focuses on the many interrelated and interconnected
elements of psychology and human action. I believe it's in step with
gut-feel and the overall truth of the way things are. Nonsensical
mathematics not needed.
In the field of economics, Austria produced some of the best theorists;
Ludwig Von Mises is representative of a tradition and erroneously known as
the father of this school of thought. They've been theorizing regarding
human action within the framework of dynamic economic systems for over 150
years.
I would be highly grateful for your comments, in regard to the above.
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Different
schools justify different political structures. The Austrian School tends to
justify Capitalism. None of these schools predict prices very well.
As you seem set on understanding and
predicting things, I suggest a puzzle for you: write down a description of
your own feelings about how come you want to predict things and send it to
FAQ.
If you can't do it, you can stop
trying to describe larger systems; if you can, the insight might set you
free from your obsession to predict the future.
Under-Standing
Standing
under an F-16, VP Cheney talks with an Air Force pilot in Qatar, March 17.
Clip: www.whitehouse.gov/vicepresident
Freedom
Living
in the Now
Clip: www.gr8dls.com
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Fri, 11 Apr 2003
Intentions and
Meta-Systems
Ed,
In my previous posting, I asked a question (deliberately seemingly) about
psychology. And got an humiliating answer that made me uncomfortable.
Uncomfortable, as it was true.
My intention was getting a feedback from you about the meta system
approach;
the approach of getting an edge through systems of systems. I think you
have discovered my hidden intention of getting an assuring feedback
(assuring in a sense that simple systems don't perform well and the
competition is in the meta-system level) without revealing this concept to
the other participants of the FAQ.
It's also remarkable of your discovery of my lack of assigning value to
people and seeing them as a distraction on my path. Here is a sample from my
previous post:
"I read Market Wizards maybe 6-7 years ago in the university library. I
was particularly attached to one figure in that book."
There is a book that has made; sorry, I have been very much affected from
the market wizards book and still I mention from the book as "that
book".
I have a deep belief, especially enforced after the loss due to death
or other reasons of a few important people in my life:
THE HIGHEST POINT ONE CAN ACHIEVE IS THE TOTAL LACK OF ASSIGNING VALUE TO
HIS LITTLE PRECIOUS LIFE.
We are, who we are, by a great deal of chance. There is a million
cases where
our fathers could not have met our mothers. There is a thousand of cases
where our parents could have killed themselves before we were born.
So, I pose here my question in an open form:
What do you think of analyzing trend following systems like moving average
crossovers or others, with the purpose of designing meta systems?
|
When you can
allow yourself to feel the humiliation directly, you might not have to set
up dramatic excuses to justify it.
The best measure of your intention is
the result you get.
If you assemble systems into a
meta-system, then the meta-system is your new system.
Meta-System: Volvox
Volvox is a spherical colony of green cells clinging to a
semi-transparent hollow ball of mucilage. A single colony may consist of
over 500 cells, each one with a tiny pair of whip-like tails (flagella). All
cells undulate their flagella in unison, propelling the colony through the
water.
Clip: © Ken Jones |
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Fri, 11 Apr 2003
True
Beliefs
Hi Ed,
How can I recognize if my beliefs are true.
Thanks for the guidance.
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To find out
if your belief is true or false, you have to compare it to a standard; if
you want your belief to be true, find someone who agrees with you.
Charles
K. Johnson
"The facts
are simple," says Charles K. Johnson, president of the International
Flat Earth Research Society. "The earth is flat."
Photo: www.lhup.edu/~dsimanek/fe-scidi.htm
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| Thu, 10 Apr 2003
Getting It
Hello Ed,
Regarding my April 8th question on gaps. My sentence
that you highlighted and your response helped me to me see something more
clearly.
My trying to guess the future caused me to sell a certain
stock. If I held on to the stock I would have made a 500% gain from
November 6th 2002 until March 2003.
The stock was CELL. My preconceived opinion made me sell
the stock several days after I bought it at about $3.50 per share on
November 6th. I bought it because it gapped up and looked like a new trend
might be forming. I should have let the trend tell me what to do but I
have always heard "most gaps get filled". I need to be more in
the present with my trading and get rid of my prediction type ideas.
Well I don't know if it is the market or this clarification you have helped
me with, but I have been pulling the trigger a little more when it comes to
buying stocks lately.
Wait it is the present change of trend in the stocks not
clarification or anything else ... Caught myself that time. Man I have to
stay in the present!
I just bought DCLK, EQT, EVG, ITXC, and USAI today. I was
thinking USAI will outperform the other stocks as I was writing this. I
still have to get rid of my notion that USAI will outperform the other
stocks.
I really have no idea what stock will perform the best or
the worst. They all could go down and cost me money. I should just follow
the trend..... Old habits are hard to break!
Things are getting too clear now. Oh my God I might be
a successful trader / investor! There I go again trying to predict. Too
awake now ... how will I sleep ... look at charts. Sorry for the mess at the
end here ... its just me hopefully getting better. Thank You
|
Trend
following systems that use stops automatically stay in in the now moment and
react just when the trend changes.
George
Ivanovitch Gurdjieff
(1872-1949)
P.
D. Ouspensky
(1878–1947)
Gurdjieff and his
student, Ouspensky use various ways to remember to stay in the now, like
alarm clocks.
Photos: www.gurdjieff.org
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| Thu, 10 Apr 2003
Book
When will your book be published?
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Already
publishing, a little at a time.
Incremental Interactive Publishing
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| Thu, 10 Apr 2003
LA
Hello Ed,
I would like to form a group in Los Angeles.
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LA !
Welcome!
You
are in the Directory.
Los
Angeles
Map: www.yahoo.com
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Thu, 10 Apr 2003
Hooked on FAQ
hi ed
I hope it's healthy to be hooked on FAQ.
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So do I.
To get off the hook, go with the flow.
Clip: www.vmchooks.com/perfection.html |
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Thu, 10 Apr 2003
More on Tribe Theory
Ed,
I am enjoying your website immensely - the insight, the humour & of
course the tales of your extraordinary success. If I understand it
correctly, you place great emphasis on a trader exploring in depth the
so-called 'negative' feelings to reveal their positive intention, thereby
making the experience of such feelings supportive, rather than destructive,
to the trader's environment.
I would be very grateful for any further examples you might care to
publish both of Tribe transcripts and your teaching, as I continue to
work on the psychological challenges of trading. I live in Europe and do not
presently choose to fly to the US on a regular basis.
I trade commodities EOD & YM intraday, always looking to go with the
trend. Some trends, like currents in the sea, are weaker than others, but
can still be profitable...
Come over here & I'll take you out for some wonderful food !
PS. Your FAQ reminds me constantly of the NLP maxim "The meaning of the
communication is the response that it elicits". Wonderful stuff !
|
Yes,
you seem to have the theory correctly. Still, the difference between that
and mastery is, well, something like the difference between sex-manual and
sex.
Educational
Art
Japanese
Edo period, 1600-1868
The Kinsey
Institute (The Institute for Sex Research) has around 20,000 books of all
sorts as does the British Museum. The Vatican Library tops them all with
something like 25,000 volumes.
Clip:
www.world-sex-records.com/sex-155.htm |
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Thu, 10 Apr 2003
Volatility
Dear Ed Seykota,
As far as I understand, volatility is a big concern for a trend follower.
I want to know how do you measure volatility in your system. Is moving
averages enough for you or do you use some other filters for this. Regards.
|
No matter
what kind of math you use, you wind up measuring volatility with your gut.
Volatility Detector
Clip: www.gutfeelings.com/stomach.html |
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Thu, 10 Apr 2003
Drawdowns of Losing Systems
Dear Ed,
As perhaps many traders, I feel some pain when I lose on a trade. The pain
is far more intensified if I have a string of losing trades.
At first I thought
the pain was caused by the loss of money, which made sense since the longer
the string of losing trades the more money lost and hence the greater pain.
However, on
further reflection, I believe the pain is really caused by the thought that
my trading system is just not working/has ceased to work rather than losing
money (after all, I may just be in a drawdown phase and will recover the
money lost in due course).
Is it possible
to distinguish early between a losing period and a system that does not
work? Thanks. |
Several
feelings might be in play: the feeling of losing money; the feeling of
losing faith in you system; the feeling of losing faith in your ability to
trade a system; the feeling of not being able to understand your feelings.
Likely it is the same feeling,
showing up in several inter-relating dramas.
Rather than start with the
dramas, just jump in to the feeling and start exploring it directly;
it tends to explain itself as you reconcile it.
Once you reconcile your feelings you
can proceed to trade your system or not, without all the chatter. |
|
Thu,
10 Apr 2003
Un-Reconciled Feelings
see:
Studying the Markets
Hi Ed,
Thank you for your insightful response to my inquiry regarding studying the
markets. The most important lesson I have learned through this FAQ is the importance
of understanding and embracing my emotions. Although I asked a question
about studying the markets, you responded with a very perceptive answer
regarding my “un-reconciled feelings.” You are correct in that I have a
tendency to test boundaries, but I was unaware I was doing it through my
email message to you.
I am beginning to see a distinct correlation between my prior life as a
tennis player who competed at the division 1 collegiate level and a brief
stint on the satellite circuit. My primary weakness then was, as you put it,
my tendency to test boundaries. There were times when matches were
going my way and I obviously had the correct strategy for my opponent, but I
would often times change my strategy, so that the matches would be more of a
“challenge.” Although by many accounts, I was a successful tennis
player, in terms of reaching my full potential, I did not achieve my
external goals…Now, maybe I ultimately received what I wanted out of my
tennis experience, but I think I will need additional self-reflection to
further clarify this. It is clear now that I was testing not only the
boundary of winning vs. losing, but also the boundary with my collegiate
coach (authority). I also see that, as was the case in tennis all along, my
opponent in trading is my inner self and I must master my feelings and
emotions to be successful.
Do you have any recommendations on how to best reconcile my feelings
towards “law, authority, forgiveness, permission and justification?” I
am dedicated to resolving these issues as part of my still nascent
trading education. I appreciate your candid responses. |
Embracing
feelings can be a good way to resolve them and quiet the need for repeating
the drama.
Perhaps
you might like to join one of the groups in the Directory, or start one of
your own. Also, you might set up some buttons to remind you to honor
and explore your feelings.
Press
This Button
Feel
the embrace - embrace your feelings.
Button: www.minibite.com
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Thu, 10 Apr 2003
FYI Sherry Netherlands Hotel
Ed,
Just FYI - I recall reading in a travel guide when I was visiting New York a
couple of years ago that the Sherry Netherlands Hotel was actually
demolished and rebuilt (either in its original location or down the road - I
don't remember) some time after Jesse
Livermore shot himself there. Kind regards.
|
Jesse
Livermore evidently killed himself in the hat check room.
Extreme Risk Control: Remove Trader
Clip: www.reiss.dk
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|
Thu, 10 Apr 2003
A Poem
On FAQ a trader gets
All these little cute vignettes
Traders come and traders go
Wanting to know how to trade successfully so
They trade technical indicators, formulas, and physics
And when it does not work out they ask Ed which keeps him quite busy
They think that trading endless indicators and averages will get them ahead
When they should be trading simple price instead
How do we trade price they want to know?
Look with your eyes, and go with the flow
What is a trend they want to know?
It is the continuous breakout of a previous high or low!
Why do the traders want to analyze, what will be will be
Accept price for what it is, and be happy and free!
|
I
can hardly wait for the rock video.
Eminem
as Ed
It
pays to get crude at the right time.
|
|
Wed, 9 Apr 2003
Article / Tribe
I read an
interesting article
and I like the part about Glenn Gould.
I look forward to attending my first group meeting, in Toronto, next week. |
I
wonder if you, too, play the piano with two radios going.
Playing
Piano and Trading
Both
require patience, practice and development of your own unique style.
Bench: www.pianoworld.com |
|
Wed, 9 Apr 2003
Heads and Tails
Dear Ed,
I continue to enjoy reading your FAQ pages. I learn something new every
update.
Two more questions:
1) I assert that trend-following, like any positive-expectation methodology,
is predictive in a broad sense. Even though I don't know whether or not an
initial movement in price will lead to a profitable trade, the kurtosis
(fat tails) of financial markets will eventually reward me with large gains
that offset smaller losses. In other words, if the market returns were
random and normally distributed, then trend-following will not work.
Comments?
2) I see a paradox in the Richard Dennis story, where a group of different
people are taught essentially the same trading method and go on to make huge
profits. Doesn't this story call into question the oft - quoted piece of
advice to "think independently" and "don't follow someone
else's system-you'll never stick to it?"
Thanks for listening.
|
Life is not
random. Living organisms decrease entropy (randomness) internally by
increasing it externally.
Following someone's system doesn't
work ... following trends does.
Thinking independently, dependently,
co-dependently or inter-dependently all seem fairly unrelated to profits, as
long as you don't do enough of it to out-think a good trend.
Normal Gaussian Distribution
Leptokurtic distributions have long thin tails,
Platykurtic distributions have short flat tails, Mesokurtic distributions are
normal, and give normal Trend Followers normal whipsaws.
|
|
Date: Wed, 9 Apr
2003
Simulation software
Hi,
I have read some of the FAQ contents on your site. I find them very
interesting and often entertaining.
I am an EE with a background in modeling of dynamic systems.
As a side note, I
am also making my third foray in trading futures. The first time I fell
apart by trading by the seat of my pants after initial "beginner's
luck" success. The second attempt was another seat of the pants
approach that I thought I needed before developing a mechanical method that I
hoped to base on a prediction technique. Then, I bought a trading course
course. I am now trading a trend-following breakout system with a false
breakout subsystem that is working well for me. My emotions are now under
control even through drawdowns.
One of my favorite modeling tools is VisSim, from Visual Solutions ( www.vissim.com
). You may want to check it out to see if it could be useful for your lift
work.
I have not looked into what you are doing, but the general model formulation
that VisSim uses is Laplace transform block diagrams. For example, an
integrator is a "1/s" block. You can model nonlinear, time-varying
dynamic systems quite easily. As far as I can tell from some of the
discussion around integral versus derivative model formulations, this
package fits the integral formulation.
I tend to naturally think this way from my control system and modeling
background and hadn't really thought of the derivative forulation since
graduation. In nearly all of my work these days, I rarely write any
equations and work directly with the block diagrams instead.
Anyway, I know you don't endorse products on your site but I thought that
this could potentially be useful to you.
|
While
simulation models may indicate behavioral modes, they don't predict
very well.
The only computer that models the
world accurately, is the world itself; it generates it's own solution in
real-time as we ride along, hopefully in the same direction.
World-Sim 2003
|
|
Wed, 9 Apr 2003
Activity and
Success
I recently visited a friend who is a day trader, he had eight monitors
wrapped around his desk, has four computers with dual processes, has a T1
line, Cable modem and a DSL line as a backup. I only stayed for couple of
hours, but I must admit after watching him trade for couple of hours I
was exhausted!
What a sharp contrast day trading is to what I read about Warren Buffet.
Peter Lynch, the famed mutual-fund wizard, visited Buffet in the 1980's and
was struck by the tranquility in his inner sanctum. His archives, neatly
alphabetized in metal filing cabinets, looked as files did in another era.
He had no armies of traders, no rows of monitors, no price charts, no
computer.
Why do you think we associate activity with success? Why do you think
trend following is so difficult to do?
|
Trend
Following is like being still - both can be boring and lead to dramatic,
non-productive activity. Success seems to correlate better with emotional
control, people skills and the will to invest as well as consume.
Eat
Some and Plant Some
Don't
mess with it while it's growing
and
work on your people skills.
|
|
Wed, 9 Apr 2003
Studying the Markets
Hi Ed,
Like everyone who contributes or reads the FAQ, I have learned a
great deal from your often humorous responses. I am a very beginner trader
who is reading and learning as much about the markets as possible.
I recently re-read your interview in the MW book and have a
question about one of your comments.
You state (excuse
the paraphrasing as I don’t have the book in front of me) that one of
the reasons for your extraordinary success in the markets is the fact that
you continuously study the markets.
When you study the
markets, are you looking at historical patterns within the different markets
or are you learning some of the fundamentals of what drives the price
movements those markets?
Will you please
provide additional insight what it is you are studying or learning from the
markets?
I understand every
trader is different and will often come to different conclusions given the
same data set, but it would be helpful for a beginner to sneak a peak
into the though process of someone as experienced and successful as
you.
Thanks in advance.
I look forward to your response. |
You mention
reading and show you don't read carefully. You ask for an excuse for
paraphrasing, call me fundamentalist and go on to suggest being sneaky is
helpful.
These patterns are consistent with
boundary testing.
Before you graduate to testing your
boundaries with the markets, perhaps you might look within for un-reconciled
feelings about law, authority, forgiveness, permission and justification.
Acting these out in the markets can
lead to very high-price drama lessons as the markets are not particularly
famous for forgiveness.
Jesus, Famous for Forgiveness
His Holiness does not appear on the board
of directors of any major stock, futures or currency exchange.
Illustration: www.sacredheart.com
|
|
Wed, 9 Apr 2003
Dynamic Mix
Portfolios
see
reference
If you've noticed, from the first day, the trend in our back and forth email
has been: I 'assume' certain things to be given, you misinterpret the
question, then I find myself clarifying, you eventually understanding
the question, and the misunderstanding dissolves.
1) assumption is the mother of screw-ups,
nonetheless, its impractical to get into how every word is used within
the grander context of every question. thus, miscommunication is easy to
come by in the web world. I will do my best to be clear and concise.
2) if you assume, for example, in regard to my
question of dynamic mix portfolios, that certain matters such as focusing a
portfolio in a trending sector and discriminating tradables to be a basic
given requirement, we wouldn't have to deal with the trend of our email
exchange that seems to be in place.
Unlike a trade in the market place, at your FAQ: Ideas
Exchange, the participants can cooperate to change the trend to their
liking.
Indiscriminate: in this question refers to historical volatility as
criteria of discrimination. I do not discriminate on tradables that end
up in my portfolio based on historical volatility. I discriminate based on
leadership, and recent efficiency of movement.
My plan is geared to jump on board the leading sectors and the leaders in
those sector.
My portfolio is updated on a rolling basis. I'm looking to get your take on
dynamic mix portfolios in general.
|
Your
use of "indiscriminate" might be a bit, well,
indiscriminate. #1-4 are from MS Bookshelf 2002 and #5 is from your
email.
in·dis·crim·i·nate
adjective
1.
Not based on careful distinctions; unselective
2.
Random; haphazard
3.
Confused; chaotic
4.
Unrestrained or wanton; profligate
5. historical
volatility as criteria of discrimination
When
you take responsibility for communication, interpretation registers
intention.
Feelings
around mis-understandings might hold some clues about using language
indiscriminately.
Lucille Ball
Little
Miss-Interpretation. |
Wed, 09 Apr 2003
Metaphor is Gain
Hello Ed,
I recommended a book recently to a good friend during a tough time of her
life. She has benefited from it immensely, and I just ordered a copy for
myself.
I notice my trading metaphor has me gaining wisdom and understanding
from your site; perhaps most site visitors are there trying to also get what
they want from the markets. |
Accumulation
may have side effects.
Bursting Balloon
Photo: G. A. Trammel |
|
Tue, 8 Apr 2003
Gaps
Dear Ed,
What is the difference between a breakaway gap and a normal gap? I know what
my definition of an exhaustion gap is (After a large move or multiple moves
in one direction, a stock will gap up on heavy volume usually reversing
several days after the gap.). What is your definition of an exhaustion
gap also?
|
Your
definition of gap depends on the future. I wonder how you identify one in
time to trade it.
Dental Gap
Counting from left to right, you only
notice the gap after you pass it. |
|
Tue, 8 Apr 2003
Dynamic
Mix Portfolios
Can you please comment on various options of creating indiscriminate dynamic
mix portfolios? |
Indiscriminate
mixing is pretty easy; many random programs work.
Focusing a portfolio on a trending
sector takes some discrimination and skill.
Random
Art
For
The Indiscriminate Collector
Art: www.gs2.sp.cs.cmu.edu/art/random |
|
Tue, 8 Apr 2003
The Trader's
Window
Greetings Ed,
In the second Market Wizards book, Jack Schwager includes a story regarding
a student of jade. This is quoted as having come from one of your writings
entitled The Trader's Window. Can you tell me where this piece could be
found? Thank you! |
The
Trader's Window is a book in progress. I am thinking to include some of the
FAQ material.
Jade
Altar Bowl (Smithsonian)
Sometimes
glassy, sometimes oily.
Jadeite (glassy to
the touch), a silicate of sodium and aluminum is a pyroxene. Na (Al, Fe) Si2O6.
Nephrite (oily to the touch) is a silicate of calcium
and magnesium belonging to the amphibole group of minerals. |
|
Tue, 8 Apr 2003
Changing Views
Hello Ed,
I am enjoying my frustration as a feeling. This has allowed my subversive
behavior to disappear. Since I acknowledged my intentions were to feel
frustration, I have:
1. Hired a tutor to teach me C++.
2. Outlined my system again ... and again.
3. Purchased MS Visual C++.
Because this is a public forum, I would like to clarify: I enjoy taking
responsibility for my trading. I always take full responsibility for losses
... as well as profits.
I did not realize my frustration was an excuse to avoid responsibility. The
idea that all of my results are intentional has had a profound affect on my
behavior. I sort-of believed this before when I read that "everybody
gets what they want." Now that I am committed to the idea, it has
changed my views on life.
Thanks for everything.
|
Commitment focuses
ability. An Eagle can see a Salmon from miles away and dive directly to it.
American Bald
Eagle
See ++.
Photo:
Peter Weber
|
|
Tue, 8 Apr 2003
Join Tribe / Interview
Ed, I'd like to apply for The Trading Tribe. Separately, may we interview
you for our trading site?
|
You
might examine the difference between "I'd like to apply for the Trading
Tribe" and "Here is my application." See if that difference
also shows up in your trading. How to join is on the Meetings Page.
FAQ
encourages traders to examine trading issues, does not make recommendations.
See FAQ ground rules. If you or your readers have issues, send them to
FAQ.
Ready
Aim, Aim, Aim ...
Commitment
manifests at the release.
Photo: www.archery.org
|
| Tue, 8 Apr 2003
Games and Trading
In the NCAA final game, a team dominated by freshmen, beat a team with
senior leadership, primarily due to that team's inability to shoot free
throws. Any lessons for trading or life? Second, I used to play chess
quite a bit. I've read that many successful traders are good at games. Is
poker your game? Why the correlation?
|
In
a Trend Following world, reasons are optional.
Reasons
often accompany the ritual of farming out the guilt, say for betting on the
losing team.
Reasons
don't even have to make sense. For example, Kansas actually sinks free
throws and Syracuse misses two critical ones in the final moments ...
curiously, you don't mention a really good reason, namely: Hinrich's
ankle.
You
might check over your trading to see if you also manufacture reasons for
markets that don't behave, rather than deal with losses in a systematic
manner.
I
also notice you like to ask "Why?" Why is the standard
invitation for others to manufacture reasons.
The
RICE System for Ankle Sprain
(Rest,
Ice, Compression, Elevation)
Take
action and make up reasons later.
-----
Illustration:
www.sportsinjuryclinic.net
|
|
Mon, 7 Apr 2003
Limit for Mechanical Returns
Hello Mr. Seykota,
I am a systematic trader at XXX Bank in London. I have been trading based
solely on models for over ten years, and have a reasonable track record. I
have come across your name in various places and I wondered if I might ask
you a question?
My subject is the risk/reward profile, Sharpe ratio etc. that is achievable
using a systematic approach. My research, on historical simulation,
suggests that there is a limit to how 'good' your returns can be for a given
market mix. I trade only currencies and interest rate and bond
futures. With this mix it is my belief that the maximum Information
ratio (Sharpe ratio without the risk free rate) I could attain tops out
at 1.2. This implies that I could make average yearly returns of 20% for
an annualized volatility of 17%. Under this scenario, the 99% confidence
level for my max. yearly drawdown is (20% - (2.33 * 17%)) = 20%.
That means that my potential for loss on the year, and my average yearly
return, are the same 1:1!
Yet, when I read the anecdotal evidence (I can't see the track
records) some traders (yourself included) manage a considerably higher
yearly return, without the need to accommodate such a substantial loss.
I would be most grateful to have you thoughts on this subject.
|
You results
seem consistent with other studies I know for static mix portfolios.
Your fixed currency & debt
portfolio misses NASDAQ, petroleum and other recently hot sectors that
account for recently hot returns.
I do not know of a way to aim your
portfolio at only the hot markets, without resorting to using a trader who
has a feel for the market.
Your experience that anecdotal track records have sharply sharper Sharpe Ratios is logical; only the
successful stories circulate.
For
example www.loser.com has a host yet no
demand for content.
Losing
May Lead to Growth
Yet
Rarely Inspires Marketing
-----
Photo: www.european-schoolprojects.net |
|
Sun, 6 Apr 2003
Newton's Beer
The guy holding the beer is watching the level, not the flow. He's being
very careful because he doesn't want to waste any, and more important he
doesn't want to make a mess!
The little woman
is watching because this Bud's for her, which is causing him considerable
stress!
He realizes that
the most efficient way to internalize that beer is straight from the bottle,
which would solve his containment problem, lower his risk, and bring the
Physics to a level he has understood since high school! |
In fizz-ics
things are not always as they a beer, even in ice-cool.
Life in the Pour House
|
|
Sun, 06 Apr 2003
Changing
Road Conditions
Mr. Seykota,
In one of the Q&As, you mentioned that there is no "best car",
but there might
be a "best car" for a person.
After some researching on the popular models and soul searching within, I
have
now chosen a car.
However during the back road testing I find out that I need to adjust my
driving behavior depending on the road conditions already.
For example, I need to break much sooner going down a steep mountain road
covered with snow, than I would if I were driving on a smooth highway in
good
weather.
Adjustment due to road condition seems common sense to me, but I am hearing
several little conflicting voices inside:
1. Yes: I am a road follower with the street smart to adjust to road
conditions. Driving needs to be modified based on road conditions and how it
slopes. I would just incorporate these factors into my evolving system (car
+ driver).
2. No: I am a discretionary driver because I overwrite the driving plan. A
road follower should have the faith to follow a simple system and stick to
them. Popular mechanical systems don't mention the need for such adjustment.
3. May be: I haven't gotten the best car for me yet. When I need to change
the
driving style or have to keep on adjusting the car, I should overhaul the
car or look for another one (or stop driving until ready).
Please shed some light on my impasse. I feel like getting stuck between
"Follow the rules without questions" and "Know when to break
the rules". |
Your
system includes a mechanical part and also an organic emotional part. When
you have these in tune with each other driving flows.
Sometimes
you can steer with your knees, eat a sandwich, use your cell phone and
perform other neocortical tricks; sometimes you go limbic.
Driver
Risk Management Test
The
limbic brain engages.
-----
Photo:www.thesierraweb.com |
|
