Risk Management ...  Fractals & Borderlines ...  Subject Index

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

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

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

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

(2) No date set yet.

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

1) What markets offer patterns that exactly repeat?

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

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

(3) No. Lots of ideas appear below.

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

To avoid whipsaw losses, stop trading.

Living through drawdowns

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

Presumably One Would Fade the System

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

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

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

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

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

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

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

Does Not Like Very Much Heat

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Give him money - He will be grateful.

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

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

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

Who are we to judge the rightness or wrongness?

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

Are there universal values outside of our perception?

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

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

Calculating Flight Times

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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