(c) Ed Seykota, 2003 ... You may not reprint without permission.

Ed Seykota's

Frequently Asked Questions

FAQ Home and Ground Rules

 

March 9-15, 2003

 

Questions Replies

Sat, 15 Mar 2003


Hypnosis

I'm contemplating hypnosis as treatment in order to get at those feelings that might be stuck. You're absolutely correct in your assertion, I'm like a jet engine only open from one end. I'm sitting on a time bomb. I'm scaling down my positions. In your opinion, is hypnosis an effective treatment mode for traders?

The work of the Trading Tribe is not so much to treat or to cure feelings, as to accept and celebrate them.  This is a critical difference. 

Fundamentalists figure things out and anticipate change. Trend followers join the trend of the moment. Fundamentalists try to solve their feelings. Trend followers join their feelings and observe them evolve and dis-solve.

The feelings we accept and enjoy rarely interfere with trading.

Trying to treat or cure feelings adds mass.

 

Nurse, Aspirator, stat.

I have located his fear of whipsaws and we are ready to suck it out of there.

Sat, 15 Mar 2003

When is the Next Tribal Weekend Meeting ?

When is your next tribal weekend meeting ? What is the normal schedule for the weekend meetings ? It says on your page that it starts Friday evening and ends Sunday afternoon. Can you please tell me approximate timings so that I can decide whether to come alone or bring the family and leave them in hotel during the meeting.

Tribal Weekends occur from time to time, in response to gathering demand -- kind of like trend markets.  Meetings run for about 48 hours, during which time you have little or no contact with the outside world.

Antique Day-Trading Equipment

Grandfather liked to watch every tick.

Fri, 14 Mar 2003

 

More Pyramiding

Could we base pyramiding on either of the following: ATR, multiple moving averages, multiple breakouts. How many pyramids is too many? Does low start up capital prohibit Pyramiding?

See Pyramiding, February FAQ. 

Pyramiding may also prohibit capital formation.

Trend Police

Mama don't allow no pyramiding here.

Fri, 14 Mar 2003

Life and Practical Questions


Your March 7th send titled MATH inspired this writing. It is a great practical start point for building a system. I want to build a trend system with solid money management. These are my base assumptions and some questions:

 

The trend is your friend implies using a long term moving average to identify trend. Is a 200 day moving average reasonable or too long?

Sitting out choppy markets implies using a breakout (highest high or lowest low of last # days) to Enter a trade. Should this time frame be 20% to 50% of moving average time frame? (ex. 100 day breakout or 40 day breakout)

Sitting tight on winning trades implies allowing Exit stops to expand in a trend. How much of a trend is too much to give back? What is the affect on other positions risk? What is the affect on new entry signals?

Bet sizing. (% of Total Equity)/($ value of stop loss) = #LOTS Should I use Total Equity or perhaps TE minus stop loss on all positions as bases for calculation of number of lots? Can the 'dollar value of stop loss' be based on any of these...ATR, breakout stop, or moving average stop?

Total number of markets to follow for possible trend. I've narrowed the field down to 20 non correlating markets. Any suggestion as to why it should be more or less.

Total risk across portfolio. Is this number the disaster number? All positions get stopped out on the same day. If your max drawdown is 30%. Is there any reason to carry Exit stops in position beyond that number?

 

If I've missed anything major or minor, please let me know. Practical advice can go a long way for those instilled with honor, discipline, and fortitude.

You seem to have a good grasp of the basic principles. Here is another principle for your list: There is no best system, any more than there is a best car. There might, however, be a best car for you.

I suggest you forego trying to find a best, or even "reasonable" system until you come to terms with how you like to trade.  Start your system design by looking within yourself:

define what kind of trading performance you want.
determine how much time and energy you are willing to invest.
realize that psychological tendencies may interfere with executing signals.
spend some time looking over lots of charts to see the kinds of things to expect.
look at the daily performance graph of the system to see if you can stand the ride.

 

Clearly, the Best Car

Fri, 14 Mar 2003

On Waking Up


Thanks to one of your gems on your website, I diid some googling, and found more stuff similar to what you said about the traders, "You get what you want from the stock market".

Most people tell you they want to get out of kindergarten, but don't believe them. Don't believe them! All they want you to do is to mend their broken toys. "Give me back my wife. Give me back my job. Give me back my money. Give me back my reputation, my success." This is what they want; they want their toys replaced. That's all. Even the best psychologist will tell you that, that people don't really want to be cured. What they want is relief; a cure is painful.

I used to have an 800 number you could call to get things back, like wives, jobs, even better prices from yesterday.  Trouble is, I loaned it out, and now I can't get it back.

 

Aspirin - For Temporary Whipsaw Relief

One of the best known aromatic acetates is acetylsalicylic acid, prepared by esterification of the phenolic hydroxyl group of salicylic acid.

Fri, 14 Mar 2003

Group in San Jose Area

Has anyone asked/suggested to create a group in the bay area ?

Seems like you just did exactly that. You might like to attend a couple meetings here in Incline Village and then start your own group in San Jose.

Home of the Great Silicon Boom

Fri, 14 Mar 2003

Request to Attend Trading Tribe Meeting

I am very interested in attending your Trading Tribe meetings.

Trading has been my lifelong pursuit. I would like to meet and share experience with people going on similar journey.

I understand that discussions in the Tribe frequently focus on the psychological and emotional aspects of trading and I have the commitment to attend regularly.

It would be my honor if you can allow me to join the Tribe.

OK.

Flying in for a Tribe Meeting

Fri, 14 Mar 2003

Looking to Myself


First of all, thank you for FAQ, it makes me think a lot. You said there is no shortage of funds to good traders.

You are 100% right. I did not know how to deal with that horrible losing streak.

I now see that a trader is not the same thing as a good technical analyst. A good trader is a good technical analyst (including trend follower) + a good risk manager + a developed organic endurance + a developed psychological posture.

Thank you for making me think for myself and not giving me ready answers. It is always good to find someone who teaches you this way.

Trading is not just buying and selling. It has a soul that must be comprehended. Traders should explore it before starting buying and selling, even if they are good in statistics or technical analysis.

Thanks for the progress report.

On the theory that it takes one to know one, maybe you could do some teaching.

Some start-up traders who have a good system, and no clients, offer to teach trend following basics to investors.  If the trader really know his cookies, the investors sense it and ask him to manage some money for them.

Professors of Trend Following

Thu, 13 Mar 2003

What I've Learned so Far

I started by making a list of feelings I'm trying to avoid, and thoughts that comprise my personal trading metaphors.

In exploring Ed's writings and discourses on trading I've learned that trading foundation lies in the mind and in oneself. I learned it is best for individuals to remain free to see and interpret the truth for themselves. As the saying goes "A good teacher protects his pupil from his own influence".

Freeing my thoughts of restrictive encumbrances, my trading philosophy is now geared for trading fully, with every nerve fully exposed to my feelings, and philosophy both subconscious and conscious. It is an integrated philosophy that explicitly and implicitly includes all my feelings and all major branches of philosophy & Science.

Feelings naturally appear during trading. The feelings we don't like seem to have roots deep in our unresolved issues. Somehow they get stuck and do not finish passing through, and can  cloud the judgment and interfere with trading. The feelings we do like seem to pass through quickly without much trace.

I suggest getting to know your feelings, by experiencing them, expressing them, letting them pass through and finding out they are pretty much all good ones.

Jet engines work best when they are open at both ends.

Lockheed Feelings Processor

13 Mar 2003


Toronto Group Update

The Toronto Group is growing every day. The first meeting has been scheduled for the evening of April 1st. FAQ contributors will be strongly represented in the group and for that I thank you.

We'll be sure to share updates, issues and thoughts from the meetings for the benefit of all.

Toronto seems about right for a group.

Before the Europeans arrive in 1635, the Hurons have a favorite spot on the shore of Lake Ontario for meeting. In the Huron language it is known as To'ron'to - Place of Meeting.

Thu, 13 Mar 2003

From Tom Basso (with permission)

Ed,

I saw a comment in the January FAQ's referring to "Tom Basso does not like very much heat (25% drawdowns max)."

Everyone should remember that I approach the trading game as a person managing other people's money. I have tried to trade the client assets with a heat that they might, on average, be okay with (cause I never will really know if I got it right with so many clients). If they aren't, it's just another excuse for them to leave.

I agree completely with your comments to a number of traders that heat is up to the individual preference of the trader, and, I might add in the case of someone managing other people's monies, the preferences of the client for whom you're working.

For new traders, always remember that less heat allows a bit more room for error. Lots of heat can put you in harm's way.

Trendstat will close its client business April 30th and I will be concentrating on trading my own portfolio after that. I do not intend to trade my portfolio anything like what I did for clients, as my financial situation and risk tolerance allows me to do some things very differently than I would ever consider doing for clients.

I had fun reading the questions and your answers. Keep up the good work!

Trade well,

Tom

Thanks, Tom.

 

 

 

A lot depends on how you manage the heat.

Thu, 13 Mar 2003

The Best System

I know that emotion and psychology are large
components in developing one's own standing strategy, but if we were to somehow take this out of the equation, shouldn't there be a system that is better or worse than another, if we were to back- test the results?

The best car for you might not be the best car for me.  I have kids and live in snowy mountains so I like a station wagon with all-wheel drive.

If you can define a  Bliss Function that includes all the things you like about a system then you can find the best system, for you.

Econo-Wagon for Going to Bible Study Class

Thu, 13 Mar 2003

Divorce

I have been working on my psychology extensively. My wife and I are divorcing. She does not wish to take this journey with me, and while not initially my choice, this I think is good for both of us.

My compliments on your site, as well as your  graphics - I would like to attend your bi-weekly meetings, however I live too far away.

I know of many traders who had very volatile trading performance during their divorces.  Perhaps their feelings were getting into it.

Divorce is like betting a lot on one trade and then getting out after a long ride down.  Lots of opportunities for personal growth.  Please be careful your mind and spirit are clear before trading any meaningful size.

If you want to get a divorce, you have to do this first.

Thu, 13 Mar 2003


Wrestling

I find some of your comments keeping me up ...
As you've suggested, I'm currently exploring directly the specific organic part of my trading. How does one go about including the organic part of trading in ones system design. Do I proceed by keeping records, observing & exploring how I feel during actual trading? Given my belief that "trading wisdom does not consist of trying to wrestle profits from losses but in learning to ride them as a cork adapts itself to the crests and troughs of the waves," How do I go about exploring the organic part of trading without feeling like I'm wrestling?

You don't. You go about it precisely by exploring the very feeling you are trying to avoid, and by exploring other feelings that comprise your personal trading metaphor.

When you come to accept, even honor and celebrate your feelings, they may come to support, rather than sabotage your trading.

Late Night Wrestling - Like Trading on the LME

Wed, 12 Mar 2003

Must Read

How many hours a day are you putting in on your web site? your content is turning into one very unique, must-read destination site. I find myself going back several times a day -- just like the Drudge report.

If I wasn't doing this, I'd likely just be doing something else.

Fee, Fie, Foe, Fum.

Hey, wait a minute ... how did that fum get in here?

Wed, 12 Mar 2003

Trading for a Living

I will ask you, following another trader's question, about this February answer:

If you are looking to support yourself, day-to-day from the markets, your account and your nerves might be wearing a bit thin.


Last year I decided to trade as a living. Yes, I was doing great in the first months. I experienced a losing streak in the beginning of this year (now, I'm back again and your answer made me think a lot about it). In February, as a consequence, I had no money to pay my bills, which was something that had never happened before. It was painful. It is a pain I learned that I cannot afford. After this losing streak, I learned I cannot afford to lose, so I'm very cautious about that.


This sentiment, in turn, made me trade less and only in strong conviction trades with more degree of leverage and stop distances reduced. I trade now with more confidence because that pain made me think a lot. I'm more precise. I'm more prudent. I ride winners until they end. Again, I learned I can't afford to lose. I could have taken money from my trade account and pay my bills. But I think, unconsciously, I didn't pay my bills in order to feel that pain ... I think it was going to teach me something, as it did.


I thought about this situation and reversed my method. Now, the first profits that I'm able to cash in, I do and my mind is set free to trade for the rest of the period. I don't know if this is a good technique, but I'm sure testing it and this is the first month.

If you can't afford to lose, you can't afford to trade.

Trading a small account and living off of it at the same time is like eating your own fish bait.

If you suspend trading for a while, at least until you get an independent, stable income, you can still continue to work on your trading method.

There is no shortage of funds for good traders.

If you are in a big rush and feel you are running out of time, get a Trader's Clock.

Trader's Clock

 

This backwards-running timepiece is particularly useful for going back to load up on those really good breakouts. Alternate it with a standard clock, to have as many hours in a day as you please.

Wed, 12 Mar 2003

Cornucopia


Your insight as to a trader’s relationship with his/her system is quite insightful. I have always felt that trading is really a metaphor for life, but I had never gone the extra step and thought about my own perception of my system (how I personalize it). You comment has allowed me to look at my development, and my system’s development, in a totally new light. I used to view my system as a puzzle … always tinkering and trying to solve it. This would often lead to a drawdown, which would lead to fear, which would lead to suspension of trading at just the wrong time.

If I had not been pretty good at cutting losses I would have ended that year and a half with zero dollars in the account. As it was, I had missed some huge moves though. How big? The cotton move in 1994 that eventually took cotton over 100 and the currency (especially the Yen) move in 1995. When had I become just a little too tentative to trade? Literally days before each move began. Amazing, but true, and I bet not that uncommon. Of course, seeing the subsequent move would get me trading again. My later trading became more profitable as I began to systematically follow two of Donchian’s systems.

I would now characterize the way I personalize my system as a ‘parent’ to use your word. I want to view it as a ‘cornucopia’!

A question: Would you mind expounding on a statement you made in the MW interview: the manager still has to ‘decide how much risk to accept, which markets to play, and how aggressively to increase and decrease the trading base as a function of equity change. Would you talk about the trading base as you meant it here?

I understand systematically risking less during a drawdown. Is that what you are getting at here?

Yes, your timing story is not so uncommon. Some traders are consistently accurate at trade timing - in a backwards way.

If you overtrade, a couple severe whipsaws can deliver a debilitating case of marketitis that keeps you out of the next trending market.

Whenever equity changes, traders must decide how and when to bring the risk in line.

Trading System as a Cornucopia

Wed, 12 Mar 2003

Oops, I didn't mean it that way.

Can contributors to FAQ edit their questions, once they appear on FAQ?

Yes. See the FAQ ground rules.

Pencils have two ends

Wed, 12 Mar 2003

Telegram for the Jade Master

hay! i jes ain't havin no luck turnin muh 200 hundrid bucks inta a bazillion buks like ya'll did. Tell me agin... wuzzat buy heigh and sale loe or wuzzit sale low an by hi? Cain't seem ta git no lift ...

Hmmm ... I strongly suggest you do not give up your day gig.  By the way, I wonder how your job's going as Superintendent of Education.

Readin' Ritin' & Risk-matik

Wed, 12 Mar 2003

Attending Trading Tribe meeting

I have been a follower of your published work and interviews about trading for some time. I believe your trading philosophy is similar to mine. I also feel that I could use help in the area of trading psychology.

I live in Reno, and I was wondering if I might attend one of your Trading Tribe meetings. If so, please let me know when and where the next few meetings will be.

See Index for more information.

The Beat Goes On

Wed, 12 Mar 2003

Joining Trading Tribe

As an aspiring currency trader, I was thrilled to discover your bi-weekly meetings in Incline Village.

I'm living in Sacramento right now and can easily commit to consistent attendance.

I've been educating myself as thoroughly as possible about the markets and about trading psychology since last spring. I have read lots of books on trading and trading psychology.

Following along with my reading, I've been leveraging my current position by acquiring as much training on Excel and VBA as possible, after coming to the conclusion that I really need to program my own back-testing software.

Simultaneously I've been paper trading demo accounts and experimenting with various money management techniques.

The biggest goal that I have, that I would like to work on with the group is opening my first "live" account with 25k in July, and I am determined to put intense focus on my personal development so as to have the mental stamina needed to stay with my system during drawdown.

The ground rules of your b-weekly meetings sound quite workable to me, and if invited, I'm committed to be as emotionally "real" as I can be.
Some sees opportunity, some seize opportunity, and some seize at opportunity.

Opening Bell

Wed, 12 Mar 2003

Risk for the Sake of Risk

I have a couple of real-life scenarios I think relate to trading. First off, I have made numerous trips across the country in automobiles. I find myself bored after awhile so I keep track of and refigure my average miles per hour after each pit stop. Sometimes when I get low on fuel I have to decide whether or not to stop at the next exit or to chance running out but try to get to the next farther exit away. Normally I have a pretty good idea as to how many miles I can still go on the current tank of gas but there is still risk involved; I feel calculated risk. The analogy I see to trading is once I have decided to go beyond what may be a 'safe' exit, I normally feel some anxiety and need to process it. The decision has been made, so at that point it is just a matter of reducing my speed to conserve fuel and living with my decision; feeling stress about it doesn't help or reverse the situation.

A second analogy I saw with trading a few weeks ago was when I was driving to an appointment. I could either take the freeway which would be a twenty mile trek through traffic, or take the twenty six mile curvy mountainous road without many cars on it. Since I was in a very fast sports car, I opted for the mountain road. It had rained earlier that morning so there was a slight amount of water left drying on the pavement. I noticed myself speeding around the corners and trying to make really good time so as to not be late. Once I knew I would be on time I had to consciously ask myself why I was still going so fast. I guess I like to experience the car's performance envelope. Any analogies to trading would be appreciated.

You pose a very interesting topic for traders. Our job is to manage risk, to deal with it responsibly. We are used to it and used to the feelings of being in risky situations.

Some traders are kiodiophobic (risk averse) while others are kiodiotropic (risk seeking).  The phobes are hesitant to pull the trigger, keep their bets small and have uneventful performance. The tropes pull on any excuse, bet large and take thrilling roller coaster rides.

The trick is to come to terms with your own tendencies and find a system that honors your psychological needs and also shows profits.

 

Kiodiotropes

 

 

Wed, 12 Mar 2003

Intraday Trading / Risk per Trade


Author of this e-mail have some short questions. Excuse me, if my questions are not relevant.

1. Author (stock market - primary target) will evaluate risk/reward in trading of most liquid futures - financial as EN, MCA, LFT and commodities oil/gold. What are "pro" and "contra" versus equity trading for intraday trader ? Author point of view - Equity market have more opportunities. Can you comment?

2. Your statement -...cut loss, cut loss, cut loss. How great loss can be on one round trip? Autor would very pleased for answer. Excuse me, if my request is not relevant.





Intraday trading is tough since the moves are not as big as for long-term trading and there is no comparable reduction in transaction cost.

The best opportunity is to develop ourselves.

Many technical traders keep risk per trade at about 1/2 %. Some can handle more, some less. Some fundamentalists, thinking they know where the price must go, don't use stops at all, for fear of whipsaws.

There are old traders, and there are bold traders. There very few old bold traders.

Old Sam Throckmorton, Bet Big on Buggy Whips.

Wed, 12 Mar 2003

Holy Grail

Just came upon your site - know you by reputation.

Everyone it seems searches for the "Holy Grail".
Since everyone already has possession of this, it seems a bit pointless.

Some like to search, some like to find, and some realize they already have it.

Grail

Tue, 11 Mar 2003

Fundamentals

I will have to reassess the harmony between my metaphor and my system by looking at the different ways of looking at interdependence, as you mentioned.

My last question for a while would be, you mentioned in MW that "way down in very distant fourth place were your fundamental ideas and, quietly, on balance, you said they have cost you money." If you could please comment on that and touch on the effects of fundamental biases on the organic part of a system. Thank you for all your insights.

P.S. Sorry for bombarding you with questions, one doesn't often get the chance to learn from a grand wizard.

The fundamental approach seems much more popular than the technical approach. Most of the time the fundamental approach feels better, so it is organically easier to follow.

For example, if a position starts to lose, a fundamentalist can just put more-on (the Moron Rule),  reconfirm he is right, and lower his average prices.  A technician must cut the loss and feel the whipsaw,

Of course, fundamentalists also wind up riding a  big positions all the way down, or at least until they get organically disgusted and sell out in despair (the capitulation).

Fundamental trading is an anti-trend following system with a tendency to cut profits and let losses ride, even add to them. Organically, the fundamental approach avoids the feeling of many whipsaws and then gets one big hit in the end.

It takes guts to keep buying breakouts and cutting losses quickly.

Abby Cohen, Fundamentalist

In 1998, Abby Cohen correctly advised her clients to remain in equities even as the market fell nearly 20% from July to October. After the Federal Reserve cut interest rates three times, the stock market came roaring back, and Abby's customers were thankful for her sage advice. The same was true in 1996. While many of her colleagues predicted a correction, Cohen banged the drum for equities, citing low inflation and rising earnings.

But when the equity-bubble popped in March 2000, ushering in the first recession in a decade, Cohen stood by her 2001 price target of 1,650 for the S&P 500. A year later, in March 2001 — when the recession officially started — she advised clients to increase their exposure to stocks, explaining that economic imbalances "have been largely resolved."

Abby Cohen in 1969

Abby Cohen peaks in 1969. Her beautician, also a fundamentalist, advises her to double up on youthful outfits, since her appearance is set to return to its old highs.

ue, 11 Mar 2003

Great Emotional Detachment

You responded to a question in February by saying... You might consider this rule of thumb: Speculate with less than 10% of your net worth. If you are looking to support yourself, day-to-day from the markets, your account and your nerves might be wearing a bit thin.

I wonder if it's possible to eliminate most of the emotions of trading by better understanding your Essence of Risk. It seems that it would be a lot easier to maintain strict discipline.

In general, attempts to bottle up emotions, result in an increase in emotional pressure, leading to spectacular catharsis.

I suggest you consider the positive intention of feelings and practice expressing your feelings on a regular basis. 

Strict discipline induces insurrection.

If you do succeed in bottling up your emotions, perhaps you could market them.

Essence of Risk

Tue, 11 Mar 2003

Interdependence

You said: if you see Yin and Yang as symbolic of interdependence, you might consider connecting with some other traders in your area, perhaps setting up a group of your own.

Interdependence refers to: e.g. without an imbalance in Yin/Yang there won't be a trend. Our place in the markets as traders as I see it is to bring harmony and balance. I see my system as a supportive ally in discovering Yin/Yang imbalances. and more directly, the Yin/Yang part of my system is profit, which I'm always striving to bring into balance. I find it discomforting to think of a Trading Tribe as interdependent.

People depend on each other in various ways:
Dependent - as a child
Independent - each man an island
Co-dependent - enabling delinquencies
Inter-dependent - free trade

I gather from your prior email, you are typically independent, rarely discuss trading with anyone.

That you have ventured to discuss it here, might indicate you are balancing things differently.

It all depends on the gravity of the situation.

Tue, 11 Mar 2003

Books on Psychology

I noticed you made some great recommendations on trading books. Can you recommend any psychology or self help, etc. books. You seem to have a lot of knowledge in that area.

I put some on the Books page.

Milton H. Erickson 1901-1980

Mon, 10 Mar 2003

Tao (see below, Pandora's Box)


These are feelings and thoughts I had bottled up for quite a while. I don't discuss trading with anyone, let alone belong to a group. I found most groups to be too mechanical. This forum gave me an outlet; it assisted in setting me free, opening up the flood gates for 'flow.' Most traders think in absolutes. They either focus on exits or entries or some other system aspect, instead of thinking about the totality of the system being congruent with the individual. it is difficult to keep that focus. Now that the flood gates are open, this aspect of trading is even more clearer to me.

It might seem at first, concepts borrowed from Chinese philosophy would ever be especially parallel to ideas found in trading. but a closer look would prove other wise. the golden rule of letting winners run; and cutting losses is nothing more than a Taoism concept, a branch of Buddhism. Tao or the way is within everyone. ones we understand the way everything falls into place.

The well known symbol of the yin and yang, two fish encircling one another, is a picture of the complementary nature of things, and their need for one another and their interdependence. To keep it simple, there are profits and losses, ups and downs, you can fill in the blanks.

Trading is not comfortable and harmonious; rather, it is a place of individuation where a person rubs up against his zero-sum counter parts, and bumps against himself in profits and losses, and in this fashion comes to know himself.

The flowing stream is a key metaphor for Taoism. be 'with it,' and not 'against. go with the flow. Not rigidity and aggressiveness but naturalness, humility not arrogance, not complexity but simplicity would do wonders for a traders soul. wisdom resides with the simple, and uncomplicated. simplicity brings one to move with the rhythms of the flow: the trend.

If you are feeling free, and if your ideas and feelings are flowing, and if you see Yin and Yang as symbolic of interdependence, you might consider connecting with some other traders in your area, perhaps setting up a group of your own.

Trading as a path to enlightenment is another interesting market metaphor.

 

 

Mon, 10 Mar 2003

Trading Tribe

I am trading my own long term trend following system on 20 commodities. In 3 years of out-of-sample actual trading, I have gained a compound 81% per year with a max drawdown of 32%. I am an engineer and I wrote my own C code to back-test various trend following algorithms and fixed fractional position sizes before I settled on the simple system I actually trade.

The chapter on you in Market Wizards pointed me toward simple long term trend following systems. I also got a lot from the William Eckhardt interview. As I took notes on the Market Wizards traders, I was struck by the large number of long-term trend followers.

If I lived closer to Incline Village, I would surely be interested in attending your Trading Tribe meetings. I am part of a group of traders who meet in Fort Collins, Colorado twice a month to discuss trading systems and methods.

We share research results and some feelings about the way our current trading methods are working. Your approach with a hot seat and expressing feelings rather than facts, avoiding advice, and working on issues differs from what we do. Perhaps the fact that our group was founded by 3 engineers pushed us toward math and back-testing rather than psychology.

I want to understand more about your Trading Tribe's approach to meetings to see if we want to adopt some of your methodology at our meetings.

Sounds like you already understand the Trading Tribe pretty well.  Also sounds like you and your colleagues have systems that manage to get on to the major movers, to stay in them long enough to profit and to cut your losers quickly.

Now if the delta between your theoretical and your actual performance is zero, and no one ever misses a signal or jumps out of a position, and you all have happy marriages and great kids and all your relationships are excellent, then discussing psychology might be extraneous.  After all, there is not much sense fixing it if it isn't broken.

On the other hand, if you have a substantial delta, and if your systems are already pretty good, then you stand to get higher returns by working on the psychological parts. Most traders, especially engineers are pretty bright about math and science and a bit challenged in the feelings department. I would be interested in how your group evolves.

The Great Dome at MIT, May 1999

Before finals, and at the height of Star Wars Mania, hackers decorate the Great Dome to replicate the droid, R2D2. MIT has a tradition of creative, grand-design hacking, one of the ways engineers find to express feelings.

Mon, 10 Mar 2003

Donchian's Guides

One of Richard Donchian's guides stands out very clearly in my mind because it closely resembles one of my own rules.

Light commitments are advisable when the market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing.

One of the hardest things I have experienced in trading is my lack of ability to sit tight and trade light when the market position is uncertain. It has taken me a few years to realize that clearly defined trends occur often enough to grow my capital by a significant rate ... Now the time has come to use this knowledge and make huge profits when these opportunities are signaled.

See Donchian's Trading Rules.

While it's good to use your head to enter and exit trades, you make the big money using your other end ... sitting tight on winning positions ... and sitting out choppy markets.

Successful traders use a variety of methods to sit tight. Illustration shows proper use of the Nervous Nellie Trader Restraint Device.

Good trading practice dictates all office staff also learn to use Trader Restraints, especially when they feel the market is going through the roof-roof.

Mon, 10 Mar 2003

Pandora's Box


Wow, about your last answer (Heat and Stomach Lining). I really have to think about that one, you just opened a Pandora's box of issues. I will have to reform something about me; you just opened up my system.

While in college I continued to spend inordinate amount of time in the libraries trying to figure out the meaning to a lot of things.... I read Market Wizards around this time, I somewhat read your section at the time but didn't pay much attention to it. In fact, I thought it was the strangest and most convoluted interview in the whole book. I was more impressed with the other wizards. Little did I know I would come back to it years later.

Through my personal studies, I started gravitating towards the premise that there exists an governing law or energy that binds all disciplines and things together. My search seemed more like the search for enlightenment; more like Zen-Buddhism than trading ... eventually I learned that Zen-Buddhim had a lot in common with Behavioral Finance, & Complex Systems/Chaos theory, Martial Arts, Medicine etc. you can call it east-meets-west. In trading, my area of obsession, by discarding the complexities of prediction I ended up finding trend  following. "Realizing and believing" that one cannot accurately describe the current situation with the detail necessary, and that one cannot accurately predict the state of any system at a future time set me on the right path. I knew without a doubt that if I could follow the daily or weekly charts I would succeed. At this point I didn't even know there was such a thing as trend following. It was not something I was doing; it was something it was doing to me.

At this juncture, while flipping through Market Wizards, 'I had the aaahhhh effect as you might say' while reading your section. Every word you said made more sense at that point than ever before. At that point all the other MW seemed rigid for the complexities of this world.

Thank you for participating on FAQ and for inspiring the rest of us with your courage to press through regardless.

Looking at the organic side of trading is, admittedly, risky -- not looking at it is even riskier.

 

Pandora's Box: (Greek mythology) a box that Zeus gave to Pandora with instructions that she not open it; she gave in to her curiosity and opened it; all the miseries and evils flew out. Reports indicate a few flew over to some of the major exchanges.

Mon, 10 Mar 2003

Heat & Stomach Lining

Thank you for your earlier answer. Lately I've really been testing my stomach lining through my simulation tests, per your prescription.

Let us say JJ has a model with the following stats, and can comfortably sit through :

historical heat 60%.
recovery 500%.
program based on a 65% blow-out.

So far JJs, peaks and drawdowns in equity remain within the boundaries of his model. He rigorously follows his prescribed money management, while focusing on long-term results. We would say JJ has enough stomach lining to take the turns. His heat is high, but his results more than compensate for it. Even though he has enough stomach lining to take the turns, should he stick to his system? Is heat only evaluated in the in the context of returns?

That you are running simulation studies on the mathematical part of your system, as a proxy for observing how you feel during actual trading ... might indicate you are hesitant to explore directly the organic part of your trading. 

If you don't include the organic part with your system design, it may very well include itself later, during actual trading, with surprising results.

That you are reporting on JJ, rather than on yourself, might also indicate you want to further distance yourself from examining your own trader-specific, organic, emotional components.

The New Joy of Sim. Work on your trading using safe simulation studies, thereby neatly avoiding the messy, emotional, organic part. Also, by the same author: Mathturbation - How to Avoid the Emotional Issues by Tinkering Endlessly with your System.

Mon, 10 Mar 2003

Trade Selection

In your trend following trades, of the dozens of markets which you follow, do you try to be so selective to wait for a worthwhile trend so that only one or two opportunities would present itself in any single market per year, and sometimes none? And when it is a good trade, usually it may run for couple of months?

Is that the kind of time horizon to look for trades that would present more profitable trading opportunities in trend following?

Will Rogers Rules for Traders:
"Buy some good stock that is going up, and if it doesn't go up, then don't buy it in the first place."
"Live your life so that whenever you lose, you're still ahead."

Will Rogers (1879-1935) never met a man he didn't like.

Other FAQ references: time constant; short-term trading

Mon, 10 Mar 2003

Risk of Ruin

As you mentioned somewhere in this forum, "risk management is trader-specific, a trade suitable for one trader might not be suitable for another." With that in mind, I have a couple of questions in regard to managing ones tolerance of "stomach-linings."

Are formulas used to measure risk-of-ruin also trader specific? For example, I believe that the percentage of winning trades and the size of the winners vs. losers are a much better indication of what to expect in the future than historical drawdown statistics viewed out of context.

I find focusing on the magnitude of correctness as well as the frequency of correctness, appears to be more reliable in "controlling" drawdown. Is this assumption fundamentally flawed? Although, I'm confident of my method because of my results, there is enough literature out there refuting my assumption.

If you were to design a race car, you might include, for risk management analysis:
the coefficient of friction of the tires
the speed of the car into the turns
the weight of the car
the condition of the road
the ambient humidity

Then, after all this analysis, you get a design you like. You make ten copies of the car and give them to ten drivers and find you get 10 different track times.

The same thing holds for trading systems. Let ten traders use the same system and you get at least 10 track records.

A lot of the difference, in all these cases, is in who has enough stomach lining to take the turns.

So if you are really looking for some answers about stomach linings, you may have to look a little further than to historical win/loss ratios.

You might have to look at stomachs and stomachs are pretty much trader-specific..

The Organic Part of the Trading System

One of the stomach's functions is to smooth fluctuations in food intake rate and to deliver an average flow to the small intestine. Another function is to smooth fluctuations in how people feel. People say they have things they just can't stomach, no matter how good they look on paper. If a trader's system performance is too "hot" or too "rich" his stomach may go into overload and attempt to protect itself by regurgitating signals. Acknowledging the organic part of the system is central to the Trading Tribe.

Mon, 10 Mar 2003

Recommendation


Do you recommend Mark Douglas' "Trading in the Zone"? I would appreciate very much your opinion. Thank you for your attention.

See the FAQ policy on endorsements.  FAQ rarely endorses specific people or products. FAQ responds to experiences, ideas and concepts.

The use of trade, firm, or corporation names in this publication (or page) is for the information and convenience of the reader. Such use does not constitute an official endorsement or approval by the United States Department of Agriculture or the Agricultural Research Service of any product or service to the exclusion of others that may be suitable.

Fancy Disclaimer from USDA Site

Sun, 09 Mar 2003

FAQ Feedback

What a pleasure to finally communicate with you. You are an inspiration and a role model (it appears, to many of us). I can still remember the day I first read Market Wizards. I went cover to cover without putting it down. Your interview stood out that day and continues to each time I read it. I guess I have read certain interviews in that book as many as a hundred times. Yours’ is certainly one of them.

One aspect of that interview that hit me then was “…when nature gives us true burning desires, she often gives us means to satisfy them. A trader without talent or knowledge will find a successful trader to help him.” (paraphrased) Thank you for allowing us all the chance to interact with, and hopefully gain some guidance from, you. If I lived within three hours of Incline Village, I would be in regular attendance at Tribe meetings. What an opportunity! However, being in Virginia puts a wrinkle in those plans.

I began that day to seek out traders from whom I could learn ... I also wanted to find old writings of Dick Donchian.

I hope to be a decent contributor to these pages and will relay my trading feelings and experiences from both the past and going forward. Any comments or insights you have would be greatly appreciated.

I noted that you have a tab for quotations on your site. It has always been fun to collect quotes from trading books, biographies, literature, and even popular literature. I have a notebook full of them. So I offer two that seem apropos to this site (to me anyway). I hope others will get something out of them.

Thank you again for a service to the trading community and to those of us that continue to look for improvement.

Thank you for contributing.  See Donchian's Trading Rules. FAQ seems to be growing and attracting contributors from all over the place.

 

Account Executive: "Bonds? What bonds? Dang it all. I thought he said 20 year-old blondes."

 

Fundamental Analyst: "So, that makes it an even better buy at these prices."

 

Chief Trader: "I'll loan you two Color GameBoy cartridges for an option to buy your skateboard."