|
March
16-22, 2003
| Questions |
Replies |
| Sat, 22 Mar 2003
Transition from Brokering
I almost fell off my chair this past Tuesday when someone told me a true
"Market Wizard" lived up the road from me!!
I dusted off the old book and re-read your words of wisdom I hadn't read for
years, and sure enough... it says right there we are almost neighbors. I
really got excited when I found your website, and found out about your
Trading Tribe meetings!!!
Can I join you this coming Thursday March 27? Do I qualify? Here is a brief
introduction:
I am a futures broker / trader wannabe, growing everyday with every trade,
that can't wait to grow up and be like you ... well, actually I want to
make the successful transition from brokering to CTA / money manager.
I discovered this fascinating business 10 years ago while as a 40 year old
world citizen (lived in 4 continents), father of 3 kids, living in a 35'
travel trailer, I was broke, on food stamps and unemployed for 10 months
(life was good, but HAD to get better)... And I never looked back... This is
it for me. I love this entire industry (less the 'hype and lies' from the BS
gurus). I have had over 1000 clients from all over the planet and have
participated in their ecstasies, as well as their many agonies, countless
times. I've made money and lost money... now I am starting to keep some of
it more regularly.
In my quest to learn and participate in every facet of this awesome
industry, but also in the hopes to becoming a professional trader, in 1996 I
had a brief 7 months S&P pit trader adventure in Chicago. I loved it but
got my butt kicked, and had to go back to brokering full time to feed the
family (which was living in a house by now ;-).
Since then I started a small IB in 1997, then moved 1999. My wife and I
operate our little firm from an office in our home.
Business is OK, but my goal is to make the transition from brokering for
a living, to trading for a living ... permanently. And I think
participating in your Trading Tribe meetings surely will enhance and
accelerate the process, while at the same time as I share my many
experiences in the trading arena, I should be a contributing factor to the
growth of other Trading Tribe members.
I trust you will find that I can meet the 4 requirements for Trading Tribe
membership, and should fit in with everyone. |
The
Trading Tribe seems to have helped people enhance and accelerate the process
of finding the right hat.
Broker
to Fund Manager
Trader
to Golfer
Financial
Advisor to Actor
Interestingly,
no changes to broker, AE (account executive) or RR (registered
representative).
One
always looks neat,
in
a hat made from meat.
--
Mark Twain (apocryphal) |
| Date: Fri, 21 Mar 2003
Another FAQ Entry
Dear Ed,
Thank you for your thoughtful and timely answers to my earlier questions.
I have another question that deals with the well-known "secret to
trading success" - Spend 10% of your effort working on entry rules, 10%
on exit rules, 40% on money management (position sizing, risk management)
and 40% on psychology. The numbers change depending on the author, but the
proportions remain roughly similar.
In one way, I interpret this axiom as "pick any trend following entries
and exits, just make sure they fit your personality, because most of them
work pretty well" I see how Richard Dennis and other trend followers
appear to have reaped huge gains by trading 20 day breakouts and MA
crossovers. I also see example trading systems that perform well on a
variety of markets that use simple breakout and/or volatility stop rules.
However, I read articles about the same trend-followers who appear to have
large quant analysis and computer programming staffs working long hours
to adjust their systems due to "changing markets," which
implies that finding a series of entries and exits that generate a positive
expected outcome per $ risked is a more difficult task than simply figuring
out which moving average to use.
Therefore, I have a conflict, a conflict which has limited my ability to
actively deploy my trading strategies. I come up with a strategy using
relatively simple indicators that seems to have a nice expected profit - and
hesitate, because I cannot seem to get to the point where I am confident
that the strategy will continue to be profitable in the future. Even
out-of-sample testing doesn't seem to soothe me very much.
Is finding a profitable trading strategy really as easy as it sounds? I
actually "get" money management - it makes perfect sense to me,
and I understand its power. However, I am getting hung up on something that
should only be occupying 20% of my time (entries/exits)!
Do I really need to be this critical about this part of my research, or
am I overestimating the difficulty of entry/exit development? |
A
simple moving average system already adjusts to changing markets, by issuing
buy and sell signals.
It seems easier for some scientific
types to work on their math rather than on their psychology. If their
math is already at 95% and their psychology is at 25%, then I suggest they
start working in the most effective area.
Sounds like you have a trend system,
and hesitate to use it since you can't predict it will continue to work.
This is what you get when you apply a fundamental mind set (predict the
future) to a trend following (go with the flow) system.
I suppose you could hire athletes to
play chess and system programmers to operate construction equipment.
You seem to have a fundamentalist (yourself) trying to run a trend following
system.
White to Mate in 1 move |
|
Fri, 21 Mar 2003
Doctor
's Parable
"Doc, will I be healthy?"
"Health
is not a guaranteed thing in life. If you have a positive mental attitude
and good personal habits, you can greatly increase the odds though. You are
the best person to ask whether you really want to be healthy and have the
determination for it."
"Doc, what is the best exercise?"
"It is
different for different persons. The best exercise for you is the one that
you love to do and have the persistence to follow through."
"I think running is good. Should I run 5 miles or 20 miles per day?
Should I stop running if it rains one inch or two inches in the
morning?"
"That depends
on your stamina inside and the weather outside. You might try to experiment
for a while and decide which is best for you."
"I have been looking out there all these years
with my eyes closed. It is a shocking enlightenment to see that the truth
can be found from within. Thanks for guiding me to real learning and where
to fish for the answers. Doc, you are a great teacher."
PS. Your FAQ has a lot of valuable advice. I feel like I'm traveling on a
whole new journey within. |
Hmmm
... a self-contained FAQ, complete with questions and answers. Hard to
think of any matching parables.
Find
the matching pair of balls.
|
|
Fri, 21 Mar 2003
Trend Following
in Stocks
(1) I was wondering if you ever applied a systematic trend following
approach to stocks and/or equity options and what your observations were (if
not, the reason for not doing so).
(2) If you have, in your back testing or actual trading experiences, did
this multi-market approach reduce the overall volatility of the portfolio? |
Trend
following is basic to life. Frances Bacon noticed runs and
consolidations 400 years ago. The aim of diversification is to cancel out
the short term noise and enjoy the overall signal.
Sir
Francis Bacon. (1561–1626)
For
honor is, or should be, the place of virtue; and as in nature things move
violently to their place and calmly in their place, so virtue in
ambition is violent, in authority settled and calm. |
|
Fri, 21 Mar 2003
Just for Your Amusement
Check out this market call. My accountant sent me this email yesterday.
Check out the PS at the bottom. Look at the what industry group is the
leading gainer today. Airlines are up 4.6% as of 12 AM EST. Non-trader
market calls seem to be one of the most reliable entry signals.
----- Original Message -----
From: xxx
To: yyy
Sent: Thursday, March 20, 2003 8:38 AM
Subject: Market Update for March 20, 2003
Why aren't we shorting airlines?
|
Non-trader
calls are almost as good as those from professional advisors.
CNBC
Market Dispatches
Jon
Markman
2/26/2003
4:09:41 PM
Oil
prices spike, stock prices sink
The commodity hits $37 a barrel. Could American Airlines go bankrupt by May?
Hewlett-Packard strikes fear into tech investors. Markman calculates where
the sinking S&P might find support.
|
|
Fri, 21 Mar 2003
Accuracy
I missed to clearly point out that even though I accept the futility of
prediction I have built my money management rules so that I'm able to remain
with in a given threshold of the magnitude as well as the frequency of
correctness over the long run.
I normally stop
trading if that level of correctness drops below sixty-percent in the long
run (for me, that is part of my money management rule).
I also find my
money management rules to be more effective at this level of correctness. I
feel this gives me a level of comfort allowing me to relax and just flow
with whatever is happening, including accepting a very high level of heat.
I just don't feel
the need for a standard trend following method with less than a forty
percent level of correctness accompanied by the inevitable un-proportional
level of heat.
My point was
I'm still able to hit big home runs with a high probability system, and yet
accept the high levels of heat which accompanies such a system.
It's strange that
talking about the above makes me feel uneasy. nonetheless, I felt the urge
to get my point across. It is as though a normal person describing how he
actually breathes! That will immediately choke the breath out of him when he
consciously describes the process. it actually arrests and interrupts the
flow of life?
Like you said the
trend should give me all the answer, no more fuss. I will simply breathe.
PS Thanks for the tip on Grof's Holtropic breath work, looks like its
right down my alley. It Should add to my personal growth.
PPS. I didn't know that what my siblings and I were
doing would qualify as a TradingTribe since they are involved in a different
field of endeavor. |
Seems
you have a concern about correctness, accuracy and being right about
things.
Sometimes
you can do far better without a burdensome emotional attachment to rigorous
accuracy.
I
made no mention of your siblings as having to be
traders, or being in the Trading Tribe. It seems consistent with your
progress with your accuracy issue that you might demonstrate some
imprecision.
Tasty
Treat for Heat Handlers |
|
Fri, 21 Mar 2003
1. Can you please
rank the importance of a) Your trading psychology, b) your trading
system, c) your money management approach, d) your years of experience in
markets, according to your trading philosophy.
2. Do you use only moving averages as an indicator in your system or do
you prefer to use more complicated indicators. |
I
suppose you could rank the importance of your brain, heart, liver, kidneys
and lungs. Then again, you could make sure they are all healthy and
support each other. I prefer simple indicators.
Ranking
Body Parts
to
find the really important one. |
|
Fri, 21 Mar 2003
Deer in the Headlight Syndrome
Is there any pill for DITHS ? If you make one, you will be biggest
drug company in the world !
|
Until
such time there's a pill for DITHS, you can practice enjoying the feeling
and eat jelly beans.
Reagan
Beans |
| Fri, 21 Mar 2003
Framing: the good, the bad and the ugly
As to your answer regarding my earlier question, I will be paying more
attention to what the trend says. Knowing the only truth I can count on
is
the trend is truly liberating.
How does the way one frames the world and experiences affect feelings? If
you could please touch on the good, the bad and the ugly.
For example as I mentioned sometime ago, I absolutely believe that since one
cannot accurately describe any situation with the detail necessary, one
cannot accurately predict the state of any system at a future time. Would
this belief affect my feelings at some level in my trading?
|
Your
beliefs and attitudes frame your world, the way you trade. Beliefs
tend to come true, and everyone, including Blondie, Tuco & Angel Eyes
tends to get what they want.
Clint
Gets the Last Shot |
|
Fri, 21 Mar 2003
Book
Recommendation
I have recently read this book and thought it provided excellent techniques
for self-control and discipline. I think the FAQ might find it
interesting. Hope it isn't against the ground rules.
Way of Warrior Trader: The Financial Risk-Taker's Guide to Samurai
Courage, Confidence and Discipline by Richard D. McCall |
FAQ
responds to questions and first-hand reports of the experience of
trading. FAQ does not endorse people or products.
Books
generally present a metaphor for trading: a dance, a puzzle, personal
growth, a river, helping others ... You have to find your own personal
metaphor for trading.
Trading
as War
|
|
Fri, 21 Mar 2003
Feelings
You wrote:
For example, consider the feeling of being lonely and having others tell
you are wrong. When the market is trending nicely, it's a feeling good
traders might especially enjoy, even use as a signal to add to a position.
The feeling of everyone telling you that you are right, might actually be
the scary one.
I didn't understand the positive intentions of feelings until your last
response. Thank you for using an example to clarify. Over the course of the
last few weeks, your responses have been much easier for me to understand.
Now I have to figure out why?.... or maybe I will just go with the flow.
|
-
-
-
Feelings
- (of a sold-out bull)
-
- Feelings, nuthin' more than feelings,
- Tryin' to forget my,
- Feelings of love . . .
-
- Teardrops, rollin' down on my face,
- Tryin' to forget my,
- Feelings of love . . .
-
- Feelings, for all my life I'll feel it,
- I wish I'd never met you girl,
- You'll never come again . . .
( You'll never come again, never, never ! )
-
- Feelings, Oh Oh Oh feelings,
- Oh Oh Oh feel you,
- Again in my arms . . . (
Again, again! )
-
- ( Feelings, feelings like I've never lost
you,
- And feelings like I've never held you
again in my arms! )
-
- Feelings, for all my life I'll feel it,
- I wish I'd never met you girl,
- You'll never come again . . .
( You'll never come again, never, never ! )
-
- Feelings, Oh Oh Oh feelings,
- Oh Oh Oh feel you,
- Again in my arms . . . (
Again, again! )
-
- Again in my arms!
|
|
Thu, 20 Mar 2003
Siblings
I've also been
working, with my brother and sister who are in the real estate field but
have basic mastery of trend following principles, on celebrating, embracing,
experiencing and letting the feelings I don't like pass through.
I always come back to my earlier question regarding doubt and feeling
lonely in a trading world where everyone seems to tell me my way is wrong.
P.S. interestingly, my siblings are enjoying the process very much
and applying it in their respective field. |
The
feelings you don't like don't pass through. Feelings you do like pass
through. To get feelings to flow through, and not interfere with your
trading, learn to like them. Part of that comes from experience, part
with identifying their positive intentions.
For
example, consider the feeling of being lonely and having others tell you you
are wrong. When the market is trending nicely, it's a feeling traders
might especially enjoy, even use as a signal to add to a position.
The
feeling of everyone telling you that you are right, might actually be the
scary one.
It
sounds like you and your siblings are forming a group and are proceeding
with the work.
Siblings
Your
true family eventually appears. |
|
Thu, 20 Mar
2003
Pyramids
1. In order to to
have reasonable diversification, in how many markets should a
trader be active assuming that the position risks are minimized at 1%
of the equity.
2. You mentioned that before entering to any position you have to decide
when and how much to add in order to form the position as pyramid, but as a
trend follower you never know how high the position goes. I guess the idea
of pyramiding with the maximum position size arranged before, may put you in
an increasing position with a small bet size. How can I solve this issue.
3. When exiting your position, do you exit all the position at one price
or do you exit step by step as a reverse pyramid. |
1.
Words like "reasonable" and "should" inhabit the
realm of fundamental analysis.
Curiously,
they also award responsibility to someone else. Your use of passive
language (risks are minimized) also gives your responsibility away.
Your
point 2 asks for a solution, without claiming a problem. Your point 3
asks how to handle unwinding a position. The answer is different for
different trading systems. You can run simulations to find out which is best
for you.
As
an experiment, for a week, you might try to begin all sentences with I (I
want ... I feel ... I minimize the risk ...). To the extent this is
uncomfortable, learn to enjoy that feeling. This is to begin to dissolve
the emotional baggage around taking full responsibility for trading with the
trend.
Once
that lightens up, you may be able to solve your specific
issues.
Baggage
Too
much baggage can interfere with scrambling up and down pyramids.
|
|
Thu, 20 Mar 2003
Bug
In regard to Wed, 19 Mar 2003 Volatility, I was
specifically, referring to the contribution of the chance of a series of
losses in a row or the theory of runs to the deviation of returns; that's
what I meant by 'eat a lot of (downside) volatility to get to the big
winners.
My question is
does one have to experience a series of losses to get to the big winners?
There is enough
ink splashed in the printing press, including Market Wizards, telling me I
can't have big winning trades and high-percentage profitable trades. Is that
so?
I believe it was
Tom Basso, if I'm not mistaken, who said reliability might actually be
inversely related to profitability.
I was flowing
until late November, when this bug was implanted in my head. Resolving
this issue is paramount so I can flow in playing the game again. I'm
currently trading 1/3 the size I was; I know I can be trading much bigger.
You can call it a crises in confidence. Any suggestions?
P.S. My signals are very few and far between, but when they come they are
highly reliable. I know even though I have some what touched on this
subject previously, It was still left dangling, some what unresolved. |
You
seem to be asking for a way to get on the big trends without having to
suffer through the drawdowns. Nice fantasy. This also gets to the heart of
trading for many traders.
Markets are fundamentally
volatile. No way around it. Your problem is not in the math.
There is no math to get you out of having to experience uncertainty.
If you have trouble with the feeling
of uncertainty, then instead of feeling it, you wind up cutting back and /
or cranking up your trading at just the wrong times.
If you want to trade consistently,
without the swings in confidence, then you have to learn to accept, even
celebrate, the feeling of uncertainty. This is the work of the Trading
Tribe.
After all, the really certain things
in life, aren't really that much fun.
Sure Thing
|
|
Thu, 20 Mar 2003
Showing Up
I have agonized over the last week on the question of how to be consistent
with my presence at the Trading Tribe meetings on Thursday evenings. Given
my employment situation in SF, I may not be able to attend consistently and
I may agitate the other tribal members. I gathered from our phone
conversation that regular attendance is important to these meetings.
I did some research on Grof's Holtropic breathing and the other information
you gave me as background to your work with the Trading Tribe. This is an
absolutely fascinating approach to espousing wakeful trading and mastering
the self in relation to trading. In doing the research I was reminded of
Suzuki's Zen Mind, Beginner's Mind". Pioneering work!
I would really like to attend, but I would rather be upfront and honest
about the possibilities of my failure to make it up to North Tahoe every
week. Please let me know how you feel about this and if I can be excused
from regular attendance.
|
Meetings
are bi-weekly and consistent attendance is important.
Woody
Allen
Ninety
percent of success is showing up.
|
|
Wed, 19 Mar 2003
3
questions/comments for FAQ
I have three entries for your FAQ pages - I don't mind if you publish any,
none or all of them, either separately or together.
1. I notice that you use technical market information rather than
fundamental information to develop your trading strategies, and seem to put
little faith in any kind of methodology based primarily on fundamental
research. How do you reconcile your beliefs with the stellar long-term
track records of stock market investors who use only fundamental
information? (i.e. Warren Buffett and other "Wizards of Graham and
Doddsville" (see Appendix of The Intelligent Investor, by Benjamin
Graham))
-My theory is that leverage is what kills even great fundamental
commodity traders. Most stock market "value investors" are
early - if you look at Mr. Buffett's track record, most of his stocks
continued to drop in price well after the buy point. If he was regularly
leveraged at 10 to 1 like most commodity traders, he would be wiped out
before the stock turned. I think that commodities whose prices fall below
the cost of production are potentially good buys - but the timing and strict
exit rules must be there to ensure success. (No, I don't mean scale trading,
which is suicidal)
2. In the world of commodity trading, there are many success stories,
not all of whom use trend-following techniques. Linda Bradford Raschke is a
swing trader, Paul Tudor Jones seems to trade intermediate swings (and also
likes to pick tops and bottoms) and there are many floor traders who scalp a
nice living. Do you espouse trend-following simply because you believe
that it is the best of many good strategies, or do your beliefs carry
further to the point where you think that other techniques are all bound to
fail in the long run?
3. I know that you do not endorse products, but I would like to support
an earlier comment from somebody who discovered a site with $1 minimum
trade. If I understand which site he/she is talking about (it is
currencies only) I second his/her views. The major handicap to small
(<$100,000) commodities traders is the fixed contract sizes which make
money management very difficult. This site lets you trade in one dollar
increments up to $1,000,000, with about 20:1 leverage and spread-only (3-6
pip) commissions. Even a small trader can "dial in" exact position
sizing. The only drawback is the currency limitation, which cuts down
on the number of non-correlated markets (EUR/USD, USD/CHF and USD/JPY all
look the same in the long term trend - cross rates help, but still circle
back to one another) |
1.
By definition, if you make money in the markets, you are on the right side
of a trend. No trend, no profit, period.
So it comes down to how do you get on
and off a trend at the right time, and how heavy do you bet so you don't
stub out during the corrections.
Buffett uses fundamentals ... and
missed the great run up in tech stocks. Of course, you can use many
methods to miss markets, so I don't think he has any unique ability in that
area. Mostly, Buffet has a great attitude; he has the seemingly infinite
patience, courage and humility of, well, a Warren Buffett. Plus he has a
secret advisor, below.
2. There are at least as many ways to
approach the markets as there are traders. I feel every successful strategy
has to exploit some or another trend.
 | Trend followers look for trends
directly in the price (and get some whipsaws). |
| Fundamentalists look to
predict inevitable trends by looking at underlying factors (and are
often early and / or wrong). |
| Arbitrageurs and swing traders
feed on small imbalances (and sometimes find out these imbalances are
just the start of a bigger trend.) |
| Contrarians look to take the
opposite side from the public (and sometimes find the public just keeps
the trend going and going.) |
3. Correct, FAQ does not endorse
people or products.
The
Buffett Behind the Buffett
Trending
Away to Margarita-ville
Searching
for ... an order to sell
It's
always the same, there's no broker to blame
'cause
I knew ... only after it fell. |
| Wed, 19 Mar 2003
Crude Oil
I notice the price of crude is going down ... is this a
good time to buy or sell? I am not a professional trader. |
Trend
followers buy up-trends and sell down-trends. Many trend followers had a
good ride up the crude oil market, and then another good ride down.
You might like to recall, around the
March highs, at least one magazine
cover expressed a widespread feeling, that the market was heading
higher. Contrarians view this kind of emotional abreaction as a signal that
the jig is up.
I notice that the public (I am taking
you as a proxy) is now noticing the price going down again, so contrarians
might just be looking for a spot to buy back in.
Fundamentalists have yet other ways
to view this very interesting situation.
In general, if you have to ask what
to do, your best move is to stay far, far away.
April
Crude Oil Futures
$28.25
at 8:15 PM, PST, March 19.
Equivalent
May Crude 27.75, May Heating Oil 74.75, May Unleaded Gasoline 89.25.
If
you don't like the price, just wait a minute. |
|
Wed, 19 Mar 2003
Volatility
Why is it
implicitly accepted by most trend followers that one has to eat a lot of
volatility to get to the big winners? Is there something I'm not
understanding? I don't find that to be the case. I'm eager to hear
your answer. |
Volatility
is the tendency to vary widely and often, as do the markets. Hold a
big position in an active market, and you can expect lots and lots of
volatility.
Chicago Board of Trade Dining Room
Attentive and flawlessly trained staff execute the house
specialty, Broiled Volatility, with Black Scholes sauce. Those
who like to eat a lot of volatility, can always get a good fill at the Board
of Trade. |
|
Wed, 19 Mar 2003
Homer Simpson Picture
I have been getting a kick out of reading your FAQ. A solid mix of wisdom
and humor. Thought maybe you could use this picture for your arsenal in a
future post.
I would like to attend next week's tribal activities in Incline Village.
Two-wheel drive weather permitting I will be there!
|
I wonder what aspect of
your trading experience the picture of Homer represents.
The
Simpsons
With
over 300 episodes, this, the longest running animated TV series ever,
still has about half as many episodes as Gunsmoke's 633. (OJ, who had his
own series for a while, is not shown in the photo.) |
|
Wed, 19 Mar 2003
Group in Los
Angeles
I'm interested in being part of a group. I'm located in Los Angeles, but
I'm willing to drive to San Jose for meetings. Is there any interest in
forming a group in LA yet? |
By
car, LA to San Jose takes about 5-1/2 hours. LA to Incline Village
takes about 8 hours. If you would like to organize an LA group, I can put
your email address in the Directory.
Los Angeles to Incline, 500 Miles |
|
Wed, 19 Mar 2003
Non-Proportional Risk Management
(see
reference)
Do you mean do not reduce new Entry risk on drawdown, or reduce new Entry
risk moderately?
Page 160 MW interview. "The manager still must decide...how
aggressively to increase and decrease the trading base as a function of
equity change."
Does 'trading
base' mean the percentage of Total Equity Risk Per Trade, (ex. 1 - 5%). Or,
does 'trading base' mean the Maximum Risk Exposure to Total Equity, (ex. 20
- 32% on all positions). |
The
trader has to maintain some level of trading appropriate for the equity.
You can measure trading base in
various ways, depending on your system:
| contracts |
| shares of stock |
| aggregate value |
| risk-to-stops |
| volatility |
You can measure equity as:
| liquidation value of the account |
| liquidation value less risk |
The trader's job is to keep these
well-proportioned.
Specifications
for Champion Great Danes
The female shall
not be less than 28 inches at the shoulders. Thirty inches or more is
preferable, providing she is well proportioned to her height. Danes
under minimum height must be disqualified. |
|
Wed, 19 Mar 2003
Formal Trading
Education
I'm enjoying your website. I wish to explore your ideas on formal
education and the markets. Could you comment on the most important
factors your previous studies have brought to your ability to play the game
better?
Suppose for a moment you are a Dean of Finance for an exciting new
university. Your opportunities to fashion a program is wide open, you
are given carte blanch. What are your thoughts on how you might fashion a
masters degree in trading and the markets? How and what would you teach? On
which subjects would you have your students focus? How would you conduct
yourself in this hypothetical situation to maximize the returns you value?
|
As
Dean, I would set up an interactive website about the real issues traders
face, and invite people to send in questions.
I
would read the mail very carefully, so I could reply to:
|
the
formal question |
|
the
personal mask and / or trading metaphor the contributor uses |
For
example, say the item was all full of very open-ended questions, one after
another. I might model him as an owl. I might suggest to the
writer that he go for a day or two without asking any questions at
all, to find out:
|
how
question deprivation feels |
|
how
a barrage of questions might make the other party feel |
|
how
else he might get information |
|
what
other masks he might try on |
Masked
Owl
Keeps
asking the same question, over and over.
Tatanua Mask
the New Irelanders
of Melanesia take this mask as a metaphor for male power and aggressiveness. |
|
Wed, 19 Mar 2003
Perceptions, Metaphors,
Dynamic
Position Sizing
Thank you very much for the great site. I am seeing a lot of things clearer
now. As I think about it I view my system as a part of myself which I
brought from the inside to the outside.
If the system
is not implemented correctly I feel an internal conflict or a kind of
dishonesty to myself. Following the signals is quite easy for me since it
gives me a feeling of going with the flow.
A problem arises
in situations which I had not discounted for and for which I do not have
specific rules. That’s why I am spending quite some time thinking about
possible future scenarios …
I would like to add some comment to the Math
is a Language post from yesterday. I ran extensive tests on dynamic
position sizing and found out that none is really better than a static
fixed percentage approach. I tried to limit my drawdowns to a specified
number with the dynamic approach because I psychologically liked the false
safety of it (“ Whatever I do my drawdown wont be below X% with a 99.8%
probability”). Additionally to the reasons already mentioned by you it has
the following drawbacks:
|
Drawdown
periods get longer (What’s worse? Longer or deeper drawdown?) |
|
After some
losses you might reduce risk because the drawdown touched a certain
level and get a huge positive move with a small contract size. For me
that’s psychologically devastating. |
|
Its prone
to curve fitting
|
Ich hoffe dem Auge
geht es besser, |
Thank
you for the additional information about problems with dynamic
position sizing.
Danke
für Ihre freundlichen Wünsche.
Tubing
Getting
the feeling of going with the flow.
|
|
Wed, 19 Mar 2003
Re-Reading
Sorry, having reread what I wrote ... it
didn't seem to make much sense to me either. I have just thought of some
tests I could do in order to answer my question.
|
If
you start with an ambiguous design and try to translate it into computer
code, you can easily get lost in math that just doesn't seem to work.
Solution: dump it all out and start
over.
Coffee
Mug
Instructions
for filling: first, make sure it's empty. |
|
Tue, 18 Mar 2003
March 13
Meeting Follow-Up
I've come to some powerful new awareness's already as a result of my first
group meeting.
1) I feel profoundly more at ease in the world and less anxiously
self-absorbed.
2) It became very clear to me over the weekend that my goal of selling my
xxx and taking out a loan for $xxx to trade through xxx was a clear example
of "swinging for the fences" and had the potential to be quite
self destructive.
3) Literally within hours of letting go of needing to sell stuff in
order to trade I came across the trading solution at xxx.
Essentially, all the other firms dictate a minimum lot size of at least
$10,000, base currency. What this means, is that with a 2% risk rule that
you need at least $20-$25k in order to be able to open even single lot
positions. With xxx, the minimum lot size is $1 and there are no fees except
the bid-ask spread. I ran the numbers, and realized that I can go live with
a $2500 "model" account. I'm shooting for the first of May.
4) I also realized that I can go live with great confidence in my system
even in it's crude, lightly (excel) back tested form. The basic parameters
are very simple and very robust, and if anything, I can refine it from more
detailed back testing analysis going forward. In other words, I'm
considering myself ready to trade, and not making a big deal out of having
everything "just so" before I put live dollars on the line.
I'm definitely not in any big hurry to devote too much time to testing
right now, my new focus is in devoting no more than a highly focused
hour to my trading decisions each day, and getting on with the rest of
living, focusing on my nutrition, fitness and most importantly having more
fun.
|
Being
at ease and letting go of what does not work are trend-following
principles and the basic work of the Trading Tribe.
Formulating a system, and
back-testing are ways to optimize portfolio selection, trade timing and risk
control.
Balancing these can help keep you on the
middle path, between stuck and floating
away.
Earth
to Trader - Earth to Trader
Come
in Please ... and Bring More Margin
Hello
Enlightened One, this is your broker. Say, I'm really sorry to get you out
of your flotation tank ... just thought you better know ... your contracts
are heading down in a fast market. Yes, I know it's mellow ... it's just
that we need you to put up a little more margin. |
|
Tue, 18 Mar 2003
March 13 Tribe
Meeting Follow-Up
It was nice to
meet you last Thursday. I enjoyed the Trading Tribe meeting. Initially,
it took a bit of concerted effort to put myself into XXX's shoes, but by the
end, I had begun to grasp it. Many share the same problems, they just
manifest themselves differently.
|
Putting
yourself into XXX's shoes, going with the feelings wherever they lead ... is
analogous to going with the trend of a market.
He's going that-a-way. |
|
Tue, 18 Mar 2003
Trend Following Works Outside Trading
I wonder if the trend following methodology is also successful outside of
trading. I have been sticking with trends in my everyday life a lot longer
since I have been reading your web site, such as my different moods, the
flow of auto traffic and more importantly the moods of people around me. Identifying
these trends earlier has made my life more enjoyable. Thanks.
|
As
trend following, going with the flow, expressing feelings and being
pragmatic all merge, you become one with your system, the Laughing Buddha.
Siddhartha
Gautama, 563-483 B.C.
The
Indian mystic and founder of Buddhism at age 35: Follow the middle way ...
accept that all things change, release all attachment, and kick butt in the
markets. |
Tue, 18 Mar 2003
Need Cash ?
Get Paid $25 to $125 an hour to work online - where
your opinion is worth a paycheck! |
Great!
Send me a paycheck, and I'll tell you my opinion of your paycheck.
J. C. Hormel introduces Spam in 1937. Five billion
cans later, it's still going strong. The newer email variety (item to the
left) does not seem to have the same consistent quality. |
Tue, 18 Mar 2003
Interested
I have sent a few emails expressing my interest in coming to Nevada and
spending some time with you. My intent is still the same and will be
following up very shortly. I am reading market wizards and reviewing other
materials as well. I was told to do this first before going to Nevada.
I am arranging time towards the end of April. Is that a good time? I will
also arrange to have funds sent. What is the amount please? |
The
Trading Tribe avoids passive language, such
as I was told.
We use SVOp - Subject, Verb, Object,
present tense, so we know, for example, who is telling you to read
first, travel later.
Still in Style, Since 1918
Section III, items:
| 11. Use the active voice
| 12. Put statements in positive form |
| 13. Omit needless words |
|
|
|
Tue, 18 Mar 2003
Anticipation
(1) From your experience, does using different trend-following strategies
for different markets reduce down-side volatility of the portfolio's
P&L?
(2) Also, does
a trend follower need to be in the market all the time in order to catch
the big move?
On a different note, you said that trend followers do not try to anticipate
anything, but does the strategy not anticipate indirectly that a trend
will continue? I suppose all strategies anticipate the future in some
ways.
|
1.
You might clarify what you mean by "down-side volatility of the
portfolio's P&L." This particular word bunching seems
ambiguous, particularly the part about the downside profit (P&L means
profit and loss).
2.
No, he just needs to be in for the big moves, and it's also nice to be out
during choppy whipsaw markets.
3.
The trend following strategy does not anticipate anything. The trader might
anticipate a top or a bottom, and stick to his system anyway.
Howler
Monkeys, c.1848
The
trouble all started when a million of these guys got a hold of a million
computers and started coding their trading systems. Typical result: "To
be or not to be, that is the ... downside portfolio P&L
volatility." |
|
Tue, 18 Mar 2003
Math is a Language - see
prior send
Me' puedes dar un vaso de agua? Didn't understand? Let me clarify.
Could I have a glass of two parts hydrogen one part oxygen?
Risk Exposure
- Measures max risk to Total Equity if all positions are stopped out.
I will use this to
determine if I can accept a new signal and position.
Program
Volatility - Measures the drawdown of Total Equity. I will use this to
reduce risk as the drawdown increases. As Total Equity increases after
drawdown I will use this to increase risk back to original levels.
Me' puedes
traducir esto en matematica? Could you translate this into math? Al fin
encontre' lo que queria, pero tuve que andar de la Ceca a la Meca. At
last I found what I wanted but I had to look high and low. Gracias.
|
Mé
puedes dar translates to Can you give me. Could I have translates
to Podría tener.
You
could also stand a little more precision with risk, drawdown and
volatility. From precise definitions, the math follows easily.
In
this and in your prior send you
suggest non-proportional risk management. This raises problems:
|
Different
position sizing for two equal size accounts, if they start on different
dates and have different performance history. |
|
After
a drawdown, prohibitively small risk allotment, effectively suspends
trading altogether. |
Me
parece que mucho dinero de nuestros impuestos anda de la Ceca a la Meca. (Seems
to me that a lot of our tax money goes all over the place.)
The
pun is on the old Spanish slang phrase, Ceca a la Meca,
meaning, literally from the Mint to Mecca, also all over the place, or not
staying in one place very long.
The
Philadelphia Mint presses the first U.S. coins, copper cents and half
cents of 1793. The presses run by hand and with horsepower.
Mecca is
the most holy city in Islam. |
|
Tue, 18 Mar 2003
Typo
I found a typo on your site.
|
Thank
you for the heads-up.
Maybe
it's time to upgrade. |
|
Mon, 17 Mar 2003
A Long Strange
Trip
When I was in college I heard the siren call of Stochastics and Bollinger
bands. An older man I met at church studied this thing that nobody talked
about, technical analysis. He had many books from impressive sounding people
dating back to the 60s and 70s which I devoured with enthusiasm.
I can remember
sitting at the back of my useless graduate human resource class, looking at
patterns and learning rules about trading. It was 1992 and at the sunrise of
online trading. My path was clear, I would go straight from graduate school
to retirement.
The fact that
my mentor lived in middle class housing, worked in a factory, and drove old
cars didn't seem to grab my attention. $250,000 later I took a real job.
I was fired from
my job as a "market facilitator". The only thing worse than losing
your own money is losing your friends' and family's money. Fortunately my
father viewed it as a lesson learned, and a cost of learning the business.
Over the next 5
years I read and studied everything. My mentor, myself and some other
friends regularly discussed charts, often meeting over breakfast to talk
about the market or our positions.
More and more I
found myself questioning their decisions in my mind. None of us had a plan
of any kind regarding risk, despite the fact that everyone I read ranted
about the importance of "money management", without necessarily
explaining in specifics what that meant. Over time
I became a
breakeven trader. Time and again I would watch my friends get
"hot" and have strings of successful trades. Inevitably followed
by holding on to an over-leveraged position and blowing up. Then they would
switch to a new indicator or method.
I came to see
learning to trade as learning to sculpt. You have to remove all the junk to
find the truth. I suspect learning truth about any subject is similar. Last
year I earned over 20% in my account and 16% in my father's.
Now I find myself
farther down the learning curve, and in an uncomfortable position. The
people I'm surrounded by, my friends and family, don't share the same view
of trading as I do. My father, although supportive, sometimes questions my
styles and decisions. My "mentor" still likes to swing for the
fences.
Have you ever
found yourself in such a position? Where you've outgrown the people around
you?
In a personal
note, I like your site. Could you please shed any light in the [XXX] vs [YYY]
situation. I have contacted the people that run both sites and they
claim the other are crooks who will steal your money, lol. |
People
who support and celebrate your growth are rare, delightful and precious
gifts. Those who don't keep up
can still be valuable teachers. Mentors
can go either way.
FAQ
does not endorse people or products, or get in the middle of other people's
fights. See FAQ
policies.
Big
Fight: Forest vs. Mayorga
Since
both gentlemen were evidently familiar with FAQ
Policies, neither one bothered to approach FAQ for mediation or
adjudication services. |
|
Mon, 17 Mar 2003
Money
Management
Thanks for your last send it was reassuring and helpful. Especially the part
about pyramiding.
These are my base assumptions about money management and parameters I will
be testing.
Money management is the adjustment of position size as it relates to;
|
EQUITY - risk
1/2 - 5% of Total Equity on any one trade. |
|
CURRENT MARKET
VOLATILITY - Exit stop at 15 day exponential ATR * 2, 3 or 4. |
|
RISK EXPOSURE
- (if all positions are stopped out) Total Equity Max Risk is 10-32% (TE
* %Max Risk) - [(settlement - exit stops)($ per point)] = $ Risk
available / TE = % TE Risk available if < 2% then No New Position. |
|
PROGRAM
VOLATILITY - For each 10% drawdown from highest Total Equity reduce risk
by 20%. (ex. begin with 2% risk on any one trade, then 10% TE loss =
1.6% risk, 20% loss = 1.28%, 30% loss =1.02%). After a 30% Drawdown for
each 10% gain increase risk by 25% (ex. begin 1.02 then 10% TE gain =
1.28%, 20% gain = 1.59%, 30% gain = 2%) |
I am having difficulty expressing Risk Exposure and Program Volatility in
a formula. Could you help?
I realize your site is about teaching traders to maintain emotional balance
while executing a well thought out plan.
However
building a well thought out plan can be difficult without support and a math
background. |
Math
is no substitute
for clarity.
If
you are having difficulty expressing elements in a formula, good chance you
are not clear about the definitions of your terms, such as "Risk
Exposure" and "Program Volatility."
To
test your clarity, try to explain your thinking to someone else, preferably
an angelic child. If you can't get it across easily, it just isn't
clear enough to program.
To
clarify your thinking, you might start by specifying how you intend to use
these factors and what they intend to measure.
Quality
Control for High-Level Thinking
|
|
Mon, 17 Mar 2003
Taking the Hot Seat
I really enjoyed the meeting last Thursday. I am looking forward to the
next. Hopefully I will get to take the hot seat that time. During the
meeting, I realized how important and crucial this type of work (on oneself)
can be for me or any trader that takes the hot seat.
I was thinking that some time in the future (it would be a while), I
might start my own group. Not sure if I can find enough traders here,
but we shall see.
|
So
far, I know of interest in forming groups in Reno, San Jose and Toronto.
Typically,
many apply, few are called to occupy important hot seats.
Royal
Throne / Coronation Chair
Speaker's
Chair, House of Commons
Trading
Throne
French Merovingian,
8th century, majestic style with gothic-arch top and full armrests, candle
holder, hand painted earthenware ash tray, poetic inscription on the seat
back by a French poet, snug-fitting cover and pull cord that rings a bell. |
Mon, 17 Mar 2003
Discipline
I would like to thank you for inviting traders to send you questions.
I have been trading for a number of years now using a trend following system
(albeit a short term one). My discipline of taking all the trades that the
system gives has diminished of late probably in response to a drawdown I
experienced in January of this year where I experienced a large string of
losing trades. Although I maintain a three-quarters of a percent loss on any
trade, the actual money amounts represented are significant (to me anyway).
This lack of discipline has meant that I have not taken a number of trades
which included a lot of losers, but also contained a couple of winners, the
net effect being that instead of being up 2% for the year to date, I am
actually down 5% instead.
I have noticed this diminished sense of discipline in other areas of my life
as well.
My question is therefore, how can I increase my discipline and maintain
it? |
You
seem to like to break your own rules.
You
might try to "go with the flow" and happily break some rules on
purpose for a while, preferably in an area where consequences are not large.
|
You
might get a coloring book and joyously color outside the lines. |
|
You
might enjoy breaking some rules of grammar while you are speaking with
associates |
|
You
might like to take a walk around the block with only one pant leg rolled
up above the knee. |
All
the while, see if you can notice how you feel about rules. Typically, this
has to do with parents.
As
you allow yourself to experience these feelings, even communicate about them
to others, and start to enjoy them, they tend to disappear.
Then,
you can either follow your rules or not, without all the emotional
overlay. Good rules, like not touching wet paint, are easier to follow
without the baggage.
Wet
Paint Sign with Ripping & Graffiti
In
NYC for the past 10 years instead of using "wet paint" signs
intact, workers have been ripping them in half, ostensibly to double the
number. Result: more locations for Mike to express his feelings about
Christine and about authority. |
|
Sun, 16 Mar 2003
About Stocks
So, according to Market Wizards, you sometimes take time off from
trading. The news says that the market will be in for a wild ride this
next week due to the threat of war - will you not trade in anticipation, or
will you give it a try and figure you can surely beat the predictions of the
media? It seems that they rate right up there with the weathermen ... |
Well,
if it's on the news, then you can bet on it. Of course, you might very well
lose your bet, or miss a good one.
Trend followers do not trade in
anticipation of anything, nor do they try to figure things out. They simply
go with the trend.
Figuring-out and anticipating events
are things that fundamentalists, and weathermen do. They engage the
processes of analysis and anticipation, with similar results. The best
ones learn simply to predict the trend will continue for a while.
Weather
Prediction Device
Put the device
outside and check it every so often. If it is wet, it predicts rain. If it
is all white, it predicts snow. If it is on it's side, it predicts high
winds. |
| 16 Mar 2003
Stuck
Quote: "I'm contemplating hypnosis as treatment in order to get at
those feelings that might be stuck."
Treatment referred to celebrating and embracing those feelings. I referred
to it as "treatment" because It seems I've become very adept at
suppressing the feelings I don't like; finding out what those feelings are,
I thought, amounted to treatment. I've come to realize that it will take a
lot from me to learn to celebrate and find out the feelings I don't like.
The problem lies as you said deep in my unresolved issues. Furthermore, I
don't know what these issues are. This is quite new and foreign to me. I
wanted to know if I could utilize hypnosis to get to know and find out what
those feelings are so I can celebrate, embrace, experience them and let them
pass through. I'm grateful that you are shading light on such an
important issue. |
Feelings
are feelings, and many of the important ones don't even have names. For
trend followers, some of them arise at the time of placing stop orders,
getting stopped-in or stopped-out, and watching their own performance
curves.
Analyzing feelings, even giving them
names, is an intellectual, logical process, and may be yet another way to
avoid the real work of feeling them and communicating them.
Feeling the feeling of trying to figure
out the feeling of trying to figure it out. |
|
Sun, 16 Mar 2003
Trade Long-Term, All Markets
It bothers me that traders devise a system, back-test it, and then choose to
only trade the markets that it works on for the past (10 years or so). This
seems like over-optimization to me. It even seems worse than over-optimizing
to the best parameters associated with a particular market. At least with
the latter, a trader will most likely participate in a big move. If one is
not even looking at that market, then one will not be able to participate by
definition.
My philosophy is to trade long term enough break-outs that will assure
few trades per market per year, but make sure that I am looking at just
about every market available. This way I am assured that I can have a big
gain when that big move comes along.
What am I am missing or what is faulty with this line of thinking?
I realize that I am exposing myself to markets that, historically, have
offered little in the way of trend following profits. (Not because they
don't move in trends, but because they tend to do so in a choppy manner.)
However, this classification seems rather temporal to me. The British Pound
has been tough on trend followers for much of the nineties, but had some
great moves before that. Soybeans often confound my systems for recent data,
but what if a trader missed the move in the seventies? It only takes a move
like that to make a huge impact on equity.
|
Long-term
trading has an advantage, in that the transaction costs are small relative
to the average move. Some traders might find it difficult to sit
tight through prolonged corrections.
Sounds like you are coming around to
the idea of trading moves, rather than markets. Some traders hold on to a
position, and keep changing their systems to fit it - other traders hold on
to their systems and keep changing their portfolios to fit it.
Most markets creep along most of the
time and then make a nice move, sooner or later.
Edible
Snail
The
fastest snails are speckled garden snails which move up to 55 yards per hour
compared 23 inches per hour of most other land snails. May 24th is National
Escargot Day. |
| Sun, 16 Mar 2003
Flying Glass
I am looking at buying my wife a Subaru AWD because our
winters in Canada are very snowy. I have a question ... I was looking at
the frame-less window at my local dealer and it didn't look very safe. I
have read a few reviews about them but they only talked about sealing
problems. |
To
control for risk of flying glass, try a vehicle with window-less frames, or
maybe the SUV below. You might like to take a look at your feelings about
risk.
FAQ does not endorse products. See
FAQ Ground Rules.
Armored
Suburban, Bullet Proof Windows
$110,000 |
|
Sun, 16 Mar 2003
The River and the Lion
After the great rains, the lion was faced with crossing the river that had
encircled him.
Swimming was not
in his nature, but it was either cross or die. The lion roared and charged
the river, almost drowning before he retreated. Many more times he attacked
the water, and each time he failed to cross.
Exhausted, the
lion lay down, and in his quietness he heard the river say, “Never fight
what isn’t here.”
Cautiously, the
lion looked up and asked, “What isn’t here?”
“Your enemy isn’t
here,” answered the river. “Just as you are a lion, I am merely a river.”
Now the lion sat
very still and studied the ways of the river. After a while, he walked to
where a certain current brushed against the shore, and stepping in, floated
to the other side. |
Nice
story. Yes, the easy way is often best. Of course, it usually doesn't
hurt to check the river for down-stream volatility.
Hakuna
Matata means no worries for the
rest of your days ... it's a problem-free philosophy.
Niagara
Falls means remember your risk control. |
| Sun, 16 Mar 2003
System Assist Broker ... Follow-Up
Thanks for answering
my March 7 question regarding the use of a system assist broker. I
wanted to follow-up on that question, because part of your answer did not
make sense to me. You stated that, “Your system-assist broker is acting in
the role of money manager. The cool part is that, so far, he is providing
this valuable service for free.”
I’m not sure that I agree with that statement. My definition of a money
manager is someone who invests (or trades) my money on my behalf in a manner
of his/her own discretion, in accordance with my risk/reward comfort level.
This however, is not how I use the system assist broker.
The system assist broker is simply executing trades
following a set of rules that I provide them for trading my account. All
decisions are made by me (through the rules that I provided the broker).
This does not fit my definition of a money manager. With that further
clarification, does this still seem like an account owner / money manager
relationship to you? I don’t see the reason of cutting them a share of my
profits for simply following my rules.
Do you see this outsourcing of the system execution function of my system as
a valuable way to reduce the risk that psychological tendencies may at times
block me from following the signals? Is there a downside to this strategy?
(other than higher commissions?)
Thanks for your time. I appreciate all your efforts on the FAQ |
My
understanding of the function of your system assist broker is to insulate
you from the order entry process, and from jumping your system.
This work-around indicates you have a
very real concern about handling an intimate relationship with orders. You
might like to take a look at your feelings in and around the area of sharing
wishes.
As the assistant accepts more
responsibility for handling the feelings of trading, he becomes the trader,
and develops entitlement to trader fees.
Tiger Woods
This world-class athlete is actually Ed's
system-assist golfer. Ed delegated the job of entering tournaments and
generating strokes, all on Ed's behalf. So far the arrangement is working
very well. As compensation for this service, Ed allows Tiger to keep 100% of
the fame and fortune for himself. This agreement is so secret that even
Tiger Woods does not know about it. |
| Sun, 16 Mar 2003
See ++
I'm sorry to hear you suffered the eye injury and now am praying for your
recovery.
|
Thank
you for your prayers and wishes. They seem to be working.
Retinal
Detachment
In a
whiplash situation, the vitreous gel, that fills the central cavity, can
separate from the back of the eye and pull the retina with it, like
wallpaper. Vitrectomy replaces the vitreous gel with a gas bubble, allowing
the retina to re-adhere to the back wall. Over time, the body replaces the
gas with fluid. No evidence exists that the procedure enables the patient to
see into the future. |
|
