"If I wasn't dyslexic, I probably wouldn't have won the Games. If I had been a better reader, then that would have come easily, sports would have come easily...and I never would have realized that the way you get ahead in life is hard work." -- Bruce Jenner
Every time we go through a bad period in our firm, whether it's for two months or for eight months, people ask me have the markets changed. And I always say the same thing. I say, "Yes, the markets are always changing; but people's reaction to change, more or less, remain the same."
I knew I could not predict anything, and that is why we decided to follow trends, and that is why we've been so successful. We simply follow trends. No matter how ridiculous those trends appear to be at the beginning, and no matter how extended or how irrational they seem at the end, we follow trends.
At JWH, we realize that not only is it impossible to foretell the future, it's not necessary. We rely on the fact that other investors are convinced that they can predict the future, and I believe that's where our profits come from.
We may take a small risk in placing a trade initially, but after we have a large profit we risk it, and that's a risk very much worth taking and one we gladly accept.
Suffice it to say that we embrace both volatility and risk and, for us, risk is that we're going to lose if we risk two-tenths of one percent on a particular trade. That is, to us, real risk. Giving back a profit to you probably seems like risk, to us it seems like volatility.
"In fact, the ironic part of system design is if you want to maximize profits, you must be willing to give back a great deal of the profits you have already accumulated." -- Van K. Tharp
The Six Kase Behavioral Laws of Forecasting
Law Number One: Remember that the objective is profit, not ego-stroking.
Law Number Two: The objective is profitable trading, not proving a thesis or world view.
Law Number Three: When wrong, move on.
Law Number Four: Have confidence in your own intuition. Do not rely on the advice or opinion of others, no matter how well respected they might be.
Law Number Five: Do not read newspaper articles or watch newscasts that discuss the markets in which you have an interest.
Law Number Six: Plan your strategy when the market is closed - when you are rested and thinking clearly.
If you owned an option that was 20 standard deviations out of the money - and I had plenty of those - how many cumulative months of time decay could you sustain if it moved into the money?...it was 67,000 months of time decay.
If you have a 24-sigma even on an option that's 24 standard deviations out of the money, your payoff is 750,000 times your bet.
We're not programmed to deal with variables that can take very large deviations. We tend to not pay at all for things when we don't have reason to pay for them, but overpay when we see a reason.
"Being a scientist can sometimes be depressing. Surrounded by younger versions of yourself, you are constantly confronted by the mismatch between the dreams of youth and the facts of maturity." -- Emanuel Derman, author of My Life as a QuantOne of my favorite quotes and not only applicable to scientists and programmers...but everyone with several years of experience under their belts...and perhaps a few gray hairs to show for it. Heck, even relates to being a parent. Universal theme...I love it!
When I first started getting into systems, I was persistent, objective, and analytical. I've always been willing to say what it is that I do know, and what it is that I don't know. If somebody said to me "this will work" I'd say, "well, why will it work?" What's the proof?"
Great thinking...I believe many of us could apply this type of thinking to our investing strategies.
And Pardo goes on to describe the great Art of Cherry Picking...
They call this sort of thing cherry picking now. So many people, when they're looking at an idea by hand will say, "oh, it worked here, it worked here, it worked there, and boy, did it work great!" They ignore the fact that it had seven losers before this big win, and three more losers before that big win. They're maybe small, but they do add up. They need to be included in the equation.
In a system, risk is uniform and constant. I re-optimize models periodically because conditions and volatility change. You have to adapt to that to get optimal returns. Generally, though, we're risking the same tomorrow that we are today. Most people not only will vary their risk a great deal, but they'll get very skittish when they actually get a profit.
There's a powerful strategy being expressed here. Something Basso mentioned in his Market Wizards interview.
"Trading cannot be taught...it has to be caught. By that I mean you must have a perceptive nature. Without it, buy a system and execute it mechanically."
"I've had experience with this problem (self-sabotage). In short, I found if I had a goal that my self-concious believed was not doable, then I'd self-sabotage my trading. Once I realized this and changed my goals, the self-sabotage stopped."
"If you want to remain emotionless during trading, concentrate on the process and let the outcome happen."
** my favorite one **
"Giant oaks do grow from little acorns. But first you must have an acorn."
"Behind every successful man stands a surprised mother-in-law." -- Hubert Humphrey
"Always program as if the person who will be maintaining your program is a violent psychopath that knows where you live." -- Martin Golding
"As soon as we started programming, we found to our surprise that it wasn't as easy to get programs right as we had thought. Debugging had to be discovered. I can remember the exact instant when I realized that a large part of my life from then on was going to be spent in finding mistakes in my own programs." -- Maurice Wilkes
He was a cowboy, mister, and he loved the land. He loved it so much he made a woman out of dirt and married her. But when he kissed her, she disintegrated. Later, at the funeral, when the preacher said, "Dust to dust," some people laughed, and the cowboy shot them. At his hanging, he told the others, "I'll be waiting for you in heaven--with a gun."
"The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people so full of doubts." -- Bertrand Russell
"Any time you sincerely want to make a change, the first thing you must do is to raise your standards. When people ask me what really changed my life eight years ago, I tell them that absolutely the most important thing was changing what I demanded of myself. I wrote down all the things I would no longer accept in my life, all the things I would no longer tolerate, and all the things that I aspired to becoming." -- Anthony Robbins
Collective2: A Marketplace of Trading Systems
Culls through the number of systems in Collective2's site and breakdowns the performance of swing trading versus daytrading. Most interesting part? Only 24% of Collective2's systems average 1% or more per week yet all systems exceed winning percentages of 50%.
Update: Cramer Offers You His Protection?
Asks and answers the question, Does Cramer have an edge? Insights shared: There may be some edge in buying the Cramers sells during the immediate negative returns and holding longer than 6 months. And it seems part of Cramer's edge is issuing buys on a rather large number of stocks. This creates a thin red line where the more stocks issued as buys...take him further away from market beating returns.
End-of-Quarter Effect: Window Undressing?
Is there a tradeable event at the end of quarters? This is something I have tested in the past and my results match their findings...expect market strength after the quarter...not before.
A Slinky (Short-term Reversion) Effect?
A study is performed on the cane walkers of Wall Street. After reading this post...I thought why judge the decline absolutely? Judge against volatility instead?
An Out-of-Sample Test
Discusses James O'Shaughnessy's strategies now used by Hennessy Funds. Interesting the Growth strategy beat Value in out-of-sample testing.
Ideally, a good performance measure should show high performance when the return on capital is high, when the equity/return curve increases linearly over time, and when loss periods (if any) are not clustered.
"I'm not smart, but I like to observe. Millions saw the apple fall, but Newton was the one who asked why." -- Bernard M. Baruch
"No question is so difficult to answer as that to which the answer is obvious." -- George Bernard Shaw
Back-testing can be useful, but I recommend you go one more step. Print out the gory details.And don't miss Basso's famous money management test on a random selection of trades. Profits to losses were setup as a two-to-one ratio and the buys and sells were fed back randomly. The tests showed professionals focused on risk while amateurs focused on gain. Something to think about.
I look for an indication that a trend either exists or doesn't. I like to look for those markets that aren't currently trending, the ones nobody cares about. Those are the markets that are likely to make a move one way or another.
If you mismatch what you're trying to do to who you are and what skills and resources you have, you're always going to be fighting it and never be in sync with it. If, on the other hand, you match your trading system to yourself, then trading can become as easy as breathing.
"If you're ridin' ahead of the herd, take a look back every now and then to make sure it's still there with ya."
Win Ratio: 69.23%Actually, not bad considering it's a first run. The profit factor of 12.54 is really nice considering I typically receive profit factors on first runs in the 5 to 8 range...if the idea has merit. Maybe we're on to something? :)
Avg Profit: 180.34%
Max Consecutive Winners: 8
Avg Loss: -30.68%
Max Consecutive Losers: 2
Max Drawdown: -8.12%
Profit Factor: 12.54
