Beating the Market

Dan has posted some great insights into the zero-sum nature of beating the market.  Read here.

Favorite quote from his post:

If the majority of investors
believe they will beat the market return by investing in fundamental
indexing, they will have to earn their above market return at the
expense of other market participants-- but those market participants
aren't anywhere to be had. Those abnormal returns exist because the
"market" has allocated funds in a particular way over the history of
the stock market. If the "market" were to no longer allocate funds that
way, perhaps we would have the indirect benefit of an overall better
functioning economic system, but directly, the market, as a whole,
cannot escape the market return. If everyone believes something to be true, you cannot earn abnormal returns off of it.

Later Trades,

MT

Quote of the Week - Letting Go

"The difficulty lies, not in the new ideas, but escaping the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds." -- John Maynard Keynes

This past weekend I wrapped up a new system I've been working on for several months now.  The sad part is it replaces all the current systems I trade.  So, I'm in the process of closing down my existing systems in order to begin trading this new one.

This kinda stuff is never easy.  One in particular has been very hard to let go.  It was the first system I developed back in 2001.  Named it after my daughter.  This new system has been named after my son.  Go figure.

One important change I have made is trading from an end of week basis to an end of month basis.  The backtesting has gone very well...but the forward testing is ongoing.  If this works out well...I may even push out to a quarterly basis.  Time will tell.

The interesting aspect of this system is it curtails nicely with the recent post by acrary here.  While I'm not anywhere close to what acrary has discovered...I too have found certain slices of the market where specific strategies work well.  And as embarassing as it is to say...all my systems I have built over the past five to six years are trying to capture the same market characteristic.  So, this monthly system really is just a simplification of all my weekly systems targetted at a very specific market slice.

What are my next goals?  Well, I have two...

1)  Figure out a strategy for the other side of the market coin.  The area I have yet to develop a viable system.  This should hopefully increase my rate of return while reducing my risk.  Heck, even if its a net loser...may still reduce my risk.

2)  Begin designing a backtesting engine.  I've done a lot of research over the past few days and had some help from a few technical gurus here at work.  I believe I've got a platform framework in mind.  Surprise, surprise...most of it will be done in Python.  Still much design work to do and testing.  Question for you Python guys and gals...any experience using Pytables?  That's what I'm considering for the time series data store.  Any feedback on Pytables would be much appreciated.

That's it here from a short-timer.  Only have a few days left at my current job before I move away from the great state of Texas.  There will be lots to miss but hopefully much to gain up in my new state of Missouri.

Later Trades,

MT

Quote of the Week

"It is impossible for a man to learn what he thinks he already knows." -- Epictetus

MT

Bill Dance Video - Funny

I haven't laughed this hard in a long time...




Enjoy!

MT

Quote of the Week - Programming

The time at my current employer is coming to an end and my new job soon beginning. I'm currently in the process of gathering up all the systems I have designed and supported over the past 8 years and ensuring the documentation is complete and up-to-date and the code nice and tight. I'll be turning these kids of mine over to another programmer to adopt and support. The programmer taking over the systems is a great guy and will indeed treat them well. But, as I'm cross-checking user guides, code documentation, and data dictionaries...I find motivation in the quote below:

"Always code as if the guy who ends up maintaining your code will be a violent psychopath who knows where you live." -- M. Golding

I've always followed a similar mantra...Always design your systems to be supported by someone else even if it will only be supported by yourself. Because our main goal should be to let our code sail...

"A ship in port is safe, but that is not what ships are built for. I want all the youngsters to sail out to sea and be good ships." -- Grace Hopper

Speaking of software...what software tools do you use in your daily routine? Editors? Backtesters? Spreadsheets? Calculators? Here's a breakdown of my software tool set...

Wealth-Lab - Rapid Prototyping! I typically develop one or two trading systems over a 3 to 6 month time-frame. Each day I'll scribble ideas onto pieces of paper. Trying to find ways to improve the system and use Wealth-Lab to test those ideas out.

R Project - Great batch analysis of Wealth-Lab backtests. I'll run a Wealth-Lab simulation that generates a comma-delimited file of the trade output. Then analyze the CSV file with a batch R script that outputs to the terminal or to HTML. Couldn't live without this tool in backtesting and system studies.

ActiveState ActivePython - I can connect to the TC2005 database with Python and parse the securities anyway I please. Build portfolios by sector, exchange, etc. Oh, and ActiveState includes the Pythonwin IDE which is nice. Update: I also can connect to Wealth-Lab Developer with Python and run chartscripts against custom portfolios. Very cool when watching the Python script open and close the Wealth-Lab Chartscripts for each symbol in the list or table you're reading down.

gVim - This is my notepad replacement. I haven't used it very long...but so far so good. Also experimenting with jEdit. If only someone would develop an EVE Editor for Windows!

Excel - Hey, I know...pretty simple huh? Well, sometimes there's nothing better than Excel in dumping data quickly and testing out various scenarios.

Calcr - If you need to quickly calculate something...this website rocks! It can even handle assignment of variables. Such as x=2; x*2. Also the Google Search Bar always works in a crunch as shown in my Amortization Formula post.

Later Trades,

MT

Technorati : Calcr, R, editor, gVim, programming, python, quotation, wealth-lab
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Testing Blog Editor

"Rest: the sweet sauce of labor" -- Plutarch

Testing new blog editor, Zoundry.

As you can see...taking it easy today. Actually taking a break before I begin more clean-up around the house. With putting my house up for sale, getting ready for my trip to Missouri, and completing a big project at my current job...I needed a rest! :)

The above picture is something my daughter and I drew a few weeks ago...a picture of her with her toy dog Danny. Just testing the picture insertion feature of this editor.

MT

New Blog Editor and Fortress

Test of new blog editor, Qumana.

By the way, it's really cool to see the excitement surrounding Sun's new Fortress Language:

Deep Market - Fortress Programming Language for Scientific Computing
Wikipedia - Fortress Programming Language
Slashdot - Fortress: The Successor to Fortran?
Sig9 - Fortress

MT

Tags: blog, editor, qumana, fortress

Quote of the Week

“All changes, even the most longed for, have their melancholy; for what we leave behind us is a part of ourselves; we must die to one life before we can enter another.” -- Anatole France

MT

Quote of the Week - Moving

"The moment one definitely commits oneself, then providence moves too. All sorts of things occur to help one that would never otherwise have occurred. A whole stream of events issues from the decision, raising in one's favor all manner of unforeseen incidents and meetings and material assistance, which no man could have dreamed would have come his way." -- Goethe

Much is happening here at TaylorTree. My family and I are moving to Missouri. As you can imagine, much to do. More to come later.

MT

Quote of the Week

"All fixed set patterns are incapable of adaptability or pliability. The truth is outside of all fixed patterns." -- Bruce Lee

MT

Hawk Picture

Hawk in my backyard, originally uploaded by TaylorTree.

Came home today and noticed this hawk checking out our backyard. My daughter and I couldn't believe how close we got before it flew off.

Hope you're enjoying your weekend.

MT

Quote of the Week

“Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma - which is living with the results of other people's thinking. Don't let the noise of other's opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.” -- Steve Jobs

MT

Interesting Stuff

Michael Covel pointed to a document from NorthCoast Asset Management here. Very interesting read on their dynamic portfolio allocation methods. From their site I found a BusinessWeek interview explaining a bit more about their techniques. Read here.

On a side note...I'd like to thank everyone at Memorial Hermann for making our labor & delivery a wonderful experience. The facility and people were the best I've ever encountered. Everyone went above and beyond the top-level of service and made our stay one to remember. There were two nurses in particular who were simply amazing and helped us through a very scary time in the middle of the night. So, to Memorial Hermann and their amazing staff...thank you from the bottom of my heart.

Later Trades,

MT

Baby Boy!

Well, I'll be out of commission for a few days...taking care of our new baby boy! Almost everything is okay...he just has some reflux issues that he's still getting tested for. Tomorrow they'll perform an ultrasound on his stomach to confirm their hunch on the problem. If they're correct...he'll require surgery. But, I'm hoping it's just a 24 hour "get used to the world" thing and he keeps showing improvement in the condition.

My wife did an incredible job and now on the road to recovery. Which is a tough road considering she labored for 10 hours before the little bugger got here.

Me? I'm tired but smart enough to know this is part of the deal. Mostly can't wait until all of our family can be well and together at home.

Keep us in your prayers.

MT

Quote of the Week

"Believe nothing, no matter where you read it,
or who said it, no matter if i have said it,
unless it agrees with your own reason
and your own common sense."
-- Buddha

Nice quote, huh? But, it could be better. Instead of following one's own reason and common sense....one should believe something only after careful observation and analysis. Then perhaps adjust your common sense to those findings.

Really sorry for the lack of system trading posts these past few weeks. Doesn't mean I've changed focus...just means I've been extremely busy in system development work. I'm building several tools to aid in my trading idea validations. Along with tools to aid in identifying the core components that lead to success in my current systems. Needless to say, it has been a learning experience. For one, this work has led me to understand more about the systems I trade. And secondly, has driven home the importance of keeping systems simple.

I see I'm not the only one reviewing trades and trying to uncover opportunities for improvement. Read TraderMike's Path to 100 R in Profits here. One suggestion I'd make in analyzing one's trades is to break your trade history into 3 groups:
Group 1 - The Great Performers
Group 2 - The Churners
Group 3 - The Lousy Losers

Spend time trying to understand Group 3's Lousy Losers. What caused those really awful losses?

But don't forget to check out Group 2's Churners. The trades that didn't do anything for your bottom line still have a cost...they tie up valuable capital and keep those brokers fat and happy.

And of course, don't forget to take a look or two at Group 1's Great Performers. That's where your Gordon Gekko personality needs to kick in and ask yourself...Could I have made more?

Later Trades,

MT

Thread of the Week - Discipline

"Success is the sum of small efforts, repeated day in and day out." -- Robert Collier

Acrary posted a great topic on overcoming discipline problems here. Acrary really nailed it on the head with the following statements:

"To overcome my discipline problems, I've been programming my life to achieve the results I desire."

"Anytime I want to consciously achieve a goal, I figure out how I can setup a process so it would be hard to fail."

Much to learn...

MT

Quote of the Week

“The real voyage of discovery consists not in seeking new landscapes but in having new eyes.” -- Marcel Proust

How much time and effort do you spend on identifying the characteristics that produce winning trades? If you're like me...a lot! But, have you ever thought about increasing your time allocation to identifying the characteristics of losing trades? More importantly...the really awful ones?

Based on Pareto's Law and more specifically Sturgeon's Revelation:
If 90% of everything is crud then 100% of our investing returns come from 10% of the trades. And if 90% of our trades are indeed crud...then it follows that 90% of that is most likely crap. Which means a little over 80% of our total trades are full of crap. :)

Formula:
crud = trades * 0.90
crap = crud * 0.90
% total crap = (crap / trades) * 100

Example:
trades = 100
crud = 100 * 0.90 = 90
crap = 90 * 0.90 = 81
% total crap = (81 / 100) * 100 = 81%

Later Trades,

MT

Amortization in Google

If you didn't know this...the Google search bar is also a calculator...and pretty good one I might add.

Here's an example amortization formula you can cut & paste into Google's search bar to obtain the loan's monthly payment amount:
20000 * ((6 / (12 * 100) / (1 - (1 + (6 / (12 * 100))) ^ -(5*12))))This will return a monthly payment of 386.656031 that corresponds to a $20,000.00 loan at 6% interest for 5 years in length.

To get a better understanding of the loan amortization payment formula...see below:
i = interest rate ex. 6 for 6%
n = number of years ex. 5 for 5 years
p = loan amount ex. 20000 for a $20,000 car loan
m = monthly payment
m = p * ((i / (12 * 100) / (1 - (1 + (i / (12 * 100))) ^ -(n*12))))

A big thanks to Hugh Chou for kindly supplying the amortization formula on his site. Please check out his site for further information regarding amortization formulas.

MT

Friday Links

Interesting article on Risk Homeostasis here.

"...human beings have a target level of risk with which they are most comfortable. When a given activity exceeds their comfort level, people will modify their behavior to reduce their risk until they are comfortable with their level of danger.....if a given person’s level of risk drops too far below their comfort level, they will again modify their behavior. This time though, they will increase their level of risk until they are once again in their target zone."

Can we create systems from this idea? The first question we'd have to answer is what constitutes risk for the average investor in the stock market? Is market volatility considered risk to an investor? I'm not sure many thought so at the time back in the late 90's. What if we examine only the downside portion of market volatility? Hmmmm...

The Five Truths About Code Optimization here. Great tips that relate to designing and more importantly optimizing your trading systems. Here are just a few:

"You are looking to answer two questions. First, did my change actually help? If the change did speed things up, is there now a new bottleneck? Some part of our program is always going to be the limiting factor -- otherwise your code would be infinitely fast. As you optimize things, it is quite likely that the part you sped up will fade into the background and some other section of the code will become the new bottleneck."

"I don't care if your idea is so brilliantly efficient that it can't possibly not speed things up. If Mother Nature doesn't agree, Take It Out."

"The trouble with optimization is there is no end to it."

And finally...check out the new Adam Sandler movie coming soon to a theatre near you: Click. I want one of those remotes! Ha ha.

That's it from here...where I'll be spending the weekend cleaning up the house in anticipation of the stork's delivery in the next few weeks.

Later Trades,

MT

Thread of the Week

What's the Thread of the Week you ask? Well, each week I'll try to post an interesting thread from one of the many trading forums out here on the wild & woolly Internet. The thread could be of value to your trading...or just a good old laugh. So, enjoy!

This week's thread is a very funny topic posted on the EliteTrader boards: "Altucher guesses: trend funds to disappear within the next 10 years..." You would think the thread would actually hold some value considering James Altucher and Victor Niederhoffer are some of the posters. But, the thread mostly ends up as an ideology debate similar to my football team is better than yours.

You do have to give the originator of the thread some credit...the opening post below sure did the job of drawing many traders into the fire:

"successful hedge fund manager and author, james althucher, states in his new book--"super cash"---- that the trend following funds will be history within the next 10 years. he cites the dismal performance of the major trend funds over the last several years, over leverage, and investors pulling out. his new book is fantastic reading into the cutting edge of hedge funds. definitely check it out!" -- marketsurfer

Even I had to post a few comments. See if you recognize which ones those were.

As a follow-up to the thread...check out Niederhoffer's post on his DailySpeculations site here. You'll have to search down for the following post, Comments on a Trend Following Discussion, dated 12-Apr-2006.



Later Trades,

MT