Development 0.1

"Be careful about using the following code -- I've only proven that it works, I haven't tested it." -- Donald Knuth

I have finally started my dynamic allocation of equity project.  This is something I've stewed about for several weeks...okay...maybe months.  But, after meeting with Jon for lunch this weekend...I finally got the motivation back to begin work on the project.  Thanks Jon!

And seeing as how I hardly ever write anything of significance on this blog...I figure I'd start documenting some of the steps I'm taking to get this project on the road.

First thing was to find a better coding environment than what I was using.  I have been using the PythonWin IDE for my trials and tribulations.  I needed more oomph.  Hopped over to Vim and have hunted and pecked my way around a bit.  No flow joe yet.

Before moving on...does anybody know of a windows or even linux distro of the EVE$EDITOR?  Somebody?  Anybody?  Hello?

Just a week ago, I found out about the new Pydev extension to Eclipse.  Pretty nice.  It's still not perfect...but much closer to what I'm looking for.  So, now that I've found an IDE that allows me to play in the sandbox a bit...on to the database choice.

I downloaded pytables due to their "designed to efficiently and easily cope with extremely large amounts of data" claim to fame.  And then did nothing with it.  It's not the relational type of storage I'm used to...so maybe that's why.  Thought maybe a viewer would help, so downloaded the vitables viewer.  It was nice...but still did nothing with it.

Okay, maybe I'm making this too hard.  One of the python programmers I know mentioned Sqlite.  Downloaded it.  Found the python extension for it here.  Explored documentation for working with it here and here.  Now, I'm getting somewhere.  Wrote a few python modules to test create, insert, drop, and fetch.  Here they are:

Create Table in Python/Sqlite:

******Begin of Code***********************
from pysqlite2 import dbapi2 as sqlite

conn = sqlite.connect("TaylorTree")
cursor = conn.cursor()

SQL = """
    create table MarketDaily
    (
      Symbol    text,
      Bar       SQL_DATE,
      Open      float,
      High      float,
      Low       float,
      Close     float,
      Volume    float,
      AdjClose  float,
      primary key (Symbol, Bar)
    );
      """
cursor.execute(SQL)
******End of Code***********************

Insert into Table:

******Begin of Code***********************
from pysqlite2 import dbapi2 as sqlite

conn = sqlite.connect("TaylorTree")
cursor = conn.cursor()

SQL = """
    insert into MarketDaily
    (Symbol, Bar, Open, High, Low, Close, Volume, AdjClose)
    values
    (
        "YHOO",
        20060801,
        20.00,
        25.00,
        19.00,
        22.00,
        50000,
        22.00
    );
      """
cursor.execute(SQL)

conn.commit()
******End of Code***********************

Fetch from Table:

******Begin of Code***********************
from pysqlite2 import dbapi2 as sqlite

conn = sqlite.connect("TaylorTree")
cursor = conn.cursor()

SQL = "select * from MarketDaily"
cursor.execute(SQL)
# Retrieve all rows as a sequence and print that sequence:
print cursor.fetchall()

cursor.close()
******End of Code***********************

Drop Table:

******Begin of Code***********************
from pysqlite2 import dbapi2 as sqlite

conn = sqlite.connect("TaylorTree")
cursor = conn.cursor()

SQL = "drop table MarketDaily"

cursor.execute(SQL)
******End of Code***********************

Not too bad.  Not too hard.  But, then I figured I'd make a module that would handle all this stuff for me.  Some hard work began...all because I had no idea how to use symbolics in Python/SQL.  Finally discovered the needle in a haystack...'%s'.  Aha!

******Begin of Code***********************
from pysqlite2 import dbapi2 as sqlite
conn = sqlite.connect("TaylorTree")
cursor = conn.cursor()

def UpdatePrice(sym, b, o, h, l, c, v, ac):
    SQL = """
          insert into MarketDaily
          (Symbol, Bar, Open, High, Low, Close, Volume, AdjClose)
          values
          (
              '%s',
              %s,
              %s,
              %s,
              %s,
              %s,
              %s,
              %s
          );
          """ % (sym, b, o, h, l, c, v, ac)
    cursor.execute(SQL)
    conn.commit()
******End of Code***********************

After spending a lot of time getting all that going...I then turn back to pytables.  Maybe I need to dig deeper there.  Found some very good documentation here.  But, I'm still sitting here...nothing.  Hey, someone give me some motivation on working with this bad boy!  Anybody have any experience to share in regard to pytables?  If so, bring it on!  I need some mojo!

And that's where I am now.  Oh...and of course, will begin working on spinning through TC2005's databank and load historics into Sqlite.  How do I do that?  That involves working with COM objects and Python makes it very easy for you.  In fact...I'm amazed at how complicated it is to call a COM object from Microsoft's own languages like C#.  In python...all you have to do in order to get to the TC2005 COM object is...

******Begin of Code********
import win32com.client
w=win32com.client.Dispatch("TC2000Dev.cTC2005")
******End of Code**********

2 lines.  Now, I'm sure there is a much easier way to call a COM Object in C# that what I was trying to do.  If anyone out there knows how...please leave a comment.  I'm really interested to see how many lines it takes to connect.

One last thing...if C# is your thing...check out Microsoft's free version of Visual Studio, C#, and even SQL Server via the Express Editions.  C# not your cup of tea?  There is Visual Basic, Visual C++, and even Visual J++.

And that's it from here...where I'm hoping to catch up on some much needed sleep.

Later Trades,

MT

Quote and Thread of the Week

"One of the best attributes I know a trader to have is humility. The best traders I know admit to knowing very little about what the market will do or don't pretend to have any kind of secret method or style or edge that others don't have. They just go in to work everyday like a brick layer. Their goal is to lay bricks. One at a time. And hopefully at the end of their life they have built a solid foundation. That's all a trader can hope for." -- Maverick74

Found the great quote above perusing EliteTrader this weekend.  The thread is titled, Writing Options for a Living, read here.  You'll have to be patient because a lot of time is spent with posts from people still believing in the Easter Bunny.  But, there are a few gems to be found...especially from Maverick74, riskarb, and a few others.

Later Trades,

MT

Quote of the Week

" Becoming wealthy is like playing Monopoly.. the person who can accumulate the most assets wins the game."
-- Noel Whittaker

MT

Thread of the Week - Birth of a Turtle

Came across a great thread this weekend regarding Curtis Faith and his Turtle background.  Read here.  I especially enjoyed the story of his initial programming experience converting trading systems.  What a great first job.  And of course, always hungry for insights and traits into what makes a successful trader.  Here's Mr. Faith's take:

The ones who were successful had more emotional control. The ones who weren't successful were either too intellectually insecure and unable to commit to a strategy, too greedy, too emotionally invested in their financial success, too affected by the large swings in equity, or too averse to the risks required to trade well (probably due to a lack of confidence in themselves). One of the things that distinguished the good Turtles from the ones that were completely unsuccessful is their personalities. The traders with a more intellectual and systematic approach to life were much more successful than the emotional traders who really wanted to make a lot of money.

And finally, one of the most important insights Curtis makes:

...all successful people owe their success to the help of others. They therefore have an obligation and usually a desire to pass on the craft, to teach and help others.

I am thankful that such a thing is true.  I owe many thanks to the people that have helped my programming and trading experience grow in the right direction.  In a sense, we are all like those baby turtles Mr. Dennis refers to.  Just trying to make it out to sea and swim with the big dogs.  And avoid the many perils from beach to sea.

Later Trades,

MT

Quote of the Week

"There is no doubt in my mind that systems and styles which offer a rougher ride will hold up more over the long run because not as many traders and certainly almost no institutional money wants the ride.




You will make more money if you can take the pain. Unfortunately, you will make little or none if you think you can but it ends up that you can't."
- Curtis Faith -


MT

Quote of the Week

"Always swim, never sink" -- Yoji Harada

:)

MT

Interview of Programming Greats!

A really cool interview of several of the great programmers of our time: Linus Torvalds, Guido Van Rossum, James Gosling, etc. Read here.

They answer questions in regard to what they feel is the next big thing, what new technology they feel is worth learning, what makes programmers productive, etc. Really great interview. Check it out.

MT

Thread of the Week

A really great thread over at the Trading Blox forum.  Read here.

Best part was the comments by Curtis Faith in regard to "the characteristics of markets over time."  Curtis broke the markets into three classes:

1)  Fundamental Driven Markets - cleanest trends and easiest to trade;

2)  Speculator Driven Markets - perception driven and harder to trade;

3)  Aggregated Derivative Markets - averaging out effect dilutes momentum.

Plus, I always enjoy it when Curtis shares his Turtles experience.  His coffee story reminds me of a few trades from my Melba Toast story. 

Also, pay attention to Barli's mention of optimization and the effect lack of cash has on your results.  This is a very hard lesson to learn.  Most backtesting platforms will drop trades due to lack of cash.  Thus, you only see a sample size of the actual results.  There are a few solutions to this problem...but that's for another time.

Later Trades,

MT

Quote of the Week

"Every now and then go away, even briefly, have a little relaxation, for when you come back to your work your judgement will be surer; since to remain constantly at work will cause you to lose power."  --  Leonardo da Vinci

Well, I had a little break.  And during that break I moved my family to Missouri!  Yes, we are now in Missouri.  Things are going good.  Still have so much unpacking to do.  But, was able to mow the yard (grass is different here than Texas) and find my grilling supplies for a good steak dinner with a corona or two.

The break did me good.  No computer, time spent with the family, and change.  Plenty of change.  Change does the mind good.  Breaks you out of your comfort zone.  And that's a good thing...even though it doesn't always feel like it when undergoing the change.  Here's more on breaking out of your comfort zone from Dr. Brett.

And that's the update for yours truly.  Oh, and I start my new job this week.  Very excited.

Have a great week!

MT

Quote of the Week

"If you've been pounding nails with your forehead for years, it may feel strange the first time somebody hands you a hammer. But that doesn't mean that you should strap the hammer to a headband just to give your skull that old familiar jolt." -- Wayne Throop

This quote rings so true.  :)

Happy 4th everybody!

MT

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
Del.icio.us : Calcr, R, editor, gVim, programming, python, quotation, wealth-lab

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

Quote of the Week

"Man with one clock always know time. Man with two clocks never sure." -- Chinese Proverb

Later Trades,

MT

Quote of the Week

"Aim for success, not perfection. Never give up your right to be wrong, because then you will lose the ability to learn new things and move forward with your life." -- Dr. David M. Burns

MT

Quote of the Week

"Why do they always teach us that it's easy and evil to do what we want and that we need discipline to restrain ourselves? It's the hardest thing in the world -- to do what we want. And it takes the greatest kind of courage. I mean, what we really want." - Ayn Rand

MT

The One Thing...

Curly: "I'll tell you the secret to life. This one thing. Just this one thing. You stick to that and everything else don't mean sh*t."
Billy: "What's the one thing?"
Curly: "That's what you've got to figure out."
City Slickers, the movie

I was a golfer growing up. A good one. Good enough to win a few tournaments in high school and be offered a full-ride in college. But, I burned out before I ever got there. Wanna know why?

I couldn't get to the next level...the pro-level. What do I mean by the pro-level? Well, I could outdrive anyone and post great scores...especially in the clutch (never lost a playoff match). But, I couldn't do it day after day. Know why? Because I thought there was a skill level that I could only achieve if I perfected my swing. I would read magazine articles, study the best player's swings, and practice 14 hour days in the East Texas humid summer heat. All in the hopes of finding that one thing that would take me to the next level. And sadly, I never found it.

The worst part...everyone else thought I was great...but I didn't. So, I gave up my talents and offers and began living life as a typical young person. Always keeping this failure in the back of my mind...the what if?

Isn't it amazing that it took trading to teach me that "magic" next level? In fact, learning to trade has been eerily similar to my golf experience. Reading trading books and studying the best charts for many endless nights than I care to share. Searching and searching for that one thing...that one edge that would take me to the next level.

I assumed that talent and a perfect edge is what would take me to the next level both in golf and now trading. Thankfully, I have finally found the one thing that can take you to the next level. And I'll even be so gracious to share it with you...

There really isn't a next level. There isn't a level where everything all of a sudden gets easy. A place where you always have your "A" game. Everyday is different. In golf...you might wake up and your wrist bothers you a bit...so you naturally compensate for this condition and fight your swing for 18 holes. There's nothing you can do about this but adapt. Find a swing that you can be comfortable with...not one that is perfect....or hits that drive 30 yards further...but a swing that gets the job done whether you feel like a million bucks or have the avian flu. Learn just what that swing can and can't do...and then play golf! Day in day out...play your game. Don't worry about the dude that can drive 50 yards past you or the guy putting the lights out in Memphis. Play your game day in and day out with the knowledge that some days it will rain, your body will not be 100%, you're moods will change, people will change, and courses will change. And if you can stick to your game despite all these changing conditions...you'll find the so-called magic next level. Same goes with trading...

Find a strategy that gets the job done...might not belt out 50% annualized returns with 10% drawdowns...but works for you...and more importantly fits you. Don't worry about what anyone else is doing...just trade your strategy day in and day out. You'll never get to a point where the profits are easy and you can just print money at will. Realize that. The best you can hope for is you'll get to a place where you'll know your system and what it can and can't do...and you'll follow it. Simple as that. Some days...you'll look like an idiot...and other days a genius...and understand that's what it's all about. It took me all these years to figure that out. Crazy, isn't it?

This "one thing" can be applied to many aspects of trading. For example, in your backtests...do you optimize parameters on your entire trade set? If so, that's a perfect world that will never happen again. Throw out the best 5% - 10% of trades from the set before you begin tinkering. That way you're designing a system built on a bit more realistic data.

Same goes with golf...do you play that par 5 as something you can reach in 2 on your best day...everyday? Hmmm...

Side note:
Several years later after my burnout I did pick golf back up again...won several local tournaments...only to hit the wall again. And haven't really played since...that's been about 5 years ago.

Later Trades,

MT

Cool New Blog Find: Deep Market

"Somewhere, something incredible is waiting to be known." -- Carl Sagan

Found a very cool blog a few days ago...the Deep Market blog. Check out the post covering Oversimplified Method for Finding Patterns in Stock Charts here. And the follow-up, Correlation Pattern Matching Explained, here. I have never thought to use the correlation function to find setup patterns. I have only used it in the traditional sense...comparing trading instruments and trading system equity curves. Very interesting.

Might be useful to take this idea and apply towards the Melba Toast logic. Hmmm....

Later Trades,

MT

Optimal Risk with Ed Seykota & Dave Druz

"The biggest secret about success is that there isn't any big secret about it, or if there is, then it's a secret from me, too. The idea of searching for some secret for trading success misses the point." -- Ed Seykota

Found an interesting paper from Ed Seykota and Dave Druz written back in 2001. The team test what heat can do to a portfolio's return and drawdown. The test shows that drawdowns will eventually overtake returns if heat is increased too much. Nothing new or exciting...just a confirmation of what I've already found in my system testing. Read the paper here.

For more info on Ed Seykota...read the following interview here. My favorite quote from the interview is...

The idea of searching for some secret for trading success misses the point. It's like golf. Some golfers play to spend time outdoors. They hang out with their cronies, become one with nature, study the greens, reconnect with their muscles, drop into focused concentration and, incidentally, pick up a birdie or two. For others, it's an exercise in finding some new Holy Grail putter. Different strokes for different folks!

Also don't forget to review Donchian's Trading Guides in the back of the interview. Make note of #7 in Donchian's General Guides:

In a market in which upswings are likely to equal or exceed downswings, a heavier position should be taken for the upswings for percentage reasons; a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%.

For more on David Druz read here, here, and here. I like David's focus on designing a system to handle anything the market that throws at it...instead of designing something for just a particular market condition.

Later Trades,

MT

Quote of the Week

"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

I can vouch for this. Being dyslexic makes everything hard. But, when you finally learn it and understand it the way you need to understand it...you know it better than anybody.

MT

John Henry's Trading Philosophy

John Henry discusses his trading system design philosophy here. Henry discusses the time period in which he developed his original trend-following system. And offers some great insights such as...

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.

Enjoy the article.

Later Trades,

MT

Interview with the Stock Bandit

Check out this really nice interview with Jeff White over on the Stocktickr blog. Read the interview here.

I like his KISS principles and the fact he doesn't look for the market to do this or that...just takes what the markets brings to him via his setups. Nice.

MT

Quote of the Week

"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

There is a fine line between giving away too much of your profits and giving too little room for your positions to grow.

Later Trades,

MT

Quote of the Week

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.

The above Quote of the Week comes from a new book I'm reading...Trading With The Odds: Using the Power of Probability to Profit in the Futures Market by Cynthia A. Kase.

No doubt, one of the all-time best books I've read on Trading...but I'll warn you...for the experienced system trader only. In other words, I would not have understood many of the fantastic insights offered in this book just a few short years ago.

In fact, while reading this book I was struck with how incredibly difficult it is to become a great system trader. Flourishing as a system trader requires two very different and conflicting mindsets:

#1) A Rule-Follower. Must be a logical thinker willing to break down the most complex of things into a set of rules to follow. And more importantly, be willing to follow the rules you have set. The latter being the hardest part for yours truly.

#2) A Rule-Breaker. In order to grow to higher levels in system trading...you must be willing to break conventional wisdom [rules] in regard to all things people including yourself take for granted. And this where the conflicting mindsets truly come into play. It's very hard to program a set of rules for a system and then allow yourself to see the ways rules can be broken to improve the system. Sounds easy...but very hard. Thinking about this one some more...I believe our true task as a trader is discovering the "real" rules versus the rules we traders have created and hold as "real".

That's what I believe Kase is uncovering in her book...the "real" rules.

Special thanks to Eric for pointing out the Variance Stop technique discussed in Kase's book. Eric's contribution has triggered several exit ideas that I'm currently testing across my systems.

Later Trades,

MT

Nassim Taleb Highlights

Active Trader Magazine interviews Nassim Taleb in the March issue. Here's a few items that Nassim shared:

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.

There's a bit more but for that you'll have to get the magazine. :)

I realize I haven't gone back to the Melba Toast system in quite awhile...it hasn't been forgotten...just been extremely busy. But there is good news...I have made some progress in capturing the dry toast pattern. At first I thought I'd have to use a bit of trig to capture the exact pattern...but from the initial tests it looks like a max/min range divided by ATR might do the trick. Hopefully, I'll get a chance to test this piece out soon and share the results with ya'll.

Until then...

MT

Quote of the Week & Robert Pardo Interview

"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 Quant

One 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!

On to other things...this weekend I found a great interview with Robert Pardo, the author of Design, Testing, and Optimization of Trading Systems. Read the interview here. Some quick highlights:

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.

Overall, a great interview and piques my curiosity as to the other interviews covered in the Market Beaters book. I guess another book to buy and read. :)

Also, don't forget...the new issue of Active Trader Magazine contains an interview of Nassim Taleb. Just bought the mag this weekend. So, I'll share some highlights of the interview sometime this week.

Later Trades,

MT

TGIF

Some great quotes from acrary over on the EliteTrader Forum.

"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 **

Now, for some silly Friday quotes...

"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

And finally, the always funny Jack Handy...

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."

Enjoy your weekend!

MT

Does Trend Following Work on Stocks?

Check out this paper written by Eric Crittenden and Cole Wilcox of Blackstar Funds: Does Trend Following Work on Stocks? There's a lot of great information embedded in this paper. And for equity system traders...much to learn. In fact, so much to learn, that I've exchanged a few emails with one of the coauthors, Eric Crittenden. Before I begin...let it be said that Eric is a very sharp guy and truly understands the system trading world.

One of the great things I found in this paper was finally someone addressed survivorship bias in their system tests. And more importantly discussed the impact of dividend-adjustments. The really surprising point, especially after talking with Eric, was that survivorship-bias doesn't play as much of a role as I thought in backtesting long-term stock trading systems and dividend-adjusted data or lack thereof plays a much larger role than I expected. So much of a role that my first goal after reading the paper and talking with Eric is to obtain dividend-adjusted equities data.

Another dividend, if you will, of dividend-adjusted data is that your system signal's can be applied to a different time series despite the underlying stocks remaining the same. In other words, you may get more trades if you run your system against two sets of data...1) Non dividend-adjusted and 2) Dividend Adjusted. Some stocks that previously looked stale or non-trending may indeed show up in a long-term trending system with dividends factored in.

Re-entry of positions is another very interesting part of this paper. In my current systems I do not have re-entry criteria. If my trailing exit is hit...I'm out of that stock for good...or until my system model captures it again. In the paper you will see stock charts with stocks hitting the ATR trailing stop and then re-entered. This also has made me look to my own systems and possibly adding some type of re-entry logic.

And finally, for those still yearning for more Trailing Stop ideas...the paper provides plenty of discussion on the Average True Range trailing stop technique. Eric has even offered an alternative solution to the ATR trailing exit problem from my Innovating Exits post. His solution involves using the variance of the Average True Range in your trailing stop. I'll discuss more on this in another post.

Finally, I'd like to express my thanks to Eric for kindly responding to my questions and graciously sharing his thoughts and views on system trading. Maybe I can get an interview out of him to share on the site some day.

Until then...

Later Trades,

MT

Quote of the Week

"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

MT

Quote of the Week

"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

MT

CXOAG System Linkfest!

Did a little digging on CXOAG's blog and found some interesting studies they've performed on the market. Enjoy!

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.

Later Trades,

MT

Over My Head...

The article titled, The Use of Hurst and Effective Return in Investing by Andrew Clark, contains much that is over my head. But, that shouldn't dissuade me or you from diving in and learning what we can. Heck, any article that contains the following statement is definitely worth my time...

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.

In the sentence above, Andrew Clark describes just exactly what all of us are looking for in designing, testing, and evaluating our trading systems.

Sorry for the lack of updates on the Melba Toast System. I've been very busy with other projects. But, haven't stopped dreaming up ways to capture the congestion. Here are just a few ideas that I will test as soon as I get the time:

• What if you count the number of weeks a stock closes above its mean and number of weeks closed below its mean? If the ratio of above to below is close to 1 then does that suggest a congestion range-bound area in the time series?



• Should we look for these congestion areas within a certain percentage from their all-time high? Or all-time low? Or both? Or maybe all-time high is too limited and we just need to look for a certain percentage from their 5-year high and low.



• Could using a stock's beta help identify congestion areas? Does the congestion area exhibit less beta than the market? Speaking of beta...has anyone ever attempted to create an indicator out of beta? Basically, the number of stocks with a beta above 1? If so, please share.

Well, that's it from here...where I'm looking forward to seeing Ricky Bobby on the big screen! Ha ha!

Later Trades,

MT

Quote of the Week

"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

Observation is important but the true key is the ability to open your mind to new possibilities. Without an open mind...you cannot see all that's possible.

Have a great week!

MT

Melba Toast Examples

This page will showcase all stocks that I find exhibiting the Essence of Melba Toast. The more examples I can find of Melba Toast...the better chance I have of identifying the logical conditions present in the pattern. So, this page will evolve as new charts are added.







MT

Quote of the Week

"No question is so difficult to answer as that to which the answer is obvious." -- George Bernard Shaw

Have a great week!

MT

Tom Basso Interview

I haven't fallen off the face of the earth. But, have been extremely busy at my day job. I'm also busy testing various ways to capture the sideways congestion in Melba Toast. The initial rules work to some extent...but after further tests...still don't capture the exact model I'm looking for.

So, I've decided I've got to go old school and start collecting charts of all the sideways congestion examples I'm looking for. I'm going to create a page on the blog and store the charts there. That way I can spend more time checking out the specifics of the moves. And hopefully find a way to logically explain the pattern I'm looking for. I'll post a link to this page in the next few days.

Until then, check out this great little interview of Tom Basso. Read the pdf here. Basso is one of my favorite fund managers in the Market Wizards book series. And in this interview Basso shares some gems.

Back-testing can be useful, but I recommend you go one more step. Print out the gory details.

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.

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.

MT

Quote of the Week - Cowboy Up!

"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."

We are so busy blazing our own path through the markets. We often forget what really matters...equity performance. Our job is to wrastle that equity to higher ground. All the talk, debate, yip-yap, and how often you're right isn't worth the bucket it sits on...if your equity isn't still there with ya!

Later Trades,

MT

Melba Toast - First Test

If you've read my first post on the system idea of Melba Toast...then you're probably wondering just how that simple little idea performed in market history. Now, remember...all we did was apply a few simple filters. We haven't gotten our hands dirty yet. That happens when we start focusing on patterns. And thanks to Damian for his pattern idea submission...which we'll be sure to use when we get to that point.

Now, when I get a rough set of filters built...I'll usually start looking for stocks that I want to pick up in the system. I do in this in two ways. The first is by using stocks that I've experienced the idea I'm trying to develop with. And I shared those with you in the first post. The second thing I do is run a quick backtest on a small subsection of the market to see what other stocks it's selecting. And to get a rough idea as to how on the mark the filters I'm using work.

Typically, I'll use the Nasdaq 100 to test with in the very beginning. Yes, I know...the Nasdaq 100 is a current snapshot of the Nasdaq 100. And it is the cream of the crop of stocks in the Nasdaq Exchange. So, if I'm looking for big gainers in the past...well the current Nasdaq 100 has them (and only them). In other words...the dice are loaded. But, regardless of these loaded dice I'm rolling with...using these stocks help initially in the test...let's me know just what the filters are picking up. And helps me find more examples to use in my development.

So, here are the results of the first test on the Nasdaq 100:

Win Ratio: 69.23%

Avg Profit: 180.34%
Max Consecutive Winners: 8

Avg Loss: -30.68%
Max Consecutive Losers: 2
Max Drawdown: -8.12%

Profit Factor: 12.54

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? :)

Here's some example trades from the backtest:







As you can see...some potential...but for the most part we're catching the stock a little too early in the process. I'm also worried that we might be filtering down too much. So, for the next test we might open the filters, especially the average price - the max closing low piece. Maybe less than 1 ATR is a bit too tight. We'll see. Until then...

Later Trades,

MT

Developing Melba Toast

I usually keep system ideas and designs to myself. I let my readers in on the mechanics of system trading such as money management, position sizing, etc. But, the actual generation and creation of a system has always been personal. And to be honest...never wanted to give away an edge.

I guess, times are a changing. I've decided to develop and test a system idea in real-time here on the blog. My point isn't to build a system for you, the reader. The point is to share my process...how I capture an idea logically. And more importantly how to continually develop and test until a) the idea's acceptance into the trading library or b) the idea's admittance into Heavenly Hills System Cemetery.

So, what's the idea?

Ever sell a stock out of boredom? When you bought the stock...it looked great. But, after months of underperformance...no better yet...after months of the stock doing nada...you sell. The good news is you didn't really lose money on the investment. But, didn't make any either.

A few weeks or months after closing out your position...the stock breaks to a higher level. Not by a whole lot...still higher than you've ever seen while holding the melba toast. Since the price isn't that much higher than your selling price...you ignore it.

Weeks...months...maybe years go by. Then, like the curiosities of an old flame, the mind wonders...what ever happened to that stock I held back in the day? Pulling up the quote in Yahoo Finance hits you like a Mac truck. That melba toast gained more than 10 times the price you sold it for. Oh, if only I had held it. If only I could stand a little fiber in my diet.

How many of these stocks have you encountered in your trading life? I've experienced plenty. Here are some examples.









About 90% of my equity is allocated to my systems. Around 10% is left as fun money. I can buy stocks for any reason and hold for as long or short as I like with this fun money. The examples above are trades made with this fun money. As you can tell...the trades were horrible. But, this fun money does two very important things for me.

1. Allows me to release the self-destructive side of my trading where I can participate a bit with the market masses without destroying my bottom-line.



2. By participating in the euphoric buying and panic selling sprees I feel all the things the masses feel. I know what it's like to put 100% of my fun money into one position and get hit like The Equities Research Center's FCL trade. To experience those feelings enable me to observe the patterns and more importantly generate system trading ideas.

And with that we get to the main point. How do we logically capture the stocks that go from nothing to something? The Melba Toasts of the world?

My initial thoughts are to identify areas in the time series where buyers are not rewarded. Basically, no new highs are made within a certain time period...let's say one year or 50 weeks.

What about the downside? I think it's okay for the market to make new lows...but not too much on the downside. So, maybe we can check the max closing low for the past year and compare against the average. How many ATR's is the lowest closing price from the 50 week average? Less than 1 ATR sounds about right.

What else? Hmmm...trend. Yes, we need to check the trend of the stock. We basically need a stock that is not trending upwards. So, trending downwards to a degree...or better yet...no trend at all will provide the maximum frustration for holders of the stock while still keeping them in it.

Let's also add a minimum volume filter of at least a 50 week average daily volume greater than 20,000 shares.

So, what do we have?

• No new highs within the past 50 weeks;


• (50 week average close - 50 week lowest closing price) less than 50 week Average True Range (ATR);


• No uptrend in place;


• At least 20,000 shares traded daily for the past 50 weeks.


• We'll slap a 2 * ATR disaster stop and a 3 * ATR trailing stop from the closing price.

Results? Here's what we've captured on the LGF chart with these rules in place:




Looks good, huh? Well, believe it or not...we've got one heck of a long way to go. LGF is just one stock. Now, the real work begins. And I'll have to leave that for another night. Until then...

Later Trades,

MT

Quote of the Week - Winners

"Winners compare their achievements with their goals, while losers compare their achievements with those of other people." -- Nido Qubein

Gotta admit, I'm guilty of this losing trait...comparing against others. And it's one I'm determined to work on for 2006. But, first...gotta make some goals. :)

Later Trades,

MT

Quote of the Week

"All progress is precarious, and the solution of one problem brings us face to face with another problem." -- Martin Luther King Jr.

Great quote isn't it? And very true.

Sidenote:
Looking for more information on money management/position sizing? There's a nice little thread from EliteTrader discussing the topic. Read here.

Finally, investors tend to believe sentiment is too optimistic if a top magazine's cover is bullish. Do we give equal attention to bearish magazine covers and their potential implications? It looks like we have a new test case: the current cover of The Economist. And it seems most people are missing the contrarian indications.

Have a great week everyone!

MT

Ed Seykota Student Interviews

Insightful post from Michael Covel on Ed Seykota's Class of 2002 here. Interesting bytes:

"To me trend following is more than an investment philosophy it is a way of life. Once I became familiar with how to stick with what is working and get rid of what is not, my personal life as well as my trading saw vast improvements. Unhealthy relationships and losing trades are cut and all I am left with are winning trades and rewarding, supportive relationships." -- Jason Dekker

"Trend following at its core is "simple", but the key lies in the consistent execution of a positive expectation system over time." -- Michael Covel.

Yes, simple is the trend following system. The complex is the consistent execution. It is amazingly hard to stick to a trend-following system year after year. Harder than this old country boy would like to admit.

Have a great weekend!

MT

Update on Innovating Exits...Graphs

I've updated the Innovating Exits post with graphs from one of the system's past trades. I've also described a bit of the system in the comments section of the post. Check it out.

I shared some quick research on Trader Mike's beloved T2108 indicator in a recent post of Mike's. You can read my comments here. Trader Mike uses the T2108 as an overbought/oversold indicator on a daily timeframe. I find it useful as a trend strength indicator on a weekly timeframe. Just goes to show...more than one way to skin a cat.

You know, there are just times when you need to jump on bike and get out of dodge. What better bike than this new one from Triumph...The Scrambler.


Source: Forty Years on Two Wheels.

Later Trades,

MT

Innovating Exits

I haven't written much on system trading lately. Mostly, because I've been wandering out in the deep jungle of quantitative finance and to be honest...got lost. I got so engrossed in theory that I forgot just what I was after.

Luckily, I found an old creek that led me back to my entry point. A little weary but a little wiser and more appreciative of the systems I currently trade. What's really amazing is after 5+ years of developing systems and trading them...the very first one is the most successful. And the second one is the second most successful. And the third is the third...and so on...and so on.

This reminds me of a programming conundrum that I run across all the time. When tackling a problem of how to program a certain piece of logic...my very first solution to the problem is always the best. And I don't know why. Because the solution I come up with isn't an "Aha!" moment. It's basically a thought that you "could" do it this way...but I'm sure there's a better way. And notoriously, there isn't. It's always that first split-second solution that is the most adept at cutting straight to the heart of the problem and getting the job done. Crazy, ain't it? Especially, if you're a logical type of person who believes the more thought applied to a problem, the better the solution will be. Wanna know what's crazier?

There are programmers out there who do not have this type of split-second solution ability. Or...they do and don't honor it. Allowing themselves to stew on the problem too long. Thus, the corresponding logic and code is horrible. These "gifted" programmers have a name...The Innovators. And know what? Nobody wants to support or work on an Innovators code. Funny.

Anyways, back to the post. One of my original systems (2nd one) has always had impressive entry logic. But, I never focused on the exit piece just because the entry worked out so well. The exit to the system is a cut-and-paste job from my first system's exit logic. Your basic run-of-the-mill ATR trailing stop. Take a stock's current price and subtract it's ATR multiplier. For example:

XYZ stock closed at $30.00.
Average True Range (ATR) for 5 days: $4.00
ATR Multiplier: 3
ATR Trailing Stop := Close - (ATR * Multiplier) := $30.00 - ($4.00 * 3) := $18.00.

This ATR Trailing Stop would scale up...never down...as the price of the stock closed higher and higher or as the stock grows less volatile. And then, if the price were to close below the ATR trail...you'd exit your position.

Get the picture? Now on to my system. The problem I've noticed after trading this system for a number of years is that investments (stocks) would exhibit very small ATR's for the majority of time but every so often experience a huge expansion of range for just one day taking the price many points higher. As a result, I'd get kicked out early in the long-term move because volatility would sink back down, price would sink back down, while those price spikes scaled me up on the trailing stop to a level that didn't fit with the overall move in the stock. Cause as I said before...we always scale our stops up...not down.



What to do, what to do? The easy solution was to change our ATR Trailing Stop formula to use the Average price instead of the Closing price to determine our trail. The new formula would look like this:

XYZ stock closed at $30.00.
The average closing price of past 20 days: $27.00
Average True Range (ATR) for 5 days: $4.00
ATR Multiplier: 3
ATR Trailing Stop := AverageClose - (ATR * Multiplier) := $27.00 - ($4.00 * 3) := $15.00.

As you can see, we decreased our trail 17% from the original trail. This might not be the right thing to do in most trading systems. Since most systems are trying to capture range expansion in some shape or form. But, if you're one of the few long-term traders out there who try to capture long-term moves...expansion is not your friend. It will shake you out prematurely. Changing the calculations in your systems to moving averages instead of just one or two price points...may help keep you with the trend longer.



Note: Please check out the comments for further detail on the type of system being used in the ATR Trail example.

Later Trades,

MT

Quote of the Week

"Only as you do know yourself can your brain serve you as a sharp and efficient tool. Know your own failings, passions, and prejudices so you can separate them from what you see." -- Bernard Baruch

The brain can be a wonderful tool or a horrific set of tinted glasses that bias everything you see. And these tinted glasses can be an extremely expensive accessory to wear in the market.

On to other things. My daughter and I are planning a Spring vegetable garden. Should be lots of fun. I figure there's no better way to teach her the following:

"Don't judge each day by the harvest you reap, but by the seeds you plant." -- Robert Louis Stevenson

And I hope the teacher learns as much as the student. :)

Later Trades,

MT

Quote of The Week

"In these times, when so much is written about the "money supply" and when some observers assert that an abundance of money will forestall a slump, it is interesting to note this comment by Senator Burton: "...paradoxical as it may seem, the starting point for crises and depressions may be found in abundance rather than in scarcity, whether of money or capital." -- Humphrey B. Neill in his book, The Art of Contrary Thinking, which was first printed in 1954.

True words of wisdom by the great Vermont Ruminator. In seeing all the wasted words spent on the yield curve conundrum this past week...I figured I'd waste a few more...

"The reason the contrarian needs to be aware of history, in this regard, is because changes in trend occur before the masses are consciously observant of the fact. Also, because when socio-political conditions seem to revolve and repeat, the average person (of brief memory) is unaware of the "cycle" and is likely to think that a "new" condition has developed." -- Humphrey B. Neil

So, what's that leave us with? Well, possibly we need to analyze the current trend in the markets. For a few years, the markets seems to have priced in a good sound economy. Do you believe the next year will see more of the same? Or will markets need to price in a little risk with that cup of joe?

Happy New Year everyone! I hope all have enjoyed their holidays. And gained focus on the tasks at hand for the new year. This year will be filled with many new events for yours truly. Found out last week that we're having a boy! Yeah! We are excited but our daughter is a little bummed. She was hoping for a little sister. But, once we told her that a little brother wouldn't play with her girl toys...she quickly warmed up to the idea of having a brother. Kids are funny that way. If only we as adults could be so adaptable.

P.S. This weekend I watched one of my favorite movies...Open Range with Robert Duvall, Kevin Costner, and Annette Bening. If you haven't seen it...you're missing out...Bucketmouth! :)

Later Trades,

MT

More Food for Thought

Thought these two posts were linkworthy...

Bill Cara shares his Rules for Successful Trading. Read here. My favorite rule? Rule #9: Take risks, not chances.

My wife and I were talking about the difference between Donald Trump and Warren Buffett last night. And it was just funny that I then find this post by the Daily Dose of Optimism on Trump's Rise to Wealth. Read here.

Just what were my wife and I discussing in regard to Trump and Buffett? Well, we were just making the case that Trump has a tougher row to hoe in staying rich because his wealth depends upon his lavish lifestyle. He has to project an image of a rich billionaire in order to keep his billionaire status. Buffett known for his value-conscious investments and lifestyle has a wider margin in his billionaire status. In other words, he can be cheap and still retain his status.

Gotta go...time to make cookies for Santa and Rudolph.

MT

Food for Thought

"Things should be made as simple as possible, but not any simpler." -- Albert Einstein

Diversification is Balderdash? Here.

This time it's different? First the New Economy and now the Inverted Yield Curve?. Here.

Baby Sitters, Protectionism, Starbucks, Export Bans, and the Bubble? Now that's my kind of economist. Read here.

Two great articles posted recently by Dan over at the The Art of Streetplay. Read Model Building Thoughts here. And Indexing the Answer here. He mentions a quote that "Stock picking is a very complicated process." I agree with that quote but with an addition..."Stock picking is a very complicated process because it is so simple."

Reminds me of programming projects I've worked on. Wanna know what the hardest projects were? Not the ones that seemed so complicated to understand at first that there was no way it could be done. Those ended up being fairly easy to design and implement. The simple little buggers are the ones that ended up causing the most problems. Time clock-in/clock-out systems for instance are very simple...yet very complex. I have spent more hours on time systems than I've ever spent on designing and implementing the merge of a sysplex into a 24-hour window. Y2K...very simple...yet very complex. Payroll...cut a person a check...how hard is that? Simple...yet complex.

Are simple things turned into complex things because of people? Or are simple things complex because the multitude of variables effect on the simplest of things? And people just happen to be one of those variables? Too deep for me.

I just know the more I study the market the less I end up knowing. A very humbling experience. So, I find myself over the years sticking more and more to the simple stuff which takes me into very complex directions. The vicious cycle of simple to complex to simple...never ends.

Happy Holidays!

MT

Quote of the Week

"Listen to what the market is saying about others; not what others are saying about the market." -- Richard Wyckoff

Nice quote. Don't listen to all the yick yack from others. Listen to the market. If the world is falling apart...is gold rallying? If we're going to have a rough 2006...how are the tech stocks doing? If gold and techs are both on the rise; what's Mr. Market trying to tell us? Hmmm...

While you're chewing on that...check out the two articles below.

The CEO of Raytheon, William Swanson, shares his management lessons...here. My favorite rules? Rule 30: Short them to the ground.

Bloomberg asks "What is Your Total Return?"...here. I have to admit...I asked myself one of the same questions mentioned in the article just a month or so ago. "Are you doing what makes you feel most alive? Does what you do add or subtract from your overall goals and happiness?" Careful about asking yourself this...life changes can occur.

Later Trades,

MT