Quote of the Week (2007-01-02)

Shlemiel gets a job as a street painter, painting the dotted lines down the middle of the road. On the first day he takes a can of paint out to the road and finishes 300 yards of the road. "That's pretty good!" says his boss, "you're a fast worker!" and pays him a kopeck.

The next day Shlemiel only gets 150 yards done. "Well, that's not nearly as good as yesterday, but you're still a fast worker. 150 yards is respectable," and pays him a kopeck.

The next day Shlemiel paints 30 yards of the road. "Only 30!" shouts his boss. "That's unacceptable! On the first day you did ten times that much work! What's going on?" "I can't help it," says Shlemiel. "Every day I get farther and farther away from the paint can!" -- Shlemiel the painter algorithm

Ran across this great interview of Joel Spolsky from Salon back in 2004. The dude has some great things to say...

In reference to the various software development methodologies:

There's certainly a lot of faux methodologies, what I often call "big-M" methodologies, extreme programming being a very popular one right now. And even when they're reflecting good ideas or best practices, the real goal of the methodologies is to sell books, not to actually solve anybody's problem. And selling the books is actually just a way to sell consulting engagements that the people who write those books do at high cost; that's their career -- giving speeches to people working for very boring companies on how to do software better.

In reference to creating software that will automatically translate a user's desire into code:

The fundamental problem that you're trying to solve here is that humans think of things in vague, mushy terms. In order to visualize something, they don't have to actually visualize every part of it. Whereas the programmer, in order to actually implement that thing, to create it, needs to have every part specified.

(continued...)

So your brain doesn't actually work the way a computer works. Your brain doesn't assume that there's all this input coming in and then process it. Instead, it just has a variety of senses available to it, and it picks the ones it wants to answer whatever questions it has right now. So you ask questions, and your eye goes and finds out the information it needs. So you're used to thinking that you have the big picture , and you don't.

(continued some more...)

And so what a programmer is doing when they translate a quote unquote spec into quote unquote code, although it seems like a translation process, what they're actually doing is filling in lots and lots of details. And as programmers are wont to do, they're trying to take something, the vague thing that the humans want, and make it very, very specific, which is the kind of thing the computer wants. That's not really a translation; it's more of an interpretation. It's a very hard thing to do.

Read Joel's Back to Basics post for more interesting tidbits on Shlemiel the painter algorithm, Pascal strings, and my favorite...XML performance issues. I've developed and supported EDI transaction processing for over 9 years and witnessed first hand the problems Joel discusses with XML. Great stuff!

Happy New Year!

MT

Happy Holidays!

Twas the night before Christmas, when all through the house
Not a creature was stirring, well, except for TaylorTree.

I wish you and your family a wonderful Holiday Season!

MT

Quote of the Week - Know Thyself

Boy: "Do not try and bend the spoon. It is impossible. Instead, only try to realize the truth."

Neo: "What truth?"

Boy: "There is no spoon."

Neo: "There is no spoon?"

Boy: "Then you'll see that it is not the spoon that bends...it is only yourself."

-- from the Matrix (one of my all-time favorite movies)

Hope all is well. I'm as busy as a bee...buzz, buzz, buzz.

Later Trades,

MT

Thread of the Week - Stock Distributions

Eric Crittenden shared an interesting study of stock distributions over at the Trading Blox Forum.

How many of you look at the Annual Compounded Returns graph and immediately think...man, I gotta get me some of those 3,000 plus 10% to 20% returns! If I can just find an edge, a better indicator, profit targets, something to capture them. Work it like a Casino, baby!

How many view the graph and have the 344 100% or more returns catch your eye? Or better yet...stare in amazement at the Terminal Wealth Relative graph and its 2,000 plus returns of 500% or more. Count me in that camp.

This study really confirms what the market is all about. Unlimited gains and limited losses. If you time the market or cap your profits in order to capture and/or protect those small gains...you'll...as Eric says...

"virtually guarantee to participate fully in the left side of the distribution and not in a positive way."

Really after giving this study more thought...it seems after you set yourself up for success via capturing the right side of the distribution...it is then just a matter of managing risk. Right? And not from the sense of your initial risk in the stock via volatility based position sizing. But, from maintaining a certain risk profile throughout the entirety of the trade. As these positions move further in your favor...I would assume their risk profiles could differ greatly from the original risk set forth.

Again, interesting study. Thanks Eric!

Later Trades,

MT

Quote of the Week

Caston glared. "Observation selection effects are totally commonplace. At the supermarket, have you ever noticed how often you find yourself in the longer checkout lane? Why is that? Because those are the lines with the most people in them. Let's say I told you that Mr. Smith, about whom you knew nothing at all, was standing in one of those checkout lines, and you had to predict which one, based only on knowing how many people were in each line."

"There'd be no way to know."

"But inference is about probabilities. And the most probable outcome, obviously, is that he's in the line with the most people in it." Once you step back and consider yourself from an outsider's perspective, it becomes self-evident. The slowest traffic lane is the one with the most cars in it. The laws of probability say that any given driver is most likely to be in that lane. That means you. It's not bad luck or delusion that makes you think the other lanes of traffic are going faster. More often than not, they are going faster."

Great quote from a great book, The Ambler Warning by Robert Ludlum.



If you haven't read it...you should.

The book, while not about investing or the market, contains two fictional characters who fit well with characters in the investment world. One of the characters lives by gut feel alone. Instinct. The other...100% logic, statistics, probabilities, just the facts ma'm. Interesting to see the development of these characters and how they find common ground.

Later Trades,

MT

First Snow!

Received our first Snow of the year and it is wonderful! For a Texas boy who has never been around snow before...I feel like a kid at Christmas. Fun stuff.

MT

Aquamarine Fund Diary, Buffett, and Owning a Business

You can tell from the volatility breakout in my blog posts...that I have some time on my hands.  :)

Found some great posts by the Aquamarine Fund Diary.  Here's a post on Warren Buffett and the Chicago Graduate School of Business - trip to Omaha.  I really liked the following bullets:

• Associate with people who are better than you. Marry up, employ up,
  work for your heroes. Associations rub off. Tell me your heroes, I’ll
  tell you how you’ll turn out. People in the room (us) have IQ, energy,
  and smarts to burn. No bad results will be due to deficiencies in this
  area.
• Take one hour. Think of the one classmate who you’d like to own 10%
  of for the rest of their life. 10% of all of their future income. What
  do you think about? The person who others admire and want to work with.
  Person who works hard and gives others credit. It’s simple. Select
  those qualities for yourself.
• "Now the fun part” who would you want to short? The guy who turns other people off.

I also liked this interview of Tom Murphy in The Wisdom of Tom Murphy.  In the full interview Murphy  encourages

"people, particularly those who are young but also experienced enough to know what's going on, to try starting a business because the rewards of being your own boss are wonderful."

Okay, readers...if you own your own business...give up the goods on how you came to the realization you wanted to run a business instead of working for whatever company you were working for.  Why did you feel the risk was worth taking?  And what business did you choose...something you were familiar with?  Something new?

And for those working for others...if you have thoughts of running a business someday...what type of business would you like to run?  And why?

MT

Quote of the Week - We're Just Ants!

"If you study an ant colony, you will find it has a life cycle — it’s robust, it’s adaptive. However, if you ask any individual ant what’s going on, they have no clue. They’re working with local information and local interaction. I think there’s a very clear parallel to markets. How do markets get to be efficient? The answer is it’s an interaction among a lot of diverse investors. The aggregation mechanism to bring the information together is the stock exchange, and then what emerges from that is the stock market.

The important takeaway is it’s impossible to understand the market by interviewing individual investors because each investor only has a partial piece of the picture. It’s the aggregation that allows the full picture to emerge. What the ant colonies teach us is that in markets, cause and effect are very difficult to pin down. Sometimes we like to think that the experts on TV or the pundits quoted in the Wall Street Journal know what’s going on. They’re really just ants." -- Michael Mauboussin

The above quote comes from Mauboussin's article, "Guppies, ants, and golf swings: Mental models for investors." This quote really defines the methodology I have adopted in trading. Forget how you feel about the stock. It doesn't matter. Forget how you feel about the market...it doesn't matter. Who cares if we're in a housing bubble, USD is going lower, inflation, deflation, yakkity-yak...don't come back. The only thing that matters is what the market thinks.

The market is really just a glorified voting system. You may believe Google, Starbucks or Milli Vanilli is road kill. But, if the vast majority of participants believe it's the next best thing...then it is. I know, I know...you know better....but you're just one vote...amongst millions of voters. Know matter how strongly you feel about something...it's just a drop in the bucket.

So, why fight it? I ask's ya's!?! Just go with it. Embrace your inner ant.


MT

Happy Thanksgiving!!!

Just want to wish everyone a Safe and Happy Thanksgiving!  This will be our first Thanksgiving in Missouri and we're really looking forward to it.  Plus, it will be our son's first Thanksgiving.

The best part is I have 4 full days of complete rest ahead of me.  Definitely time for catching a movie or two.  And many other things I've put off for far too long.

I leave you with a rather interesting thread over at the Trading Blox Forum on Pre-emptive money management.  Provides food for thought on volatility based position sizing.  Is volatility predictable?  If so, should we adjust our position size to anticipated changes in volatilty?  Since our current position size is based on historical volatility.

This also begs the question as to the use of historical volatility in position sizing.  Is past volatility a good measure of future volatility?  Should we use a shorter time frame for measurement?  Or longer?  Or weight the average?  Seasonality may be a poor choice to predict changes in price but what about changes in volatility?

Is all this getting way to complicated?  Would we instead be better off just randomly choosing a number?  And one more question...when do your best returns occur?  During periods of high volatility?  Or low?  How about your worst returns?

As always, something to explore.

Later Trades,

MT

Quote of the Week

"There's a great story about a famous local trader at the Chicago Board of Trade (CBOT).  One day, he was on the floor of the CBOT and a U.S. inflation number came out that was totally unexpected.  Pure pandemonium ensued.  When all the noise died down, he walked out of the pit having made $10 million and said, "By the way, what was the number?" -- humorous story shared by Dr. John Porter in the book, Inside the House of Money

It's official...the new trading system is in production.  A week earlier than the deadline.  Much of the work was done in R.  In fact, a few times in the project, I just don't know what I'd do without the fantastic little language.  Python and Ruby was used as well.  Along with Wealth-Lab.

That's it from my part of the world...where I'm eagerly anticipating my first Missouri snowfall. 

And enjoying the cool vlog, WallStrip.  It's the first stock market show I've seen where the highlighted stocks are chosen from a valid investing concept.  Who'd a thunk it?  Smart!

Later Trades,

MT

Quote of the Week

"Implied volatility is based on historical volatility, but who cares about historicals? They're irrelevant. The point is, things can happen for the first time that aren't in your distribution so they can't be priced. If it's never happened before, how can you hedge yourself? The only way to hedge the unknown is to cut off tail risk completely." -- Jim Leitner from the interview in Inside the House of Money

MT

Quote of the Week

"All these years I had been sustained by an illusion - happiness through victory - and now that illusion was blurred to ashes. I was no happier, no more fulfilled, for all my achievements.

Finally I saw through the clouds. I saw that I had never learned how to enjoy life, only how to achieve. All my life I had been busy seeking happiness, not finding it." -- Dan Millman's character in the Way of the Peaceful Warrior.

MT

Quote of the Week

"In times of change, learners inherit the Earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists." -- Eric Hoffer

Sorry everyone for the lack of posts or response to emails.  I'm trying to meet a November 1st deadline for a new trading system.  And between that and the entire family being sick from a nasty little cold bug...well I haven't been up for much else.

I do appreciate your patience...and hope to get back to the normal routine soon.  In fact, once I push this trading system to production...I plan on taking a nice long break from the trading system turret.  Catch a few breaths before my next run.  Ha ha!

Until then, hop on over to the StockTickr Blog and read Jon Tait's interview.  One of the best interviews yet from StockTickr.  Jon's a smart cookie and shares some great insights into system trading and market behavior.

Later Trades,

MT

Quote of the Week

"Many questions are unanswerable.  Many answers are questionable."  -- from a fortune cookie

Wow, the above quote is so true.  I have dug a little deeper into everything I have worked on the past several years.  Calling into question my beliefs and attitudes towards the market.  I was so wrong.  It all started from a seed that Eric Crittenden planted into my head.  "Sounds like an exercise in curve-fitting", he said, in reference to one of my system ideas.

Then a friend introduced me to the concept of focusing on what you don't like to do and casting it aside in order to free yourself for the things you do like to do.  The butterfly began to flutter...

"It has been said something as small as the flutter of a butterfly's wing can ultimately cause a typhoon halfway around the world." - Chaos Theory

Next, I watched the recent show on Sabermetrics where they discussed Bill James and many of the very cool things brought out in Moneyball.  Flutter, flutter.

Finally, my recent foray into the hazards and pennywinks of developing a trading platform has brought out a very interesting focus to my trading.  What would I like in a platform?  What am I really trying to test?  How is a certain test helpful to my bottom-line?

And all that has helped me to understand what I've been missing.  I've been focusing on the wrong thing!  So much of my time was spent on my next trade.  Kinda like in Sabermetrics where they found too much focus was on RBI's or Homeruns.  Bill James found Outs was where the focus should be. 

And I think in trading...the focus should be on the only fixed rule that I know exists:  If you don't use margin...your losses are limited to 100%.  But, as long you don't cap your profits in any major way...your gains are infinite.  With that in mind, where should your focus be?  And what kind of formulas and tools can we use to measure this new focus?  For example, the smoothness the Sharpe Ratio tries to show becomes something of a throw-away...a tool/formula used to measure the wrong focus in your trading.  Don't understand?  Maybe this will help.  Or maybe not:
http://www.fooledbyrandomness.com/0603_coverstory.pdf

Later Trades,

MT

Quote of the Week - Kaizen

"The most important choice you make is what you choose to make important" -- Michael Neill

I had coffee with a friend today that brought up an interesting topic. He said, instead of thinking about all the things you like to do or would like to do and persuing them. Step back a moment and think about all the things you do not like to do...and stop doing them. A lot to chew on for yours truly.

First off, because it is very hard for me to think about what I don't like to do. Perhaps because I've spent so much time and effort in determining what I like to do? Or maybe I don't like to admit there are things I don't like to do?

Reminds me of Kaizen. Eliminating activities that add cost and do not add value in an effort to continuously improve. We could all use that, right?

So, here I am thinking about what I don't like about investing/trading.

1) I don't like nothingness. I don't mind drawdowns...at least something is happening. And of course, I love when I'm reaching new equity highs. But, I absolutely abhor nothingness. That period of time when your investments just sit there and do nothing. I don't like that. Which is a bad thing...since most of an investor's time is spent in nothingness.

2) I don't like gut feel investments. I want a precise method to follow that lets me know exactly when to buy and when to sell. Thus, the reason for developing trading systems.

3) I don't enjoy buying and selling stocks. I enjoy researching trading ideas and building systems around those ideas. But, the actual buying and selling of stocks is not fun for me. Would enjoy things much better if someone else traded my systems, so to speak.

That's about it as far as my dislikes. Not too bad. One day I need to write what I like about investing/trading.

Trading Platform Update:
I've made lots of progress on the trading platform front. But, so much still to go. I'm spending equal time in Python and Ruby in this quest. My major roadblock right now is obtaining the most efficient way to process historical stock data against portfolio data.

Most trading platforms process a symbol at a time. But, doing that prevents you from ranking all stocks triggered for a given day along with the currently held stocks and choosing the top 10, 20, etc. Because you'd have to read all symbols and all dates in order to get at a certain date for all symbols.

So, I'm trying date processing instead. Spin through all the symbols for a given date instead of all dates for a given symbol. Doing this would enable me to rank, adjust, etc. prior to the next day of trade. But, going this route scares me due to performance issues. Maybe it won't be so bad. We will see.

If anyone has ideas on this subject, please send my way. The main goal of the project is to avoid memory intensive methods. The reason? The trading systems I work with consists of all stocks in the US Markets going back 20 years or so. It crashes Wealth-Lab due to its memory method of position sizing despite 2GB of memory. I could buy more memory, but that would be too easy. :-)

Later Trades,

MT

Quote of the Week - Dilbert?

"I'm a great student of successful people, and usually at some point in their careers, they've had to take a huge risk. That used to cause a dull ache in my stomach. I still get it, but now I ignore it." -- Scott Adams, creator of Dilbert

MT

Fall Movies

Wow, there is nothing like Fall movie lineups to get you going.  And this season looks to be a good one.  Here's just a few of the movies that caught my eye and will likely see...

We Are Marshall & Facing the Giants - Nothing like football movies in the Fall.

A Guide to Recognizing Your Saints - Returning home again?

The Departed - Good Cop?  Bad Cop?

Fearless - Jet Li...Martial Arts...need I say more?

Enjoy the weekend!

MT

Quote of the Week - Mindsets

"Often when you mention risk, what people think of is the downside. Danger. That's not the entrepreneurial mind-set," she said. "The entrepreneurial mind-set is that risk is the heightened probability that there is a big range of possible outcomes." -- Heidi Roizen

The above quote is from Money.com's recent series on What it takes to be rich. I love the story describing growth mindsets versus fixed mindsets.

Dweck, the psychologist who studies growth mind-sets, created an experiment to demonstrate how persistence and the pursuit of knowledge leads to success. She posed a series of trivia questions to a group of people with fixed mind-sets and another with growth mind-sets.

After each answer, one and a half seconds passed before the participants were told whether they were right or wrong, and, if they were wrong, another one and a half seconds lapsed before they were given the correct response. Their brains were monitored with electrodes the entire time.

Dweck found that the people with fixed mind-sets cared a lot about whether they were right or wrong but not at all about what the right answer was. The growth-mind-set participants stayed interested until the correct answer was given, showing an interest in learning new information rather than in simply validating their intelligence.

more from Carol Dweck...

People with fixed mind-sets believe that they were born with a certain amount of intelligence, and they strive to convince the world of their brilliance so that no one finds out they're not actually geniuses.

Growth-mind-set people believe that intelligence, knowledge and skill need to be "cultivated" by trial and error. Failing at something, they believe, is the best way to ensure they'll succeed at it the next time.

This growth mindset versus fixed mindset sounds so interesting...I just might have to go out and read her new book:

Follow along with the Money.com's series here...
Lesson 1: Make your own luck
Lesson 1, Corollary 1: Building 'social capital' often pays off in the end.
Lesson 2: Failing at something is the best way to ensure success at it the next time.
Lesson 2, Corollary 1: Successful people are always on the look out for new experiences that they can later build on.
Lesson 2, Corollary 2: If you see an opportunity, take it. But that doesn't mean betting the ranch.

Later Trades,

MT

Quote of the Week - I Love Ruby!

"It is not the responsibility of the language to force good looking code, but the language should make good looking code possible." -- Yukihiro Matsumoto

I just discovered the power of Ruby!!!

More later,

MT

Quote of the Week - Programming

"And don't write longer, more obtuse code because you think it's faster. Remember, hardware gets faster. MUCH faster, every year. But code has to be maintained by programmers, and there's a shortage of good programmers out there. So, if I write a program that's incredibly maintainable and extensible and it's a bit too slow, next year I'm going have a huge hit on my hands. And the year after that, and the year after that.

If you write code with more code that's fast now, you're going to have a hit on your hands. And next year, you're going to have a giant mess to maintain, and it's going to slow you down adding features and fixing bugs, and someone's going to come along and eat your lunch." -- Wil Shipley

Great quote!  Read more on this topic here.

MT

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 -


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Quote of the Week

"Always swim, never sink" -- Yoji Harada

:)

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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

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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

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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

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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.

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Quote of the Week

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

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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

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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

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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