Nassim Taleb Interview

Weird that I checked Taleb's site the other night and found the Notebook. And then noticed I'm ranking #1 on blogsearch.google.com and #2 on Technorati.com for "Nassim Taleb" searches. From Technorati I found a recent interview with Taleb from SmartMoney.com here. Great interview by the way. Here are some of my favorite parts:

Psychologists ran experiments to see how people absorb information. In one experiment they found people who work with racehorses, and asked them to name up to 50 pieces of information they would need [to determine if it was going to be a winner]. They ranked them by order of importance. They took the 10 most important ones out of 50 and looked at the prediction of accuracy to determine if a horse will win a race. Then they took the 20 most important pieces, then the 30. In the end, you had no gain in predictive power beyond the first 10 pieces of information, but a huge gain of overconfidence...

It's the market that creates the indicator, not the indicator that creates the market.

To become Bill Gates you need more luck than skill. But to become a prosperous person, you need more skill than luck.

I believe Warren Buffett has skills, but probably two-thirds of it comes from an environment that helped him.

I am unable to predict markets, but I know it.

The favorite quote being the Bill Gates more luck than skill. I've referenced that type of thinking back in this post on Relativity by Dr. Mike Ott here. I strongly believe that environment makes up at least 2/3 of a person's success. The other 1/3? Ah, that's your edge.

Got Edge?

MT

Random Markets?

Check out the Coin Toss Simulation - Visualizing Randomness from this link. Enter an amount in the Number of coin tosses box and press the "Simulate" button. Go ahead...enter 500000. Hmmm....

MT

Taleb's Notebook

Occasionaly, I peruse Nassim Taleb's site just to get a reality check on my system development activities. Tonight, I noticed Taleb has setup a Notebook that he notes is not quite a blog (funny). Read it here.

Not much happening on the homefront. Busily evaluating a trading idea....while the list of new ones rapidly pile on my desk. Speaking of desk notes...I have to really thank one of the commentors on this blog for recommending EverNote. I was very reluctant at first especially since it involved organizing my thoughts from the scattered scraps of paper and journals to a forum that's neat, tidy, and structured. But, I've really grown to like this little product. I'm slowly but surely beginning to keep everything stored in EverNote and the pile of notes are becoming electronic in form. Kinda cool. At least my wife thinks so. :)

This weekend? Somehow got wrangled into installing ceramic tile in my dad's kitchen. Hows' that for a howdy-do? But, it should be fun and filled with adventure. I'm just afraid the rest of the family will see the results and want more of the same. They'll just have to wait because dad has bigger plans for this computer geek...hardwood flooring!

One last thing...check out the movie Dreamer with Kurt Russell, Dakota Fanning, and Kris Kristofferson. I was really surprised...my wife and I saw it on our date night and I thought it had chick flick written all over it. That might be...still a good heart-warming movie that showcases the struggle of safety and stability against risk and opportunity.

Enjoy your weekend!

MT

Quote of the Week - Einstein

"It's not that I am so smart, it's just that I stay with problems longer." -- Albert Einstein

Boy, Albert, I sure hope you're right. Cause I've been trying to figure out this market for a heck of a long time!

Question is...how long should you stay with the problem versus cutting your losses and moving on to something else? How many other Einstein's have stayed with the problem til' their dying day...never solving the problem?

To test this theory out...

Try picking stocks and setting a profit target of 50% and don't sell until they hit it. Only two possible outcomes to this test: Stock will hit the profit target Or it won't. Time is removed from the equation except for the length of your lifespan. If the profit target is hit...you'll have found an Einstein.

Same Test as above but exit the stock if 50% target is not reached within a year. Same possible outcomes as the prior test but Time is added to the equation.

Are you better for your Sticktoitiveness or for Cutting Losses Short?

P.S. Would be interesting to see how many stocks bought the day of their IPO acheive their profit target and go on to become Einstein's? Would we consider 50% gain worthy of Einstein status? 100%? 300%?

Later Trades,

MT

Quote of the Week

Since I couldn't find a picture for this week's Serenity Now...I've decided to post a Quote of the Week. I actually thought of today's Quote of the Week from a discussion I've had with Jon Tait (FickleTrader) in regard to burning the midnight oil in an effort to build our systems.

"The Heights by Great Men Reached and Kept were not Attained by Sudden Flight, but They, while their Companions Slept, were Toiling Upward in the Night." -- Henry Wadsworth Longfellow

Maybe I'll try to post a Quote of the Week every Monday.

Have a good weekend everybody! My plans? Well, I plan to put my daughter to work. She received a rocking chair from her Papa on her birthday. And she would like it finished the color purple. So, her and I will sand and prime the chair this weekend. Should be fun.

MT

System Analyzer and Y2K

I've been working on a heck of a project. I'm trying to create my own System Edge Analyzer using a bit of Python and mostly R. I still have much work ahead but thought I'd give you a preview as to the initial output of the project. And no, the FathersDay Edge is not about trading on Father's Day. I named it after the day I stumbled upon the edge which happened to be Father's Day.

Also, check out Jon Tait's discussion on Profit Factor and his sneak peak of his backtesting project.

System Analyzer - FathersDay Edge

Sector Return Trades WinPct AvgPL AvgWin AvgLoss PFactor Sharpe 1 Overall 20375.77 9510 78 2.14 5.3 -8.91 2.11 0.3 11 pyAerospaceDefense 50.2 15 73 2.6 4.56 -2.81 4.39 65 12 pyAutomotive 267.02 71 63 0.39 5.93 -9.21 1.1 4.33 13 pyBanking 298.85 74 86 3.08 4.67 -7.11 4.03 34.22 14 pyChemicals 235.89 48 85 3.23 5.75 -11.58 2.81 46.14 15 pyComputerHardware 1825.94 432 79 2.5 5.35 -8.18 2.46 11.9 16 pyComputerSoftware 5378.91 1333 79 2.13 5.14 -8.86 2.18 6.09 17 pyConglomerates 0 0 18 pyConsumerDurables 789.88 196 77 1.98 5.27 -8.73 2.02 14.14 19 pyConsumerNonDurables 411.83 112 75 1.62 4.9 -8.23 1.79 14.73 110 pyDiversifiedServices 2194.29 522 77 2.19 5.44 -8.85 2.06 9.52 111 pyDrugs 6024.43 1418 79 2.03 5.38 -10.54 1.92 5.64 112 pyElectronics 4420.77 1123 78 2 5.06 -8.7 2.06 6.25 113 pyEnergy 1109.56 245 80 3 5.69 -7.5 3.03 18.75 114 pyFinancialServices 350.55 97 74 1.99 4.87 -6.29 2.2 19.9 115 pyFoodBeverage 194.33 47 79 2.41 5.25 -8.1 2.44 34.43 116 pyHealthServices 3606.47 863 78 2.23 5.37 -8.82 2.16 7.69 117 pyInsurance 360.69 104 65 0.79 5.3 -7.73 1.27 7.9 118 pyInternet 2702.58 622 79 2.22 5.48 -10.25 2.01 8.88 119 pyLeisure 513.61 125 75 1.81 5.46 -9.28 1.77 16.45 120 pyManufacturing 1344.04 307 80 2.6 5.49 -8.78 2.5 14.44 121 pyMaterialsConstruction 452.44 92 86 3.99 5.73 -6.54 5.38 39.9 122 pyMedia 694.87 174 72 1.53 5.56 -8.74 1.64 11.77 123 pyMetalsMining 396.86 94 78 2.75 5.44 -6.59 2.93 27.5 124 pyRealEstate 82.87 28 64 0.27 4.6 -7.53 1.09 5.4 125 pyRetail 566.23 130 78 2.4 5.61 -8.75 2.27 20 126 pySpecialtyRetail 632.62 145 74 2.56 5.86 -7.07 2.36 21.33 127 pyTelecommunications 3063.99 775 76 1.81 5.19 -8.99 1.83 6.7 128 pyTobacco 64.03 13 100 4.93 4.93 123.25 129 pyTransportation 204.06 55 71 1.63 5.23 -7.14 1.79 20.38 130 pyUtilities 138.81 26 92 5.09 5.78 -3.29 20.2 101.8 131 pyWholesale 845 224 76 1.96 4.94 -7.66 2.04 13.07

Funny, how it has taken many hours/weeks and brain-fried late nights in order to input, process, output into the simple little HTML table above. Reminds me of a story about the Y2K problem.

I was working around the clock for hours, weeks, and months on end in order to get our administrative systems ready for Y2K. For those few who don't remember...the Y2K issue centered around the fact that legacy systems used the 2 digit years instead of the 4 digits. And year calculations and comparisons drive a multitude of systems. So, if you compare the year 05 against 99...you get issues. Capisci?

Anyways, while I was burning the midnight oil getting everything in order...either converting everything to 4 digit years or windowing the problem...I got a call from a friend of mine.

Friend: "Hey, have you heard about this Y2K crap? Everybody is just making this Y2K stuff up, I tell ya. You watch...when January 1, 2000 gets here...nothing will happen."

Me: "You're right, nothing will happen because programmers like me have been working our butts off trying to make sure nothing will happen."

Friend: "Huh?"

Me: "Listen, it works like the George Soros Reflexivity theory. If all the programmers know there's a Y2K problem then the Y2K problem grows less of a problem as more of the problem is understood and worked on by those programmers. So, you are correct, when January 1, 2000 gets here...nothing will happen."

Friend: "Huh? Are you telling me Y2K is or isn't a problem."

Me: "Ah, Forget it. I gotta get back to work."

Friend: "Whatcha working on?"

Me: "The Y2K problem...[hangup]"

Six months later my friend calls me up on January 1, 2000 after I had stayed up all night to ensure our batch systems ran correctly and was still in the process of verifying their results.

Friend: "Hey, Happy New Year! I don't mean to rub it in...but I knew it, I knew it, I knew it! That Y2K was just a bunch of mumbo jumbo! Like I told you before...here it is Jan 1, 2000 and nothing...NADA...happened!"

Me: "Happy New Year yourself. And yes, there was a Y2K problem and we fixed it so nothing happened like I told you before!"

Friend: "Huh? Now, Mike, how can it be a problem if nothing happened!"

Me: "Ah, forget it...go watch your football games...I gotta get back to work"

Friend: "Work? Work? On New Year's Day? What the heck? What they got you working on now?"

Me: "Y2K...[hangup]"

Later Trades,

MT

Serenity Now

Driving in the Georgia Mountains, originally uploaded by TaylorTree.

Picture taken with my head out the car while driving through the beautiful Georgia Mountains.

MT

Coastline by Major Hurricane Strikes by State

Coastline by Major Hurricane Strikes by State, originally uploaded by TaylorTree.

Thought the graph above would better reflect which states receive the most hurricanes per coastline miles. As you can see this is quite different than the original graph showcasing states and their respective hurricanes hit. The prior graph showed Florida, Texas, and Louisiana being the top three. Those are now replaced by Mississippi, Alabama, and Rhode Island. Rhode Island? Say what? Okay, this chart is definitely more interesting than the last one.

Heck, according to this information...Louisiana is in the bottom 6. Also, interesting that Louisiana has more coastline than Texas.

MT

Hurricanes by State

StateHurricanes, originally uploaded by TaylorTree.

Working with the R project's barplot function and decided to play around with some hurricane data. The chart above reflects the number of hurricanes (major) making landfall by state. Nothing too surprising in the numbers.

The mean of the #of hurricanes by state is 22 while the median is 12. Which makes sense due to Florida being hit 5 times more than average. And Texas and Louisiana being hit more than 2 times the average.

MT

Rumor of reduced commissions at Interactive Brokers...

Rumor is that IB dropped commission rates for US Equities to $0.005/share all-inclusive. Read this thread from EliteTrader for more details on the rumor.

Not sure if this is true or not...but if so...might need to re-evaluate my broker choices. Hmm....

Later Trades,

MT

Moneyball the Market

"Baseball - of all things - was an example of how an unscientific culture responds, or fails to respond, to the scientific method." -- Michael Lewis

The two sides are, on the one hand, the old scouts and, on the other, Billy Beane. The old scouts are like a Greek chorus, it is their job to underscore the eternal themes of baseball. The eternal themes are precisely what Billy Beane wants to exploit for profit - by ignoring them." -- Michael Lewis

"By analyzing baseball statistics you could see through a lot of baseball nonsense. For instance, when baseball managers talked about scoring runs, they tended to focus on team batting average, but if you ran the analysis you could see that the number of runs a team scored bore little relation to that team's batting average. It correlated much more exactly with a team's on-base and slugging percentages. A lot of the offensive tactics that made baseball managers famous - the bunt, the steal, the hit and run - could be proven to have been, in most situations, either pointless or self-defeating." -- Michael Lewis

"tinkering with the records of baseball games to see how the machinery of the baseball offense works. I do not start with the numbers any more than a mechanic starts with a monky wrench. I start with the game, with the things that I see there and the things that people say there. And I ask: Is it true? Can you validate it? Can you measure it? How does it fit with the rest of the machinery? And for those answers I go to the record books...What is remarkable to me is that I have so little company. Baseball keeps copious records, and people talk about them and argue about them and think about them a great deal. Why doesn't anybody use them? Why doesn't anybody say, in the face of this contention or that one, "Prove it"?" -- Bill James

These are some of my favorite quotes from the book, Moneyball by Michael Lewis. I especially like the Bill James quote basically asking why if we have the data and are asking the right questions...why oh why don't we use them in our strategies? Instead we focus on arguing our point with opinions. Enjoy reading books where the author makes the case to invest in stocks because Echo Boomers are an emerging powerful consumer and a host of other dynamics that can't be tested nor quantified on enough data points to matter.

This is why I like the recent Larry Connors book, How Markets Really Work. No opinions or pithy remarks. Connors instead focuses on Moneyballing the Market. Taking commonly held beliefs and turning them upside down and exposing them for what they truly are...eternal themes of the market sung by the Greek chorus of brokers, analysts, and media pundits.

Questions are asked and data is analyzed. And this analysis of data is what triggered this review. It changed the way I create, test, and design my systems. Before I would come up with an idea and immediately run a template system with my idea to expose the common statistics I look for...win%, avg gain, max drawdown, etc. From there I would begin filtering to improve and refine.

But, I really like the Connors method instead. He asks a question like is it true that new short-term highs are a sign of a healthy market? Then collects data on short-term highs and corresponding returns and short-term lows and corresponding returns into table form. Then he creates bar charts and equity curves of the comparison between the two to aid in visually analyzing the results of the study. I can see all kinds of possibilities with this method. It feels like more of your original edge is maintained instead of getting bogged down into filtering down the edge into the statistics you are trying to achieve. Plus, via the bar charts and equity curves you can really see whether the edge you think you have is true and robust against a benchmark and opposite view. One of the possibilities of this method is throwing in acrary's random trades from the Edge Test into the mix.

The downside of the book? I would enjoy more tests! More questions! It's just rare to find someone who asks and tests the questions you've been asking and answering yourself. Only other book like it that I've found is Altucher's Trade like a Hedge Fund book. I would have also enjoyed some discussion on how the questions asked relate to individual stocks within the general market.

Overall a book that can help in your pursuit of trading Jeet Kun Do. With that in mind, I'll leave you with this quote:

"True observation begins when one is devoid of set patterns." -- Bruce Lee

Side Note
What's happening to my Astros? It's the 8th inning and Astros are down by 2. The Sox pitchers seem to have the Astros ticket. Especially last night when we had just a good lineup at bat and the big wide one took em' down...one by one. Ah! The pain of being a Houston Astros fan. :)

C'mon Stros!

Later Trades,

MT

I'm Back!

What a week! I've been through Louisiana, Mississippi, Alabama, Georgia, Tennesse, and Arkansas on my travels this past week. We pretty much stayed in and around Atlanta either at a conference or with family. It has been a great experience. Learned a lot at the conference, spent some quality time with family, and enjoyed some great scenery such as the Appalachian Mountains north of Atlanta.

The difficult part was being cut-off from the Internet for such as long time (1 week). Ha ha. And I'm paying for it with all the emails and blogs to read. The blogosphere has been busy!

I also got a chance to dive into the book, How Markets Really Work by Connors and Sen. A great book and one that triggered several system ideas that I'm anxious to work on. I plan to discuss more on this book later in the week...so stay tuned!

Also, thank you to everyone on the baby news congrats. I really appreciate it.

Well, gotta get back to my rat-killin...so check out these posts that caught my attention and I'll write more later.

Recent interview of Ryan Jones a.k.a Fixed Ratio Jones by TradingMarkets. Read here.

This article by Steven Gabriel shares some of the insights from the book, How Markets Really Work. Read here.

Nice blog by Dr. Wish that I recently stumbled across. Here's one of his posts detailing the Darvis Method of Trading. Read here. There's some great system ideas in this post to test.

By the way, a big thank you goes out to April for introducing me to Ginger Ale on our recent trip. Great stuff. Can you believe I've never had ginger ale before? I know, I know...I'm showing how backwoods I am. April was kind enough to send me home with two bottles. Also, they grilled some steak that was amazing and were kind enough to share their seasoning secrets...Dale's Seasoning. Amazing stuff. And another thank you to Mysti for taking us to the Fair and letting us borrow their MapQuest to get home. I really don't know how we would have gotten back without it. Thanks guys!

Later Trades,

MT

Having a Baby!

Baby2_Ultrasound, originally uploaded by TaylorTree.

Just got back from the doc...it's official...we're having another baby!!!

Enjoy your weekend!

MT

Interview with Hank Camp from TradingMarkets

Lot on my plate tonight but wanted to point you to this great interview of Hank Camp by TradingMarkets.com. I jotted down several notes from the interview...including:

Trading using the PREM. I've actually coded a crude version of PREM in my systems before...but never knew the true technical term until this article.

Nice tidbits on quote services and nomenclature of the PREM series (DTN, Esignal, Comstock, and TradeStation). Check out their website for further detail on quote providers here.

Interesting insights into event trading such as "reverse manipulation" during options expiration, days of the week (option expiration Mondays, unemployment report Fridays, and Friday 13th), and William %R.

By the way, do you keep a trading notebook for articles like these? To jot down notes, ideas, further research topics? I've got stacks of these things. I've briefly addressed this topic before on dealing with ADD and the need to write things down...but I think this would benefit all traders out there. For example, tonight I have my notes from the above interview along with action items to test in my nightly system studies.

Actually, first thing I'm starting off with tonight is testing a volatility stop involving the close divided by a long-term moving average. Call this value R. Then smooth R with a shorter moving average duration. Apply a lower band of 3% to 5% from the smoothed R and if the original R drops below the smoothed R...scale out a portion of the whole position or get out entirely. This vol stop was discussed in the recent AIQ Opening Bell newsletter. You can find several issues of the Opening Bell here. Enjoy!

Later Trades,

MT

Lake Livingston - Dry Lake

Lake Livingston - Dry Lake, originally uploaded by TaylorTree.

Another picture of the effects of the water release. This area was a nice little cove where shad would get driven into by the thousands. Great place to cast for bait. Now high and dry.

By the way, had a great idea over the weekend on a topic for this blog. I'll need a little time to research just how I'm going to handle it. But, once the research is complete...I'll share it with ya'll. Should be fun!

Have a great week!

MT

Lake Livingston - Dry Lake II

Lake Livingston - Dry Lake II, originally uploaded by TaylorTree.

Took some pictures of the lake to showcase just how much water has been released from the Lake Livingston Dam. Refer to this post for the before pictures of the lake.

Serenity Now

"Fishing is much more than fish. It is the great occasion when we may return to the fine simplicity of our forefathers." -- Herbert Hoover

daughter_1stfish, originally uploaded by TaylorTree.

Figured this picture was most appropriate for this week's Serenity Now since my daughter's birthday is this weekend.

This pic was taken while catching her first fish, a little largemouth bass. She actually caught two fish that day. The other one was a crappie. Okay, enough bragging. :)

Have a good weekend!

MT

Reversion to the Mean

Interesting post from Michael Covel titled Reversion to the Mean. Thanks to Ugly Chart for the FatKat link which triggered a search for James Simmons (Renaissance Technologies) which then guided me to Michael Covel's post. Funny where someone's post will take you. :)

Back to Covel's post. This talk of the next landing likely to be average in regard to pilots garners the question...will your next trade likely be average? Is there some dependency out there to explore in your trading system's position sizing methods? By following the Martingale method, am I rewarding my perfect landings (increasing size of next position) and ridiculing my bad landings (decreasing size of next position)? Oh, ideas to test...

Side Note
We were without power today and this hundred degree weather was a killer. I'm writing to you with a big smile on my face because just after FEMA came around my neighborhood bullhorning that they have no idea when power would be restored...the power was restored! Yeah! Having electricity never felt so good. Even if it's only for a short-time until the next rolling black-out.

Wanted to share a memory I have of my mom that might prove insightful. My mom lived through a lot...but I think the top two things that really put the fear in her were the hurricanes and gas crunch of the late 70's/early 80's. Know what I remember? She never allowed her car's gas tank to get below half a tank. Never. She would keep that sucker topped off every opportunity she got. Kinda like my grandpa after farming through the Great Depression...never kept money in the bank. I wonder, has a whole generation of people passed through these 25 years not understanding what a precious and valuable thing commodities can end up being? Only to experience it first hand over these past few months?

Know what my wife's worry is now? Someone stealing gas out of her car. Not stealing her car...but her gas! Remember when it used to be a big thing to have a lock on your gas cap? To be honest, I grew up never understanding why you'd need a lock on your gas cap. Now, I do. Another story for you...

While waiting in Houston evacuation traffic...everyone was running on gas fumes. The longer it took, the more gas it ate up. One woman was in her car staring off into space, frustrated with the hours she had spent in this traffic, only to witness someone beside her car syphoning off her gas. While she was driving it mind you. She immediately got out, yelled at the guy, and he ran away...cut short of his objective...but with a little more gas than he had before.

Have these past 20 something years been a perfect landing in commodities?

Are we headed for a Reversion to the Mean? Something I speculated back in March in my Canary in a Coal Mine post?

Finally, please keep all the people who still do not have electricity due to Hurricane Rita in your thoughts and prayers. We are having heat records blown out of the sky this week (100+ degree days), no breeze, nothing. And thoughts and prayers for all the men and women of the utility companies who are working around the clock to get power restored.

Later Trades,

MT

Update: Wanted to clarify a bit on the term Martingale. When I referred to Martingale in the above post, I was referring to a specific type of Martingale commonly known as Anti-Martingale. Where you increase bet-size based on winning and decrease bet-size based on losing. The conventional Martingale often referenced in the BlackJack world back in the day increases bet-size on losing.

A few links to explore on Martingale...
Position Sizing by Michael R. Bryant
The Truth About Betting Systems
Betting Systems and the House Edge
Exposing the Gambler's Fallacy

A few links to explore on the Law of Averages and Gambler's Fallacy...
Law of Large Numbers and Gambler's Fallacy
The Law of Large Numbers

Serenity Now

pre_rita_calmbeforestorm, originally uploaded by TaylorTree.

Testing the flickr service out. I think I'll try to post a picture each week titled Serenity Now (possibly on Fridays). Just trying to figure out the easiest way to do this.

MT

Lake Livingston Dam Update

I'm powering down for the night but wanted to post a few links to information on the Lake Livingston Dam release currently in progress. First here are the links: Engineers rushing to inspect dam damage, Residents May Have to Leave Because of Worries about Dam, Emergency release of water begins from Livingston Dam.

Note, I checked on the lake levels tonight and it is true...the lake is dropping fast. So, be careful out there...especially if you live in the Liberty County area. When water is released from the dam...the Liberty area will not actually see the full impact until 5 days later. And speaking of Liberty...apparently all power is still down in that area as well as Dayton.

And to my regular readers...please be patient with my current posts. I promise I'll get back to writing about trading and systems very soon. Just feel an obligation to get the word out especially since most of the hurricane coverage is centered around the bigger cities such as Houston and Beaumont.

Take care,

MT