Quote of the Week

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

MT

Quote of the Week - Moving

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

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

MT

Quote of the Week

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

MT

Hawk Picture

Hawk in my backyard, originally uploaded by TaylorTree.

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

Hope you're enjoying your weekend.

MT

Quote of the Week

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

MT

Interesting Stuff

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

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

Later Trades,

MT

Baby Boy!

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

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

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

Keep us in your prayers.

MT

Quote of the Week

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

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

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

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

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

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

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

Later Trades,

MT

Thread of the Week - Discipline

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

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

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

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

Much to learn...

MT

Quote of the Week

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

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

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

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

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

Later Trades,

MT

Amortization in Google

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

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

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

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

MT

Friday Links

Interesting article on Risk Homeostasis here.

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

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

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

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

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

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

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

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

Later Trades,

MT

Thread of the Week

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

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

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

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

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

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



Later Trades,

MT

Quote of the Week

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

Later Trades,

MT

Quote of the Week

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

MT

Quote of the Week

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

MT

The One Thing...

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

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

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

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

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

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

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

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

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

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

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

Later Trades,

MT

Cool New Blog Find: Deep Market

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

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

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

Later Trades,

MT

Optimal Risk with Ed Seykota & Dave Druz

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

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

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

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

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

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

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

Later Trades,

MT

Quote of the Week

"If I wasn't dyslexic, I probably wouldn't have won the Games. If I had been a better reader, then that would have come easily, sports would have come easily...and I never would have realized that the way you get ahead in life is hard work." -- Bruce Jenner

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

MT