Trend Following with Managed Futures: The Search for Crisis Alpha (Wiley, 2014) by Alex Greyserman and Kathryn M. Kaminski is an academically rigorous book with a practical bent. Although on the surface it appears to have a narrow focus, in reality it covers a broad spectrum of important but often overlooked investing concepts. Even readers who have no real interest in managed futures can learn a great deal from it, especially if they have some familiarity with financial statistics.
The authors start with an 800-year historical perspective and then discuss trend following basics, theoretical foundations, trend following as an alternative asset class, benchmarking and style analysis, and trend following in an investment portfolio.
Here I’ll simply highlight a couple of ideas that are central to the book’s thesis.
Let’s start with the notion of crisis alpha. “Crisis alpha opportunities are profits that are gained by exploiting the persistent trends that occur across markets during times of crisis.” (p. 145) Viewed in the context of the adaptive market hypothesis set forth by Andrew Lo in 2004, “for both behavioral and institutional reasons, market crisis represents a time when market participants become synchronized in their actions creating trends in markets. It is only the select (few) most adaptable market players who are able to take advantage of these ‘crisis alpha’ opportunities.” (p. 73)
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rss12 Things said by Jesse Livermore
1. “An investor looks for safety… The speculator looks for a quick profit.” Livermore is saying that what differentiated him and other speculators from investors was: (1) a willingness to make bets with short duration and (2) not seeking safety. Anyone reading about Livermore must remember that he was not a person who often/always followed his own advice. He eventually shot himself leaving a suicide note which included the sentence: “I am a failure.”
2. “A professional gambler is not looking for long shots, but for sure money…Since suckers always lose money when they gamble in stocks – they never really speculate…” Livermore believed he was not a gambler since he only speculated when the odds were substantially in his favor (“sure money”). Livermore’s statement reminds me of a quotation from Peter Lynch: “An investment is simply a [bet] in which you’ve managed to tilt the odds in your favor.” Livermore’s statement also reminds me of the poker player Puggy Pearson who famously talked about need to know “the 60/40 end of a proposition.” When the odds are substantially in your favor you are not a gambler; when the odds are not substantially in your favor, you are a sucker.
3. “I trade in accordance to my means and always leave myself an ample margin of safety. …After I paid off my debts in full I put a pretty fair amount into annuities. I made up my mind I wasn’t going to be strapped and uncomfortable and minus a stake ever again.” Livermore is not referring here to seeking a Benjamin Graham style “margin of safety” on each bet but rather to this: once you establish a big financial stake as a speculator, setting aside enough money so you don’t need to “return to go” financially is wise. Livermore wanted a margin of safety in terms of safe assets so that he would always have a grubstake to start over in his chosen profession of speculation. On this point and others, he failed to follow his own advice.
4. “Keep the number of stocks you own to a controllable number. It’s hard to herd cats, and it’s hard to track a lot of securities.” There is only so much information a single person can track in terms of stocks whether you are in investor or a speculator. By focusing on a smaller number of stocks you are more likely to (1) know what you are doing (which lowers risk) and (2) find an informational advantage you can arbitrage.
5. “Only make a big move, a real big plunge, when a majority of factors are in your favor.” Only bet when the odds are substantially in your favor. And when that happens, bet in a big way. The rest of the time, don’t do anything. (more…)
Taleb Says ‘Every Human’ Should Short U.S. Treasuries
Feb. 4 (Bloomberg) — Nassim Nicholas Taleb, author of “The Black Swan,” said “every single human being” should bet U.S. Treasury bonds will decline, citing the policies of Federal Reserve Chairman Ben S. Bernanke and the Obama administration.
It’s “a no brainer” to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.”
Taleb said investors should bet on a rise in long-term U.S. Treasury yields, which move inversely to prices, as long as Bernanke and White House economic adviser Lawrence Summers are in office, without being more specific. Nouriel Roubini, the New York University professor who predicted the credit crisis, also said at the conference that the U.S. dollar will weaken against Asian and “commodity” currencies such as the Brazilian real over the next two or three years.
India 1854 Inverted Head Variety
The classic 1854 inverted head variety set a new world record yesterday at Spink. The stamp, part of the Vestey collection auctioned off on October 13th, 2010 brought in a record GBP 105,390. The stamp was cut to shape. Twenty seven copies of this world famous rarity are known, only 3 of these were cut square. Image is courtesy of Spink. Entire catalog can be downloaded from: http://www.spink.com/auctions/pdf/default.asp
Why Trading is Difficult
1. Need to internalize lots of trading simulation of specific set-ups in real-time to trade effortlessly
2. Need to trust money management system to weather +10 losses in a row
3. Tuff to internalize that its the 5-6 huge monthly runners that is the big pay-off days
4. Must master +3 trade set-ups to make money consistently month to month.
5. It takes considerable time to mathematically think and act like a trader
6. Trading is a performance skill which requires mastery of every element of trading
7. It requires time capital and considerable effort to achieve the experience to make it effortless and automatic
8. It takes several attempts at different trading methodology to sync with a trader’s personality and cognitive strengths
9. It takes time to set and internalize specific rules that embed a sense of mastery
10. To survive in trading requires weathering the lengthy learning curve
Discipline
Ray Dalio about mistakes – Hedge Fund Market Wizards
Mark Twain on Stocks & Month of October
Cofnas, Sentiment Indicators -Book review
The Crossley Bird ID Guide is, to my mind, a good segway to Abe Cofnas’s Sentiment Indicators: Renko, Price Break, Kagi, Point and Figure: What They Are and How to Use Them to Trade (Bloomberg Press, 2010). Cofnas contends that the best way to use the chart types he describes is “in tandem with candlesticks” because “using all five charting methods together [will] generate enhanced confirmations of key price points.” (p. 8)
Each chart type has a “best use” in trading. The price break chart is best at detecting the beginning of a trend, projecting reversal points, and confirming cycle turning points. The Renko chart detects “micro changes in sentiment and momentum.” The point and figure chart shows support and resistance lines, projects breakout ranges, and balances bulls and bears. And the Kagi chart is good at timing the turnover of sentiment. (p. 7) Let’s look very briefly at the first two types of charts here.
Price break charts, available on Bloomberg Professional workstations but easily programmable on other platforms (Cofnas spells out the construction logic), are often known as three-line break charts, although there’s nothing sacrosanct about the number three. They could be set up as six-line break charts just as easily. The idea is that “a series of black columns will be followed by a white column if the high of the previous [x-number of] black columns is broken by the new price. … A black column is added if the low of the previous [x-number of] white columns is broken.” (p. 23)
Cofnas explains how to understand the strength of price movement using price break charts and describes trading strategies (focusing on entries). He also looks at combining cycle analysis with price break charts, describes multiple market applications of price break charts, and explores the use of price break charts in option trading. (more…)
Nifty Future :4803 last Hope for Idiot Bulls
Break below this level will create panic selling.
-Three Consecutive close below 4803 level……Next Target 4667-4621.
–Major Support :4501
(Three Close below this level+Weekly close below 4501 )….Then ????
*Remember ,What I had written on 28th ,29th ,30th April.Exit and Sell everything.
*Will see Unexpected levels by May end and 15th June.
*101% Again writing…..Sell Sell Sell.Once it will break and close below 4501….then ??
*If I will write………….then Idiots will Laugh ,Jokers will comment.
Updated at 13:08/25th May/Baroda