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The Trend Following Mindset
In the San Antonio Spurs’ locker room, there is a quotation on the wall from Jacob Riis:
“When nothing seems to help I go back and look at the stonecutter hammering away at his rock perhaps a hundred times without as much as a crack showing in it. Yet at the hundred and first blow it will split in two, and I know it was not that blow that did it, but all that had gone before.”
UBS On The Exasperating Euro
Strategist, UBS
For foreign exchange investors there’s nothing more exasperating than the euro at the moment. Having fallen from above 1.51 against the dollar in December to below 1.19 in June, the euro has since bounced smartly back to above 1.30. Defying predictions of a Eurozone break-up or a further perilous decline to parity, the euro has instead wrong-footed many in the currency market.
Indeed, exasperation explains one of the factors behind the euro’s correction, as investors had become increasingly bearish on the currency. The belated bailout of Greece, sharp bond spread widening within the Eurozone, concerns about competitiveness, and political tensions within Europe all convinced foreign exchange participants that the euro had become a one-way bet. Hence, the euro’s summer recovery has been the clear pain trade in the currency markets, forcing investors to close their shorts.
The reversal in the exchange rate has been driven by stronger data in the Eurozone and renewed concerns about the health of the US economy. In particular Germany’s super-competitive exporters have benefited from the slide in the euro in the first half of the year. An excellent reflection of this is the continuing strength of the Swiss franc. As Switzerland sends 20% of its exports to Germany, the franc is a proxy for the largest economy in Europe. In many ways it is a substitute for the old German mark.
In contrast, the dollar has fallen this summer as weaker US growth has forced Federal Reserve officials to consider resuming quantitative easing. As last year’s inventory bounce has begun to wear off, structural concerns about the health of the US housing and labour markets have come to the fore again.
In the near term the euro is likely to keep its gains; there are still shorts in the market and fears about the Fed will keep the dollar on the back-foot. But the longer-term picture remains bearish. The structural problems of high debts, low growth and diverging current account imbalances remain stubbornly high. Fiscal austerity will undermine Eurozone growth this year and next. The European Central Bank won’t be in a position to raise interest rates until well into 2011, at the earliest.
What are the risks to our long-term bearish euro view? The major concern of course is the Fed resuming asset purchases in order to expand US money supply. This would undermine the dollar as it did in March 2009 when the Fed started a year-long programme of buying Treasuries and mortgage-backed securities. The other concern is that the consensus among foreign exchange participants remains bearish on the euro. As a result, their positioning would keep the markets vulnerable to further exasperating rallies in the currency.
Thought For A Day
Bernard Baruch: 10 Rules of Investing
“Being so skeptical about the usefulness of advice, I have been reluctant to lay down any ‘rules’ or guidelines on how to invest or speculate wisely. Still, there are a number of things I have learned from my own experience which might be worth listing for those who are able to muster the necessary self-discipline:
1. Don’t speculate unless you can make it a full-time job.
2. Beware of barbers, beauticians, waiters — of anyone — bringing gifts of “inside” information or “tips.”
3. Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.
4. Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars.
5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.
6. Don’t buy too many different securities. Better have only a few investments which can be watched.
7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.
8. Study your tax position to know when you can sell to greatest advantage.
9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.
10. Don’t try to be a jack of all investments. Stick to the field you know best.
A Review: “Two Centuries of Trend Following”
The paper “Two Centuries of Trend Following” by Lemperiere, Derenble, Seager, et al of Capital Fund Management purports to show that trend following has been profitable, over a wide range of markets, consistently over 200 years. It deserves to be reviewed as it represents a case study of the statistical practices, and armchair explanations that are sometimes used to justify a system that in the most recent five year period has lost its mojo. Rocky has asked me to review it.
The amazing thing is that the authors seem to know how to compute hyperbolic tangent regressions, and compute the duration of a drawdown given a sharpe ratio, yet they seem completely unaware of the problem of multicollinearity, overlapping observations, and lack of independent observations.
In a nutshell, they compute hundreds of thousands of means, and they combine them and measure how far away from randomness they are. Recall that the average of two random observations is about 0.7 times as variable as one observations. The average of 100,000 observations is about 1/320 as variable as 1 observation. (more…)
Nuggets
Price — The Truth, The Light, The Way
- Work to understand price
- Price does not move in a straight line
- Big moves take time
- Volatility is your friend and helps to compress time
- Although volatility is your pal, it can cut both ways
- If a stock moves 30% a day, then you can’t trade with a 5% stop
- Don’t expect a volatile stock to stop behaving as it has been and only move in your favor just because you’re now in it. Unless you’re Bill Clinton, what is, IS.
Random Thoughts:
- Observe but be slow to shift gears — we are trend followers, not predictors
- It’s the market’s “job” to shake you out
- The market will do what it has to do to create the most pain (for the most people)
- The market will often do the obvious in the most un-obvious manner
- Err on the side of the longer-term trend
- DO wait for entries
- DO use protective stops
- DO trail and scale as offered
Electric car sales and market share in selected countries/regions
A Winning Trading Method is Really All About this…..
Successful trading is the attempt to be on the right side of the flow of capital. Each change in price happens with a new agreement between the current buyer and seller. Buyers and sellers are always equal for a transaction to take place, the cause of movement is determined by whether the buyers want in more than the sellers want out. Prices moves when capital flows into and out of a market, and inflow pushes up prices because demand becomes more than supply, price discovery happens to find out what sellers are willing to take to sell their position.
Many crazy over bought or over sold trends occur because one side has little pressure on it, position holders, shorts, or buyers sit tight as a trend accelerates. Equity markets rise when new money has to enter to be put to work but there is little interest at selling due to position holders sitting on winning positions.
Price resistance on a chart is caused by simply being the place that current holders are taking their profits. Price support happens at the price that people on the sidelines are ready to get back in at. These are simply spots where capital flows in and out. (more…)