That enormous profits should have turned into still more colossal losses, that new theories should have been developed and later discredited, that unlimited optimism should have been succeeded by the deepest despair, are all in strict accord with age-old tradition. Benjamin Graham A trading philosophy is something that cannot just be transferred from one person to another; it’s something that you have to acquire yourself through time and effort. Richard Driehaus The essential element is that the markets are ultimately based on human psychology, and by charting the markets you’re merely converting human psychology into graphic representations. I believe that the human mind is more powerful than any computer in analyzing the implications of these price graphs. Al Weiss Opportunities change, strategies change, but people and psychology do not change. If trend-following systems don’t work well, something else will. There’s always money being lost, so someone out there has to win. Gil Blake, New Market Wizards |
Archives of “tradition” tag
rssEvidence Based Trading
The late Ayn Rand emphasized that philosophy was the most practical of disciplines: it governs the ideas that lie behind all we do and think. The philosophical premises we assume affect how we approach trading.
A beautiful example of this is David Aronson’s new book, “Evidence-Based Technical Analysis”. It’s a well-written, thought-provoking text, with many practical examples of how to conduct data analysis in an objective way.
Starting with the premise that knowledge consists of statements that are found to be true, Aronson, writing in the positivist tradition of philosophy, excludes subjectivity as knowledge. He explains:
“The most important consequence of TA adopting the scientific method would be the elimination of subjective approaches. Because they are not testable, subjective methods are shielded from empirical challenge. This makes them worse than wrong. They are meaningless propositions devoid of information. Their elimination would make TA an entirely objective practice.” p. 148
This is bound to rub many traders the wrong way, but it’s an important challenge. What is knowledge? How do we know what we know in the markets? How can we demonstrate that knowledge is such, and not illusion? (more…)
Evidence Based Trading: Why Philosophy Matters
A beautiful example of this is David Aronson’s new book, “Evidence-Based Technical Analysis”. It’s a well-written, thought-provoking text, with many practical examples of how to conduct data analysis in an objective way.
Starting with the premise that knowledge consists of statements that are found to be true, Aronson, writing in the positivist tradition of philosophy, excludes subjectivity as knowledge. He explains:
“The most important consequence of TA adopting the scientific method would be the elimination of subjective approaches. Because they are not testable, subjective methods are shielded from empirical challenge. This makes them worse than wrong. They are meaningless propositions devoid of information. Their elimination would make TA an entirely objective practice.” p. 148
This is bound to rub many traders the wrong way, but it’s an important challenge. What is knowledge? How do we know what we know in the markets? How can we demonstrate that knowledge is such, and not illusion?
Once we start with the premise that all knowledge consists of explicit propositions that can be tested for truth, we necessarily are led toward trading that is rule-based and rigorously backtested.
Is there another, *valid* form of knowledge and trading? Can we prove that?The late Ayn Rand emphasized that philosophy was the most practical of disciplines: it governs the ideas that lie behind all we do and think. The philosophical premises we assume affect how we approach trading.
Words of Wisdom from :Kroll's book
The Professional Commodity Trader (reprinted in 1995 by Traders Press) to follow him as he traded between July 1971 and January 1974, during which time for the 39 accounts that he managed he turned $664,379 into $2,985,138. He funded his own account in July 1971 with $18,000; eighteen months later it had appreciated to $130,000. Apparently before he “retired,” he was sitting on a $1 million account. What was the secret of his success?
Kroll was a discretionary trend trader in the tradition of Jesse Livermore. He had simple entry and exit rules. To initiate a position he would trade in the direction of the major trend, against the minor trend. “For example, if the major trend is clearly up, trade the market from the long side, or not at all, buying when: a. the minor trend has turned down, and b. prices are ‘digging’ into support, and c. the market has made a 35-50 percent retracement of the previous up leg.” To close out a long position at a profit, liquidate one-third at a logical price objective into overhead resistance, another third at a long-term price objective into major resistance, and trail stop the remaining third. There are three approaches to closing out a position at a loss. First, enter an arbitrary “money” stop-loss such as 40-50% of the requisite margin; second, enter a chart stop-loss “to close out the position when the major trend reverses against your position—not when the minor trend reverses (that’s just the point where you should be initiating the position, not closing it out).” Finally, “maintain the position until you are convinced that you are wrong (the major trend has reversed against you) and then close out on the first technical correction.” (pp. 27-28) He admits that the last alternative can be potentially lethal; the technical correction may not come in a timely fashion.
Kroll offers some advice to the would-be futures trader. He urges the wannabe to play only for the major moves—not for scalps. As he writes, “Riding a winning commodity position is a lot like riding a bucking bronco. Once you manage to get aboard, you know what you have to do—hang on and stay hung on; not get bumped or knocked off till the end of the ride. And you know that if you can just manage to stay in the saddle, you’re a winner. Sounds simple? Well, that’s the essence of successful trading.” (p. 44)
Put another way, when ahead, “play for the big score and don’t settle for a minor profit.” On the other hand, when a trade isn’t working out, “spend your constructive effort in calculating how to close out the losing position with a minimum loss or perhaps a modest profit—and if such an opportunity is offered, take it.” Contrary to a lot of the literature, he also advocates striving for a high winning percentage. The problem with accepting a small fraction of winning trades is that “the winningest accounts . . . still manage to chalk up some mighty big losses—it seems just about impossible to always keep losses small, no matter how hard you try.” (p. 153)
I’ve extracted some words of wisdom from Kroll’s book, but what makes the book so enjoyable is that Kroll takes the reader through actual trades, some winners and others losers, and shows the courage it took to ride the bronco and the acute pain he felt when he was bucked off. It’s a book that you read in one sitting, fully engrossed.
Jack Schwager’s “Hedge Fund Market Wizards” in Two Paragraphs
Nearly every professional Trader will agree that Jack Schwager’s “Market Wizards” series is required reading. And his latest in the series, Hedge Fund Market Wizards, continues the same tradition of excellence. I’ve nearly finished my first read-through. If you are time constrained (and who isn’t) and/or you haven’t yet picked up the book, I may be able to save you some time by offering this brief mock introduction to each Trader that nearly describes every interview in the book:
Over the past 10-15 years, Trader X has achieved an [insert mid-teens to mid-twenties]average annual return. While this return may not sound that impressive, consider that Trader X has never had a drawdown larger than [insert impressive sounding single-digit number]percent! However, Trader X’s Sharpe Ratio is extremely high. How could this be? Well, a shortcoming of the Sharpe Ratio is that it makes no distinction between upside and downside volatility and therefore understates the Trader’s true performance because volatility has been heavily skewed to the upside (which, presumably, most investors wouldn’t have a problem with).
How has Trader X achieved such an impressive Return/Risk track record? He lazer beams extreme focus to risk controls and never risks more than [insert some minuscule number]percent of his total portfolio on any individual trade. Combining these risk controls with his attention to seeking out asymmetric trading opportunities that have the potential to yield trading gains far in excess of the maximum risked to enter the trade is what separates Trader X from his pedestrian competitors.
There ya go, you’ve basically read all 15 chapters of Hedge Fund Wizards.
Now what do you think you need to focus on?