my journal 2

[Yamato]

goddamn taxi driver

As if my career frustrations weren't enough, I came across a dishonest cab driver today. He was trying to make me take the longest route home, and had the taximeter on fare 2 instead of fare 1, which is slower and within the city. On top of this, the middle seat in front (his car had 3 seats) was permanently hiding the taximeter. I am not used to arguing, but I was so frustrated from work, that I told him quite a few things today, and got to move the seat, change the route twice, and, amazingly for me, I even told him "yeah, sure, keep on denying!", when he was pretending that everything was ok, and that I was being fussy. A mother ****er like today only happens to me once every 100 cabs I take, but had i been in a good mood, I would have never told him to even move the seat.

Self-control Update
Needless to say this caused a swing down in my self-control chart. I had negative thoughts, which will cause me to go to sleep late, I smoked, I ate sweets, I made an enemy (the cab driver), but at least today I didn't take any abuse from anyone. I now understand that swings down in self-control are not necessarily caused by your own weakness but can be caused by a series of unfavorable events, very much like a drawdown in events, which will happen every once in a while. I guess we could say that today was my largest drawdown in weeks: someone brought up the topic of promotions at lunch and got me depressed, I met a (rare) dishonest cab driver. But that's it. My first automated trade is making money. So at least I didn't have a financial drawdown.

 

[Yamato]

market wizards: larry hite

Here Larry Hite says things I said and thought before (I will highlight in red the things I particularly agree with):

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[FONT=Verdana,Verdana][FONT=Verdana,Verdana][FONT=Verdana,Verdana]Isn't it possible that the markets can change and the future will be very different from the past? [/FONT]
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The markets may change, but people won't. When we were still in the testing stage, before we actually started managing any money, my partner Michael Delman came up with the concept of using holding periods as a measure of system performance. Evaluating systems solely on a calendar year basis is very arbitrary. What you really want to know are the odds for profitable performance in a holding period of any length. In our simulations, Peter determined that 90 percent of all the six- month holding periods, 97 percent of the twelve-month periods, and 100 percent of the eighteen-month periods would be profitable. After over seven years of actual trading, the numbers turned out to be 90 percent, 99 percent, and 100 percent.
I will tell you how confident I am of the future validity of our evaluation process. There is a fellow who works for us who used to be a colonel in the British army. His service specialty was dismantling bombs all over the world. I asked him, "How did you do it?" "It wasn't that difficult," he says. "There are different styles of bombs; a bomb in Malaysia is different from a bomb in the Middle East. You go there and see what kind of bomb it is and take it apart." I said, "Let me ask you a question. What happens when you come across a bomb that, you don't know?" He looks me in the eye and says, "You record your first impression and hope it is not your last."
I came into the office one day and found this same steel-nerved individual virtually on the brink of tears. I asked him what was wrong. It turned out that the Fed had made a major policy change, which dramatically reversed many major market trends. Overnight, our fund, which had gone from a starting value of $10 to nearly $15, had fallen back to under $12, just after he had opened a major Swiss bank as an account. I told him, "Get them on the phone." "What?" he asked somewhat confused. I repeated [speaking more slowly and emphatically], "G-e-t t-h-e-m o-n t-h-e p-h-o-n-e."
When I was a broker, my boss taught me that if you don't call your client when he is losing money, someone else will. And, to be honest, when I was a broker, I did the same thing. When I called prospects and they complained about their broker, I would say, "Oh, how could he put you in that trade?"
So I get the account on the phone and explain that our simulations show that this type of event will occur once every few years and that I am confident that in nine months the fund will be back to a new high. "In fact," I said, "I have just borrowed some money to add to my own investment in the fund." "You really did that?" he asked in a surprised tone. I assured him that I did.
Well, the account doubled up on their investment, and the fund immediately shot straight up. Today that account is one of our biggest clients. How could I be so sure? I knew what those systems were about. What makes this business so fabulous is that, while you may not know what will happen tomorrow, you can have a very good idea what will happen over the long run.
The insurance business provides a perfect analogy. Take one sixty-year-old guy and you have absolutely no idea what the odds are that he will be alive one year later. However, if you take 100,000 sixty-year-olds, you can get an excellent estimate of how many of them will be alive one year later. We do the same thing; we let the law of large numbers work for us. In a sense, we are trading actuaries.
I have a friend who went broke trading futures. He can't understand how I can trade by following a computerized system religiously. We were playing tennis one day and he asked me, "Larry, how can you trade the way you do; isn't it boring?" I told him, "I don't trade for excitement; I trade to win." It may be very dull, but it is also very lucrative. When I get together with other traders and they start exchanging war stories about different trades, I have nothing to say. To me, all our trades are the same.
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That's how I wanna be. I wanna be like Larry Hite. In this next question he's asked by Schwager, he talks about some things I wrote here before (build them simple, build many of them). Again, I will highlight in red the parts I agree the most with.

There are many money managers who use trend-following systems—and quite a few of those don't second-guess their own systems. What makes Mint different? How have you been able to achieve return/risk ratios far above the industry average?

Because we know that we don't know. No matter what information you have, no matter what you are doing, you can be wrong. I have a friend who has amassed a fortune in excess of $100 million. He taught me two basic lessons. First, if you never bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you. Second, if you know what the worst possible outcome is, it gives you tremendous freedom. The truth is that, while you can't quantify reward, you can quantify risk. I will give you an example how important this advice is. One of the world's largest coffee traders invited me to his house in London. When I walked into his library, I noticed he had just about every book ever written on power. He took me to one of the finest restaurants I have ever been at. At dinner, he asked me, "Larry, how can you know more about coffee than me? I am the largest trader in the world. I know where the boats are; I know the ministers." "You are right," I answered, "I don't know anything about coffee. In fact, I don't even drink it." "How do you trade it then?" he asked. I told him, " I just look at the risk." Well this great meal lasted for several hours. Five times he asked me what I did, and five times I told him that I managed the risk.
Three months later I heard that he had blown $100 million in the coffee market. He obviously didn't get the message. And you want to know something? He does know more about coffee than I do. But the point is, he didn't look at the risk.
So the very first rule we live by at Mint is: Never risk more than 1 percent of total equity on any trade. By only risking 1 percent, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical. For example, one manager I know had a large account that withdrew half the money he was trading. Instead of cutting his position size in half, this manager kept trading the same number of contracts. Eventually, that half of the original money became 10 percent of the money. Risk is a no-fooling-around game; it does not allow for mistakes. If you do not manage the risk, eventually they will carry you out.
The second thing we do at Mint is that we always follow the trends and we never deviate from our methods. In fact, we have a written agreement that none of us can ever countermand our system. The trades are all the same. That is the reason why we have never had a bad trade at Mint. There are really four kinds of trades or bets: good bets, bad bets, winning bets, and losing bets. Most people think that a losing trade was a bad bet. That is absolutely wrong. You can lose money even on a good bet. If the odds on a bet are 50/50 and the payoff is $2 versus a $1 risk, that is a good bet even if you lose. The important point is that if you do enough of those trades or bets, eventually you have to come out ahead.
The third thing we do to reduce risk is diversify. We diversify in two ways. First, we probably trade more markets worldwide than any other money manager. Second, we don't just use a single best system. To provide balance, we use lots of different systems ranging from short term to long term. Some of these systems may not be that good by themselves, but we really don't care; that is not what they are there for.
The fourth thing Mint does to manage risk is track volatility. When the volatility of a market becomes so great that it adversely skews the expected return/risk ratio, we will stop trading that market.
Essentially, our approach has three lights in determining the acceptance of trading signals. When the light is green, we take all signals. When the light is yellow, we will liquidate an existing position on a signal, but we will not put on a new position. Finally, when the light is red, we liquidate existing positions automatically, and we do not take any new positions.
For example, in 1986, when coffee went from $1.30 to $2.80 and back to $1.00, we got out of our long positions on the way up at $1.70 and didn't trade the market for the rest of the price climb and subsequent collapse. Now, while we may have lost some additional profits, being out of markets like that is one of the ways we are able to achieve such rigid risk control.

Here's an interesting interview by his partner, Peter Matthews:
http://www.opalesque.com/OFI133/Founding_Father_Peter_Matthews_the_developer_of791.html

 

[Adamus]

Re: market wizards: larry hite

Here Larry Hite says things I said and thought before (I will highlight in red the things I particularly agree with):...

Both the Larry Hite extract and the link to the other article are interesting to read, although I don't believe they are actually informative in any way. I know I have to control the risk. Is there something else that I missed?

 

[Yamato]

Yeah, interesting observation.

I think we all read and understand different things in a book or into anything, even according to different times in our lives. We read a book at 15 and we think we understand everything in it. Then we read it again twenty years later, and we feel "wow, now I understand it!".

I could have read the Market Wizards interviews ten years ago, and I would have felt that I understood them. Yet, unless they actually taught me those things I didn't know, I would have been missing most points they were making, because I didn't know exactly what they were talking about. Instead, I came across this book this year, and when I read Dennis', Seykota's and Hite's interviews, I felt that every point they made was something I learned in the past ten years during my back-testing, automation, and forward-testing. The things they said were things I could have written, and in many cases, things I had already written even on this journal. When Hite describes his trading he's also describing my trading.

Having said this, it doesn't mean we actually learn new things. As I noted on this journal a few months ago, while discussing with wprins, we might actually enjoy better a book that doesn't teach us anything because it agrees on everything with us, rather than a book that challenges our thinking, and that might teach us something, but we reject it and say it's worthless. And in one of those posts, I remember also writing that maybe, for the above-mentioned reasons, reading books is not very useful, but just an enjoyable pastime. Hey, I am pretty much against books myself. I just enjoy that a famous and rich guy like Larry Hite agrees with me on many things. But now that I think of it: if a guy got rich thanks to doing the same things I am doing, this is very useful information to me, because it's telling me that I am on the right track, like reading a map.

Sometimes I have been even describing a map when I was actually lost. For many years, until recently, I wrote tons of posts about discretionary trading that made sense to profitable traders, and made sense to others who told me they became profitable thanks to them. Yet I was never able to become profitable as a discretionary trader, because I have always been missing some necessary ingredients, and I still ignore what they are exactly.

So anyway, what is writing, what is teaching, what is communication and how does it help us? To get down to our subject, automated trading, it is very hard to read about automated trading things that will not be useful to us, because it is simply so concrete, that there can be little bull**** about it. Even in general interviews such as those by Schwager to Hite, Dennis and Seykota, they're revealing to me that they used my same tricks while back-testing. In discretionary trading, things are much more confused and unclear, and someone could be bull****ting you like me (unintentionally). By reading my posts, even back in 2001, many thought I was profitable, whereas I wasn't. Not that I lied or anything, but when I wrote things they made sense to me, but maybe i never really applied the things I understood, just like I know if I eat sweets I get fat and yet I eat them. In the same way I know how to make money, but I don't do it, for self-control problems or similar.

 

[Yamato]

self-control update

Despite being a saturday and being home all day, my goddamn self-control didn't go that well, because the goddamn maid has left cigarettes, sweets and other things to eat in the goddamn house. So obviously I am exposed to more temptations and naturally I am more likely to surrender.



One of the lowest Saturdays in terms of self-control. Goddamn whore.

On the other hand, just like Hite says for system trading, the same applies to system living, or simply monitoring my self-control for now: I don't know what'll happen tomorrow, but I know what'll happen in the long term, because the monitoring (the chart helps, too) shows me how the past has gone, and I know the future will be similar. But if you didn't monitor the present, you would not have the past data, and you couldn't predict the future.

And this monitoring tells me this: on weekends I break fewer rules, because I am less tested, except when the whore fills the house with temptations.

Another thing is this: I've pretty much quit scratching my head for good. Not scratching my nose, though.

I've resumed eating binges (not real ones, but in manner of speaking, yet definitely overeating), ever since I have a new maid, who was instructed to bring food home. The previous one was worse and better. She was worse because she refused to buy me milk (too heavy to carry: she would have needed a sub-maid to carry it for her). She was better because she didn't buy all the wrong things, which I tried to throw away, but she keeps on buying them for my father, and under his instructions. Damn.

Other than this, I was looking at more tests and simulations, and, realistically, I am counting on making, safely, from now on, 30% per month, regardless of how much capital I'll have. This is far from the 100% I wanted to make, but it's good because it will happen. I was forever aiming at that 100%, rushing things... and only pushed it away further and further. By now I'd have a million if I hadn't rushed things by wanting 100% a month. Yes, I did triple my capital one month, and made 100% in several months. Yet I also lost everything a few months later, blowing out my account about 3 times per year in the past 12 years.

Anyway, this is all behind me now. I'll be happy if I can make a consistent 30% a month, or even just an average 1000 dollars per week which would definitely allow me to quit my job.

 

[Yamato]

automated trading update

Out of the 40 systems I am forward-testing:
1) I've got 8 systems that still suck (they lost money or they still didn't make enough trades to be judged).
2) I've got 15 systems that I am using right now, because they're good enough and have a drawdown I can afford
3) I've got 17 systems that are good enough, but I can't afford due to their drawdown. I will add them all at 50k. If I add them now, they will cause me a drawdown of 13k, which could wipe out my account immediately.

Here's a chart with the three most important lines of my equity:
1) in pink, what the equity would have been like WITHOUT reversing signals (which can always run the risk of being an overoptimization - I hope not).
2) in blue, what the equity would have been like WITH reversing signals (reversal works like this: if the past week was negative, most of the systems will reverse their signals this week)
3) in yellow, what the equity would have been like WITH reversing signals and IF I had allocated the present number of contracts to my systems, which gets decided based on present capital and on money and risk management formulas (especially ROA score for every system). The previous two lines use 1 contract for all systems, and even unprofitable systems get traded.



The above lines tell me a whole lot. Yet none of them tell me what my real equity would look like if I had reinvested gains (too complicated to implement that). So what I do is I divide the profit by the present 8 months of forward testing, and get an idea of how much the system makes per month. Then I compound based on that. The system makes over 50% a month in the given period, but I think I should realistically be expecting a 30% per month (or else if what I expect doesn't happen, this will encourage me to resume discretionary trading to "help" it happen). Line 3 (in yellow) tells me how much I could have expected to make in the past 8 months, given the present capital and the present number of contracts traded. Now such line is below the blue line, only because I am undercapitalized. If I had a capital of 100k, the yellow line would look like this:



It would allocate more than 1 contract per system, and would still not trade any contracts for the bad systems (only 8 out of 40 right now). Another important part of my formulas (the risk management part), says that I cannot lose more than 5% on the worst possible loss for a system. So, with 100k, if the system incurred its worst loss, I would lose 5k. If it exceeded it, and doubled it, I would lose 10k. I am ok with that concept. With this capital, systems can be expected to make about 50k, which is 50% a month, and this is constant, from here on, no matter how much capital you are investing. But as I said I am only expecting 30%. Another consideration is that, as capital increases, I could reduce the risk due to a maximum loss, from 5% to less.

All this is a great improvement, I mean this monitoring of drawdown, profits, ROA, etcetera.

I used to do things in a different way until less than a year ago. I'd start trading, even with as little as 4000 dollars, hoping I wouldn't incur a drawdown immediately and not knowing what to expect of my systems, at all. Actually I always got lucky and once brought that 4k to 24k. Then, on that occasion and others, I'd incur a series of losses. Obviously, since sooner or later, that happens. If you're not expecting a drawdown, when that happens, you get mad, because you considered that 24k as if it were your own money. When you get mad, even if the drawdown doesn't last long enough to wipe you out, you take care of it by doing revenge trading. You stop using your systems and start trying to make that money back. That's how you get to zero. And it happened several times in the past 2 years.

Also, initially I didn't even know which ones were good and which ones weren't. I had the back-test results but wasn't looking at them in detail: I just cared that they made money. Now I have come a long way. I know both the back-tests and forward-tests in detail and I know how these systems interact with one another. Now I can almost say like Larry Hite: "what's so fabulous..." (see quote on bottom of post).

One more thing, let's look at the two drawdowns of the 14k and 100k situations. These drawdowns depend on the capital available and contracts allocated (besides of course all my money and risk management formulas). Now, with 14k, I can hope to make 70k in 8 months, but I have a possible drawdown of about 4k. Then, with 100k, I'd have a potential profit of 450k, but a drawdown of 25k (mostly due to CL contracts being traded - now they are not traded). Now, in terms of drawdown, I am wondering: would it be convenient to just forget about the CL and similar contracts, and simply multiply the smaller futures (with smaller drawdown) contracts? It's simple: if I multiply 70k by 6.5, I get to 450k profit, which is about the same as the 450k I get with 100k and using the CL and similar systems. In order to reach 450k with these smaller futures, I also need a capital of 100k, more or less, since 14k times 6.5 is close to 100k. So there are no advantages in terms of return. And if I multiply my drawdown of almost 4k by 6.5, I also get about 25k, which is the same drawdown of the other allocation of contracts. So overall the results are exactly the same, but the other method (with the CL contracts, GOLD and so on: systems that have bigger drawdowns) is better because diversification is good in itself, so I should use it particularly if it doesn't cause me any disadvantages in terms of profit and drawdown. So this ultimately means that my formulas are very good at calculating ROA.

My key formulas are two. The one on risk management, which I mentioned, and which ensures that the maximum loss doesn't exceed a set percentage of the capital. And the one based on the ROA index, which I calculate like this.:

=-G2/AVERAGE(H2,I2,2*K2)

Forward-tested profit divided by the average of: forward-tested drawdown, back-tested drawdown and twice the largest loss of the system. This formula is miraculous in detecting how good a system is, and if you think about it, you'll realize why. Also, it is simple, because, since i am bad with formulas, I always make sure my formulas are simple and thoroughly understandable.

Then I also have another formula, a minor one: the liquidity formula. If one day I'll have a large capital, i want to make sure my trades don't affect the market I am trading. So I divide the future's average daily volume by 5000, and this gives me the number of contracts I can trade before affecting that market to my disadvantage. That value goes from a minimum of 15 contracts on the GBP, to a maximum of 500 contracts on the ES. Of course I am not scalping but making trades that last several hours and have several ticks of profit, or else those values would need to be lower, because with these values I could still affect the market, but not by more than 1 tick.

 

[Yamato]

automated vs discretionary trading: some thoughts

I was tired of writing here and took a break on the other journals. The most popular ones are those where someone is teaching others to trade. There's usually someone drawing lines on a chart, and posting that chart or a video. I don't have a problem with that, in that I believe they're profitable and they're in good faith and trying to help others.

However, what's really distrubing to me is that their method is definitely not univocally defined. In other words, you don't know if and how well it has worked in the past, you cannot test it, you don't know if it will work, and, even if it will work this time, you will not know if you'll still be good at drawing those lines in the future. The method is not clearly defined on paper (as it is for automated trading) but rather is (or isn't) in the mind of the person drawing the lines. For example, you can never know, by seeing two people drawing lines, who is consistently profitable and who isn't, and who will be in the future. Because not only does it depend on all the lines he will draw in the future, but it will also depend on when he will exit if the line worked and caused him a win or didn't work and caused him a loss. And not just this time, but all the times to come.

I don't have a problem believing that some of these people drawing lines (which basically is the description of what most discretionary traders do) are consistently profitable, but in my opinion this method (discretionary trading) has too many variables to be able to keep them all under control mentally, especially when your judgment will be clouded by emotions and other interferences. Your judgment is constantly tested by having to decide how much to invest, where to invest it, when to invest it, and when to divest it. For every trade in the future, will you be able to rationally decide these 4 things, despite all interferences, such as: I am tired, I need money, I am pissed off today I can't accept to lose...?

What Dennis, Seykota and Hite convey in their Market Wizards interviews is that system trading is a much more efficient trading methodology, in that it automates all these future choices and rates all potential past choices, without even the need to have been there. And of course I totally agree with them, having had behind me a whole 12 straight years of unprofitable discretionary trading (from when I started to when I quit), and 2 years of profitable automated trading (ever since I started).

Getting back to Market Wizards, as far as I've read until now, most of the interviews are to discretionary traders (rather than system traders), so that's obviously one more reason to believe that one can be profitable even with discretionary trading, and I never doubted it.

Among these discretionary traders interviewed, so far I've only found traders who are both technical and fundamental traders (obviously fundamental analysis can be considered a form of discretionary trading). Interestingly, the three system traders generally say that discretionary trading lead them to losses, and also they don't care for fundamental analysis either.

To conclude these thoughts in random order, on the differences between discretionary and automated trading, I will go back a few years, to the late 1990s, when I started trading. I would trade options, with a large spread, sending my orders by fax and calling up the guy to execute my orders as quickly as possible. My only analysis was looking at daily charts, which seemed very easy to read back then. I would buy an option for 60, that could only get sold back at 40. In order to make that spread back, I would have to be right for two days. It would be like buying the EUR at an ask price of 1.35 and having a bid price of 1.33.

I wouldn't want to be a discretionary trader, especially not one who's still struggling to understand what the best instruments are: futures are the best instrument. Options and similar are bad. As a discretionary trader you already have to take care of so many variables, and decide rationally each one of them, that I can't imagine how you could ever worry also about picking the right option each time. And yet some people manage to do it. I don't know, maybe I am lazy, maybe I don't have enough energy any more... or maybe this is simply not the way to go for anyone. If I am right about this, all discretionary trading is wrong, and... I just remembered this Larry Hite quote from Market Wizards (page 70-71):

What made you believe that you could develop methods to put the odds in your favor?
I don't know that I understood it all then, but over the years I came to realize that the markets are inefficient. I have a friend who is an economist. He would try to explain to me, as if talking to a child, why what I was trying to do was futile, because "the markets are efficient." I have noticed that everyone who has ever told me that the markets are efficient is poor. He argued that if I could develop a winning system on a computer, so could others, and we would all cancel each other out.

What is wrong with that argument?
Because people develop systems and people will make mistakes. Some will alter their system or jump from system to system as each one has a losing period. Others will be unable to resist second-guessing the trading signals. Whenever I go to a money management conference and sit down with a group to have some drinks at night, I always hear the same story. "My system worked great, but I just didn't take the gold trade, and that would have been my biggest winner."
[...]

Here's a better answer than Hite's: it's not that some automated traders are doing it wrong and by doing that, they keep the market inefficient and profitable for those who do it right. It's that the small percentage of system traders cannot outweigh the overwhelming majority of discretionary traders, of which, for the reasons I mentioned, only a small percentage can win. Basically, the markets will stay profitable as long as the money will be mostly managed by discretionary traders.

Or maybe both Hite and I are wrong, because his explanation is definitely not good enough, and mine sounds good, but I have no idea what the figures are: how many trades are made by who? This is somethings I've always tried to find out but never succeeded. Also: how much money is lost by who? Everyone talks about 90% of traders losing, but I could never find the original source.

 

[Yamato]

This short video explains in yet another way my points above:

The approach they seem to be suggesting is to trade an entirely mechanical system manually, which wouldn't make sense, since you could automate it and not waste any time at the screen (and eliminate the danger of emotions, and boredom). So I am guessing that his "mechanical" system has some discretionary parts, which is why he's not talking about "automation" but just manual execution of a mechanical system. But then this would disprove his whole point, because wherever there's discretion there's danger. So it's either mechanical and automated, or it doesn't make perfect sense (as in this case), even though he gets the main point across: the more mechanical, the better. In this sense, even though he doesn't say it, it is understood that automation is the ultimate goal.

 

[Yamato]

more youtube browsing... Brian Magnosi

I was browsing more through youtube, looking for "mechanical systems", "system trading", "automated"... and similar words, and I found this good guy. Believe it or not, he seems quite honest. Regardless of the fact that the words are the usual words scamsters use: "i'll teach you how to make a lot of money with automated trading".

The first video I liked because he doesn't look that good, not wearing a tie, bad lighting, bad background... it makes me trust him. The things he says are reasonable as well.

The second video is even better, because of what he says and how he says it:

I am going to check this guy out, because he is quite interesting. Not that i need to buy anything from him. I always do my research when I find something interesting.

This is his web site:
http://www.your100klifestyle.com/?t=YT

Believe it or not, even though he sounds exactly like scamsters, especially on the video in his web site, he doesn't seem to be one. The only reason I can find that he could be a scamster is that I see no point in selling anything if you have a profitable automated trading system. Except the usual story about multiple sources of income, or that we all like to teach stuff from time to time, like I write stuff here. I don't know. Sometimes I was fascinated by some guy, like about 20 posts ago, and then later found out he was definitely a scamster. This time it doesn't seem to be the case so far. I'll come back and write my opinion here in case I change my mind. If he is honest, I would like to find out his motivation for teaching this stuff.

Ok, on his web site I didn't find enough to make up my mind on whether he's a scamster or not, so I'll have to watch some more of his videos and see if he gets into details more, about his systems.

Ok ok... ATTENTION: it has nothing to do with automated trading systems. This guy somehow mis-titles his videos in an effort to catch as many viewers as possible. He's only teaching an "automated online business model" and probably in a perfectly honest way, but it has nothing to do with automated trading as I initially thought. So I will quit reading here. In the rest of his videos he discusses a whole lot of ways to make money online and often says "this is not a good idea, I have a better idea", like in this other one:

In summary, after years of web browsing, I still haven't found someone honest, who's selling you his trading system for 100 dollars. So far all of these products, like FAP TURBO and similar, on sale for 100 dollars or so, are not better than something you can build yourself on tradestation, for free, in just a few months of work. Of course, this is true only if you know what you are doing. But if you don't know what you're doing, I don't think it's a good idea to trade your money on FAP TURBO.

Probably the most valid product, in terms of trading education and products, that I have come across is Market Wizards. It doesn't promise to teach you anything, but it teaches you more (and for less) than all these other courses and products put together. Not that i ever bought any of them, but on youtube I often come across them, and it's always a struggle in order to appraise who is and who isn't out to rip you off. Well, with Market Wizards, the guys interviewed are definitely not trying to sell you anything. At least those guys are honest. We can rely on Market Wizards and the universe they describe.

In many ways, when you go through these trading products on sale (books, courses, videos, chats, platforms, systems), you feel like you are in the movie "The Matrix", which perfectly describes a situation where you can't understand what's true and what's an illusion. The easiest way to understand true from false is if they're asking you for money or not. On forums, usually you trust the ones who are not asking you for money and mistrust those who are trying to sell you something. Another useful way to detect bull**** from useful stuff is how shiny a video or a web site is: the shinier it is, the more of a scam it is. Check out Ed Seykota's web site:

http://www.seykota.com/tribe/

It's almost as if he were proud that his web site looks crappy. Now, check out Larry Hite's web site, actually the web site of his company even:

http://www.hitecapital.com/

It's empty. Another book author I didn't mention yet, whom I trust is E.P.Chan, who wrote "Quantitative trading".

Check out his web site:
http://www.epchan.com/

You get my point. If you still don't get my point, compare those three web sites to FAP TURBO:
http://www.fapturbo.com/

Bottom line: the crappier they are, the less they're trying to sell you stuff, and the less they want to sell you stuff, the more you can trust them.

 

[Yamato]

drawdowns destabilize you and have ripple effects

Any type of drawdowns destabilize you, financial ones or like meeting assholes at work, riding a cab, or a neighbour. I have had a bad drawdown on Friday (as said in previous posts: cab driver, work frustrations, etc.) and today I am still destabilized by it, I can feel it. That in turn made me look for rewards in trading, and today I am allowing the CL to trade, which has a bigger drawdown. If I get lucky one drawdown will be compensated by a gain. But if I am not lucky, there will be a ripple effect, and a drawdown in my daily life may cause a financial disaster. It wouldn't be the first time and it would happen for the same reasons as before.

To make things worse, I met my boss, usually nice to me, and I could tell he wasn't nice, which means he's also in a bad mood. And this makes things worse.

I should be able to withstand drawdowns in one field without destabilizing other fields.

On the other hand, I am "only" increasing my overall potential drawdown by 3000 dollars. The best CL system has lost 2000 recently, and if it doesn't exceed its drawdown, it will soon make money. If it does, I will be able to trade it from here on along with the others, and as capital will quickly increase, it will decrease the relative size of that potential drawdown of 6000. The bigger the capital, the more prepared I will be for that 6000 or higher drawdown. If it happened immediately, it would pretty much kill me. But if it waits even just 1 week to happen, I will be ok, because, instead of having 14k, I should have 16k.

However, my daily frustrations have caused me to be in a rush to make money and be gratified by the only thing available: trading. This is certainly not good. Pushing your luck in your risk management because you're frustrated is not good. On the other hand, I am happy with pushing my luck only this far, and the more time will go by, the more "this far" will be ok. For example, beyond 20k, these contracts would be reasonable, and I could be beyond 20k in just two weeks.

 

[Yamato]

more thinking about my systems' drawdown

It's only fair that just as losses were an obsession in my discretionary trading before I quit, now the systems' drawdown (which is the same as losses) are an obsession in my automated trading. And maybe that's why I failed as a discretiionary trader: because I could never see my losses as part of a natural drawdown, and instead I took them personally, each one as a personal failure.

Now it's easier to rationally accept my losses, as part of a natural drawdown. It is so, because I have the back-testing and forward-testing results, and they constantly tell me that every once in a while there will be a loss followed by more wins. The loss is followed by wins because it does not affect the system emotionally and doesn't cause it to modify the strategy. With my discretionary trading instead, losses affected me emotionally, made me upset and caused me to alter my strategy, and would therefore be followed by even bigger losses. The interesting thing is that the same happened with wins, which made me euphoric and overconfident and, because of that, altered my strategy and were followed, once again, by losses and, what's worse, losses that were out of control and blew out my account. This was the pattern:

1) loss
2) get upset, revenge trading... strategy altered (bigger leverage, more risk, less patience)
3) bigger loss ensues (because of leverage)
4) blow out account

1) win
2) get confident, euphoric... strategy altered (less patience)
3) loss ensues (see above for continuation)

With automated trading, these problems are all behind me. After each loss, the strategy stays exactly the same.

Now, back to my drawdown obsession. I tried to make things simpler and summarize them, and here's the situation.

The premise is that I want to diversify, because it's good in itself and it reduces the drawdown. Some systems are better than others, but I want to use them all. Of course, if I can only use half of them, I will use the best ones.

The general trend, is that if I trade a large number of systems, including the ones on the CL, the drawdown increases and so does the profit. But as I said, such a drawdown will increase less than if I trade more contracts on just one system, no matter how good that system is. Obviously if that system never failed, it would make sense to just trade that system and forever increase the number of contracts traded, but that's far from being the case, even for the best system.

Now, here comes yet another simplification of the drawdown situation, this time in terms of monthly gain / drawdown. This is the ultimate simplification of the drawdown tendencies of my systems (and maybe every system).

THIS IS IT

Given my preference for diversification and all other parameters being optimal, the more drawdown I accept, the more it will make each month.

Examples.

Say I trade the best combination of 20 systems, with a total of 30 contracts. I will potentially have... say a maximum drawdown that will last a month and will cause me a potential loss of 5000 dollars, and it will happen one month per year. On the other 11 months I will make 5000 per month. This is more or less the situation.

Now, say I trade a less strict selection of systems with more contracts. I would have a drawdown of 10k, that will happen for one month, and I would make 10k every month for the rest of the year.

Now, all this would not be an issue and I would not have brought it up IF I needed more capital to trade the 10k, and couldn't trade it now. But the dilemma is: since I could start immediately trading the 10k system, which is obviously better (since it will make me 10k per month rather than 5k per month), what's really there to stop me from doing what the most convenient thing is?

The only thing stopping me is that if I incur the drawdown right after I start, I go broke (I have 14k now). If I don't and I take this gamble, then at the end of the year I will have 110k rather than just 55k.

EUREKA!

But I guess I can already see the answer to my own question (it's very useful to think out loud as i did here). The answer is that I should only start trading the 10k as soon as the 5k will bring me to a point where the 10k drawdown won't blow out my account and won't affect my ability to keep on trading. Right. Because starting off with the 5k won't keep me from moving on to the 10k as soon as I have 20k.

So that my equity curve (provided I don't encounter any drawdown) would look like this, month by month:

14k (using 5k combination of sytems/contracts)
20k
25k (I can start trading the 10k combination)
35k
45k (DRAWDOWN)
35k

By using the 10k combination right from the start I simply run the risk of blowing out my account, and gain only one month if I get lucky and the drawdown doesn't happen, since I'll make 10k in one month, rather than in 2 months (which the 5k system would require).

Is it worth it to risk blowing out my account (10% probability of it happening) just in order to anticipate retirement by one month? The last time by pushing my risk and trying to anticipate retirement, I blew out my account and postponed it by one year.

MEMO to myself:
Disable the goddamn CL_ID future until I have enough capital to comfortably withstand its drawdown, which is about 20k.

I guess the reasoning is pretty simple here, as they point out on wikipedia on the kelly criterion entry:
http://en.wikipedia.org/wiki/Kelly_criterion

A natural assumption is that taking more risk increases the probability of both very good and very bad outcomes. One of the most important ideas in Kelly is that betting more than the Kelly amount decreases the probability of very good results, while still increasing the probability of very bad results. Since in reality we seldom know the precise probabilities and payoffs, and since overbetting is worse than underbetting, it makes sense to err on the side of caution and bet less than the Kelly amount.

If I exceed in my bet, I will risk blowing out. If I put too little, I will simply risk not maximizing my returns, but certainly I will not risk blowing out my account. As a consequence, I should try to be on the safe side. In a way, I should try to be as much on the safe side as possible, and only try to increase my equity as slowly as I'll need the money. How much money do I need right now? None, because I have a job! So why I am overbetting and hoping to get lucky? I guess it's the same restlessness and thirst for action that lead me to blowing out my account over thirty times as a discretionary trader.

 

[Adamus]

Re: drawdowns destabilize you and have ripple effects

I just read somewhere and I think it was one of your quotes here where somebody says "no system is fully automated - there is always a discretionary part: whether you trade or not, how much leverage you use....." or something like that. Sounds like you're proving that.

Another quote, about luck, out of MWs: "You work hard, you make your own luck". That was Tom Baldwin. Not a system trader, but that is my favourite interview in the whole 2 books.

 

[Yamato]

self-control update

This is tragic. I came home and the CL system, sure enough, was incurring one of its worst losses in weeks. That system is now at its worst in months.

But that's not it. I wasn't prepared for this loss (now certainly I won't disable it), so I did the usual: discretionary trading and interfering with system. I doubled up and all that. Consequence: I lost 300 more than the system lost.

Since the compulsive trading wasn't as bad as usual (even though really bad for an automated trader), I didn't rate it as a 10, but only as a "5" self-control issue (the maximum is 10, whereas all other values are on a scale of 0 to 1).



The trouble seems to be the usual: I take losses personally even if they are caused by a system, and even if they're within its drawdown. Especially the big ones like today. I was going to disable it, as I had written in the post above, because I knew that its losses were too big. Now I can't disable it anymore, because it would not make sense to only have it enabled during its losses. You can't just disable a system as soon as you incur a loss, or you'll miss all the wins.

So I am stuck with this big drawdown system, which trades twice a week on average, and can either cause a 2000 dollar win or a 2000 dollar loss (on average the wins are bigger than the losses, and they're more frequent). Now it's at its worst, and hopefully it won't fail me again in the next few days.

I am really pissed off about today's loss, but in a certain way, I've still got the situation under control, because my discretionary trading fortunately only caused me an extra loss of 250 dollars, rather than the potential disaster of wiping out my account.

Anyway, hopefully I'll stick around long enough with my capital to reap the benefits of what Larry Hite's quote talks about. Hopefully my systems will run long enough to see profit happen.

Hopefully I'll see some profit from the other systems in the next 24 hours, or I'll start feeling pretty depressed. This CL system was the second best one I had. It didn't incur such a big drawdown since October. Since I started forward-testing this system, this is its second worst drawdown. The worst one was 5000. This time we've already exceed 3000. From this point this system could pretty much blow out my account only if doubled its worst (forward-testing) drawdown, and lost another 7000. It would have seemed impossible this morning, when I enabled it, but after seeing it take a 1700 dollars loss, it doesn't seem that impossible anymore.

I really hope I'll be too busy in the future to suffer from the systems' losses like today (and be driven to trade discretionary to make it back), and too busy to fantasize about stellar performances and push my risk management to dangerous levels by allowing trading by systems that can potentially blow out my account by slightly exceeding their biggest drawdown, like I did this time with this CL system. In the weekend I felt restless, and I felt the need to push my risks higher so I'd make money a little faster. And here I am: -2000.

And now I'll go to smoke my last cigarette, which I anticipated on my excel table as another 0.5 off my self-control daily ratings.

It's incredible how frustrated I became in just 24 hours and all due to my overachieving tendencies. Instead of trying to overachieve in terms of risk control, I underachieved at risk control by trying to increase my potential gains. CL_ID is indeed my second best system in terms of ROA and my number one system in terms of absolute gains, but I still sucked. Once again I ****ed up. All thanks to myself. My inner urges. My inner self-destructive overachieving compulsive tendencies...

Try to realize it's all within yourself
No one else can make you change

May this crappy song hypnotize me and keep me hypnotized until the drawdown is over - hopefully it is already over. So far the fear of losing has lead me to trade discretionary and lose another 300. Same old story. I don't feel good, I don't feel good, I don't feel good...

 

[Yamato]

sid and nancy

I am watching a movie, to stay distracted from trading and drawdown.

http://www.letmewatchthis.com/watch-3581-Sid-and-Nancy

It's quite interesting. As I watch, I do research. Previously, months ago, I had watched the documentary on Joe Strummer ("The Future Is Unwritten"). The Sex Pistols like The Clash couldn't play for ****, but were hugely successful. They lasted even less, and with Sid Vicious only stayed with them for a year, before the breakup. It's amazing how famous they became for doing nothing good and for so little time, particularly Sid Vicious: one year of this crap and he got so famous. The power of... I don't know. I don't know how this could ever happen. Even madonna is more talented than they are.

Anyway, this is all right:

And these movies on these worthless musicians (maybe "the power of content", maybe they had content) are quite good: the documentary on Joe Strummer, despite his music sucking so bad, makes his story very interesting. Also Sid & Nancy is good.

However, from wikipedia, here's John Lydon's opinion:

Lydon commented on the movie in his 1994 autobiography, Rotten: No Irish, No Blacks, No Dogs:

"I cannot understand why anyone would want to put out a movie like Sid and Nancy and not bother to speak to me; Alex Cox, the director, didn’t. He used as his point of reference - of all the people on this earth - Joe Strummer! That guttural singer from The Clash? What the **** did he know about Sid and Nancy? That’s probably all he could find, which was really scraping the bottom of the barrel. The only time Alex Cox made any approach toward me was when he sent the chap who was playing me over to New York where I was. This actor told me he wanted to talk about the script. During the two days he was there, he told me that the film had already been completed. The whole thing was a sham. It was a ploy to get my name used in connection with the film, in order to support it."
"To me this movie is the lowest form of life. I honestly believe that it celebrates heroin addiction. It definitely glorifies it at the end when that stupid taxi drives off into the sky. That's such nonsense. The squalid New York hotel scenes were fine, except they needed to be even more squalid. All of the scenes in London with the Pistols were nonsense. None bore any sense of reality. The chap who played Sid, Gary Oldman, I thought was quite good. But even he only played the stage persona as opposed to the real person. I don’t consider that Gary Oldman's fault because he’s a bloody good actor. If only he had the opportunity to speak to someone who knew the man. I don’t think they ever had the intent to research properly in order to make a seriously accurate movie. It was all just for money, wasn't it? To humiliate somebody’s life like that - and very successfully - was very annoying to me. The final irony is that I still get asked questions about it. I have to explain that it's all wrong. It was all someone else’s ****ing fantasy, some Oxford graduate who missed the punk rock era. The *******."
"When I got back to London, they invited me to a screening. So I went to see it and was utterly appalled. I told Alex Cox, which was the first time I met him, that he should be shot, and he was quite lucky I didn't shoot him. I still hold him in the lowest light. Will the real Sid please stand up?"
"As for how I was portrayed, well, there's no offense in that. It was so off and ridiculous. It was absurd. Champagne and baked beans for breakfast? Sorry. I don't drink champagne. He didn't even speak like me. He had a Scouse accent. Worse, there's a slur implied in the movie that I was jealous of Nancy, which I find particularly loathsome. There is that implication that I feel was definitely put there. I guess that’s Alex Cox showing his middle class twittery. It’s all too glib, it’s all too easy."[11]

 

[Yamato]

Going to sleep in heaven, going to sleep late I mean. After finishing that movie about crappy music, I had to listen to something pleasant.

"I'll find my way through night and day...". This is music, poetry.

Not the crap of the people above.

I will go to sleep. It was a hard day, all thanks to my own enemies from within: impatience, mainly. What awaits me now is just one big question mark: after losing 3000, will the CL_ID lose more and even exceed its maximum drawdown, dragging me down to blowing out my account? We'll know the answer within a couple of weeks. I can even take another 2000 dollars loss, but not two certainly.

 

[Yamato]

Not feeling good. I am feeling restless, nervous, fearful. Obviously I am overbetting. When you're constantly afraid that something will go wrong... on the other hand, if just one trade went right on the CL_ID, I could trade it from here on without worrying about anything else, since its ratio of wins to losses is about 2 wins every one loss. This is a gamble, that will keep me worried for a whole two weeks, which is the time the CL_ID will take to trade 3 more times, during which I should get about 2 wins and one loss, especially considering the last 3 trades were all losses.

Luckily I am at work, and will be for the next two weeks, so the only danger of interfering is for the hours I will be at home, from 16.00 to 23.00 (CET), which is still a lot of time.

 

[Yamato]

if we go up today, we'll go up/down tomorrow/tonight...

I was thinking of this yesterday. That friend of mine, who once, a couple of weeks ago, told me that OIL could not go higher than 83, because of some OPEC reason, whatever it is. Anyway, it partly affected my choices of yesterday of doubling up my short position and so on. But here's what I should have been aware and should have told this guy, fundamental analyst moron: how do you know your predictions are right or even likely to be right? How can you prove it?

I would have gotten no answer. Because his answer are neither back-tested, nor, in his case, backed by previous successful choices. Fundamental analysts should not even be listened to.

But this is not it: this applies also to all technical analysts, who didn't back-test their theories about the market.

And now I finally get to what I wanted to talk about: the technical theories about the market. If I look at all my systems, and at what theories they're based on, theories all verified with back-testing, I see that mainly there's two ideas:

1) if we go up now, we'll go up later (trend)
2) if we go up now, we'll go down later (reversal)

I've also got systems based on the opening gap theory, which is another thing. But all systems have some features based on these two concepts: continuation and reversal. And generally I can define moments (the difference is mainly that of day vs night) of the day where one thing or the other is true: if we have gone up we will continue to go up, and if we have gone up we will start going down.

Let's look at all the categories of my systems, in (decreasing) order by profit produced, and how they relate to these two different phenomena of rise after rise vs fall after rise, which is another way of saying trend vs reversal. When does trend take place and when does the reversal take place?

WITH ID trend: during the day, whatever the trend it continues
ON bounce: at night, whatever the trend, it reverses
overstretched: after an exaggerated trend, it reverses
Weekday Bias: in certain days of the week, the trend moves faster
Volatility Breakout: when it speeds up, the trend continues
Opening Gap: when trend is in favor, gaps get filled

In other words, as far as my systems, 4 groups out of 6 groups, are based totally or at least partially, on the concept of "trend", a term I never liked. What it basically means is that a move will be followed by another move in the same direction.

The other 2 groups of systems are based on the opposite concept, "reversal": the concept that a move will be followed by another move in the opposite direction. That tends to happen during the night and when the previous move was too long, or, as I call it, "overstretched". For example, if in one day the CL moves by 3 points, that definitely qualifies as "overstretched" to me, and that's where the "trend" principle stops working, and the "reversal" principle starts working. That's what statistics say as far as my futures. But I would be quite confident that it happens in every market, even those I don't know.

 

[Yamato]

self-control update

Ok, finally home. Plenty of trades open. Some of them making money. I am not touching anything. Still... feel bored, restless. Maybe I will start swimming at the swimming pool. But first I want to see some real profit, like 2000 dollars more on my account. Otherwise I don't feel good about spending money for the cab, swimming pool ticket and so on. I am punishing myself until my systems make some money. I will force myself into lethargy, to save money.

Today it might be a very good day in terms of self-control, partly simply because i didn't meet any challenges to my self-control and partly because of my acquired good habits.

The good habits are: I've pretty much acquired, since I've started this monitoring, the good habit of not scratching my head. Also, I've quit altogether discretionary trading, except for rare relapses, like yesterday, when faced with unexpected drawdowns. Also, rarer eating binges.

The challenges I didn't meet are things such as: boss was in a good mood and was kind to me and didn't even send me any emails with work to do (I was on my own all day long). Taxi drivers on the way to work and on the way back were both very honest and friendly. No conflicts with people met at work, and actually good interaction with those I met. This is pretty much it. Oh, and I didn't lose any money with my systems today. I am breaking even right now. So these are things that today didn't test me, and as a consequence I didn't feel the need for any urges to smoke/eat/scratch... to vent out my frustration, since there was no frustration. So far this is how my self-control table and chart look like:



Now I am faced with a major problem: finding something to do for the next few hours. Otherwise boredom will lead to frustration. Frustration will lead to urges to engage in negative activities (scratching, smoking, eating, trading), and in turn those negative activities will cause me more frustrations and more urges... until death.

 

[Yamato]

http://en.wikipedia.org/wiki/The_500_Greatest_Songs_of_All_Time
http://en.wikipedia.org/wiki/Like_a_Rolling_Stone

http://en.wikipedia.org/wiki/Bob_Dylan

 

[Adamus]

Re: self-control update

Oh, and I didn't lose any money with my systems today. I am breaking even right now.

I have to tell you this: you won't be break-even until you make up the money you lost with that ****-up yesterday.

You need to get the first chapter of "Disciplined Trader" tatooed across your forehead.

Otherwise, well done. You're trading. Possibly the start of your new career. I wish I was there too.