Friday, November 20, 2009

Las Vegas Trader's Expo

I went to a session by longtime traders John Carter, Hubert Senters and a bondtrader. I like these guys as they work well together and have the most successful trading business on the web at www.tradethemarkets.com . They charge $3000 for a 3 day seminar and $1500 for the DVDs. They also charge $500 a month and have over 500 in their chat room every morning. A multi-million dollar business + trading. They do it well.

The bond trader had trouble getting his connection to the internet. So Hubert said, 'here use mine'. The bond trader moved over to Hubert's laptop and entered a bond trade right after the open. The trade immediately went south with about a $500 loss on one contract and there was a question from the audience. "What exactly were you thinking when you entered that trade?"

The bond trader (who is probably not so much a friend any more) thoughtfully replied:

"Well.... I was thinking.... this is Hubert's account so 'WHAT THE HELL' !!!"

The auditorium broke the morning stillness with complete derision and laughter. The comment summed up most of the presentations and all of the exhibits this year.

With that I decided to cut my time at Trader'sExpo short and head home.

Friday, October 30, 2009

Trading and John Boyd

From an article published in the September, 2002 issue of SFO magazine.

When Linda [Raschke] needed a model for guiding her recent training project for traders, she did not turn to the fields of finance or psychology. Rather, she turned to the military and the writings of Colonel John R. Boyd.
============ From the article:

Col. Boyd of the Air Force was a fighter pilot known for his challenge to fellow airmen. He allowed himself to be placed in a position of tactical disadvantage in an airfight and promised that, within 40 seconds, he would be on his adversary's tail, ready for the kill. Col. Boyd was never known to have lost this bet, earning him the nickname "Forty Second" Boyd.

During his career, Col. Boyd developed his approach to airborne combat into a comprehensive philosophy of military strategy. He described combat decision-making as a function of Observing, Orienting , Deciding, and Acting (OODA). These processes form loops, with new actions providing fresh observations and requiring renewed efforts at orienting and responding. The goal of military training, Boyd stressed, is to accelerate OODA loops, becoming more efficient than the enemy.

Trading futures and options requires especially tight OODA loops. There is always new action to Observe across multiple markets and indicators. This requires an ability to rapidly Orient and assess whether we are in trending or non-trending markets, volatile conditions or non-volatile, near support/resistance or away from it, etc. From our Orientation, we must rapidly create and update trading Decisions and then find the will and clarity to Act on these plans.

Ask yourself: Am I preparing myself to trade like Col. Boyd? Am I training myself to observe my market data, size up the action, craft a trading plan, and execute it all within a matter of seconds?

A glance through the Ranger Handbook offers some helpful clues as to how this might be accomplished. Much of the book is taken up with descriptions of drills and procedures, each broken down into easily identifiable components. By breaking complex processes down into clear components that can be reviewed and rehearsed, the Army ensures that they are in "an instinctive and familiar way of thinking for a platoon leader."

Making complex skills instinctive and familiar is the key to tightening OODA loops. Col. Boyd could never have overcome his adversaries in forty seconds if he had to consciously analyze and plan each of his maneuvers. It was because these maneuvers were overlearned to the point of becoming automatic that he was able to operate within his opponent's mindset.

Elite traders of futures and options also need to make complex decisions within a time frame measured in seconds. This can only happen if they have broken their trading down into easily identifiable processes that can then be rehearsed under pressure until they are second nature. The process of development being followed in Linda's training project can be described in three stages:

Skill – A trading skill or pattern to trade is taught to the trader or identified by the trader as having profit potential. This corresponds to the Observe phase in Boyd's OODA loop.

Drill – The trading skill or pattern is rehearsed, first via walk-throughs (simulated trades on historical data) and then by paper trading live markets. The trader learns to recognize opportunities to utilize the skills and patterns as trading conditions unfold and formulate trading plans based upon the incoming data. This corresponds to the Orient and Decide phases of Boyd's loop.

Fulfill – The trader's development culminates in the fulfillment of actual trades in real time utilizing the entry, exit, and money management skills that have been rehearsed. This provides practice in "pulling the trigger" on one's decisions: the Act phase of Boyd's loop.

Thursday, October 29, 2009

Rydex Asset Allocation Trading System

I have 3 trading systems that I have used for the past 2 years that are very solid but also very short term.

With fixed income returns down to 1-3% I need something that will give me a 'modest' risk return of 8% a year.

While searching for a longer term system I found http://www.tradingmutualfunds.com/site/791078/page/891334

They move money around using a very simple method of active asset allocation and use Rydex family of funds to keep costs to a minimum.

Searching for rules to trade such a switching system I found an old AIQ Opening Bell Newsletter from October 2002 in an interview of Jay Kaeppel who described a relative strength mutual fund trading system.

"The Relative Strength System buys and holds the five Fidelity Select funds at the top of the Relative Strength Long-Term Report (with the caveat that the low for the most recent week must be above the 28-week EMA). A fund is held until it registers a weekly low that is below the 28-week EMA at the end of the previous week. Then it is sold and replaced with a new fund from the Relative Strength Report."

This approach moves too slowly for me although I agreed with the general approach and goals.

In the August 2001 issue of Active Trader magazine there was an excellent article on "Dynamic Asset Allocation" by Michael De La Maza where he shows how to combine short-term risk management with a long-term trading horizon. This article uses the Sharpe ratio to allocate capital among a set of mutual funds and the re-balancing is done daily (what I want).

Saturday, May 9, 2009

Learning Matlab: Installation

After reading Ernie Chan's "Quantitative Trading" I became interested in MatLab as a way to develop new trading systems to diversify my trading approaches. Today I have a java application that reads in InteractiveBroker statements and does simple MonteCarlo tests. I would like to move all of these simple risk measurement functions to MatLab.

Priced at $1000 MatLab seemed to need more consideration. An open source alternative called Octave looked like it would do everything I want and cost nothing. The Octave developers have worked to make

Octave completely equilivent to MatLab. It seems, from reading forum posts, that Octave is almost compatible and that most script files developed in MatLab will run on Octave. But, not all Octave scripts will run on MatLab because Octave has many additional commands that do not exist in MatLab. Octave has also been reported to be much slower than MatLab, for me this is not important.

I will use Ubuntu as all new software development is free of anything related to Microsoft. This is mostly because of an intense dislike for Windows anything. The decision is made easier as Ubuntu runs my InteractiveBroker and custom trading apps with no problem.

Step 1: I downloaded "Octave", "gnuplot" and 'QtOctave' using the Ubuntu Package Manager and had them running within minutes without a single configuration change. Very nice.

Step 2: Study - I ordered 'MatLab Dymistified' from Amazon (because it was the cheapest MatLab book...). Then discovered the very complete Octave tutorial at: http://wiki.aims.ac.za/mediawiki/index.php/Octave:Getting_started

Save yourself some money - the free tutorial is better than the book....

Step 3: Script Compatibility - try some of the scripts from Chan's book and in the public domain....

Friday, May 1, 2009

Irrational Behavior in the Markets

Prof. Daniel Kahneman received a Nobel Prize in Economics for his work on irrational decision making. I have seen him in interviews tell his often repeated story of the 'map':


"But the story Kahneman recalls when asked about the economic models at the root of the current financial crisis is actually taken from history, not an experiment. It concerns a group of Swiss soldiers who set out on a long navigation exercise in the Alps. The weather was severe and they got lost. After several days, with their desperation mounting, one of the men suddenly realized he had a map of the region.

They followed the map and managed to reach a town. When they returned to base and their commanding officer asked how they had made their way back, they replied, "We suddenly found a map." The officer looked at the map and said, "You found a map, all right, but it's not of the Alps, it's of the Pyrenees."

According to Kahneman, the moral of the story is that some of our economic models, perhaps those of the investment world, are worthless. But individual investors need security - maps of the Pyrenees - even if they are, in effect, worthless."

Ok, fine. but there must be some way to measure the relative worthlessness of a economic model.... If there was you would think that a Nobel prize winner would know how to do so.


You can read a very good interview with Kahneman at: http://www.haaretz.com/hasen/spages/1077151.html

Thursday, April 30, 2009

Ubuntu as good as Mac or Windows 7?

A lot of articles like this one since Ubuntu's new release this week. The fact that Linux is being compared directly as a desktop competitor is a great success for a product that is free. I am using Ubuntu more and more and I am very pleased with the ability to download software that doesn't cost me.

http://news.cnet.com/ubuntu-9.04-as-slick-as-windows-7-mac-os-x/

Sunday, April 26, 2009

LTCM 10 Years Later from an Insider

Eric Rosenfeld who was part of the core LTCM team gave this very interesting presentation at MIT on LTCM looking back 10 years.

http://financeprofessorblog.blogspot.com/2009/04/long-term-capital-management-look-back.html

Plenty of different information than what was reported in books and documentaries.

Wednesday, April 22, 2009

"Quantitative Trading: How to Build Your Own Algorithmic Trading Business" by Ernest P. Chan

About 180 pages that is an easy read for anyone with some trading knowledge.  Chan has a great background and a lot of experience that show throughout the book.

Chan uses MATLAB examples to show how software tools can be used to backtest and automate trading strategies.

He also has several examples including a 'Mean-Reverting Model' and a 'Pair Trading' system.  Both have very good Sharpe ratios and appear very straightforward.

Chan's chapter on backtesting and his use of MATLAB for measuring risk and leverage were also very interesting.

My takeaway from the book includes:

1.  I will look into Octave, a MATLAB clone, to see if I can adopt it instead of writing all of my own backtesting software from scratch.

2.  I am always looking for another system to complement what I am doing today.  I have looked at 'Pair Trading' in the past and will use Octave and Chan's example to revisit my previous work.

I liked the book and can easily recommend it.  I can also recommend Chan's blog at http://epchan.blogspot.com/.


Tuesday, April 21, 2009

Google Announces O3D

Google announced APIs and examples of their Open 3D plug-in that will allow 3D rendering within any browser.  OS and browser independent.

Watch the video - very nice.  Also the example page has a lot of good examples that you would expect only on a compiled software application.

http://code.google.com/apis/o3d/

Nice Story

This guy Schrenker ran a ponzi hedge fund and then tried to fake his own death by parachuting out of a plan on autopilot.  An Air Force F-16 joined on the plane and said nobody was inside and the door was ajar.  Now the guys defense is that this would take too much 'planning' and he is not capable of it.  As one poster said, "Gee it is lucky his parachute came down next to where he stored his motorcycle..."  And now he is doing national interviewes on TV??? 

==============
Schrenker told "GMA" that there would be too much planning involved in faking his own death.

"Let's step back and think about what someone would have to do if they wanted to fake their own death," Schrenker said in a jailhouse telephone interview with "Good Morning America's" Chris Cuomo. "They would have to establish a new identity. They would have to have a well-funded bank account, a place where they would live. And I did nothing like that."

Schrenker, 38, said that he'd survived an actual accident Jan. 11 by parachuting to safety after his plane hit turbulence and the oxygen system began to fail.

http://dealbreaker.com/2009/04/wasnt-me-babe.php

Saturday, January 31, 2009

Fox in the Hen House

From the Financial Times this article... How can the Fed be sure that any hedge fund borrowing money is solvent and will be able to repay? There seems to be no regret to the hedge fund in borrowing money and if plans do not go well going they go out of business. Tax payer pays the build and carries all of the risk....
Hedge funds gain access to $200bn Fed aid

By Krishna Guha in Washington

Published: December 20 2008 05:01 | Last updated: December 20 2008 05:01

Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit.

The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.

Boyd and the Trading Software Application

From "Boyd: The Fighter Pilot Who Changed the Art of War" by robert Coram:

"Colonel Boyd's development of the theory of maneuver warfare began, not with ground battles, but with a study of some mock air-to-air combat exercises {conducted at Nellis Air Force Base in 1974}that led him back to the study of air-to-air combat during the Korean war. American aviators were very successful that conflict. They achieved a 10:1 kill ratio over their North Korean and Chinese opponents. Colonel Boyd begain his study the the question: "How and why did they do so well?"

He noted that in several traditional measures of airrcraft performance the principal Communist fighter, the MIG-15, was fster, and it had a better sustained turn rate. But in two less obvious measures of aircraft performance, the F-86 was much superior to the MIG. First, the pilot could see out much better, while the MIG's flaired canopy made it difficult to see out. Second, the F-86 had high-powered and highly effective hydraulic controls and the MIG did not. This meant that while the MIG could do many individual actions--including turn, climb, and accelerate-better than the F-86, the F-86 could transition from one action to another much more quickly than the MIG.

Using these two superiorities, the American pilots developed a tactical approach that forced the MIG into a series of actions. Each time the action changed, the F-86 gained a time advantage, because the f-86 pilot could see more quickly how the situation had changed and he could also make his aircraft shift more quickly to a new action. With each change, the MIG's actions became more inappropriate, until they were so inappropriate that the MIG gave the F-86 a good firing opportunity. Often, it appeared the MIG pilot realised what was happening to him and panicked, which made the American pilot's job all the easier. "

====
If speed of executtion of the OODA loop how can these lessons be applied to developing a true trading application? First start with the network and the connection to the exchange. Then look at the software application itself. eSignal, Tradestation and other representations of 'charting applications' are more like the MIG aircraft in the above descriptions than a modern F-16 with its clear canopy. If you have used any of these legacy applications you can see they suffer from a software architecture that dates back to the late 1980's without improvement or innovation. Completely bloated database model, slow rendering of screen views that do not take advantage of graphic card technology that is now common to every trading computer, outdated SDI (single document interface) and MDI (multiple document interface) designed for word processors and spreadsheests, and the need to be 'generalized' for all markets rendering them a disadvantage for all but the slowest trading methods.

What then would a next generation trading application look like?

Thursday, January 29, 2009

Risk Discussed by Kahneman and Taleb

The panel discussion by Kahneman and Taleb was worth watching two times. Taleb has written 'Black Swan' and 'Fooled by Randomness' is a recognized expert on chaos and risk management. Kahneman holds a Noble prize in economics awarded in 2002 for his work on 'Prospect Theory' having to do with decision making between alternatives that involve risk. To watch a panel discussion between both of these men was a real pleasure.

http://paul.kedrosky.com/archives/2009/01/28/daniel_kahneman.html

Tuesday, January 27, 2009

John Boyd & Fighter Pilot Trading Introduction

Colonel John Boyd (1927-97) was an Air Force fighter pilot who changed the way fighters are designed and evaluated and changed military strategy. As a fighter pilot he focused on air combat tactics. He developed the 'Energy-Maneuverability' theory that helps to evaluate one aircraft against another and the benefits of one air combat maneuver against another. When the Pentagon was trying to build heavier and more powerful fighter aircraft he showed the need for a small, lightweight, highly maneuverable aircraft and the F-16 was born. His theories also helped to change land combat as well. In the 1970's he worked with the Marine Corp, already a 'first to strike' mental model to an even faster and more mobile fighting force.

Boyd developed the OODA (Observe, Orient, Decide, Act) Loop where 'time is the dominant parameter'. The fighter with the fastest OODA loop execution will, all things being equal, win.

For a trader the OODA loop can be an important tool. If you can execute your OODA loop faster than the market sentiment you will be very successful. If the market is turning faster than you; you will lose.

Friday, January 9, 2009

Opening Range Breakout

This weekend I was doing some housecleaning and when through boxes of Futures and Stock & Commodities magazine. I scanned a few articles I thought were interesting and tossed the rest into the recycle bin. One of the article subjects that appeared again and again was 'opening range breakout'. I remember a forum post about Tony Crabel's "Day Trading with Short Term Price Patterns & Opening Range Breakout" going for over $1000 on eBay, somebody still thought OBR has some value. The rest of the weekend was spent looking into OBR to see if I could add another system to my small 'watch list'.

Without paying for the rare book most(all?) of the content from the book seems to be available elsewhere on the web. Stock and Commodities has an 8 article series by Crabel that is very complete. http://search.store.yahoo.net/cgi-bin/nsearch?unique=25de0&catalog=traderscom
However the best overview of Crabel's approach that I was able to find is the INO recording of a Crabel seminar in the 1990's, the INO archive has the pdf handout which contains a lot of data on the merits of combining 2 different uncorrelated systems and then trading those 2 systems across 30 futures markets. The sound quality of the recording is terrible but well worth the effort in trying to understand OBR.

The most recent advocate for OBR is Mark Fisher founder of MBF Clearing Corp and author of "The Logic Trader". http://www.mbfcc.com/logicaltrader.html A good interview of Fisher can be found at http://www.thelogicaltrader.net/FuturesMagMarkFisherprofile.pdf The real find on the web is the 3 day seminar by Fisher done several years ago that can be found at: http://www.traderslaboratory.com/forums/34/mark-fishers-acd-trading-method-seminar-3367-5.html

Results, the OBR weekend was interesting. The OBR concept seems very dated in a 24/7 trading world when the significance of the first minutes of the trading day is much less important than in the 90's. Fisher's method and especially the seminar videos are great and well worth the time but nothing in Crabel's works or by Fisher will produce a system by itself. Both authors provide a lot of valuable information that can be used as a base for a system or to acquire a better understanding of the first hour of trading.