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. "

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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.