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Hi superfragalist,
I am still working through this, chewing on the many interesting bits
and pieces in here. Some things I don't agree with, some I would
change but for the most part, this is very informative, very good and
well worth applying in trading. The one thing I would want to
recommend is that you be less biased towards long and equally prone to
keeping short positions! With that out of the way, I most of all
appreciate the fact, pointed out here, that this is what you do for a
living! Now, really as a matter of interest, but also to get some
practical guidance, could you please ellaborate on the following points:
- Do you think markets have become easier or more difficult to trade?
Given the 'online', real time environment we operate in coupled with
powerful software such as Metastock, trading should be easier. But is
this offset by an increase in volatility? Or whatever?
- How much time do you spend analysing the markets. Is it a 24/7
thing, two hours a week, one day a month? Do you spend more time when
you make/loose money, in up- or downtrends or at say month end.
- How long do you keep a position? Of course, 'it depends', but I
once talked to a trader, I guess in a similar situation as you, who
would be very uncomfortable to keep something for more than say two or
three days. He knew this and easily shared it. So if you have
something there, let us know.
Thanks a lot for your inputs.
Regards
MG Ferreira
TsaTsa EOD Programmer and trading model builder
http://www.ferra4models.com
http://fun.ferra4models.com
--- In equismetastock@xxxxxxxxxxxxxxx, superfragalist <no_reply@xxxx>
wrote:
> Good afternoon, MG. Your questions are interesting ones as usual.
>
> Because of your major contributions to the forum, your background and
> your experience, I would like to respond to all of your questions with
> a reasonable amount of detail, which would probably provide more
> energy for further discussions that might benefit others as well as
> ourselves. However, I am somewhat limited in my detail as a result of
> having to respect Roy's newsletter and the people who pay a very
> modest fee to subscribe.
>
> I agree that subjectivity in a trading system is a tricky subject.
> I've always believed that a mechanical system is highly unlikely to be
> traded as a strict mechanical system when that system is in the hands
> of an individual. It's very difficult to remove judgement or emotion
> from someone who is not only executing the system but tracking it's
> performance with their personal funds. Anyone who has the iron will
> and stomach to stick strictly to a mechanical system as the drawdowns
> grow, is someone who has the discipline to trade without such a
> system. I think various research projects by Future's Truth Magazine
> has shown this to probably be true.
>
> On the other hand, mechanical systems make sense for money managers
> with larger amounts of capital and staff resources. The corporate
> structure is usually diversified, disciplined and monitored
> sufficiently to get the best from a mechanical system.
>
> For me, I feel the human mind is the fastest, most flexible CPU there
> is and I don't want to remove it from my decision making even though
> sometimes the human CPU can be significantly disrupted by all kinds of
> events. Unfortunately, I don't see Kalman filters as an indicator of
> how much I should train my neural nets. Everyone in my family thinks
> they're in charge of that task.
>
> In my trading, I look for four kinds of markets: uptrends, downtrends,
> consolidation with leadership in tact and consolidation with rotation.
> Consolidation includes sideways markets, normal pullbacks and various
> other gyrations that aren't trends.
>
> Regardless of the market conditions, I use the same methods for
> finding my prossible trades. Mine is a combination of TA, quants and
> fundementals along with a pure TA exploration that is very effective.
> I don't vary that technique because I haven't found a method that
> produces a better pool of candidates.
>
> The size of the pool of candidates changes as market conditions
> change. In an uptrend, I'll find 50 to 100 trades that look
> reasonable. I have a set of chart rules that I use to evaluate which
> of those candidates I'm willing to take a risk on. My chart rules
> don't change according to market conditions, either.
>
> In a consolidating market with leadership in tact, the pool of
> candidates might shrink to less than half as many as when the uptrend
> is clearly visable. Obviously downtrends stop my long trading and I go
> short. Markets consolidating with rotation, or alternatively that are
> directionless, calls for no trading, or very, very short holding
periods.
>
> How much subjectivity is there in the chart rules? I would say that
> there is little flexibility and subjectivity in creating the pool of
> candidats, but somewhere in the area of 40% in the evaluation of a
> chart as to which of those possible trades to take.
>
> I've used systems testing to create the part of my system that selects
> stocks for inclusion in the pool. I've tested that system in all four
> market conditions and I know the trade statistics that are likely to
> occur in each case. I've developed a method for figuring out which
> market condition exists, and I have a pretty good idea of what to
> expect from the pool based on how I see the market at that moment.
>
> However, when the 40% (plus or minus of course) subjectivity comes
> into the final selection of which stocks to buy, then the systems
> tests are of little value. I've figured out those trading statistics
> by analyzing the final trading results. This gives me feedback on how
> my chart reading rules are working.
>
> I have a standard chart template I use to look at stocks. I only use a
> couple of indicators to confirm what I think I'm seeing. While I don't
> use the indicators as a reason to buy, I sometimes use them as a
> reason not to buy. I'm mostly looking at price volume action, with the
> indicators as a back stop in case I'm reading that wrong.
>
> In addition, to the total number of stocks that look like good trades
> changing according to market conditions, my rules for size, exits and
> stops change also.
>
> If the market is in an uptrend like it was in Nov and Dec of 2005, I
> use longer MA's, loser stops and less rigorous exits. In January I
> tightened the stops and exits and shortened the MAs. In April I didn't
> trade. My holding periods change accordingly as you would expect.
>
> I'm mostly a long only trader. I do short the indexes when I see a
> downtrend, but I'm even more conservative in my shorting. With
> commissions so low and execution times so high, there's little
> economic reason not to be conservative when it so cheap to buy back in
> if you're stopped out too early. It takes some degree of discipline to
> go back to a trade after being stopped out, but my number one rule is
> don't lose money.
>
> I have to live strictly off of the returns on my capital account so
> preservation of my capital account is a rule with zero subjectivity.
>
> A lot of people want to automate the chart reading criteria that I use
> to narrow my lists of trades among the choices I have. I don't think
> that works very well because the subjective evaluation is necessary to
> respond to different market conditions and to consider all of the
> variables and their constraints.
>
> If you read Roy's newsletter you will see how Pareto's principle and
> my education in the mathematics of operations research has shapped
> what I do. I have an explanation in there about why I don't believe
> maximization or minimization despite the high usage of these
> principles in econometrics and production management. (Even an
> excellent, expert, programmer such as yourself would find some
> interesting and new things in there. I do and have increased my code
> library a lot because of it. You would even get a few new systems
> develop ideas out of it.)
>
> I don't optimize much using the systems tester. As I said in my other
> post I optimize mostly to evaluate robustness. I use the systems
> tester as a relative comparison and to figure out how much the trading
> statistics change from one market condition to another.
>
> When I do optimize I optimize the sytem to perform the best in
> uptrends, and then I add rules to restrict it's ability to trade in
> other market conditions.
>
> I do not feel that optimizing or testing across a wide range of market
> conditions as a means of optimization is a good idea. I do test across
> several years to look at overall systems performance, but I also test
> year by year to correlate the performance with the market conditions.
> I also test on various subsets of the universe of stocks. I use in
> sample and out of sample data, especially when I want to evaluate the
> performance of the system in a particular market type, or to determine
> the effectiveness of my filters at preventing trading when the trading
> statistics for that market condition are below my acceptable
thresholds.
>
> I see trading as more about strategy than about indicators so I don't
> waste a lot of time with indicators. Trading to me is the management
> of probabilities. Unfortunately the mathematics of probability is one
> of the hardest math techniques for people to understand. Too many
> people assume they understand probability because they can get a feel
> for a one in ten chance or 40% losers and 60% winners. To me, that's
> not probability, it's performance statistics.
>
> As you know, probability is understanding independent events and
> dependent events and how to determine the possibility of different
> combinations occuring.
>
> Well, this is a long post so I won't go into any more detail. The
> detail and code is in Roy's newsletter, but I hope that this much of a
> discussion has at least been worth the time it takes to read it.
>
> This stuff works for me. Obviously there are thousands of ways to
> trade. I've looked at as many of them as I could, and what I do is the
> best fit for me, and it produces great results on my scale of results
> measurements. My three primary requirements are: don't lose money,
> consistency is more important than big numbers, and make enough to pay
> the bills and increase my capital account to offset inflation and any
> slips in rule number one.
>
> Thanks again for your contributions. While a lot of them are way over
> my head, I'm sure many people appreciate the time and effort it takes
> to post them.
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