Archive for January, 2005
30 Year Track Record
Sometimes an image can create an “aha” moment:
Pull out your HP 12C calculators and do some compounding comparisons with that chart.
Hot Tip Bunk
Here is a great example of the hype all people should avoid:
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THIS COMPANY IS GETTING READY TO EXPLODE
General Electric (GE) and British Petroleum (BP) have entered this $30 Billion market.
Trading under (WYSK)
Current Price: $0.73
Short Term Outlook: EXPLOSIVE
Industry: Energy
Untapped and barely known to investors, this industry has quietly become one of the most vibrant and rapidly growing segments of the alternate energy market.
HERES WHY:
1. The Global Wind Power Market could be worth $30 Billion Dollars a year by 2010.
2. European Wind Energy Association found that by the year 2020, wind could provide 12% of the world electricity supplies, meeting the needs of 600 million European households.
3. Wind energy could supply 20 % of the nation.s electricity, according to Battelle Pacific Northwest Laboratory, a Federal research lab.
4. Wind plants now power the equivalent of 7.5 million average American homes (16 million average European homes) worldwide.
5. Wind is the world’s fastest-growing energy source on a percentage basis, with installed generating capacity increasing by an average 32% annually for the last five years (1998-2002).
6. Blue chip companies world wide are entering the Green Power Generation industry. A few are: General Electric (GE), and British Petroleum (BP).
7. Annual turnover of more than US $5 billion per year.
8. Has been growing at an average rate of 40% annually over the past 5 years.
DON’T LET THE WIND PASS YOU BY ON THIS ONE!
David Harding on Risk
The following excerpt is from an interview with David Harding, Managing Director, Winton Capital Management. David’s firm is primarily trend following based.
HedgeWeek: Are institutional investors prepared to take more risk for higher returns?
David Harding: Sadly, the institutional investors and the consultants who service them are doomed forever to make the same mistakes, they all want results with zero risk. Futures fund management, and hedge fund management in general, is not a traditional asset management business
Gann Hype Continues
A recent opinion on my book said it was good for perhaps the “experienced Gann trader” looking for a new approach. There is a problem with this logic. There is no such thing as an experienced or profitable Gann trader.
A good excerpt on Gann foolishness:
“At heart, Gann’s advanced methods are essentially numerology. Numbers drawn around a “magic square” and various geometrical lines drawn on charts called “Gann Fans” which are drawn at numerologically important angles, cycles, “Gann numbers”, astrology, biblical predictions and even the Great Pyramid of Cheops are part of his wide variety of techniques. Many of these techniques originally worked with little gadgets that mechanically calculated these “important” numbers. Little wheels and puzzles, you would dial up the present market levels in it and the pointer would show the various Gann numbers as output. To the best of my knowledge this represents the first historically documented case of a professional trading guru marketing a dodgy black box trading package. The workings of these devices was obvious enough, you would turn the dial and there is the answer, however how Gann never came up with any sort of evidence as to how he found his algorithms, he seems to be the L. Ron Hubbard of futures trading, presenting his “research” as a fait accompli and never subjecting it to any form of scrutiny.”
Price Momentum
Price momentum in futures markets was analyzed in a recent paper. In the conclusion wise points were raised regarding hedgers:
“The trend-following profits we document are unlikely to be explainable by known risk factors, and are too large to be subsumed by the relatively low transactions costs in futures markets. Our results incorporating past trading volume show that, unlike in the stock market, volume adds little information; that is, when we control for past return momentum, there generally are no significant differences in the realized returns of high vs. low volume commodities. However, when we examine the temporal relations between net long positions by trader type and trading rule indicators, some very interesting findings emerge. We find strong evidence that, in most futures markets, commercial traders are contrarians, and that non-commercial traders use trend-following strategies in the aggregate. While the latter finding was expected, given the prevalence of managed futures funds and commodity pools among reporting noncommercial traders during the 1986-2003 period, the stylized fact that in most markets it is the commercial traders (and not, for the most part, the non-reporting traders) that are contrarians in the aggregate is surprising. While these findings suggest that momentum profits are being driven by hedging pressure, it is not immediately obvious why these large, presumably knowledgeable commercial traders are employing contrarian trading strategies when these strategies are unprofitable on average. Are they rationally reducing their risk in some way by doing so? Or are commercial traders contrarians because they are succumbing to behavioral biases such as loss aversion and/or the tendency to lock-in favorable commodity prices too soon?”
Qian Shen
Department of Economics
Alabama A&M University
Andrew C. Szakmary
Department of Finance
University of Richmond
Subhash C. Sharma
Department of Economics
Southern Illinois University at Carbondale
Catch as Catch Can
Trend following trading can be seen in nature. The predatory nature of a trend following strategy resembles that of a Great White:
“Just as each of us must balance a household budget, predators must balance an energy budget. All of the multitudinous tasks that an organism needs to carry out in order to maintain itself must be accomplished within its energy budget. Everything an animal does is limited by the number of calories it takes in. Thus, it doesn’t make sense for a predator to expend more calories in capturing a prey animal than can be extracted by digesting it. Predators - unlike nations - cannot operate at a deficit, at least not for very long. How do predators decide how to best expend their calories? Do they strive to ‘economize’ - minimize energy expenditures and maximize energy ‘profits’? Why, from a group of similar potential prey organisms, does a predator choose one individual prey animal over another?…There is ample evidence from field studies that predators tend to be opportunistic, but it is a gross oversimplification to suggest that they rely on prey that are sick, injured, or just plain stupid. There are very few ‘free lunches’ in nature…[and] evidence suggests that the White Shark is a cautious and methodical predator that feeds relatively infrequently.”
Reversals
All the volatility in currencies this week was not good for trend followers. But then again, trend followers aim to capture the “meat” of a trend. Trend followers don’t time tops or pick bottoms. If you ever see a trend follower bragging he “timed a top”, question him or her. There is a high degree of probability that individual is not trading as a true systematic trend follower.
Here is a good example of the wrong way to think:
“Exit longs on the exact day of the historic high!”
This is not the talk of a great trend follower.
Not Trend Following
It is a challenge to bring new traders over to a trend following mindset, but it is doubly hard when wrong information on trend following is put forth.
Trend following trading does NOT involve:
1.) Trading spreads.
2.) Profit targets.
3.) Swing trading.
Most all great trend followers are trading the same approaches they were trading 20 years ago. They don’t worry about changing markets as all good trend following systems are built from the ground up to respond to change from the start. Responding to change is inherent in trend following.
If you ever see someone say that trend followers have changed to new styles (and I do see this), realize they are dead wrong.
