Michael Covel: News & Info.

An excerpt of an interview with Art Collins and Richard Dennis follows. First the question from Collins and then the answer from Dennis:

Q. How hands on are you behind the programmers? Are you standing behind them explaining exactly what you want optimized, etc?

A. I spend most of my time talking to programmers and waiting for results. I’ve been working with most of these people for 20 years so I•m able to get into that intermediate zone between computer-ese and real English. I call them up and say here’s the idea in English. Here’s my idea of how it would go in the program, but you’re the guys who are going to have to decide that ultimately. It’s actually quite an adventure because a good programmer will get the first iteration wrong half the time.

From Hedge Fund Daily comes the hedge fund world through the lens of a newbie reporter:

For hedge funds, it does not compute to use human analysts, when an electronic version can do basically the same job. And thus, Reuters reports, hedge funds, which were early to adopt new investment methods, are being credited (or perhaps, blamed, if you’re an analyst), for the burgeoning growth of quantitative strategies. “It’s all about trying to create an artificial analysts,” one unnamed portfolio manager at a quant hedge fund told Reuters. “It may not do it as well (as a human), but it makes up for it in volume.” Reuters cites as evidence of quant success to two of the industries top hedge funds that use them, D.E. Shaw and Renaissance Technologies, which were formed by math professors and are well-staffed with scientific types. Following their example, even non-quant hedge funds are expanding their use of computer models. “It doesn’t necessarily mean that Wall Street analysts are going to go out of business,” Ron Papanek, director of strategy at RiskMetrics Group, said in a Reuters interview,” but it does mean that there are other ways to be successful in identifying value.” He further noted that the fact that the biggest hedge funds are using its means “this form of analysis has legs.” Taking some of heat off hedge funds for equity analysts woes, Brad Hintz of AllianceBernstein, said the human kind are “doomed” also because regulatory investigations into analyst conflicts years ago has resulted in lower trading commission, and that’s put research on the cutting block as firms try to save on operating costs.

How can an author write about quantitative trading strategies in June 2007 and with a straight face make the case that these efforts are innovative or new? Systems trading has been around since the time of Richard Donchian - that’s back to the 1950s and earlier. Don’t get me wrong, Simons is a trading stud, a legend, but the basic ideas of 100% mechanical systems is not ground breaking.

A good read that adapts Leonardo Da Vinci precepts to trading.

Feedback:

Hey Michael, Hello, I am a mathematics and philosophy student at Michigan Tech University. I loved reading your book twice; I am going to read it a third time. I find the trend trading philosophy to be very stoic and the concept, rather simple yet eye-opening. Often I find myself teaching others about your style of trading and even debating with others about indicators (basically all indicators never stack up to price in the long run or any run for that matter)…When you say “turn your philosophies into computer code” what exactly do you mean by this. If I am more of a risk taker, make bigger bets that sort of deal?

Real straightforward. If your rule, for example, is to buy when a market makes a 100 day high - then make that a rule you can put into computer code. That’s it. Of course that can expand out to cover much more than my simple example.

I received this feedback:

“Jim Sinclair said that just relying on computers and computer models cannot be a substitute for the real knowledge of the markets. What is your opinion about that?”

I responded: “Do you think his opinion makes sense given the public performance data of the traders you say he criticizes?”

He responded:

“Well, he seems to know a lot about gold and gold markets. He also seems to have forecasted correctly the present gold price action. It is not a bad idea to read first his comments.”

Here are the comments in question. I don’t understand how these comments refute trend following performance data.

Trading is not about hero worship. Meaning just because someone of note says something - do some homework. The numbers are either there or not. If trend following performance numbers did not exist for the many traders I have interviewed and or profiled, I never would have mentioned their names.

James Montier recently wrote about the lack of acceptance of systematic trading:

“The industry has a large dose of inertia contained within it. It is pretty inconceivable for a large fund management house to turn around and say they are scrapping most of the processes they had used for the last 20 years, in order to implement a quant model instead. Another consideration may be the ease of selling. We find it ‘easy’ to understand the idea of analysts searching for value, and fund managers rooting out hidden opportunities. However, selling a quant model will be much harder. The term ‘black box’ will be bandied around in a highly pejorative way. Consultants may question why they are employing you at all, if ‘all’ you do is turn up and run the model and then walk away again. It is for reasons like these that quant investing is likely to remain a fringe activity, no matter how successful it may be.”

In a zero sum world, Montier nails yet even more reasons why strategies like systematic trend following will excel into the future.

A good piece of wisdom from Bill Eckhardt:

“If you make a bad trade, you have money management, you have a whole bunch of things that will come to your aid, and you’re really not in so much trouble if you make a bad trade. But if you miss a good trade there’s really nowhere to turn. If you miss good trades with any regularity you’re finished, you’re doomed in this game.”

Feedback received today:

“Hi, I was just experimenting using different moving averages to react to price movement in equities and futures. I notice that in your book, you mention only exponential moving averages of different time lengths. What do you think of using moving averages with different calculation methods (say exponential and triangular or time series) in order to track recent price movement in a stock as opposed to price movement in the past? It seems like that would be a pretty good way to track breakouts. Thanks. Joe.”

I look at these issues in a different way. The key is answer the 5 questions presented in Chapter 10 of my book:

1. How do you determine what market to buy or sell at any time?
2. How much of a market should you buy or sell at any time?
3. How do you determine when you enter a market?
4. How do you determine when you exit a losing position?
5. How do you determine when you exit a winning position?

If after testing you determine that your variation or choice of moving average works to help you answer those 5 questions (to meet your personal goals of profitability, drawdown, etc.), then you are on to something. If it doesn’t work, lesson there too. But don’t get fixated on the entry indicator…

I was quoted today in The Minneapolis Star Tribune. The article was titled Computer Algorithms Increasingly Call Shots in Stock Trades. While the article may come off as a little simplistic, we should all appreciate this reporter tackling a subject still foreign to most traders and investors. [source]

Van Tharp, thinking appropriate for my audience, emailed me one of his white papers (PDF) regarding “trading systems”. Take a read!