Michael Covel: News & Info.

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

Ed Seykota includes a section on data verification at his web site.

This report from The Economist contains the following excerpt:

“Beyond worries over market stability, might an even greater danger be lying in wait? Mr Hooper proposes a doomsday scenario. Some day, advances in natural-language processing and statistical analysis might lead to robo-traders capable of analysing news feeds, deciding which shares to buy and sell, and devising their own strategies. Given that companies are very keen to patent their algorithms, it is quite possible that just one company could then emerge as the victor in this algorithmic arms race, says Mr Hooper. This outcome would create a particularly challenging problem for regulators. “It is a possibility that you could have an unfair advantage and there would be nothing governments could do about it,” he says. It is an interesting idea. But it seems unlikely, since there are so many possible trading strategies, and unlike simpler problems in computing (such as sorting a list) it is doubtful that there will turn out to be a single trading algorithm that outperforms all others. Yet perhaps such a suggestion should not come as a surprise. For whenever robots are being discussed–even if they are merely the software-based, share-trading variety–the idea that humans will lose their jobs and the robots will take over the world always seems to be lurking in the background.”

A Simple Trading System: Exponential Average Crossover from Ed Seykota. An online tutorial worth checking out.

One of the favorite questions by beginners is, “Can I trade your system or invest with a trend follower with $5000?” Not sure where this number comes from, but it always seems to be the same $5000 for all beginners!

I noticed the other day that Ed Seykota was asked at his site Seykota.com (and I paraphrase):

“I have $5000…should I keep trading or stop until I gather equity to diversify?”

In true Seykota style he responded:

“Say you want to buy a car and only have a few dollars. I wonder if you: Go out and purchase something in your budget, like a spare tire (or) wait until you can afford to buy a whole car.”

He then added:

Plan A:
Drive this around for a while.

Plan C:
Develop a trading system and attract capital.

Another long standing view on the “capital” needed to trade.

“Back testing can help you experiment with various methods for trend identification and risk management until you find some combinations that suit your temperament. Any back testing you do, and any subsequent trading you do, all occur in the moment of now.”
Ed Seykota

The following interview is between Trade Center Inc. and Dean Hoffman:

Trade Center Inc.. What is your entry method to the market? Is it price-based or do you rely on some proprietary mathematical formula? Is position sizing done in the same method? How important is position sizing? What do you base position sizing on?

Dean Hoffman. My primary entry is based on some form of trend recognition. It is not merely a function if price but rather a combination of algorithms and filters. I also use money management overlays for position sizing considerations, as it’s a critical component.

(more…)

From CSI’s Technical Journal:

“Every process you consider [in a trading system] requires some level of decision-making control to force a market profit. Your trading algorithm should have at least one trigger to explicitly buy or to sell a given commodity [or any market for that matter], and to take a profit or a loss as time and market conditions unfold. These triggers, called parameters, can be used alone or in conjunction with other triggers to develop specific trading signals. Overcomplicating the decision that gets you into the market tends to consume statistical degrees of freedom. The more freedom you take out of the market (adding process control), the less chance your trading algorithm will be successful. Factors such as commissions, slippage and inevitable errors made by you and your paid partner, the broker, all impact the likelihood that the market will pay back your risk capital. Excessive parameter control artificially minimizes their impact.”

Ed Seykota was recently asked:

“I’ve got Excel on my computer…is it possible to make a good trading system on Excel or do I need to purchase…[a] sophisticated software program?”

Seykota Answered:

“A trading system is an agreement you make between yourself and the markets. You can use a number of ways to test the agreement before you make it. Excel has the advantage that you can see everything the system does. Other software has an advantage of speed and ease of use. You might consider starting off with Excel until you get a feel for system trading, and then move on to more specific software for comprehensive testing. You might also consider auditing a few runs of your testing software with Excel, to make sure you have accurate coding.”

Visit Seykota.com here.

I recently finished an interview in the Caribbean with a top trader. He currently manages over $1 billion in client capital using strict mechanical models. His dedication to master his niche over many years (by no means an overnight success) should be an inspiration to all. More to follow in the coming months…