Jul

8

 "At the corner of William street and Exchange Place, we met F. He was once a man of wealth, but he had left it all in that same unfathomable abyss. He was a harmless but very disagreeable lunatic, a Cassandra who predicted nothing but evil." Ten Years in Wall Street, by Worthington Fowler, 1870

It's much easier to learn and remember from stories than from more traditional ways. This among other things is the basis of the most successful language programs, our most popular friends, and much of children's activities. It is also the basis for much of the best selling literature including Louis L'amour who describes himself as a storyteller and whose Western books have sold more, about 500 million copies, than all other writers of Westerns combined from the beginning of time.

One can agree that stories are a great teaching tool, but one must also note that they can be used to illustrate any point. And the problem with such stories is that there are enough of them that even the most specious promoter can haul out a few great predictions and stocks that show his greatness. It would be good, therefore, in telling stock market stories to include a moral that perhaps could be tested. I'll start the ball rolling with two stories.

Jim Lorie was one of the most successful speculators I ever knew. He passed away with a vast estate and he did it mainly on a teachers salary which was very modest in those days. His method was always to ask his friends for a good stock, buy and hold it, letting go only when it was bought out. He didn’t believe much in technical analysis and when I told him that I planned to start a firm to speculate based on the multivariate analysis of the predictive properties on one market on another, he told me that he recommended against it and that I should stick to mergers and acquisitions.

When he came to New York for Merrill board meetings he liked to come to our offices to relax. He always was very eloquent, and facile, indeed, he was the only one that could stop a faculty gathering in its tracks and have a hundred people crowded around him to hear his bon mots. He always had five jokes of a free market nature to share, as well as five books he had read that he could recommend. We always talked like two brothers and there was never a halt in our dialogue, which usually subsumed our great victory 10 years earlier in the Western Squash doubles, where he said that he must have been the better player because the opponents hit 95% of the balls to me. Or perhaps the conversation would turn to the macaque monkey I had as a pet that I named after him.

But this day, just before going to a board meeting at 1 pm, he became a bit tongue-tied and reticent for the first time. Finally he blurted it out, "Vic, you don’t have to accept this. But I'd like to participate in just 1% of your action for the rest of today. What do you say?"

I can’t leave this call for stories without relating one from the times that Sam's was founded, circa April 15, 1864. "On the first of April, the bull leader, Morse was at the height of his glory. Every stock that he touched had turned into gold for the fortunate buyers. Rock Island, Erie, Fort Wayne, Pittsburgh Ohio, and Mississippi certificates responded in succession to the wand of the great enchanter. … He fought the bears as one would his natural enemies and now throughout the whole market, it was in vain to search for any of that tribe of bears…. Alas, how changed from that Morse, who but the year before, had led his dashing ranks to the summits of the market. He departed from the arena, a stripped, penniless, heartless, stricken man. Out of the troops of wealthy friends, which but lately clustered about him, only one or two still clung to him (like Doc and Wiz might cling to me) … An appalling stillness, like that which precedes a tornado, followed the words ‘Morse and company had failed.’ "The board room seemed suddenly transformed into a cyclopean workshop where a hundred great trip hammers were being plied. Pillar after pillar toppled over, till the dome fell. A three-month mad revelry of speculations, in which were concentrated all the emotions, all the incidents of a century of sober, legitimate traffic, — then the dark dawn of another melancholy awakening. … A crowd of ruined operators reeled and served up to the rostrum, half crazed by their losses, and stupefied or maddened by drink, and the whole room rang with yells and curses.

"The space outside the railing was jammed with weary faces, on which was written only the word "ruin." Above all the chorus of execrations was heard the word "Morse." Human nature now showed its basest side. No epithet too vile with which to couple the name of the prostrate financier, (you can still find many of these on Elite, traded about me today). He had fallen like Lucifer in one day (on April 15, 1864, sort of the same as me on Oct 27, 1997).

"The men who but yesterday extolled him to the skies, now vied with each other in cursing him. The king of the market was a lurking fugitive. Men calling themselves gentlemen met him in the street, and showered abuse upon him. Shoulder hitters, who had lost some of their ill-gotten gains by his fall, sought him out, and struck him like a dog…. A few month more, and he lay upon his death bed in a second-class boarding house, and without means to pay for the common necessities of life.

"Even when he died, his landlady held his body for trifling debt (perhaps one of Artie's predecessors had to forcibly take the body to the morgue, as he often told me that he had performed this duty for many failed gamblers and that all of them died broke). It was only when some friend stepped forward and paid the sum, that the funeral rites could be performed over all that remained of what was once a king of Wall Street."

I believe I could always count on Dan Grossman, and one of my wives or daughters, or a collection of friends to save me from that suspended state should a similar hiatus be visited upon me.

The moral of these two stories is that all gamblers die broke and you should never get in over your head. Let us have more stories with testable morals.

George Criparacos adds:

It was a clear day, late spring, and we decided to go horseback riding on a farm, a little outside of St. Louis. I had never ridden a horse before, and they gave me an old horse on the premise that this horse had so much experience with first timers it would follow the rest of the pack without giving me a lot of trouble. So we rode off and my horse followed the rest with me trying to hold on. It was a nice feeling and a first hand-on experience of all the cowboy stories I had read as a boy.

A half hour later, with my back starting to ache, I was enjoying the sense of being under the clear sky when suddenly the horse stopped. My friends started picking at me, that by now I should have learned how to. But the horse refused to move. Then, without notice, it turned and started galloping as fast as it could. It was really scary. To this day I do not know how I managed to stay on the horse for the five long minutes it took to run back to the barn, elongated by the fact that besides being out of control I did not know where we were going.

We entered the barn and the horse stopped. I jumped off with my heartbeat at 200 only to hear my friends laughing, as they entered the barn behind me. And then it happened.

Clouds as green as a cucumber filled the sky. It was then that I realized what the expression "out of the blue" means. A hail storm with hailstones as big as an apple started. For the next half an hour, no one was laughing. We all realized what the horse had done, and under the protection of the barn stories emerged of the secret senses animals have.

Since then, and this is the moral of the story for me, I have always paid attention to signs that are not easily identified. A muscle that starts twinkling on my right arm, a toothache that comes and goes. and I have read of the back pain a certain very successful trader has to warn him of something that cannot be seen or measured. 

Ali Meshkati comments:

Like many aspects of the financial markets, there is a razor thin line that separates the realm of speculation from the realm of gambling. It is most interesting that these two realms can become fatally intertwined as a result of poor judgment and/or strategy in speculation leading to a gamblers mentality of recouping gains as quickly as possible. It is all the more interesting that the average “speculator” will, in the heat of battle, fail to recognize when he has exited the universe of speculation and entered into the alien world of gambling. It is only after one has exited the battlefield - perhaps due to a fatal wound - that the participant realizes that the terrain in which he or she began the battle was not nearly the same as where it ended.

As a former hedge fund manager, who experienced quick success, followed by quick failure, it is true that, for a majority of mortals in the world of speculation, the greatest of failures will come after the greatest of success. The reasons are obvious, the core of which lies at the basic element of our nature, which is to survive. Success leads to a dulling down, so to speak, of our instinct to survive. With that dulling down comes a series of events that can occur in any order, but typically consist of the following:

1. Puffing of the chest, which, in modern times, comes in the form of acquiring large homes, fancy cars, expensive furniture and collector items that have little purpose or use, besides showing off to whoever is willing to look and listen.
2. Relaxed discipline, primarily in the form of enjoying yourself, to the detriment of the very vehicle (your mind and body) that got you to the point where you can enjoy or abuse the things that you are enjoying or abusing in the first place. Excessive eating, drinking, and sex, which serve to disrupt the harmony that enabled your success.
3. Lack of focus, which typically leads to an unrecognized crossing of one of the many thin lines that exist in the financial markets. Subsequently, this leads the speculator into an unknown realm, which, he or she will not recognize until steep losses ensue or perhaps even complete failure, if the survival instinct has been dulled down enough.

I know of very few speculators who have not succumb to basic human nature, which often works to the detriment of speculators, as the markets are heavily counter-intuitive and prey upon basic human emotions and nature. The only goal of the speculator then should be to always be paranoid, as the battle with yourself is never-ending.

Janice Dorn adds: 

A scorpion and a frog meet on the bank of a stream and the scorpion asks the frog to carry him across on its back. The frog asks, "How do I know you won't sting me?" The scorpion says, "Because if I do, I will die too."

The frog is satisfied, and they set out, but in midstream, the scorpion stings the frog. The frog feels the onset of paralysis and starts to sink, knowing they both will drown, but has just enough time to gasp "Why"? The scorpion replied softly and calmly: "I can't help it, it's who I am, it's my nature., it's me being me."…from Aesop's Fables

No matter who you are, how intelligent or how much education you have, if you keep doing the same thing over and over again, expecting different results, you are suffering from the most insidious form of insanity. This is self-delusion of the highest degree. Many years ago, when I first started to trade, I was so optimistic that I could make money consistently. I was smart, more educated than almost anyone I knew, a successful brain scientist and physician, and always had been able to study hard and master anything I put my mind to. I could do it and nothing was going to stop me. I would work longer and more intensely than anyone else, and show wonderful profits month after month.

Little did I know what I was facing, and that I was about to come head on with the most challenging task of my lifetime. Simple, maybe, but not easy. Not easy at all. After a few months, I found myself dancing as fast as I could, yet running on a treadmill going nowhere and suffering from vertigo, headache and a severe case of tick-itis. I studied and read everything I could lay my hands on, subscribed to service after service looking for the Holy Grail and struggled to make consistently successful trades. Why couldn't I do it? What was wrong?

Is this so difficult? What about all the people who have returns of greater than 80% a years? They couldn't be exaggerating, could they? After all, it's in print and on a heavily subscribed website, so it must be true. Mustn't it? So I studied more, subscribed to more services, learned new indicators, bought books, joined some chat rooms and saturated myself with information. This produced more vertigo, headache and sleep deprivation. I was on total information overload. I started sleeping sitting up so that I would not sleep too deeply and could awaken more easily at 4:30 AM (having gone to sleep at around 1:30 AM) in order to study and watch the markets before they opened at 6:30 AM.

I was in total immersion, so why couldn't I make consistently successful trades? I became paranoid, thinking it was a kind of conspiracy since every time I took a position it went against me. I knew the stop and was stopped out in my minds, but we didn't take the stops because I had faith that the position would come back. It was some kind of a misunderstanding or misinterpretation by the market that was responsible for the price spiraling downward.

Buy more. That's it. Average down and keep averaging down and eventually, I will get it right. Eventually, the price will come back up and I will be justified. Why isn't the price coming back? I know it has to. After all, I studied it, charted it, listened to the gurus, read everything on every bulletin board, and it absolutely has to come back. Oh, that news that just came out… Ugh! Must be false or overstated because there is no reason that the stock should be selling off like that.

I know it is coming back, so I will buy more. Wow! Look at the size of the position now. Hmmmm. I better kick it up a notch and start participating in every message board and study every report and watch every tick every day for signs that life is returning and I can get back from underwater. Most of you know how this feels. I do. I have been there, lived it, and suffered losses from it. Life was miserable this way. I became depressed and irritable. I walled myself off from the rest of the world just trying to figure out what to do. I had dug a really deep hole and the only way out was to sell and take the losses, or waited and be in agony day after day, watching my account and my self-esteem (what was left of it) erode like sifting sands.

I tried too hard, studied too much, and pushed myself to the point of both physical and mental exhaustion. Why? Why did I not honor the stop, continue to hold on and even average down? I had to figuratively kill the frog and kill myself in the process. In order to be reborn, I had to destroy the internal self-defeating programming and start all over again. I had to step back, look at what I had done with a sharp and penetrating glare in the bright light of day. I decided to take the loss, to stop trading for a while, to take a vacation and center myself. My health returned. The dizziness and headache went away. I didn't care so much about watching the flickering ticks (so, at least, I was in remission from a severe case of tick-itis).

It was not the market, the charts, the software, the gurus or anyone/anything else. It was me! I was my worst enemy. Nothing was going to change until I got right with myself.

"The most exquisite paradox is that as soon as you give it all up, you can have it all. As long as you want power, you can't have it. The minute you don't want power, you'll have more than you ever dreamed possible." Ram Dass

Steve Leslie adds:

The depth of this fable is remarkable beyond belief. There is a meal that is worth a lifetime here alone. The speculator would be well served to read this several times and reflect on its enormity since we have all been guilty of doing something that we blame on "our nature" and ultimately suffer the consequences. It can be a convenient excuse.

I can think of so many illustrations of this that a book could be written on this one fable alone:

Phil Mickelson had all but won the 2006 U.S. Open by holding a two stroke lead with three holes remaining. He had played beautifully for 69 holes on Winged Foot in Mamaroneck N.Y. Winged Foot had lived up to its reputation of being a brutal challenge for the greatest players in the game. Mickelson came to the 16th hole and on the par five he bogeyed. He parred the 17th hole and came to the 18th hole needing a par to win the tournament. He had been struggling with his driver all week and Johnny Miller commented that all he needed to do is put his drive in the fairway and the tournament was his. He would become only the 2nd person in the last 50 years to win three major tournaments in a row. Miller suggested that he should take out a three wood and just smooth it into the fairway.

Inexplicably, he takes out his driver and pushes his shot to the left, it caroms off a hospitality tent, and lands in a trampled patch of dirt with an obstructed view to the green. He tries to pull of a Houdini-like shot and hits a tree leaving him with essentially the same shot. This time the ball is struck and flies into a bunker. From there the nightmare continues. He overcooks the sand shot and makes an up-and-in. His double-bogey practically gives the tournament to Geoff Ogilvy who had to chip in for par on the 17th hole himself to preserve a totally bizarre finish.

"I still am in shock that I did that," Mickelson said after his final round 5-over-par 75. "I just can't believe that I did that. I am such an idiot. I just couldn't hit a fairway all day. I tried to go to my bread-and-butter shot, a baby carve slice on 18 and just get into the fairway and I missed it left. It was still OK, wasn't too bad. I just can't believe I couldn't par the last hole. It really stings. I came out here and worked hard all four days, haven't made a bogey all week [on No. 18] and then double-bogeyed the last hole. Even a bogey would have gotten me into a playoff. I just can't believe I did that.

"So, it hurts because I had it in my grasp and just let it go, as opposed to somebody making a long putt or what have you."

Let us learn from this and remember that as Caesar remarked "The fault dear Brutus is not in the stars but in ourselves." 

Mar

23

 The market's repertoire of rhythms extends past human grasp. Sometimes it seems to make no sense at all, at least to me.

Sometimes, things seem to become clear. Just as in Afro-Cuban music, a strong voice - the "mother drum" in bata - dominates the counter rhythms of the smaller drums, sometimes the Fed's announcements dominate the backdrop of lesser voices — Chinese monetary authorities, fixed-systems followers, and what have you.

Earnings season has a peculiar rhythm. But it's ever-changing, based on which companies are strongest at the time.

One quality the market shares with music, good music, anyway, is "always the surprise." Bach, Mozart, Beethoven were all masters of deception and expert at weaving rhythms across bars. Beethoven's sforzandi, unexpected sharp accents, and sudden pianissimos, will be appreciated by all traders.

Back in the '90s, when I was the editor for the stock coverage, a humorous bond reporter at Bloomberg had a saying when stocks had yet another amazing jump: "Stocks ONLY GO UP," he would say, rolling his eyes knowingly, meaning just the opposite. No good musician plays loud all the time.

Victor writes: 

I am thinking of ways to quantify the rhythms of markets. Instead of looking at what others do, critiquing it, and then augmenting, I thought I'd just take a crack at thinking of it my own way.

Music rhythms would seem to be a good starting point. The rhythms that kids are taught are those they can step or clap or slap to. They can be fast or slow to start with. And I would look to see if the number of moves in a minute is fast or slow and how this changes. The slapping would involve moves from separate markets occurring in the same time period. When we step, the first step is the accented one and that's a good way to look at moves within a period. Is it the first step that's always the biggest, and what happens when the second or third step in a period is the biggest?

I would look next at the rhythms of big moves. They obviously are reversing now, with some big Tuesdays: February 27, -58; March 8, +22; March 13, -28; and March 20, +8. Naturally this kind of stuff isn't predictive in general or else it would come out in the standard time series programs. But on occasion, it comes back and forth to an inordinate degree and the question becomes how to find it.

Animals often migrate at the same time of year to the same places even when transported geographically. One wonders if the migrations of markets after big moves have a fixed place in the price firmament that they go back to. Or is it just in time, like the conventional seasonal stuff that one can expect from the migration? Last year, prices went way down in May and migrated back the last part of the year. This year the migration started in February. The month ended with the three old bags ("a woman her age would never show her posterior to a camera") acting in concert with the rhythmic release of the perennially bearish message from the Sage.

The rhythms of political announcements always seem to follow a circular path. They start with a loose cannon doing something that hits into something else. Then others join the act. One typical sequence involves worry about inflation, based of course on a preview of an upcoming release, then the release of the number, then the big bond fund guy saying he's bearish, then the perma-bears finding other inflationary things, then the opportunistic movement in certain nations that benefit from this or that energy price, and finally the rhythm ending with the release of the next number, or the quieting influence of an open market meeting.


Hoaglin
has some great diagrams of rhythms in the body. And the body has different rhythms that it responds to as molecules bounce into each other and create disturbances throughout other more complex molecules, thus upsetting the usual homeostatic methods. One market makes a big move, perhaps silver, and it spills over into others in a rhythmic sequence, perhaps an up in energy, and then a decline in stocks. It's not over until the initiating market has its move back down as was the actual case with the recent bloodbath and recovery, which seemed to have the elements of rhythm of all the ones I mentioned.

Of course, the rhythms have to be combined with the melodies. The speed of the moves has to be counted with the steps between those moves, sometimes big and sometimes small. And I like the way they quantify melodies in the Joy of Music and in the statistical studies of music intervals that have so much resonance with markets.

A more humdrum approach to rhythms, which I take, is to look at the rhythms of patterns. How often do the 3-day moves with their eight possible directions: —, –+, -+-, -++, +++, ++-, +-+, + — repeat? Is it a first order Markov process vis-a-vis these eight patterns, and what is the correlation between the closeness of each of the last three moves to these three patterns, and future moves? I recently ran some rhythm stuff with open, open to close, and open, and found some ministerial randomness with t's all below one, but enough evidence of non-randomness to get me thinking about rhythms on the whole.

I know enough about rhythms to know that they feel like the basic rhythms come from within the body, like the beating of the heart, and they can model it with rhythms based on the mathematics of African rhythms. Whatever quantifications they are making in bringing African rhymes and Latin rhythms into the heart beat problem would seem to be a natural for extension into the market.

I am fortunate to know someone with perfect rhythm and she is the coeditor of this column and I am going to ask her how she would try to trade in the market if she knew nothing else but markets. Perhaps other musicians with perfect rhythm might have similar expert opinions as to where market moves would be going based on their knowledge and oneness with rhythms in markets. Certainly these experts would be more prone to give good calls than the eminent people who have passed the tests of the mystical societies of America that are licensed to forecast the market.

The market's open now, and I haven't read any of the dozens of books I have on rhythms lately, but after I do and study it on the Net, perhaps I'll have some other ideas. For sure, my colleagues will be able to augment my preliminary fast ideas on this and guide others and me in proper directions.

George Zachar comments:

Perhaps other musicians with perfect rhythm might have similar expert opinions as to where market moves would be going based on their knowledge and oneness with rhythms in markets. Certainly these experts would be more prone to give good calls…

An interesting way to test this would be to submit representations of various tradeables in various time increments to musical prodigies who are naive about markets. I am thinking particularly of junior and senior high school students, who could have sufficient musical training and experience, without having been exposed to what passes for financial and economic wisdom in the popular press. 

Ken Smith writes:

In harmony with Victor's piece on music, rhythm, I attempted to write a melody with three notes. I am having difficulty conveying this little ditty because the note symbols for music are not available in email text messages.

I've tried before to get symbols to end up as they were written when they appear after I've sent them. Somewhere in the Internet circle symbols sent in email get warped, become hijra. Meanings are thus distorted.

So maybe someone can help here. The musical symbols for this simple melody would be symbols for the Dollar, Mark, and Yen, just three notes.

Create a melody using these notes - they are real notes, after all. Then choreograph a dance for the melody. Add lyrics. Create permutations and program computers to trade dollar, mark, yen - according to the melody.

"A salient feature of markets is temptation." (Syncreticus)

Todd Tracy writes:

Everyday I am inspired by the list and become more humble. In the business of music I had done well being rather sure of myself. That confidence came about from having practiced hours daily for 20 years. And even then I had much to learn. Afro-Cuban percussion was one of those things I knew nothing about until the day that my roommate brought home four percussionists. I didn't know at the time that they would be living and practicing in my living room for two years. And yes, they had many percussionist friends. The neighbors didn't seem to mind. They played all day, ten drummers strong, and then went on to their gigs at night.

One guy, Jacques, studied African rhythms. His guru was Babinga. Another guy, Blake, studied Cuban fusion. His guru was Giovanni Hidalgo. Davey was into Indian drums, Egyptian bells, and all sorts of experimental world music. Josh was a well-rounded guy who did it all. Their friends were mostly jazz funk kit players.

At any rate, I was doing 80 hours a week at the record company but on occasion they would let me sit in with them during rehearsals. When it came to the Congolese and Senegalese rhythms I had to learn to play the pattern given to me and not concentrate on the patterns the other guys were playing. The African stuff doesn't resolve like western music. Each part is simple; the complexity comes from the layering. Euro rhythms resolve every measure. Four beats to a measure at tempos ranging from 60-130 beats per minute. The African stuff would resolve many measures out, like ten equivalent western measures. It felt as though it was random until, with incredible anticipation, the resolution was at hand.

The Latin stuff was different in that the Cubans, Haitians, and Puerto Ricans had fused the African rhythms with western melodies. The most important part to the rhythm was the clave (wooden sticks that ring out when struck). The clave would be a simplified version of the rhythm. Then came the congas. They would play a rhythm called a Tumbao. Again, you had to concentrate on your part but synchronicity was achieved and resolved after just a couple of measures.

I was completely humbled by all that I did not know. But soon, through repetition, I found I had a whole new arsenal. These guys would play until their hands bled every day as they developed the incredible muscle memory needed to counter western rhythmic intuition.

Now the straight up rap beats are simple in that they are looped (kind of like rock music). But it is the anticipation of that resolution that concerns us with the market rhythms. In hip-hop the kick is on the one and the three; the snare is on the Two and the Four. The snares are played late to increase the anticipation. This lateness is the most important part, in fact, so important that rap artists actually consider the two and the four as the one and the three.

All of the rhythms resolve. There are problems in programming the beats in that there is a finite number of places to put each beat within a measure (460 ticks per beat) and the velocity of each beat is set at a value 1-127. We can, however, increase the resolution by doubling the BPM and by fine-tuning these anticipations and resolutions. I am studying the Quantlet Booklets so that I could one day break down the market rhythms as is being shown to me by the list members through the graciousness of Victor and Laurel's benevolence.

As far as what I think the S&P index will do from a musician's perspective is resolving to 1450 after channeling a bit more.

Laurence Glazier writes:

It is very tempting to apply my knowledge of music in selecting trades, though I like to follow grounded mathematical principles at this stage. I would note that much of what we consider the theory of music was derived by the posthumous analysis of the works of the one and only JS Bach (the Moses of music?), which like much technical analysis is seductive but not necessarily predictive. I work on the principle that part of this analysis represents laws of musical reality empirically testable, but not in the normal way. As Leschetitsky said, "Where words end, music begins."

Of the technical analysts of music, Schenker is particularly interesting, while those who have enjoyed "The Glen Miller Story" may have observed the appearance of another significant analyst, Schillinger.

Having said that, I believe the analogies with market rhythms, while not necessarily predictive, would be very valuable as part of a real-time virtual reality program reflecting the current state of play in the markets, and pose the question whether users of such a system would do better if they were more musical.

Victor Niederhoffer adds:

There is something rhythmic in the moves of bonds and stocks together, over and above the comparative rates of return that the Duo and Dodger have quantified. And it's like the monkey rope that Melville describes, where when one goes down and the other has to follow. But there is much thrashing around as the turbulence from the whales temporarily overrides the inextricable bond.

And in that context the bonds, after setting a 19-day low at 11,202, are still up 2/3 of a point or about 1/2% on the year. And the stocks, after setting a 19-day high at 1445, are up about 1/2% on the year. Regardless of that it's what I used to call an ugly day and the rhythm is very bad for both when a big decline in one occurs in conjunction with a big rise in the other. Something has to give, and as Berlioz would say in reviewing Beethoven, you know it's going to return.

George Criparocos writes:

The two days preceding the big note (02.27, the resonant, memorable one) had the bonds making a rhythmic intro analogous to what is expected when the largest instrument of all, the bass, announces a change in melody.

Since then, the contrabass, cellos, and violas (10s, 5s, 2s) are keeping the resonance, while the bass returns. The clarinet (Yen) is hanging around its 200MA set like a rope, refusing to let go of the anticipation and the piano (stocks) are all over the pentagram, in 1/16th intervals: four days low, four days high, four days flat, four days high.

The rhythm seems to be analogous to a symphony, lets say in F major. The allegro is in progress and I anticipate that the andante should follow in a molto mosso way.

James Sogi adds:

Todd's analysis of African rhythms resolving over eight or 12 bars or multiples rather than the simplistic four beat 16 bar square "rock" structure is right on the beat.

One of the most basic rhythms popular in the blues is called the shuffle. It is a short-long, short-long, short-long, similar to the heartbeat or train on the track, da-dum, da-dum, da-dum. This basic rhythm underlies many more complex patterns.

Applied to the market after a small beat, there the long bar, the "shuffle." The count often does not capture the rhythm, just as European musical notation does not carry information relative to rhythm. That is an odd omission. A shuffle might be notated as straight quarter notes, but played as doted quarter and eighth note sequence and designated as a shuffle, all the musicians know right away what it means.

The rhythm can get behind the pocket, giving a laid back feeling, like the end of last week. Or the rhythm can get ahead of the beat, like disco, like last month's drop.

The middle of the pocket of the beat is the march's oom-pah, oom-pah, even beats. The rhythms will swing from behind the "pocket" and give the music different feels. This is very difficult to quantify because the interaction of the multiple players is complex and the "feel" is a subtle thing to capture. Musicians know this.

To capture this in the market is a difficult matter. The main difficulty is the time structure. A structure stretched out over weeks is difficult to feel for human rhythmic sense as our rhythm is based on the heart and walking, and resides in the feet and heart and head motions. So it's hard to feel the market rhythm without condensing the time and looking at the numbers or speeding it up on a replay as an interesting exercise.

Russ Sears writes:

To Be With Me
by Russ Sears

Chic chic ca dee!
The Bluebird on our clothes line sings to me.
Come home, come home,
To be, to be,
 to be with me.

Kar Reeee! Kar Reeee!
The Bluejay mocks the hawk in perfect key
Go! Clear! Go! Clear!
Not free, not free,
No meal is free!

Tit tit ra lee!
The glorious Lark boost for all to see
Stay back, Stay back,
Match me, match me
You cant match me.

From Vincent Andres:

I am thinking of ways to "quantify" the rhythms of markets.

I didn't test it yet (will probably do so sooner or later) but the already known track of Hurst/Hölder/ exponents seem to me to be a possibly good piece of measurement.

Another possible tool could be wavelets.

Also, I recently came across a paper melting wavelets + Hölder curves : L'analyse par ondelettes, in Science, Vol.119 Sept. 1987. Yves Meyer, S. Jaffard, Olivier Rioul. The paper is in French. Very certainly progress have been made since this paper was published.

 

Jan

13

It's a hard life trying to outperform the stock market indexes. Most of the time these traders do not have tested systems or, if they have done some testing, it is likely that the methodology used has some shortfalls. But let's suppose that everything is fine, and that they have managed to find a niche of market inefficiency which can be exploited by a small flexible trader in and out of the market very quickly. The problem is that a part time trader goes to work in the morning, participates in meetings, travels, etc. Sometimes the boss calls him/her right when the setup is there to be traded! When the system gives a buy/sell signal, he/she is not there to trade it. The lack of consistency is the main issue. For a European trader, it is even worse. Markets in the US open 15:30 European time and close at 22:00. The European part time trader goes home when US markets are open and finds the family "requirements" to be met often more demanding than those of the office work. He/she has to help the kids with their homework, the wife/husband with things to do, dinner time, friends after dinner, etc. Being consistent with the trading plan is almost impossible even for the most determined and focused part time trader. Moreover, when they go on holiday, no trading is possible unless they want to divorce. At the end of the day, although their system works fine and they are very disciplined traders, there is no way to outperform the market simply because they were not there to trade their systems.

Maybe the solution is to give up trading, buying an ETF and spend more time with the family.

Kim Zussman comments:

Yes, but there can be advantages to the part-time vantage:

1. Not looking at markets all day reduces over-trading. The more you look at moment-to-moment moves, the more tempting it is to mistake them for opportunities.

2. Long-term patterns and anomalies are generally more profitable because they integrate more risk and less vig.

3. Personal diversification: Necessarily, frequent losing trades are extremely painful, and it is nice to have other concurrent professional activities which are rewarding. Be a portfolio with a mix of risky and low risk assets, balanced to suit your psyche.

3a. Cover: Being ridiculed and berated by family and friends is diluted when the income stream is not at stake, and they can more easily forgive difficulties of a second vocation if the first is intact.

4. You can easily run your own hedge or mutual fund while drastically reducing cost and customizing risk to fit your temperament.

4a. If you are certain there are others who can invest much better than you, get past your ego and use them.

5. The market needs you, especially if you trade a lot and make many mistakes, to provide liquidity and profits for smart guys on the other side of your trades.

6. The golf rule: Investing/trading can be more frustrating than golf, but it is 1.5 million times more interesting and will make you a babe magnet.

George Criparacos adds:

As a part time trader, I identify completely with the problems outlined and with the response of Dr. Z. I would humbly like to add that there should not be a target to outperform the market.

Scott Brooks offers:

This is a great post by Kim! There is wisdom here for everyone, even those who are not part time traders. Everyone, even pros and day traders, should cut this out and put it in their playbook. I know I am!

Thanks for this Kim!

Scott Brooks further adds:

It is important to remember that outperforming the market (usually thought of as the S&P 500 … the cap weighted index) is difficult. Most pros don't beat the index.

Maybe your goal would be to create an income stream of 3%/year to live on with a moderate amount of growth to offset some of the effects of inflation.

Maybe your goal is to beat a composite index of stocks and bonds (pick the indices that you think are appropriate).

Maybe you're good enough as a personal trader to accomplish the return goals your looking for and to receive satisfaction from managing your money (kind of like a hobby … but one that is profitable).

I have several clients that have me run a portion of their portfolio while they run the rest. The reason in many cases is that one spouse has nothing to do with the money (usually the wife) and the other spouse likes to invest and is really into it (usually the husband). The husband realizes that if something happens to him, his wife is not just going to take over the portfolio and all of a sudden become an expert in something that she has no interest in. So he has me run a portion of the money so that he can be comfortable with my competence and the wife can have a relationship with someone that she knows and has come to trust.

People can have many goals in the markets. It is imperative that you:

1. Identify what your goals are
2. Figure out a methodology that can accomplish those goals
3. Figure out if you have the time to work that methodology
4. Make sure that a fail safe is in place (i.e. work with a professional if your spouse is not interested, or work with your spouse)
5. Figure out if you have the competence to accomplish your goals
6. Be able to back test your system in the bad times (everyone was bragging about their genius in the 90's … but seem to have lost half their new found IQ since)
7. Have a playbook for how to handle different scenarios (especially what I call lifeboat drills)
8. Be willing to admit that they may not be able to do it
9. Other things that are important that I'm sure I'm missing
10. Make sure that you're having fun if you meet all the above criteria

Steve B. adds:

The part time trader is not the problem or the issue. The part time trader has at his disposal an arsenal of conditional orders that are set to fire on almost any imaginable market condition. It is the conditions that the part time trader has not taken the time to identify.

The issue in this case is the strategy. A part time trader will trade like "the trend is your friend." In this case the trend is what is hot and what strategy is in vogue. With the ever-changing cycle of trends, there is no possible way to get ahead in this type of trading. I would also argue that the part time trader is price focused - he does not care about volatility, interest rates, currency fluctuations, emerging markets, etc. due to the nature of his game "part time."

The part timer finally is apt to find shortcuts in order to make up the difference in time. The problem with shortcuts is that they run near to the edges of steep cliffs.

Dylan Distasio responds:

The issue in this case is the strategy. A part time trader will trade like "the trend is your friend." In this case the trend is what is hot and what strategy is in vogue. With the ever-changing cycle of trends, there is no possible way to get ahead in this type of trading. 

I would disagree with this statement as someone who has traded both fulltime as an intraday trader, and who now trades part time with a different vocation during business hours (and a longer trading time frame for a number of reasons). The part time trader is not tied to trend following strategies, and is certainly not obligated to follow what is hot and in vogue. They are just as capable of fading the herd as a full time trader or coming up with any other strategy to try within an interday time frame.

I would go on to argue that trend following strategies are capable of making money long term. The No Load Fund X newsletter which combines a relative strength trend following strategy with mutual funds (or more recently ETFs) has consistently beaten the S&P 500 since 1980 as audited by Hulbert Financial Digest.

In any case, they are not tied to the trend. There's nothing preventing them from following whatever strategy they wish. Practical considerations usually exclude the intraday time frame as an option for the part time trader, but they can use their ability to sit on their hands and cherry pick within a longer time frame as a strength.

I would also argue that the part time trader is price focused - he does not care about volatility, interest rates, currency fluctuations, emerging markets, etc. due to the nature of his game "part time."

I would argue that the part time trader should care about all of these things. Speaking for myself, I certainly do.

The part timer finally is apt to find shortcuts in order to make up the difference in time. The problem with shortcuts is that they run near to the edges of steep cliffs.

The part timer who is serious about attempting to beat the market should realize the amount of work required to do so. I think most of the ones who are able to trade part time and consistently beat the market are combining a lot of hard work after hours with their experience, and a willingness to constantly learn.

J. Klein offers:

Respectfully, I would tend to disagree. Part time vs. full time is not a question of strategy. It is, I feel, an acknowledgment of one's limitations.

Many will disagree, but I find that trading is mainly hard work. If you work hard on learning the market and about yourself, eventually you will work out some small strategies that leave you with a few more coconuts in the evening than you had in the morning. I am old enough to have seen more than one dumb young person get decent rewards, if they hung around long enough and are honest and hardworking.

The market is very large and there are many opportunities, but a part timer may take a relaxed view and let most of those golden opportunities flow away. Existing in a less pressurized environment, he may engage in only a few situations, and follow them more carefully. He trades part time, but his mind keeps working full time (how can one avoid it?) so he may be doing more thinking on each trade. More thinking, less pressure, less fear = better results, hopefully.

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