I have a cold and so not much energy for anything other than watching tv. I'm catching up on Michael Woods' show about China, and in episode three there is an incredible story about the siege of Kaifeng and the destruction of one of the dynasties in the early 1100s by northern invaders (vid cued up to that point). If you watch it, be sure to get to the poem that is read, "On the Defeat of the Nation" by Li Qingzhao.

I can't find an online version of that specific poem by Li Qingzhao, but I did find this group of translations of some of her other poetry, and there is some really striking stuff with such a clear voice from nine centuries ago:

A sample:

Last night, dead drunk, I dawdled
While undoing my coiffure,
And fell asleep with a sprig of
Faded plum blossom in my hair.
The fumes of wine gone,
I was woken out of my spring sleep
By the pungent smell of the petals,
And my sweet dream of far-off love
Was broken beyond recall.

Now all voices are hushed.
The moon lingers and softly spreads her beams
Over the unfurled kingfisher-green curtain.
Still, I twist the fallen petals,
I crumple them for their lingering fragrance,
I try to recapture a delicious moment.

Leo Jia writes: 

In Turkey today, it is illegal trying to inquire about one's ethnicity. The country stands by a slogan that it is one country, one race, and one religion. I bet they learned the tactics from China just about 2000 years ago when all the country men were termed the Han.

Speaking about Chinese poems, I always wondered in what dialects they were chanted. Obviously not in the mandarin as we know it today, because it's been only widely spoken for less than a century even though it was used mostly in the royal courts as early as the Qing Dynasty some 300 years ago.

But anyhow, due to the nature of the Chinese language being based predominantly more on writing than speaking, it's very hard for a listener to fully understand the chant of a poem, mostly tersely phrased. One just can not easily guess which actual character (which defines the meaning) of a particular sound (which can mean many things) is used.



It appears many American media are worried that the US will lose the trade war against China. That sounds very cowardly. The trade war will hurt parts of the American economy, but how can it lose? For every $1 America sells to China, it buys $4 from China. So China's loss will be at least 4:1 vs America's if the trade war goes into full motion. Plus, a few of the big imports by China, like soybean and Boeing, are irreplaceable. Other things like the semiconductors are critically needed by Chinese economy. So China doesn't really have a lot of weapons.

Any other opinions?

Stefan Jovanovich writes: 

Trade wars helped build the United States. So it should hardly be surprising that the people most dedicated to tearing the country down are hysterical at the prospect that county may be having another one. 

Stef Estebiza writes: 

America has already lost.

You have decided to invest in China/Asia rather than in your population. I would not see it only at the "trade war" level. Globalization has allowed you to ignore internal problems, your population, to focus on foreign profits. The structural problems are the same worsening. Either you decide to reduce your earnings by investing in your own home but by recovering structural problems, your population…or you will have to keep it.

Unbelievable watching the children, the students who survived the massacre in the streets demonstrate against the weapons without the support of the American political parties. It speaks volumes about the real situation of America.

If there's one thing you really have to worry about losing, it's your population…that you've already lost for the interest of a few.

Here in Italy we rejected right and left, the major political parties. There are two major parties in the government, both as out of the popular discontent. If Americans wake up and form a third party (your constitution permitting) you can put Republicans and Democrats in mothballs.

Then either raise your population from poverty, put back a little balance in the system, or they will show you the green mice.

Stefan Jovanovich writes: 

"America" has not invested in China/Asia. Even our war spending kept most of the money here on-shore. (I can remember lobbying to abolish the draft in 1971 after I got out of the Navy and running up against all the Congressmen whose districts were prospering from the war orders.)

When I wrote that trade wars helped build America, I was not being facetious. The times when the United States has been a taker in foreign exchange have been the times when the country's population and wealth have grown. Whenever the U.S. has been "protectionist" - i.e. let people and money come here freely but charged goods and services an admission fee, the place has boomed. Whenever "prudence" - i.e. worries about paying off the debt - and "internationalism" - i.e. let's become allies with the French, British, etc., etc. - has guided Congress, we have "lost", as Stef puts it.

We certainly lose whenever "policy" takes hold and questions of "structural" reform become more important than the common sense that even Congress accepted before our best and brightest all went to graduate school - don't let people come to the country with diseases or criminal connections and choose: (a) free trade for goods and services and no immigration OR (b) open immigration and tariffs. Most of the time the political majority chose (b). They are doing so again right now.



 It's clear that the People's Bank of China (PBOC) just cracked down on the initial offerings of cybercurrencies (as did the SEC). But it's possible that they just made all virtual currencies illegal. If someone can read Chinese, they can provide much better insights than Google Translate…

Google translate says: The tokens or "virtual currency" used in coinage financing are not issued by the monetary authorities, do not have legal and monetary properties such as indemnity and coercion, do not have legal status equivalent to money, and can not and should not be circulated as a currency in the market use.

anonymous writes: 

In China, what are said to be not allowed are always allowed for somebody, or are done by many regardless; and what are said to be allowed are always not allowed for somebody, or may not be done by many regardless.



 The scenic Georgian mountain town Kazbegi is less than 10km to the Russian border. One afternoon we decided to bicycles there. After about 3km there was a tunnel of about 2km long. It's dark inside and we could see barely the light at the other end. As we entered, there were some cars with lights so we could see the way. But when the last car of the group passed us nearly 300m inside, it became pitch dark looking forward.

I tried to ride forward but felt something very strange. I had a hard time controlling the bike. For less than 20 seconds, I brake but then felt my hands and one knee on the ground and the bike lying down. I don't know why and how i fell but instinct told me to stand up quickly because vehicles can arrive very soon. So I did that and pulled the bike up and started walking back toward the light. My wife was ok as she stopped very early trying to call me. I was not much hurt except some scratch on the knee. I think i was very lucky.

But anyhow, the point I want to make is that I couldn't control the bike in the dark. It started fishtailing, if that is the right word, or swinging from side to side much like the front tire was flat. Now thinking about it, without sight my mind had to rely on other senses that are much slower than vision, so the control was out of sync.

Perhaps there is a lesson here for trading. The reason market swings up and down is that the market participants trade in the dark. They rely on senses that are much lagged behind. So even when the market fell, traders don't know why and how it fell.

So a better vision is indispensable.



 If American Enterprise Institute's numbers are correct and if the Trump Administration is serious about their promise of creating jobs, Trump should immediately give up on coal and focus on solar. Unfortunately, AEI's presentation is wrong.

AEI put their thumb on the solar scale. For solar, they included employees dedicated to the construction and installation of new solar assets in addition to operating employees. They did not do the same for coal. They didn't do it for coal because almost no one is building a new coal plant.

Instead of comparing apples with oranges, AEI compared apples with orange trucks. Nevertheless, on the jobs front, the conclusion is the same: Trump should give up on coal.

Stefan Jovanovich writes: 

When Milton Friedman was shown a construction project in The Third World where the earth moving was done by people using shovels, he was told that this was helping with employment. Friedman is said to have replied: "Then why not take away the shovels and give them trowels." The output for solar remains trivial - .04 billion MWH vs. 1.24 billion for coal and 1.38 billion for natural gas. Even the most optimistic projections of the DOE don't have solar producing even 10% of the present output of either coal or natural gas before 2025. Perhaps the solution to the employment problem is to abolish the long-wall mining equipment and bring back the shovels.

Leo Jia writes: 

It is alive and well here in China. At my building complex on the east side of Shanghai, which was an early 1990s series of lux buildings, they'll send a ground crew of 10 to trim hedges all day. I could have easily done the same with a trimmer in an afternoon during my summer odd jobs.

Other bizarre aspects of town– even in some of the most posh areas with the latest buildings, there are a dirth of street lights and almost none of the bicycles, runners, and electric mopeds, even the newest, have lights and/or reflectors.

Another thing I wince at is workmen of all kinds not using safety glasses which cost all of a couple of USD equivalent. The ones I see wearing are the supervisors well away from the dangers.



What are the 10 things you would strictly warn a man assembling a comeback so as it's more or less guaranteed to happen.

Leo Jia writes: 


There is no where for one to come back to. 

Perhaps we can visualize someone lost in the hilly jungle. He was on a peak. Now, for some reason, he is lost in the jungle somewhere near the valley, feeling miserable and wanting to go back.  The reasons that could make him feeling miserable include: 1. he can't see the sun; 2. other creatures are bugging him; 3. it's quite wet; 4. his former buddies are all on the peak.

But he did not realize that 1. he does not get sunburn nor get bothered by wind; 2. there is a lot of fish to eat; 3. he won't get thirsty; 4. while his buddies are standing still, he is conquering the entire territory with peaks and valleys.

So one should strive to have life's fullness.



 A very interesting article written by Lyft co-founder:

"The Third Transportation Revolution: Lyft’s Vision for the Next Ten Years and Beyond"

What are your thoughts? Any investment ideas in light of this?

One fact mentioned in the article is "The average vehicle is used only 4% of the time and parked the other 96%."

I guess it is tempting to fix this huge inefficiency, but unfortunately the 4% usage time is not arbitrary, probably 90% of people have concurrent usage time: to commute to/from work.

Jim Sogi writes: 

Not only that, but when it is used, only one person is in the car. Better to have a small form factor car.

David Lilienfeld writes: 

I keep thinking about the Segway. Wasn't it supposed to revolutionize transportation too?

Stefanie Harvey writes:

The issue I find with the Segway is battery life and time to become comfortable using it. I have a Ninebot mini Segway pro; it took two rides to get comfortable with it but I almost returned it after the first.

Navigating uneven roads and curbs are also a challenge. Weather is challenging and it's sufficiently heavy that carrying it on/off bus or train is suboptimal (heavier than a commuter bike.)

Jeff Watson writes:

My son and I were early adopters of hoverboards (a mini-Segway clone), a year before they got big. These days we don't ride them any more due to safety concerns, and quality issues. But then again, why would one ride a hoverboard, when one can ride a one wheel. My son and I got a couple of them in summer 2015 and haven't looked back. They will go anywhere, on any terrain, fast, dangerously fast. The boards are well made, fly like the wind, and one can even use them at the beach as long as they are not totally submerged. The battery charge lasts longer than one's legs. One Wheel's are seductively dangerous. My go to board that every day I ride around the neighborhood is still the boosted board. Expensive, but worth every penny.

Vincent Praver writes:

Many of the ideas in the blog post reflect common wisdom in the sector.

A recent presentation from morgan stanley's auto analyst [related link ] covers these ideas well.

Jim Sogi writes: 

I have 150 miles on my electric bike so far and now ride it everywhere under 10 miles. It does 25 mph and most of the roads around here are 25-30 mph so get there almost as fast as a car, and can maneuver in close, park at the door, and be out faster than a car. I can visit 4 places in the time it takes to park. It THE way to go. I put some grocery bags on the back. It has tail lights and headlights. Its great exercise and feels great to be in the out of doors. Mine has electric automatic continuously variable gears by Nuuvinci. I got the custom Moto wood laminate pedals with skateboard grip to ride in slippers. It has a 750W mid drive motor and a big battery.

The small factor electric vehicle is the wave of the future.

Vincent Paver elaborates: 

Three tidal waves of the future, breaking simultaneously:

electric vehicles

autonomous vehicles

shared vehicles

They are highly complementary to each other, empowered by software, and will fundamentally change transportation.

It's a question of when, not if. Will we substantively change in the next decade, or will it take 2 or 3 decades?



 "The Coming Anti-National Revolution" by Robert J. Shiller:

For the past several centuries, the world has experienced a sequence of intellectual revolutions against oppression of one sort or another. These revolutions operate in the minds of humans and are spread – eventually to most of the world – not by war (which tends to involve multiple causes), but by language and communications technology. Ultimately, the ideas they advance – unlike the causes of war – become noncontroversial.

I think the next such revolution, likely sometime in the twenty-first century, will challenge the economic implications of the nation-state. It will focus on the injustice that follows from the fact that, entirely by chance, some are born in poor countries and others in rich countries. As more people work for multinational firms and meet and get to know more people from other countries, our sense of justice is being affected.

Indeed a likely big wave in the comin' decades.  Any further thoughts?

Rocky Humbert writes: 

Shiller may have gotten this 100% backwards. If my perception of the global and popular mood is correct, then the pendulum may be about to start moving in the opposite direction. The Brexit/Trump meme is the instant when the acceleration of the globalist/intellectual elite/HYP is changing sign. (Stefan can elaborate–but I am unaware of any of these so-called revolutions being wholesale wealth transfers…without bullets flying.)

As a footnote, I am surprised that anyone claims to be surprised by the most recent lewd Trump video–it is entirely consistent with the persona that he projects. In my 30 years on Wall Street, I've heard and seen much much worse. Similarly, the Wiki document dump on Hillary's speeches confirmed the perceptions that her detractors have.

Lastly, someone posted an article about the wisdom of crowds and confidence. And that confident observers (as a group) make the best predictions. I have gone on record and remain confident that Trump will be the next president. I do not share Mark Cuban's belief that this will result in a stock market "crash" — but on the edges, none of this is particularly bullish. The most interesting question for me is whether when Trump wins and if the markets get turbulent, will the Fed blink in December? Given the number of HYP's there, and their collective beliefs…

Back to Shiller. The UN will be the first globalist institution to suffer Trumpture. (Trumpture is the rupture of a bubble by Trump. If the NY Post and Drudge pick this up, I will be most pleased.)

HYP=harvard/yale/princeton. For full disclosure, I'm a Yalie.



 What were significant real estate bubbles in history? What were the aftermaths of their popping?

Stefan Jovanovich writes: 

In U.S. History you can start with William Duer and the Ohio Company.

anonymous writes:

The book Manias, Panics and Crashes is good as is the book Devil Take The Hindmost



Say that you have a yearly goal of 40% and you achieved in 7 months, or that you have a monthly goal of 10% and you achieved it in 11 days. Do you stop trading at this point? Or do you continue trading thinking the luck is on your side at the moment? Or do you adjust your goal and continue trading with the new goal?

Cheers, Leo

Victor Niederhoffer writes: 

The market will sometimes go much below your goal and to even things out you have to make as much as you can above your goal. Furthermore, the market doesn't care whether you've achieved your goal or not, it will always go its own way, and if you can make a profit on an expected future value basis, you should go for it. Luck is random, but the skill will persist. Apparently you or a colleague has it. Don't throw it out.

Andrew Goodwin writes: 

Your answer may rest in the structure of your money management operation. If it is a hedge fund structure, then heed the following points made in a post on the hedgefundlawblog.com. If you get behind you must know how you will deal with the moral hazard. Since you are ahead greatly, then your incentive is to take the money unless you know with some certainty that you cannot fall below a high watermark and will likely increase your gains.

1) The management fee, over time, usually does not generate enough income to operate and the profitable traders expect bonuses even when the overall fund loses.

2) The winning traders will leave to other firms or will start their own if there is no performance fee gathered to pay them.

3) If fund performance goes negative then high watermark provisions normally go into action. This can lead the manager to swing for the fences or simply close shop.

4) The wind down of the fund can deplete the investor assets and lead to general price markdowns of holdings especially if others had similar strategies and exposure.

5) The fleeing investors will enter into a new fund with a new high watermark and start the process over again.

Here is where the game gets interesting. The author suggests creating exotic option outcome provisions that he calls "Modified High Watermark."

These include A) Reset to zero under certain circumstances. B) Amortize the losses over a period so that the manager can still earn some incentive fee. C) Create a rolling period for the high watermark so that after a time the mark level drops.

His modified high watermark solutions might keep the manager from swinging when the performance fee looks too distant and might keep genuinely unlucky managers around until their skill manifests itself in due course.

Nigel Davies writes: 

There's a case for reducing leverage as one's account size increases so as to reduce the 'risk of ruin', and for some this might be done in a very systematic way. Another question is if there's a point at which one's financial goals have been achieved, especially if one's dreams lie elsewhere. 

Bill Rafter writes: 

You did not specify if your annual goal of 40 percent is based on analysis that suggests a 40 percent return is the mean or maximum. Let me assume that the 40 percent is the maximum annual gain you have ever achieved, if only as an academic exercise. Thus the 40 percent is your quitting point based on perfect knowledge of a particular system.

How frequently have you been calculating your forecasts (or inherently, your position choices?) As was learned from the Cassandra Scenario, "that more-frequent forecasting is inherently profitable, even more so than some forms of perfect knowledge." So:

(1) If 40 percent is your mean annual gain, then continue to trade at the higher level. That is, if you started at 1000 and now have 1400, continue to trade the 1400. Obviously it would also be good to shorten your forecasting period. (2) If 40 percent is your maximum expected gain, then pocket the 400 and start over trading with 1000. Shortening the forecasting period is not a given in this case.

Phil McDonnell adds: 

Let us assume the market has a normal distribution of returns and that the probability of making a 40% return or better, at random is 15%. Then if you decide to take all profits at the 40% level then your probability of a 40% gain will double to 30%. This result follows directly from the Reflection Principle.

The above assumes that your returns are random and implicitly assumes that you have no ability to predict the market. To the extent that you can predict then you should make your decision on your current outlook and not on any arbitrary price point like 40%.

Gibbons Burke comments: 

It seems to me that one should be disposed to let the markets give you as much as it wants to give you without putting artificial limits on that phenomenon, but that practical limits should be enforced on how much lucre it can remove from your wallet. Is more return ever a bad thing, assuming that the distribution of returns is not serially correlated? As our gracious host has noted, the markets have no idea how much money you have made or lost, so the idea of reversion to the mean on an equity curve makes no sense in the same way that it makes sense for market prices which are making repeated excursions up and down seeking the implicit underlying value of the thing (the ever-changing "mean" to which the market is always reverting.)

So, setting a goal to achieve a 40% return seems a reasonable thing to do, but I submit that this goal should be accompanied by the qualifier "or more" and be willing to let a good thing continue.

Regarding the 'limiting losses' idea, in the Market Wizards interview with Jack Schwager, Paul Tudor Jones admitted to having risk control circuit breakers in place so that if he ever lost more than x% in a month he would shut down trading for the remainder of that month. Limiting and rationing losses in ways such as this seem like a reasonable discipline if one is going to set limits on how the market will affect your stake.

An old floor trader's trick I learned while reporting on the futures pits is that if a trader enjoys a windfall gain on a trade, and reaches a pre-figured goal (or more), he takes half the position off the table as a positive reward for being right and taking action on that conviction. Leave the rest of the position on to collect any further gain which the market might want to provide, but he raises the stop to break-even for the remaining position (not counting the profits already taken off the table) in order that a winner would not then turn into a loss. If he stop get hit, he still has half of a windfall gain return in the bank. If the market continues in a favorable move and another windfall gain is realized, the process can be repeated.

This tactic has an anti-martingale character which some more bold traders might object to.

All these thoughts are mostly elaborations on the first two fundamental rules of trading: 1) let your winners ride, 2) cut losses.

Stefan Martinek comments: 

This loss avoiding behavior was well researched by Paul Willman and others. It is observed within traders of all levels approaching a bonus target; cutting off is generally viewed as irrational and Willman discusses how to adjust incentives to get a trader back to risk neutrality. Which reminds me more general but relevant quote from W. Eckhardt: "Since most small to moderate profits tend to vanish, the market teaches you to cash them in before they get away.

Since the market spends more time in consolidations than in trends, it teaches you to buy dips andsell rallies. Since the market trades through the same prices again and again and seems, if only you wait long enough, to return to prices it has visited before, it teaches you to hold on to bad trades. The market likes to lull you into the false security of high success rate techniques, which often lose disastrously in the long run.

The general idea is that what works most of the time is nearly the opposite of what works in the long run.



Generally, market regime has been simply defined as up, down, and sideways. Clearly that is not enough for all kinds of trades. I believe that there is at least one way to define market regime based on any type of trade one conducts. So market regime is really a relative term and can be defined in countless ways.

Here is a list of 10 ways I define it.

1. based on past high-low vs multiples of ATR

2. based on the position of current close vs past high-low

3. based on change of price moving average

4. based on standard deviation of closing prices vs. percent of closing price

5. based on slope of linear regression

6. based on change of ATR

7. based on ATR vs percent of closing price

8. based on sign of average returns

9. based on average of abs(return) vs percent of closing price

10. based on standard deviation of returns vs percent of closing price

Jim Sogi adds:

11. Vol
12. Liquidity
13. Bar size
14. Speed



 This is a fascinating article that leads me to imagine how much more the subconscious mind performs everyday with the visual signal without our awareness. Is it at work when we read something? If it is, then it could get different meanings of the text from our understandings. How much could the difference matter to us? Surely it is at work when we look at trading charts. Does it have a better way to trade the charts than what we are aware of? How can we best know what it tries to guide us? Perhaps this is a strong hint on the benefits of meditation, by which we are supposed to obtain clearer understanding of the situations we are in.


"A patient with bilateral damage to primary visual (striated) cortex has provided the opportunity to assess just what visual capacities are possible in the absence of geniculo-striate pathways. Patient TN suffered two strokes in succession, lesioning each visual cortex in turn and causing clinical blindness over his whole visual field. Functional and anatomical brain imaging assessments showed that TN completely lacks any functional visual cortex. We report here that, among other retained abilities, he can successfully navigate down the extent of a long corridor in which various barriers were placed. A video recording shows him skillfully avoiding and turning around the blockages. This demonstrates that extra-striate pathways in humans can sustain sophisticated visuo-spatial skills in the absence of perceptual awareness, akin to what has been previously reported in monkeys. It remains to be determined which of the several extra-striate pathways account for TN's intact navigation skills."



"Yangon Stock Exchange will open in the first week of December"

It will open just one month after the historical election in the country.  If the election turns out real, and the result is carried through, then the exchange may offer an investment opportunity in decades in my mind. Any other thoughts?



I just learned about this type of (ETF?) fund traded on Chinese stock market.

The fund's total asset, while being invested in a certain set of equities, is divided into two sub-funds, Fund A and Fund B. Both sub-funds (closed-end in my understanding) are separately traded on the exchange as ETF's. However, Fund A is a fixed income fund to its investors. Fund A's downside risk and dividends are assumed by Fund B. While Fund B takes Fund A's responsibilities, it also inherits higher returns (and also higher risks) associated with the underlying equities. The operator of the fund adjusts asset ratio between Fund A and Fund B whenever Fund A's market price drops by 10% (and perhaps rises by 10% too). At the adjustment, both sub-funds' market prices get revalued, and Fund B's investors may get certain number of shares of Funds A which can then be sold to the market at anytime.

Fund B sounds somewhat like the 2x or 3x ETF's in the US, but it does not re-adjust its asset everyday while the 2x and 3x ETF's do.

What do you see the pros and cons of this type of funds? Does it sound very lucrative for the fund operators? What strategies would allow investors to make money with it?



I view the market as having many dimensions. I believe you can define market regimes based on its status along any one dimension. For instance, one dimension could be trendiness. You can define three basic regimes along this dimension: up trend, down trend, and sideways. Another dimension could be volatility. So regimes along this dimension can be high volatility and low volatility.

How else would one separate the market into different regimes? Which ways of separation in your experience benefit trading more?



  I think ultimately the biggest hindrance in trading, if not the biggest hindrance in anything, is oneself or one's own mind. Your thinking is your opponent.

Is the market mechanistic or competitive? I think it depends on the situation. I tend to imagine that the market has the following participants in any day:

1. bulls and bears

2. primates.

The former are big and have their views decided for that day or the following period. They mostly fight fiercely. The latter are small and are simply ready to join either the bulls' camp or the bears' camp at anytime depending on their own views of which side is stronger.

The fight between the bulls and the bears are competitive. But for the primates in this case, it is not competitive (or at least not in the same sense). To them, it is simply making a choice.

The bulls and bears both understand the nature and tendencies of these primates, so they try to take advantage of the latter whenever possible. So, in this case, the primates have to compete with the big ones. This might only be possible when the two big sides are not fighting fiercely between themselves.

The primates are controlled by their innate nature of fear and greed (let's just say that the bulls and bears are less prone to fear and greed), so their combined behavior is quite predictable. So when either the bulls or the bears (when one side is absent or subdued) attack the primates, it is quite mechanistic.



 Your biggest opponent in trading is yourself. Has anyone heard this statement? It seems incredibly naive to me. Not surprisingly, I just read something like it posted on twitter. When I put in an order and get 3 shares filled, it is clear to me that someone is gaming the order. They get the info and then I don't get a real fill. On the other hand when I develop a strategy that qualitatively seems to anticipate stop or momentum buying, my buying is part of the force that pushes price to that level–releasing potential energy, one of the most useful concepts in trading. Everything has an impact. To think it is all just a "mental game against yourself" suggests that the market is mechanistic process vs. a competitive process, which is entirely wrong.

anonymous writes: 

This (not well documented) jab at mom and pop retail investors comes to mind: "Fidelity Reviewed Which Investors Did Best And What They Found Was Hilarious".

Ed Stewart writes: 

It reminds me of something I read in a poker book about one of the top cash game players (I'm not a poker player). He would supposedly call out to people considering a game, saying, "hey, come on over, we are playing all of your best games, imagine what a little luck could bring" very friendly, etc. I could see in a similar situation someone calling out, "Hey, if you master the mental game against yourself, the rest of us will hand you our money, we are just bystanders". 

anonymous writes: 

I believe that there is nothing inherently wrong or detrimental to a successful trading process from some form of self-awareness.

The problem is that it is very rarely quantified. This list has/had a resource in this regard, the esteemed Dr. Steenbarger.

One has had occasion to work through both of his main texts in isolation & in a more institutional setting. Regardless of ones view about this stuff, I would encourage all to read and think about their market approaches in the context of both books. He is a serious guy and performed some intense experimental tests upon himself in real time.

It is reasonable to assume that such help would be more suited to fundamental discretionary traders, but a more in depth thought process may expand that.

One whole heartily agrees that throwaway lines are useless ( much more so when transmitted through what may prove to be one of the Four Horsemen of the Apocalypse- i.e TWTR.)

Leo Jia writes: 

I think ultimately the biggest hindrance if not the biggest opponent in anything is oneself or one's own mind. As you suggested that someone thinking that trading is all just a mental game against himself is wrong, you actually suggested that his thinking is his own opponent.

Is market mechanistic or competitive? I think it depends on the situation.

I tend to view market has the following participants in any day: a) bulls and bears, and b) primates. The former are big and have their decided views for that day or the following period. They mostly fight fiercely. The latter are small and are simply ready to join either the bulls' camp or the bears' camp at anytime depending on their own views of which side is stronger.

The fight between the bulls and the bears are competitive. But for the primates in this case, it is not competitive (or at least not in the same sense). To them, it is simply making a choice.

The bulls and bears both understand the nature and tendencies of these primates, so they try to take advantage of the latter whenever possible. So in this case, the primates have to compete with the big ones. This might only be possible when the two big sides are not fighting fiercely between themselves.

The primates are controlled by their innate nature of fear and greed (let's just say that the bulls and bears are less prone to fear and greed), so their combined behavior is quite predictable. So when either the bulls or the bears (when one side is absent or subdued) attack the primates, it is quite mechanistic.



 Something today reminded me of a mentor (English teacher, older guy retired a few years later) that I had in high school. One of the key things he told me was, "Never get serious with a girl whose mother you would not want to have relations with, if given the chance". I think more than a few times that thought flashed before my eyes and it saved me from serious error, partly because it was memorable. I'm trying to think of any similar rules of thumb that might help us to avoid those trades or strategies that can severely set back profits, create anguish, and otherwise make things worse than they should be. Any ideas?

Leo Jia writes: 

Hi Ed,

"Never get serious with a girl whose mother you would not want to have relations with, if given the chance"– I thought that was only my words!

There can be many similar things for trading. Here are some for critique.

1. If you don't like someone's way of life, don't trade like him.

2. If you don't like the dominant players of a market, don't trade that market.

3. If you don't like the rule makers of a market, don't trade that market.

4. (I learned this one from Scott Brooks) If there is already a professional at the table, go somewhere else.

5. If you don't like a country's tax code, don't trade in that country.

6. If a market hasn't shown a lot of opportunities in the past, don't trade that market.



 Tonight I went for my usual 5k walk. I plugged in my ear phones and hit my Pandora app and had to decide between my stations. I was in the mood for some rock, so I choose the appropriate station, turned the volume to the right level and set off my journey.

About 3/4 of the way through my walk, I was heard a special treat. The studio demo version of the Lynyrd Skynyrd's "Free Bird".

Now, I'm sure most, if not all, of you are familiar with that Free Bird. It is, IMHO, one of the 3 greatest rock songs of all time (the other two being Layla and Stairway to Heaven).

But I had never heard the studio demo version before.

What is unique about this particular song is how different, yet similar, it is to the album version or the live version (I prefer the live version…."play it pretty for Atlanta").

Free Bird starts out as a ballad, but then, kicks into high gear with the famous 1970s style guitar jam.

When the studio demo version kicks into high gear, it starts out with the screaming lead guitar for a few moments…then the lead guitar stops, and all you hear for the next few minutes are the rhythm guitars.

Anyone who knows Free Bird know that lead guitar jams long and hard for at least 5 minutes straight. It is an unmistakeable 5 minutes of classic rock guitar licks that anyone with even a passing appreciation of classic rock will know and recognize.

But on the demo version, the "jam" portion is mainly rhythm guitars for almost the entire time.

What was very interesting to me is that even though there were only rhythm guitars playing for most of the song, in my head, I could not help but hear the lead guitar…even though they were not there.

I tried very hard to concentrate on the rhythm guitars and appreciate what I was hearing. Heck, I sorta played in garage band in my teens and I played the rhythm portion of Free Bird many times "back in the day".

But no matter how hard I tried, my mind forced me to hear the absent lead guitar.

Listening to this demo version of Free Bird got me thinking about the markets and my investing strategies.

How many things happen around me that I just assume are there….but really aren't…..whether in my life as a father or as an investment adviser?

When I vet money managers to place my clients money with, how much I am superimposing (is that the right word?) what I think I should be hearing/seeing over what is really going on?

When are there subtle (or not so subtle) changes that I miss because the meme playing in my head tricks me into hearing/seeing what I expect to be there?

I'm going to refocus myself to see if I'm really hearing what I think I'm hearing….or whether there are some missing lead guitar illusions that are clouding my judgement.

I pose this question to the group: How might one go about doing that?

In the meantime……..here's the YouTube link to the demo version of the Free Bird. Try and listen to it without hearing the absent lead guitars(also, bonus points if you spot the difference in lyrics):

And to give some context to those that don't know the song, here's the album version of the same song.

And I'd be remiss if I didn't include my favorite version of the song (play it pretty for Atlanta).

And just because it's so tasty, I'll throw in a little semi-obscure Skynyrd hit: Curtis Lowe

Leo Jia writes: 

Reality or illusion? I like to study the topic, and learn how to tell the difference or whether there is a difference. One believes something to be real when the 5 senses send signals to the mind and the mind says thus it is real. That is what reality means to most people. What if one's 5 senses were altered? The mind then has no way to tell. Think about virtual reality. Though the current technology is not fully there to truly alter the 5 senses, it demonstrates how the mind determines reality. Actually, the concept of virtual reality itself tells that there is not a real line between reality and illusion. It is all mixed together. Do we live in the world or does the world exist within oneself? I am more inclined to the latter.

Scott Brooks writes: 

Great points, Leo.

I like illusions as well. My youngest son is into magic and illusions and does a pretty fun show for kids birthday parties. Even though I know how the illusion works, it is still fascinating and fun.

But I'd like to take it a step deeper. I know when I'm being tricked when watching my son or a Penn and Teller show. But what about when I have no idea that I'm being deceived….or even deeper, when I'm the one doing the deceiving, and I'm both the deceiver and the mark (i.e. self deception).

I'd like to know how I can clear my head of those times. But…..how do I know what I don't know that I don't know?

Rocky's Ghost writes: 

Excellent post, Scott! Thanks for sharing.

Rocky believes that, when speculating (as distinct from investing), more important than seeing one's own ghosts, is seeing everyone else's ghosts. For example, in his early days, Rocky would occasionally find bona fide arbitrages in the options markets. However, the ability to monetize the arbitrages relied on OTHER PEOPLE also seeing the arbitrage and closing it. If you are the only sane man, you will likely go bankrupt long before others realize that you are the only sane man. Or, put another way, when the lunatics are running the asylum, it pays to trade as a lunatic — while remaining mindful that they are indeed lunatics. Now where did Rocky leave his bottle of Clozapine?



 I just read the book Contrary Opinion by R. Earl Hadady. Aside from his point on bullish consensus, I found the following very interesting (I call it theorem of winning and losing). We all know that the majority lose trading futures. So, say 80% traders lose, and let T denote the total number of traders, NW the average number of contracts held by winning traders, and NL the average number of contracts held by losing traders, then the following equation holds:

0.2 * T * NW = 0.8 * T * NL

From the above we get: NW = 4 * NL

Which mean the average number of contracts by winning traders is 4 times the average number of contracts by losing traders.

If 90% traders lose, then we have

NW = 9 * NL

So, the theorem says the deep pocket traders have a natural advantage to win. It begs the question of how traders with not so deep pocket can survive and win. What are the good strategies? I wonder if this also implies that one may increase the chance of winning by not diversifying funds.

Stefan Martinek writes:

"It begs the question of how traders with not so deep pocket can survive and win. What are the good strategies?"

Trading can create such an addiction that sometimes addicts do not realize that the world is full of opportunities outside of trading. Good business strategies match our pockets, or our pockets + pockets of family/friends (initially). Trading with a small account frequently makes no economic sense if we consider opportunity costs. It's better to go kitesurfing.



 One major problem with diet prescriptions is that they assume people are animals or machines. They only pay attention to the material side but miss the spiritual side.

I think the way to go about eating should be first maintaining a healthy spirit and then eating and savoring whatever the spirit wants. What it wants are fine cuisines rather than simple food. When great tastes are savored, the spirit is satisfied and wants nothing more to eat. Great cuisines also make us happy and high-spirited. The happy spirit will then take care of body. Think about whose body it really is. It belongs to the spirit anyway.



 Monkeys trained to use a fiat currency make the same mistakes as humans: they are loss-averse.

There are few ways how traders manage loss-aversion: (a) Deleveraging. In other words, everyone has a breaking point and can operate below this "gambling" threshold; (b) Diversification. By spreading a total exposure over wider group of instruments our anchor to individual outcomes is weakened [focusing illusion]; (c) Operational controls to enforce trade exits in case that all the other things fail [Paul Willman's research of traders in the City of London].

But how to design a trading strategy which is built to directly profit from loss-aversion of others?

Leo Jia comments: 

If this means one decides to totally abandon the nature of loss-aversion, then one can go do against all he recognizes as loss-aversion behaviors. This brings a question about its true benefit. If on the other hand, one only wants to take advantage of others' loss-aversion behaviors but maintain his own loss-aversion nature, then what he can do perhaps is limited.

The question is what really counts as loss-aversion.

If what we mean by loss-aversion is losing 1% of assets, then clearly it makes great sense to abandon it. But as one is willing to lose no more than 50% of assets, is he still considered loss-averse? If yes, then how much benefit would he gain by relinquishing this 50% limit?

So if God enforced us a loss limit within which we humans operate, perhaps he gave us a limit that is too small. Is it truly limitless in His mind? Perhaps there is also a limit with Him which just happens to be somewhat larger than ours. This latter may seem reasonable.

anonymous comments:

For those who believe loss aversion is an evolved behavior, it makes sense in the world of extreme scarcity: if you are on the edge of starvation and have a little bit of food, losing all the food could be significantly more detrimental than doubling it is beneficial. This does have some parallels in today's world, as for an average person near retirement age losing all of their savings is significantly more detrimental than doubling them is beneficial.

In terms of the markets, taking advantage of this asymmetry would be something like this, I imagine: let's say the average market participant hates to have their holdings go down by 1% (or any other number) twice as much as they would like them to go up by the same percentage. Let's also say that on the average everybody's holdings have an equal probability to go up and down. If you can figure out how to bet a small enough amount of your capital not to go bust multiple times in such a way as to counteract that tendency than on the average you'll make good winnings. The big question is of course how to bet against this tendency. Should you always bet when others are fearful against their fear regardless of any other evaluations of the situation?

Ed Stewart writes: 

"But how to design a trading strategy which is built to directly profit from loss-aversion of others?"

I think you can open up the concept far more broadly. I see it as the fundamental concept for a near unlimited number of strategies — an idea close to the core of the trading game, regardless of the market.

I told a spec-lister I met with a few weeks ago that the concept (described differently) is 80% of my short-term trading focus — meaning if I don't see it at work I don't trust the idea much at all — to such an extent I've mostly given up on other things. It is very similar to the Bacon cycle idea, but on a specific duration or circumstance (which itself is subject to the larger bacon-cycle effect). Loss-aversion creates urgency, price-insensitivity, and enough order flow to at times scare market makers — all things which open the door to speculative profits.


-Times of day that loss aversion is most impactful or loss averse traders are prone to being active
-Price movements that signify loss aversion - quantitative definition
-Events that will trigger loss aversion
-If you know the basic "plays" or trades used by speculators on different time horizons, u look to anticipate who is about to be squeezed. If u define the setup condition (basic play) and a trigger event (of loss aversion) and combine them, you can find interesting ideas both on a discretionary and systematic basis that are highly counter-intuitive to most traders.




X= "I touched the stove"


Y= "I got third degree burns"

then I would NOT disregard the data set as "too small to be indicative".

Larry Williams writes: 

Yes, yes…one sample size is adequate–there seems to be a connection readily seen.

Leo Jia replies: 

My issue is when X is not exclusive to Y, I have not much clue on how X happens and whether Y has a rational reason to be linked with X. This can be possibly because if it is too clear it might very well be different later.

It is quite like a situation where I am a monkey in the zoo. Most of the time I am kept very hungry. The zoologists play a lot of games with me, delivering food here and there at times. During the last five years, I discovered this thing (which I have no idea what is but you humans call it "stove") 10 times in my play field. The 9 times I touched it, it was warm but not harmful and dispensed quite a lot of food, although one time it had no food and was hot so I got burnt then. I am not sure if this is part of the game, but I am clever enough to remember this.

I keep in mind that the stove was not the only thing I encountered that dispensed food. There have been a lot of other situations, one of which is that, quite frequently, you human spectators throw in bananas andvcandies though also often times with garbage which causes some real pain.

So in this case, how do I take into account the stove case?



 I admit I have difficulties separating myself from the monkeys.

During trading strategy development, most of the time I have found that a 'good' strategy by many criteria can't actually beat out the performance of the random trades by monkeys. So the question is what constitutes intelligence? Is performance the sole criterion that separates intelligence from non-intelligence? If not, what else? What can make me say, "ok monkeys, I can't beat you in performance, but this thing makes me much more intelligent than you"?

Marion Dreyfus writes: 

Monkeys' investments are hypothetical; no one has really actualized this hoary supposition. Your trades are measurable and real.

Et voila la difference.

Ralph Vince writes: 

Because you think too much.

No joke.

You look for an "edge," i.e. an asymptotic probability weighted mean that is > 0.

The monkey - he doesn't. He does not posses that great big brain that leads him to believe in the delusions (see previous line) that you do.

He is only concerned with a finite time horizon, one play (get the banana! Don't worry about the small probaiblity of a chock, get the banana), in his case. You, on the other hand, have used your big brain to lure yourself into thinking you will be around tomorrow, something you take for granted.



 I was reading this article and started thinking about the ten scariest things in trading: The Top Ten Things That Make Horror Movies Scary

1. Fear of Death.  This is the ultimate fear, both existentially and psychologically. It isn't really a horror movie if people don't get killed.

In Trading: fear of depletion of assets.

2. The Dark. From our earliest childhood we are afraid of the dark – not the dark itself, but what it hides. It makes horror movies even scarier to watch them in a darkened theater, or a dark living room, right?

In Trading: not knowing enough news

3. Creepy, Crawly Things. Snakes, spiders, rats, and other crawling things are scary in and of themselves, but when they touch the skin, in the dark, it amplifies this common phobia.

In Trading: monthly expenses

4. Scary Places. Horror movies are full of scary places – graveyards, old houses, overgrown forests, dungeons, attics, basements. These are dark places, where evil things can hide.

In Trading: instruments or markets that one had very bad experiences with.

5. Disfigurement. Many horror movies feature grotesquely disfigured antagonists (think Frankenstein's monster, the Phantom of the Opera, zombies). Studies in early development have found that young infants will react with fear to asymmetrical or disordered faces.

In Trading: any instrument that had a devastating history.

6. Dismemberment. Fear of dismemberment involves loss of a part of the self. The popularity (and horror) of the Saw movies involves self-dismemberment as the only way to escape death.

In Trading: stop loss.

7. Suspense (Anticipation and Expectations). The best horror movies are full of suspense (think Alfred Hitchcock). Suspense involves creating anticipation that something bad will happen, but not knowing when it will occur. Some of the most shocking horror movie scenes, create anticipation, but then violate the audiences' expectations (e.g., the hero gets killed; the killer is the one the audience least expects, etc.).

In Trading: market keeps going up with some bears talking about a crash.

8. Spooky Music. Music can create moods and elicit emotions. The music used in horror movies can be creepy, and can be used to accentuate the actions seen on the screen. Music intensifies feelings of suspense and shock.

In Trading: unfortunate family events.

9. Lightning and Thunder. Many people are afraid of lightning and thunder – sudden flashes of light, that can kill, and a sudden and deafening sound that accompanies the lightening. Flashing lights and loud noises create a startle response and they are a mainstay of the horror film.

In Trading: trading alarm.

10. Fear of the Unusual. We know that young children are often afraid of things that are different or unusual (such as a disfigured face), and highly unusual-looking things are often sources of fear. But a common theme in horror movies is to take something that is normally not scary (e.g., a doll, a child, a clown) and make it into a feared object. In other words, making the usual, unusual. This may explain the growing number of people who confess to a fear of clowns and dolls.

In Trading: everything unusual in the market.



 "How our brains trick us into ignoring movie doubles but let us recognise people we love":

Our brains are constantly perceiving the world as more stable than it actually is. Consider this: Every time the light hits your face differently, you look a little different - but people don't perceive you as having suddenly changed into someone else. In fact, they probably don't see your face as having "changed" at all. Without this neurological trick, the world would be a decidedly more confusing place.

But according to a study published this week in /Current Biology/, that mechanism - which researchers have dubbed the "continuity field" - can also steer us wrong, and have us convinced that two totally different faces or forms are the same.

"The brain is creating stability out of what's actually a very unstable system," said David Whitney, the senior study author and a University of California at Berkeley professor of psychology. His lab coined the continuity field term in a previous experiment. In that study, they observed the mechanism by which people meld similar looking objects together.

"When you're watching /Harry Potter/, you don't notice that his plain T-shirt changes to a Henley, for example," first author and doctoral candidate Alina Liberman said. "Your visual system is primed to see things as remaining stable. You have a bias towards ignoring small changes in your environment."

Leo Jia writes: 

I wonder if this has to do with focusing of attention.

For instance, if you focus on the nose of a portrait on a computer screen and then the nose changes color or shape, you should be able to notice that. But if in the mean time, the ears changed, then it is hard for the person to detect that because his attention was on the nose only.

Perhaps this is the evolutionary way of using resources efficiently because the brain's processing resource is limited. This must have proved to work well during, say, hunting. Men wouldn't easily lose focus of the rapidly running rabbit because they see changes instantaneously. What men perhaps don't easily see is that a cheetah starts to chase the rabbit from another angle.

In terms of reading the market, the reason I believe we often miss things perhaps has more to do with the fact that there are so many things going on at the same time that our attention can't handle them all. 



One lesson I am taking from the following article is that randomness is the safest and least damaging method after a series of losses. Of course it is better to have a strategy with an edge. But when you feel threatened or defeated any known strategies could take on a negative edge, so it is better to go random, which always has a zero edge that is better than a negative one. Species seem to have learned this through evolutions.

One other lesson perhaps is that randomness is a great mind opener if one is mindful enough. It is said that failure is an opportunity to learn, so maybe this lesson teaches us that randomness is the door to success.

"Strategic or Random? How the Brain Chooses":

Many of the choices we make are informed by experiences we've had in the past. But occasionally we're better off abandoning those lessons and exploring a new situation unfettered by past experiences. Scientists have shown that the brain can temporarily disconnect information about past experience from decision-making circuits, thereby triggering random behavior.

In the study, rats playing a game for a food reward usually acted strategically, but switched to random behavior when they confronted a particularly unpredictable and hard-to-beat competitor."

anonymous writes: 

An interesting thought that reminds me of modeling the Genetic Algorythm process. Throw in a random factor that ends up improving the search results.



 Last night just before going to bed, my iPad prompted me to update the operating system. So I did it without hesitation - Apple had built my trust through past experiences. This morning I found the iPad is dead - the update failed miserably. I then tried to restore it by connecting it to a computer, but had no luck. I searched and found news articles reporting large scale failures worldwide. It affects all iPads, and iPhones (if you have one, please don't update yet!). Problems appear not only with the update process, but also with loss of personal data and overall usability. Reportedly a lot of devastated people complain in social media.

Is this the beginning of the end of the iFervor?



 I have read about these top five regrets of the dying, and have wondered whether they might apply to myself.

I wonder whether people are all that similar. I observe vast differences amongst people, not only from individual to individual, but more importantly from groups to groups. There can be endless ways to group people: by social status, economic status, life style, fundamental belief, spirituality, sociableness, sensibleness, courageousness, risk tolerance, consciousness, and etc, falling under the normal bell curve with the majority of the people near the mean of each distribution. People near the mean of one gauge might be at the outlier of another gauge.

It is also not difficult to imagine that the answers to each of these regret questionnaires also fall under the bell curve. So the top answers are nothing more than a representation of the people close to the mean. Should one care to be normal? Or when they say, "I wish I'd had the courage to live a life true to myself, not the life others expected of me", should one simply say to himself, "I should have the courage to have my own wishes, not the ones most others had"?



Would anyone advise on how to determine backtesting periods?

I presume one should choose the most recent period because it may better correlate with the present situation. But is that really true? If it is, then how far back should one include, and how far in the future can it correlate? My experience seems to say that a short backtest period can lead to a very short future prediction or even a very poor prediction. On the other hand, a longer period often leads to poor performances during the present situation.

Shane James replies: 

At the Spec Party I had the privilege to spend a reasonable period of time one to one with the remarkable Sam Eisenstadt.

His work is likely one of the best examples of creative thought in the history of financial markets. He explained to me that there wasn't much backtesting to what he/they did. He came up with some principles that made sense to him and started applying them in real time.

Now, in our so called modern world, things may have moved on (Sam graciously stated as much to the room when he was giving his views on the modern markets). HOWEVER, maybe not so much…..

Try this:

1. If your trading idea has an average holding period of a few days (preferably less) then start from today and run it in real time for the next 90 days or so. By definition, the prices upon which you are testing your ideas did not exist when you had the idea so you have already eliminated most bias if you do this.

2. If you are happy with the structure of the returns (win, lose or draw) then consider if the results were biased by any factor during your live test phase and if related to long only stock index trading then make the requisite adjustments for drift.

3. Perhaps now consider a backtest.

The point being that I think it makes sense to test on data that did not exist BEFORE you perform the backtest.
Some like to 'exclude' certain data and 'pretend' it didn't exist so they can assume that the excluded data is 'out of sample'. For instance they may take 10 years of data and use the odd number years as test data and the even number years as 'out of sample'. This might be a reasonable idea to make yourself feel more comfortable but there is an intangible and very difficult to explain benefit to performing the kind of 'spontaneous' testing set out above on data that did not exist at the genesis of your idea before one starts seeing how well a set of heuristics performed in 1971!

Leo Jia responds: 

Hi Shane!

Thanks very much for the valuable advice.

Wow, Mr Eisenstadt! I would really love to thank him for my early success stories with referencing the Value Line. But I guess it wouldn't matter to him as he might have heard from too many!

Talking about my early experience (back in the 90's), I actually had been using your suggestion all along. There was never backtesting for me — I got an idea and went to buy the stock the next day. It actually worked well overall.

Should I go back doing the "novice" way? That becomes a question worth thinking now that you mentioned it. Perhaps this goes with the valuable lessons where having had enough struggles using complex ways, one discovered the neglected simple way being far superior. In Chinese culture, Tai Chi can be considered as that type of "simple ways".

Now, a couple questions about your suggestion.

1. By putting a new idea directly live, what problem is one trying to solve? Is it the concern that poor backtesting result may make one throw out potentially a good strategy? And is this concern because of the belief that past data are already different from the present situation?

2. In what ways can this idea that seemed to come from nowhere be better than the many ideas one gets by studying historical data? I know inspirations are invaluable, but one doesn't often get those inspirations that are not the results of study. So beyond the mistrust of the correlations between past data and present situation, are there any other reasons?

Thanks again for your thoughts.

Bill Rafter writes:

I am sorry to jump into this discussion late, but think there are a few points that can still be brought.  Looking for beta over a constant period of time (say 6 months) is somewhat meaningless and useless.  It’s a bit like describing a man with one foot in a fire and another in ice as at a tolerable temperature.  You have got fat tails with market volatility and a static window might be good for a journalist, but of limited value for a trader.

At a given time there is a time period over which the study of a market’s behavior will be significant.  And let’s say that at this time it really is 6 months, or 126 trading days.  Assuming no real changes, tomorrow that time window will be 127 trading days, and so on until you get a market change.

When the sea does change, bad things can happen in a hurry and beta value for the preceding 6+ months will be of little value.  Within the last week this happened with biotech:  it had been happily chugging along with good but not extraordinary outperformance of the indices.  Then it got clobbered with huge excessive relative volatility to the downside.  Had you been adapting your monitoring of volatility you would have been prepared, whereas if you stuck with your 6-month window you would have been clobbered along with the group.

My advice to you is to learn how to deal with the market adaptively.  I assure you that if you have a monitoring mechanism which you like, if you make it adaptive you will improve results dramatically. And it doesn’t matter which signal type (momentum, volatility, sentiment) or time frame (intra-day to weekly) you favor.



 Some commodity futures markets I have been trading just opened night sessions (from 9pm to 2am). That created some unknowns for me, as I don't know how the night sessions would affect the daytime sessions, particularly the opens/closes of the day sessions. The strategies I have been using are based on studies of the past 3 years' data. So I stopped trading these and just watch. Since these markets all have overnight overseas markets, I suspect the newly added night sessions would not make much difference to the day sessions.

Would anyone would share some experience on this?

Victor Niederhoffer writes: 

You should find markets that already have these sessions, and apply your methods to them which will work just as well as your normal. The volume in these abbreviated sessions by the way will be very low, and you won't be able to trade them. But the volume will be just enough to throw off all your opening regularities from the past.

Mr. Krisrock writes: 

Be aware that global futures markets are looked at as ONE MARKET. Time zones aren't important but prices and liquidity and price targets are very important.



I did some computation lately and found the following results about correlations. These results show me something I did not realize before.

Given time series A, B and C. Say Corr(A, B)=0.2, and Corr(A, C)=0.05. With this, one would think that to help understand A, C is useless. But that is not always the case. If one combines B and C and gets series D, where D = B & C, one may find Corr(A, D)=0.3, which means C actually can be very valuable in studying A. This can be understood as the combination of B and C and can eliminate some elements in both B and C that are negatively correlated with A.

Would anyone share further lessons on this?

Alex Castaldo adds:

Before I read this I had not realized that correlation is not transitive (i.e. if A is correlated to B, and B is correlated to C, it does not follow that A is correlated to C). It does not directly answer your question, but it shows that the behavior of correlation can be rather unintuitive.



 Any reflections on India? Reports about the new prime minister sound very promising. With a vibrant culture, India in my view could be in the spotlight at least in the coming 10 years, more so than China. Thoughts please?

Peter Tep writes:

I recently read a post by Martin Armstrong where he speaks about the difficulties facing India in the past. His main point was on language and that as more and more of the country learn and become proficient at English this will provide the platform for the next 'boom' - for lack of a better word.

Seems to make sense for opening up the skillset in the economy. Let's just say I wouldn't want to take on a young Indian in maths, programming or CFA calculations!

I did see that Modi's intention was to expand power access to the 700m+ population by focusing on solar. Purely from a headline perspective I'd be looking at which companies are set to benefit the most from that or whoever is closest to Modi and his administration.



 This was a very interesting article.

"A chinese mathematician figured out how to beat anyone at rock-paper-scissors":

"The pattern that Zhijian discovered — winners repeating their strategy and losers moving to the next strategy in the sequence — is called a "conditional response" in game theory. The researchers have theorized that the response may be hard-wired into the brain, a question they intend to investigate with further experiments."

Jordan Low writes: 

If I am reading it correct, the losers are basically choosing to display what won recently. Isn't it like using 3Y returns to pick mutual funds? Or did I get it wrong?

Steve Ellison writes: 

I don't play that game, but a good strategy might be to make selections as randomly as possible, for example by memorizing long sequences of digits of irrational numbers (Arthur Benjamin has a memory aid for how to do so).

Bill Walsh, the coach of the San Francisco 49ers football team in the 1980s, scripted the first 25 plays of each game in advance. This strategy made it harder for opponents to guess what play might be coming next. I have an idea that, if I could ever find enough trading systems with positive expectations, it might be good to randomly pick a sequence of systems to use in advance, in order to keep the crocodiles guessing.



 I was talking to an old friend of mine yesterday. He was a floor broker for Lehman Bros in the bond pit (he once sold me 500 calendar spreads while standing next to me at a urinal in the men's room). When he first left the floor he attempted to trade electronically and within a relatively short period of time went through all of his money. He had to take a job with the CME working at their help desk, and was eventually promoted to associate director of the Globex control center working the third shift from 3 a.m. to 11 a.m., and is now a senior director at the CME.

He told me an interesting story about his experience trading after he left the CBOT. It was about another ex-denizen from the floor. This individual, however, had worked as a clerk for a mutual friend of ours, who had been a trader. My friend went on to tell me how the ex-clerk had been making $1,000- $1,500 screen trading, per-day, like clockwork — averaging $25,000 per month for quite a period of time.

However, after my friend went through all his capital and stopped trading, he lost touch with this ATM of an ex-clerk. But serendipitously, ran into him the other day when he hopped into a cab. However, the ex-clerk was not another passenger, but the driver. Of course, there are quite a few lessons to take away from this story- not the least of which are:

- markets change and if a trader doesn't adapt, he'll be driving a cab
- becoming a successful trader is not easy, even if you're experienced
- core competency in one endeavor, does not guarantee competency in another
- working for a living sucks
- always be prepared to trade
- markets aren't the only thing that reverts to the mean
- not every cab driver in Chicago is from Pakistan or the Middle East

- never turn down an edge, no matter where you are, or what you have in your hand
- always wash your hands after making a bathroom trade

- success is fleeting, losing is forever

Leo Jia writes: 

Thanks Gary, for the interesting post.

I found your title (or the last lesson on your list) quite intriguing: "success is fleeting, losing is forever". Seems apparent in a lot of cases. But why and how is that true? Especially when we consider your other lesson: "markets aren't the only thing that reverts to the mean".

Anatoly Veltman writes: 

Isn't it true: even having made 5,000% on your money, once you lose only 100% - you got no money left. That is more like self-sabotage.

Leo Jia writes: 

Normally, if one wins/loses in percentage terms, one nearly never loses 100% - sure one may lose so much as to have not enough fund to continue trading.

Let's assume that he wins/loses 5% on each bet. To make 5000% in the fastest way, he needs 175 consecutive wins. From here, to lose all he has made and get back to his original amount (which is still enough for him to continue trading), he needs to go through 166 consecutive loses. If his wins/loses do not happen consecutively, which is normally the case, it might have taken him over thousands of trades on each way.

So in this process, even though losing takes fewer times than winning (166 vs. 175), winning and losing both take a long time. So the other lesson "markets aren't the only thing that reverts to the mean" could apply here: after losing some, one starts to win. I am not sure how one can conclude "success is fleeting, losing is forever".

In the worst god-given case where he has no edge at all and trades simply based on flips of a fair coin, he has equal chances of winning and losing.

The only case where "success is fleeting, losing is forever" is possible is when he always strives so hard to create a very large negative edge for himself.

J. Hughes comments:

 Interesting, but the distinction needs to be made, "he was a floorbroker", quite a different occupation than that of floor trader. It's easy to trade against an order deck.

Having done both job's, cabdriver, and trader, though for different reasons, I can state unequivocally, yes markets change and if traders don't adapt, they perish. But the bigger insights lie in how much cab driving is similar to trading. Both position risk capital upfront, the 3 G's, gates, gas and graft. Then there is risk control, it takes skill to size up an individual when one is traveling at 35 MPH and trying to cover the costs of the 3 G's. Then there is return on capital, I can say first hand, my return on capital as a cabbie, on a nightly basis, was far superior on a percentage basis and more consistent as a hack, than a trader. Although I am back to driving a computer once again, and there are times I wish I was back pushing a hack. Both positions are very much traders. It's a natural fit. The lesson is, "life is replete with vicissitudes."

Ed Stewart writes: 

The problem with making $ 1,000-2,000 a day is it is enough to provide a salve and decent quality of life that makes one feel like a professional, but this is not dentistry or a job at a federal regulator. IMHO the correct target is to get rich and become a real capitalist. How one does that, via trading, a service business, or a money manger (combining the two) does not matter so much as actually doing it by any means that is legal and ethical. Going for crumbs doesn't cut it.



 I have been thinking about what could be a good set of criteria to measure trading (strategy) performance for individual traders.

The criterion of average return divided by the variance of the returns seems to have its shortcomings. One reason is that some large positive returns can cause the variance to go up resulting in an indication by the criterion that the performance deteriorates. But some large positive returns are good to have.

Other criteria like Sharpe ratio seem more suitable for institutions.

I think using properties of the linear regression line of the cumulative return curve might be a better choice.

Two useful properties are the slope and the "width" of the linear regression line. By "width" I mean the deviation of the cumulative return curve around the linear regression line.

A good performance should have high slope on the one hand. And if we do not consider reinvesting profits, it should have narrow "width" around the linear line.

So then the value of slope/width seems meaningful.

If we take the linear regression line as a risk free benchmark, then this value may be very similar to the definition of Sharpe ratio, but practical for individuals.

Would anyone please comment on the pros and cons of this, or any other better ways to measure performance.

Alexander Good writes: 

Great post!

I think it makes sense to measure linearity of PNL and convexity separately so I agree with you that R sq is a good one to employ. I am curious how width differs from the strategy's std though…

One thing that you can do as a cheap proxy is median return * sqrt(252)/std return and then for skew then have a (rolling max peak to trough draw down)/(rolling max peak to trough draw up).

You can benchmark your strategy vs. bonds, the S&P and a traditional 60-40 mix or your other strategies. It's very hard to beat a vol weighted portfolio of stocks and bonds so it's a good benchmark in my humble opinion assuming you're trading your PA and you don't have large retirement holdings. I assign different weights to skew and median return depending on my portfolio construction.

In portfolio construction you'll often find things with strongly positive skew have good inverse correlation to market PNL series and are typically 'long vol' (idea ripped off AQR's value and momentum everywhere).

Trending strategies frequently have very positive skew (momentum) whereas mean reversion tend to have skew that looks like the S&P (value). So if I'm net long beta my marginal utility of doing trending models is higher whereas if I'm net short I tend to size up mean reversion strategies.

Would be curious to know what other people are using/ how other people think about this/ if they have good papers on the subject. 

Leo Jia writes: 

Aren't they different?

std of returns has this term: (Ri - mu)^2, where mu is the same for all i's.

The width has this term instead: (CRi - Vi)^2 where Vi is the value on the linear regression line at time i and is all different across all i's.

Alex Castaldo writes: 

Personally I just like to look at the equity curve visually, and it is not difficult to store large numbers of graphic files in a folder and quickly "flip" through them by hitting a key on the computer.

But for automated evaluation Leo's two criteria (slope of regression, and "width around the regression" (which is also called the SEE or standard error of estimate.in regression textbooks) make sense to me.

However I know there are many other criteria that have been proposed. There is one with a foreign name that I think starts with "v" but that I can't remember. I am sure some people here know what I am talking about, it was much blogged about 2 or 3 years ago.

In looking for it I accidentally googled another measure of equity quality, the k-ratio , that believe it or not has 3 different versions.

Any other ways to measure equity curve "quality"?

anonymous writes: 

As with many things involving non linear information, my experience suggests that one must mix, blend or combine different 'quantities' to form a unique and proprietary time series.

For example, some form of 3D 'curve' that combined the three quantities return, AUM & volatility that gets thicker as AUM in the strategy grows and changes colour as volatility of returns increases perhaps… 

Ralph Vince writes: 

percent of 6 month periods underwater
percent of 1 year periods underwater
percent of 2 year periods underwater

percent of time at equity highs
percent of time within 1% of equity highs
percent of time within 5% of equity highs
percent of time within 10% of equity highs
percent of time within 20% of equity highs

I have all of these programmed up in javascript which you can peruse at lspindexes.com and click the "compare" tab. 



 The lesson I would take is this.

Initially, people believed that the yuan had been manipulated (or in better word, controlled) at a very cheap level. So they invested in yuan. Then it has been so apparent to everyone that the smooth uptrend was due to control. So having witnessed the evidence of control twice, one should have envisioned that the same control could be against one's favor as well.



Data, from anonymous

March 28, 2014 | 2 Comments

 I often look at the amount of past price action used to attempt to predict future price action.

Some things that are useful to ponder, in my opinion, are:

1. Is more past data really going to help to make the future prediction more accurate?
2. Should there be a balance between look-back period and forecast horizon?
3. How important is data accuracy (tick level to daily range)?
4. Should reference points & times be changed every second, minute and hour of a day?
5. Should the definition of 'big move' and 'small move' be a fixed thing or relative to the market's current level?

For me, it's NO, NO, VERY, YES & RELATIVE.

Go Well.

Leo Jia writes: 

In Schwager's book "Hedge Fund Market Wizards", Jaffray Woodriff addressed this in the following way. Any comments? It does have to do with what one is trying to get, doesn't it?

"Do you give the same weight to data from the 1980s as data from the 2000s?

Sometimes we give a little more weight to more recent data, but it is amazing how valuable older data still is. The stationarity of the patterns we have uncovered is amazing to me, as I would have expected predictive patterns in markets to change more over the longer term."

Larry Williams writes: 

As I see it we certainly cannot compare data from the old pit sessions to today's electronic markets.

And how do we handle Saturday trading in the real old days or that markets were close on election day…or in 1967 the markets were close on Wednesday… or there used to be a massively important bond report the goosed bonds on Thursday??

We need to understand what the data represents.



TEASER ALERT: I am not about to write what you expect!!

A popular blog site recently posted a story that advocated people to tap their home equity and buy stocks. The link is here or if that link doesn't work, here. 

What I find interesting about this article is that it is being met with universal revulsion judging from the blog comments and other related postings. (Not naming names.) The so-called Pros are saying it's irresponsible, ludicrous, sign of a top, etc. etc. etc. And the so-called pros are also saying that people will get sued for giving this advice. (I have no opinion).

Let's ignore the fact that this column's recommendation was extremely good advice for the past 5, 10, 15, 20, 30, 50 years, and let's also ignore some of the weaker arguments in the story.

I think we should step back and analytically consider that there is actually some merit to the concept (for some people). (Caveat: I am not bullish on stocks).

Imagine the very responsible Mr X who every month took all of his extra income and paid off his mortgage early. He's now about 40 or 50 years old. And he owns no stocks. He owns no bonds. And he has no mortgage. And he's got enough cash to meet any emergency. I can make a very rational argument that Mr. X would be very well served to place a modest mortgage on his home and use the proceeds to acquire some financial assets. Not necessarily all stocks. But definitely some financial assets. There are several underlying arguments in favor of this: But first and foremost is diversification. We know mathematically, over time, diversification is the only free lunch.

So the authors of this controversial blog post got distracted by things like positive carry. And some other not-so-true things. But all of the readers spewed venom. And this reaction may have informative value.

Remember: A home is both a consumption good and a store of wealth. If someone put 100% of their net worth in a single undiversified stock, they are asking for trouble. And a home is really no different in that respect.

anonymous writes: 

I agree 100%.

The negative reaction, it seems, mistakenly seems to argue the case of not selling one's residence to buy stocks (which is clearly not what the author of the original piece advocated). Clearly, if one were to buy a second residence with that same home equity, in the case of agnosticism as to the direction of home prices and equity prices, would their reaction be the same?

Leo Jia writes: 

I think it all depends on who Mr X is.

If he is financially skilled (which seems not the case at all in Rocky's description), then maybe OK.

If not, then he should stay at where he is.

Or if he is really tempted, he should first spend a lot of effort in getting the skill. But Mr X should be well advised that he would still have no clue of what that skill is after many years of fooling around.

Do we all believe that investing is an easy job for everyone?

Different from the house, a financial asset is liquid and evidently volatile. Ordinary people can not tolerate the pain when the change of their asset value is vivid and clear. With the benefit of liquidity, the pain would cause them to do a lot of stupid things, which will then burn them out in no time.



"Reading, after a certain age, diverts the mind too much from its creative pursuits. Any man who reads too much and uses his own brain too little falls into lazy habits of thinking." - Albert Einstein

Stefan Jovanovich writes: 

This certainly explains why he and so many other brilliant people fall for the idiocies of socialism. As a system it is flawlessly logical; it lacks all the chaos, confusion, corruption that liberty produces. It requires more than a little reading to learn just how insanely vicious the logical systems of political economy all have been.



First order differential equations of the form:

the rate of change of a variable + the original variable x a constant equals a constant times a function, or

dy/dt + p * y =  k1 * q(t)

has wide applicability in all physical settings. it's used to model the cooling and diffusion equations for example, as Arthur Mattuck in a brilliant and relatively easy to assimilate lecture shows.

For what variable in the market does its rate of change depend on its level and the movements of a second variable. The moves of stocks relative to bonds and currencies comes to mind. Is it predictive in certain cases and how do random perturbations affect the solution and its predictivity? Are there any methods used to solve these first order equations that are useful for markets without regard to stochastic, useless solutions?

Leo Jia writes: 

I once attempted to use it to model the market, but I did not proceed. The reason is that I realized the solution would be a function of two coefficients, i.e. K and K1 in this case, and so by varying the coefficients, one can fit the solution well onto the historical chart. The way to fit it wouldn't be very distinct from that of fitting a moving average onto a historical chart. So to me it seemed to fall into the same dilemma as trying to profit from a moving average model. Would anyone correct me?



 Among the 4 Chinese companies on MIT's 50 Smartest Companies 2014 list, Tencent is very well positioned with their products and services. Its enhanced instant messaging service QQ has been the most popular by far in China for years, nearly used by everyone. In recent years, its new service WeChat which runs on both Android and iOS and includes free voice/video calls/messaging among members are gaining similar status. For sometime already, WeChat has been cutting revenues for mobile service providers. One interesting thing is that an elder man from Denmark whom I met recently in Thailand uses it. He said a lot of people in Europe use WeChat and regard it to be far better than Skype.

Alex Forshaw writes:

I use WeChat partly because I cover Tencent and partly because I need to stay in close contact with Chinese people, but I can confirm that more Westerners are beginning to use the service as well. The English version is very simple and effective. The Chinese version has a lot more features and is becoming the top mobile communications client in the world.

Globally, Wechat competes aggressively with LINE, a South Korean company that has locked up the Japanese market for this service. LINE, Wechat and WhatsApp are now in a worldwide land-grab over these services. WhatsApp seems to be a distant third in this niche.

Tencent is very intelligently turning Wechat/Weixin into a "mobile OS within a mobile OS," and it's beginning to up-end a lot of basic services in China. They are partnering with Dianping (Chinese Yelp + Opentable + GRPN component + others), Didi DaChe (Chinese Uber) and other local services companies to drive a lot of 'local business' traffic. The really big call option in Weixin is to turn it into a mobile payment client (a lot of Chinese make mobile payments thru their cell phone as opposed to with a credit card because of idiosyncrasies in the Chinese payments system.)

Analysts argue that within Tencent's current US$125bn market cap, $40bn or so is due to Weixin/Wechat. 

Peter St. Andre writes: 

Facebook is buying ~500 million locked-in users controlled by WhatsApp, so that they can add those poor souls to the 1+ billion locked in users already controlled by Facebook itself (although presumably there's some overlap in their users).

I'll note that, although both Facebook Chat and WhatsApp use modified versions of the chat technology I've worked on since 1999, I ain't seeing any of those billions of dollars. I am, however, probably having a lot more fun than the folks working at Facebook and WhatsApp.



I have been thinking about trying to use the 5 Whys Method to analyze trading errors on my account (and then check the "images" tab for actual users' examples).

But the exogenous events (Black Swans, terrorist actions, bad actors with undesirable or stupid agendas, etc) that are beyond a small investor's control, for example: Das Fed; China changing its economic or monetary policies seemingly at whim; whale trading errors; etc., leads me to think that without either (1) an ultra conservative approach that isn't going to yield much investment return, and/or (2) insurance like put-call strategies that I admittedly know little about, a simplistic equation might look like this:

P = G + D *a * b,        or    [1]
P = G + D * e              

P = investment profit
G = growth of investment
D = dividends (if applicable)
(a) likely risks I know about that are possibly going to occur, and
(b) unknown risks I don't know about that might or might not occur
(a) and (b) collectively = e … an acceptable amount of uncertainty ("Implementing Six Sigma" by Breyfogle III, 2nd ed, Wiley, page 1029)

roughly translates to:

Investment Profit = growth of investment share price + dividends if applicable * risks I know about that are possibly going to occur (beta-likely things) * unknown risks I don't know about that are possibly going to occur (exogenous things)

I view these 'e' uncertainties of the market/s as gravitational-like-affecting forces, similar to a planet (the Market) and its multiple 'e' moons affecting the planet tides. Then, if one doesn't know the orbits of the moons (see 'a' above) and/or their respective orbits are random / erratic (see 'b' above), the 'e' effects exert influences that push and pull the market.  Sometimes the direction is good, sometimes not. 

Which all reminds me of the Chair's recent Lotak Volterra equations information, and a lecture during a university optimization class where Dr. Pugh (Indiana-Purdue Fort Wayne chair of Engineering Technology Dept) went through a very similar discussion about "Why Things that are Normally Stable Suddenly Change".  He was diagramming essentially identical graphs using Hare and Fox populations.

Leo Jia writes:

Why 5 whys?

Welcome to the list, Rich.



 I did an interview at the Metals and Minerals Investment Conference in San Francisco. I gave a talk with more details on gold at the same conference. I comment on stocks vs. bonds. This is my 11 minute interview starting 30 seconds into the interview time.

Comments welcome!

Leo Jia writes: 

That is a very interesting interview. Thanks Bud.

Regarding big banks' manipulation of gold and silver, I have read such speculations for a few years. I often wonder how this can be possible given that there are big capital in the world that is not part of the banks. Why wouldn't they come in and break the manipulations and make money at the same time? Perhaps in the way Soros broke Bank of England?

Bud Conrad responds: 

Yes, Leo, you have read those speculations for years — and for years those who put them forth have been viewed as members of a lunatic fringe. The most frequently heard dismissal of the case was, to the effect, "anything that big could not go un-noticed." Yet, as we have discovered in recent years, the LIBOR market and the swap markets have, in fact, been rigged. Each, as I understand it, are much larger and more vital than the gold/silver markets. Why anyone remains doubtful puzzles me…



 I watched the 3D version of the movie Gravity yesterday in a remote city theater in China. I noticed on IMDB that the official showing date is Nov. 20th. I wonder how it gets shown in China a couple days earlier. Perhaps because a Chinese satellite is featured in the film.

Anyhow, aside from a scene in space, the movie's story is very simple and nearly empty. It goes basically like this: while in the wild away from home, two teenagers suddenly discovered their bikes got ruined. To save the stranded girl, the boy surrendered his life. Then the girl struggled to reach to other unattended bikes. She finally got one (a Chinese one), and returned home with it.

I noticed it is rated 8.5/10 on IMDB, an unbelievably high score. It seems like a scam to me. I would give it 5 only for the space scene, otherwise just 2.



I remember some stories in American history where farmers have lost big in playing agriculture futures. It looks like the same will happen to the coal riches in China. A new chapter in wealth transfer is likely starting.



Attached is a weekly chart of CSI300 index (representing 300 large stocks on Shanghai and Shenzhen exchange) from January 2007 to now.

Would anyone call an upcoming bull market from this?

Perhaps the chart is not too obvious yet. Fundamentally, it is true that many foresee a slowdown in GDP growth in the coming years. But what is important now is that people can anticipate some structurally healthy growth. And this is very different from the past 5 years when the growth seemed high but the market mainly saw it as unhealthy and stayed essentially hopeless. The new government seems to deliver a lot more confidence to the market with a new direction for the economy.

Any thoughts?

Bill Rafter writes: 

One suggestion I have is that you ask yourself two questions:

1. Consider the participants in that market; what time frame do they typically observe in terms of long term perspective (i.e. lookback period), and

2. How frequently do they watch the market?

The reason to care what others do is because they are your competition. The money you make, you get from them. Thus, know them!

Point #1 may also be related to taxation. Is there a period of time in China such that if a position is held that long it qualifies for a tax break? In the U.S. that means it qualifies as a "long term capital gain" with a significantly reduced amount going to the confiscatory government.

If there is no such period, then it's nice to see history going back to 2007, but it is irrelevant to what is happening now. However it is good to have history as you can easily see with a visual how a market behaves with the signal process you use. You should statistically test, of course, but a quick look is valuable. (Tukey said so, and he is a god in this area.)

Thus your window of observation for decision making (as opposed to history) should not go back perhaps more that 50 percent greater than the period identified in point #1. In our case (in the U.S. with equities), we do not look back farther than a year and a half. Frequently as little as four days.

Point #2 is the shorter end. If everyone watches the market every day, then by limiting your snapshots to weekly, you are discarding valuable information. Ask yourself, "Why would you ever want to eliminate valuable data?" You would not do that with a neural net, so why do it with real intelligence? Some would posit that weekly information (data or charts) eliminates some noise. However we would argue (and have demonstrated) that it is impossible to separate signal from noise. Specifically I would suggest that if someone gave me what they considered noise, I could find some signal within. It may not be the best example of signal, but it's in there.

Leo Jia adds: 

Thank you very much, Bill, for the precious advice.

There are a couple reasons for me to have attached the weekly chart starting from 2007.

1. I look for a possible multi-year bull market, and for that to me the trend looks clearer on the weekly chart.

2. One key reason for the past few years' laggard market, aside from those fundamental reasons I outlined, is the bull-run and crash in 2007-2008. The bull-run was solely due to the government reform initiative in the stock market which tried to ensure all shares (government shares and floating shares) to be equal. The crash then was mainly due to market suspicion that the resulting floatable government shares would subsequently flood the market. Now 5 years over, the flooding of the government shares, if that happened indeed, is likely to have settled down.

To answer your two questions:

1. There is no tax incentive in China encouraging people to hold longer. Holding period are generally much shorter. It can be as short as a few months for funds, and as short as a few days for individuals.

2. Most participants watch the market everyday.

Perhaps one thing different in China's market is that large market movements are all initiated by government policies. Market enthusiasm are only summoned when the imagination of a government direction as positive.

I am not a government analyst, but traditionally, each government in its 10 years tended to create at least one big upward move in the market. Looking at this government, its initial months already showed signs of its focus on finance (along with new direction on economy). The recent launch of bond futures is one such key move.

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This is a great TED talk on "How to Make Stress Your Friend":

Stress. It makes your heart pound, your breathing quicken and your forehead sweat. But while stress has been made into a public health enemy, new research suggests that stress may only be bad for you if you believe that to be the case. Psychologist Kelly McGonigal urges us to see stress as a positive, and introduces us to an unsung mechanism for stress reduction: reaching out to others.

To your health!



 There have long been debates on whether people are rational or biased and irrational. Works by Tversky, Kahneman and et al seem to have directed our view toward the latter. But which view is really correct? Are we admirably rational in our choices, as the classical economists assume, or are we hopelessly irrational, as the behavioral economists claim? The author of this article "Sex, Murder and the Meaning of Life: the evolved wisdom behind our seemingly stupid decisions" is contending an alternative view that "our decisions are in fact biased, but in ways that reflect an evolutionary Deep Rationality".

As this would fundamentally affect our way of trading, I really would love to hear Dailyspecs' comments.

In addition, does the trading community today mainly believe that people are rational or biased and irrational? To your understanding, is there any view that dominates the trading community at the moment?



Attached is 15-minute chart of Shanghai A-Share Index, starting from morning of Aug. 5th to 1:50pm today [August 16, 2013]. If you can not read the numbers very well, the highest is marked as 2191 and the lowest (about the 10th bar from the right starting at 10am today) is 2061. The 5th bar from the right starts at 11:15am and is the last bar before lunch break at 11:30. The 4th bar from the right starts at 1pm and is the first after the lunch break.

There were some huge and sudden buy volumes on large cap stocks right before lunch break. The reason is unclear at this time.

(A small note about this chart: in China rising price bars are red, falling price bars blue or green).

Alex Castaldo adds:

See  this news article "China Trading Error " for a possible  (after the fact) explanation.

Leo Jia follows up:

Everbright Securities has admitted it as a trading error and has petitioned to the authorities to void the trades, but it seems that the authorities didn't approve.

But the complication is what happened after the "error". All stock trades are T+1, so Everbright could not sell what it bought on Friday. To the best it could, it redeemed as many stocks as it could to ETF shares and sold the ETF shares on Friday. It also greatly increased its short positions in the index futures, resulting it being the largest short position holder of the index futures with a total of 7130 contracts. Everbright claims these are all defensive activities.

Clearly all these will cause more stir in this coming week. But what is important is to see how the authorities will treat this case after their investigations. The short positions give people reasons to question that it could very well be a calculated activity to manipulate the market. The hope is that the authorities doesn't open a door now for similar type of manipulations in the future.



 I'm just curious: why is the rice market small when the crop is so popular all over Asia and Asia has so much population? Is is because the Asian country make it a priority to be as self-sufficient as they can be even when it's not economical?

Leo Jia writes: 

As a picky rice eater, I think the large varieties of rices segment the rice market. All these rice are not the same at all though they may look very similar. The majority of rice produced in China is a hybrid rice developed by a contemporary Chinese scientist named YUAN Longping. Its mouthfeel is horrible, but it is much cheaper and contributed largely to feeding the large population in the country. Sogi-san commented that rice in Japan costs 4x or more than it does in the US. I am not sure if he referred to the same rice, but to my taste, some Japanese rice are much better than the American one.

There are two rice futures in China, but to my understanding they are both of some small varieties and therefore traded thinly.

Jeff Watson writes: 

Rice is a thin market because the insiders want to keep it that way, and the export market is small compared to other staple grains and grasses. Furthermore, rice tends to be consumed in the country of origin. We export around 3 million metric tonnes if memory serves me correctly, which is about half the US crop.



According to my reference "A Market Profile is an intra-day charting technique (price vertical, time/activity horizontal) devised by J. Peter Steidlmayer".

Price is plotted on the y axis.  At the end of the day using tick data a histogram or probability density is plotted in the x direction showing essentially how much time was spent (or how many contracts were traded) at a given price level. (For those interested there is a video presentation on the CMEgroup web site).

Some Chinese trading software has this feature built in. The volumes corresponding to price levels can be shown together with the price chart.

Years ago when I first discovered it, I was very fascinated as it appeared to work very well as a very good indicator for support and resistance levels. But later I found that it was only calculated (or simulated) and did not contain real facts, and I haven't paid too much attention since.

The issue I had is this. Say at some point someone bought N number of shares of a security at price X. Clearly, the software has no problem of recording volume N at price X, but the problem it has is to correctly remove the volume of the current seller(s) that was previously recorded when they bought. As a result to me, the volume profile might just be a guess work.

Did I miss something? Any comments on how one can better use this feature?



Morgan Stanley states: "China relies more on indirect or transaction-based taxes, such as business tax, VAT, and consumption tax".

I just noted during the last few days that retail sales tax is about 20% in China. I wasn't quite clear about this number before as Chinese stores never charge for tax, i.e., tax is never itemized on the receipt. Plus, all merchandise are marked with prices including the tax.

I only noticed this at the cashier of Metro (the German warehouse store) when she told me the total price was 630 yuan but I saw on her monitor a number of 530 yuan. Looking carefully, the total of 630 included a tax of 98.

Ironically, the Chinese prefer a quoted price including the tax. The first culture shock for American businesses as I experienced years ago was that Chinese buyers don't like to see a quote with tax listed as extra.

This is an interesting article: "How China's Tax Structure Crushes the Poor".



To give a fuller perspective of the Chinese stocks, I attach some charts of the different markets. All these are weekly charts from 2006 to now.

To start with,the first here is the Shanghai-Shenzhen 300 Index, comprising the 300 largest stocks on both exchanges. This is the base of the Index futures currently traded on Shanghai Financial Futures Exchange.

Sh Sh 300

The Second is the Shanghai 50 Index, comprising the 50 largest stocks on the Shanghai Exchange.

Sh 50

Most stocks in the above two indexes are of state owned enterprises.

These stocks and the index futures are only available to domestic Chinese and are priced in Chinese Yuan.

As we can see, both are at quite depressing levels.

Third is the index of small caps on the Shenzhen exchange. This comprises stocks of all small, and most importantly, private businesses. Again these are only available to domestic Chinese and are priced in Chinese Yuan.

small cap

To compare with the two large cap indexes, this is not nearly as depressing. 

Now here are two indexes of stocks priced in other currencies and available for international traders.

The first is Shanghai B-shares index. It comprises all of the less than 100 stocks priced in USD on the Shanghai exchange.

Shanghai B

The second is the Shenzhen B-shares index. It comprises all of the less than 100 stocks priced in HKD on the Shenzhen exchange.

Shenzhen B

While the Shanghai index not too depressing, the Shenzhen index is actually somewhat strong.



 I just stumbled upon this inspiring post: "20 Ways to Get Good Karma" by the Dalai Lama. Many teachings can be directly applied to trading, such as:

1. Take into account that great love and great achievements involve great risk.

2. When you lose, don't lose the lesson.

3. Follow the three R's:
- Respect for self,
- Respect for others and
- Responsibility for all your actions.

5. Learn the rules so you know how to break them properly.

7. When you realize you've made a mistake, take immediate steps to correct it.

8. Open your arms to change, but don't let go of your values.

18. Judge your success by what you had to give up in order to get it.



 Laurel told me her flight to Shanghai from the regional airport of Yichang was delayed 20 hours. I must admit I don't fly very frequently (thank God), but none of my flights in recent years were on-time, and this is countrywide not only in Beijing and Shanghai. Best delay was 3 hours and worst was 12 hours. This is much worse than say 5 years ago. It is a serious detriment to businesses and I believe it serves as a big drag to the economy. The key reasons as cited in the article are poor air traffic control and the occupation of the air space by the military.

Victor Niederhoffer writes:

I have heard that it is impossible to check your bags through from one country in China to the other and this adds to the number of delays which I have also heard comes from the restricted air space with the rest allocated to flexions.

"China's Airports, World's Worst for Delays"



I believe the sun combined with a comfortable climate is key for happiness. People, and all organisms, are just more active in it. Places like Boston or New Jersey just don't have it. A former classmate couple who moved from Chicago to Silicon Valley told us their feelings during the initial days was always like "Oh, the weather is great today, let's go do something" until they found the weather is always great.



 I found there are many similarities between trading and playing poker (Texas Hold'em).

1. In both games, at first one is presented with an opportunity. In trading, this is the time one starts to decide whether one should make an entry; and in poker, this is when one is dealt with the first 2 cards. One calculates at this time the chances and the expectations and makes a decision on whether to proceed and how much money to put in.

2. While holding, one is constantly presented with the potential possibilities to win or to lose. In trading, this is reflected by the ups and downs of the equity value; and in poker, every new card coming to the table alters one's chances. During this time, one constantly calculates the chances and the expectations and makes decisions on whether to continue holding and whether to add or reduce one's position (in poker one can't reduce).

3. At closing, in poker, this means the final showdown; and in trading, this is when one has to close out the position. Only at this point, the possibilities to win or to lose are realized.

Probably one crucial difference is that in trading one does not have a way to bluff, unless one is a heavy weight in the market. But it is quite the same in both games that one is often bluffed at.

John Netto responds: 

I feel compelled to respond given I have used both mediums as a way to make a living. No comparison between poker and trading is complete without examining the ancillary issues such as transactional costs and liquidity.

In poker, the house takes a rake on every pot and for every orbit (time the dealer button goes around the board), a player must post a big blind and a small blind. The rake can be as small as 5% and as high as 20 percent given the venue and size of the pot.

In trading, one might pay a small fee for software or data, but on a percentage basis, this is substantially less. Overall, these are real factors for a number of professional cash game players in computing their positive expected return.

Liquidity is another issue. You are at a table with 8-9 other players and the higher the stakes go, the more seasoned and experienced the players are.

Therefore, assessing the "volatility" of a table is critical as a trader who likes to be long a lot of gamma, I like to be in games where the players are looking to gamble and mix it up in a lot of pots and chase down their draws at bad payouts.



 The Fortune Global Forum 2013 is being held at the Shangri-La Hotel in Chengdu between June 6th and 8th.

Someone has started a new campaign to name Chengdu (a 2,500 year old name, which literally means "becoming a capital") City of Fortune and Capital of Success.

The participants in the forum are listed here and the agenda is here.

From Xinhuanet: "This is the 12th annual forum held by Fortune magazine. It's also the first one hosted by a western Chinese city, following Shanghai, Hong Kong and Beijing. Chengdu is the capital of Sichuan Province and is a rising economic engine in China's "West Development Strategy". Last year, Sichuan Province ranked in the top 10 in terms of foreign direct investment utilization."

From China Daily's article "Chengdu gains from Fortune Global Forum":

More than 600 state leaders, CEOs of world-class companies and economists from around the world have registered for this year's event under the theme "China's New Future".

The city will enrich the forum, as it is pertinent to its theme and this year's core topics: sustainable development, innovation and technology.

The city's good infrastructure, convenient transport links and logistic systems, comparatively low labor costs and efficient administration system have attracted 238 companies out of the world's top 500 to the city. Chengdu's GDP was 800 billion yuan ($127 billion) in 2012, accounting for one third of Sichuan province's economy and 8 percent of western China's GDP.



Aversion to losses or aversion to risk? Which of the two is addressed by willingness and ability to close out losing trades?

Well, without invoking mathematics where it is not necessary, it is common and logical to place on the table that when a losing trade is closed one has the willingness and aversion to the risk of the persistence of loss becoming into a bigger one and one does not have aversion to the present level of loss in being accepted.

Now on the other hand, unwillingness to stop out a losing trade is indeed loss aversion.

The computations that show that having utilized some sort of mechanical rules for stopping out adverse incursions actually increased the probability of meeting with adverse incursions is totally flawed abuse of statistics.

Several arguments:

1) Historical data analysis does not undertake the "uncertainty at a given moment to decide upon" into account and is definitely incorporating hindsight 20:20 vision mind-set.

2) Any measurements of uncertainty and thus risk are never definite, since measurement of uncertainty too will be having an uncertainty of its own. So a trader in the middle of a losing trade has to decide that the level of uncertainty in his method, mind or cognition regarding the calculation of the "value of uncertainty" in his trade has become too high for him to handle. That's where humility, the currency that prevents others from profiting more from your mistake, can come into play and allow the willingness to hit the stop.

3) However, when either with or without the illusions of statistical computations of stop losses increasing the probability of meeting with more losing trades, one fails to control the human weakness of loss aversion, to somehow and anyhow turn that loss into a profit, one is becoming totally risk-insensitive. From skill, the turf changes to the power of prayer. The game begins to change from action to hope. Inconsistency of thoughts thus turns one into a trader who is continuing to hold on to risk without a mental apparatus to assess it or react to it. As the loss continues to grow not only the lack of willingness to take it hurts, the ability to accept the increasingly bigger loss also dwindles rapidly.

I am ready to be thrown before any firing squads of mathematical minds and ideas on this list if they can with or without numbers help me learn how come this list celebrates and cherishes a human value of humility and yet indulges in an idea that staying on in a trade that has incurred a level of loss greater than anticipated when the trade was opened are mutually consistent.

I would close my submission for now with one thought:

When loss aversion creeps in it makes a decision system (mind) risk-insensitive and with no respect for risk, returns are impossible. Yet, if a mind continues to be risk-averse it does not have loss-insensitivity and in humility such a mind closes out risk that has turned out to be less than comprehensible.

Phil McDonnell responds: 

Since I am the well known culprit I shall give Mr. Kedia a reply. If the probability of a decline art the end of a period of time equal to your stop is p then the probability of losing the stop amount with a stop loss strategy is 2 * p. It is simply a derived relationship. It is what it is.

It is not a misuse of statistics but rather a description of how a stop loss exit strategy will change the distribution of returns. Larry Connors studied over 200,000 trades from a winning system and compared the results with and without stops. He found the use of stops increased the probability of loss and reduced the expected gain.

In my opinion the best way to trade is to reduce position size so that no one loss hurts your account too badly. That means many small positions to me.

Larry Williams adds:

Ahhh here I go off on a rant; please excuse a tired old mans bitterness at system vendors who claim stops hurt performance.

Yes, they are correct in that the statistics of your system will look better if one) you don't use a stop and two) your use a market with a perpetual upward bias like the stock indexes have been, usually.

They are absolutely totally incorrect in terms of living the life of a trader. So what if I am long in a position that eventually shows a profit but because I did not have a stop loss that one trade moved against be 20,000 or $30,000 and it took a year or so to get out of? Yeah, the numbers look good (high accuracy) with no stops but it's one hell of a lifestyle.

High accuracy is a false God.

Consistency and never being in a place where you can get killed is more critical. Perhaps Mr. Connors has never sat through the reality of a large loss, especially in a large position. I have; I would rather battle the devil at midnight on a new moon with both hands tied behind my back.

It's one thing to have a system with "good numbers" it is quite another thing to be a trader and have to deal with reality.

It only takes one bullet in the chamber to kill you when playing Russian roulette. As near as I can tell trading without any stops, in any way whatsoever, is just the American version of this form of spinning the wheel.

Play the game as you wish but please heed the warnings of an old man.

Leo Jia adds: 

I have been studying the use of stops. Due to loss aversion I guess, I would like to use narrow stops. But among the various strategies I have yet found one working well with narrow stops. Good stops have to be relatively wide in my cases, but having no stops or stops that are too wide clearly hurts results (my trades are time limited). So a good choice for me is to size the position according to the stop size.

Sushil Kedia writes: 

If you reduce position size can it be argued that a position of Size N reduces to N-n implies that you took a stop loss on n lots out of N you held. Then too, it validates the fact that you do take stops.

Anatoly Veltman writes: 

Larry covered main bases (different markets, different position sizes, different lifestyles) pretty well. I just want to be sure that reader doesn't end up with wrong impression. I think the best conclusion is "it depends".

And because my act follows Larry's (who is certainly biased in favor of stops), let me try this. If you enter based on value (which is certainly against trend), then there is no justification available for a stop. Unless you argue that this stop proves you were an idiot on the entry. But if you are an idiot on value entries, then why play value…

Anton Johnson writes: 

 The problem with using Conners' simulation as evidence that placing a trade stop-loss reduces returns is that he tested a winning system that likely had never experienced any 5-sigma negative excursions prior to the test date. And of course there are no guarantees that his strategy, or any unbounded trading strategy, will perpetually avoid massive drawdowns.

When implementing a strategic trade, a good compromise between profit maximization and loss mitigation can be achieved by balancing trade size along with a stop-loss, which when placed at a level that only an extreme event will trigger, will likely contain losses to a predetermined range, and also prevent getting stopped-out of a potential winner. If one is disciplined, maintaining a mental stop-loss level is preferable to an order pre-placed in the book, and available for all the bots to scan.

Larry Williams adds: 

But speaking of stops, I go back to my litany, my preaching the essential reason for never putting stops on an exchange server, or even your brokers server. Putting stops on servers means that your stop becomes part of the market. And not in a positive sort of way either. Pick a price, hit the button, and take the hit. Discipline is key here.

Ed Stewart writes: 

A trader needs a decision process for managing the expectation or expected value of the trade as well as the equity position. The problems occur when these two things are in conflict.

The thing with stops is that at times it makes no sense to get out of a trade when the expected value is still good. What is the difference between exiting at a small stop-loss point 4X in a row vs. one loss of that same size? Well, if at each "stop out" point the expected value was favorable, it makes no sense, one is just locking in losses. At times the best "next trade" is simply staying in the current trade.

However, I see Larry's point and it is a good one. Yet, the example of letting a loss get huge or holding an underwater position for a year is to me something of a false alternative. No exit strategy but hoping for a profit at some point is not a reasonable alternative.

What maters, I think, is the expected value of the trade at each moment, and balancing that against equity and a margin or error to ensure, "staying in the game".

Given this I always trade with mental stops, if not on individual positions, on total account equity. Having that "self-preservation" discipline is useful.

Jeff Watson writes: 

I learned very early on in the pit on how to go for the stops, and that weaned me off of stops completely (except in my head).



 I first saw the 'dead eyes' look of a poker player/loser when I was 13 or so. Still gives me restless nights and I know I cannot become that way.

My dad took me into the "stockman's bar" in Billings, Montana to impress upon me what degenerate, greedy people turn into.

Probably another sleepless tonight tormented by that devil.

Gary Rogan asks: 

What is the real difference between gambling and speculation (if you take drinking out of the equation)? Is it having a theory about the odds being better than even and avoiding ruin along the way?

Tim Melvin writes: 

I will leave the math side of that answer to those better qualified than I, but one real variable is the lifestyle and people with whom one associates. A speculator can choose his associates. If you have ever been a guest of the Chair you know he surrounds himself with intelligent cultured people from whom he can learn and whom he can teach. There is good music, old books, chess and fresh fruit. The same holds true for many specs I have been fortunate to know.

Contrast that to the casinos and racetracks where your companions out of necessity are drunks, desperates, pimps, thieves, shylocks, charlatans and tourists from the suburbs. Even if you found a way to beat the big, the world of a professional gambler just is not a pleasant place.

Gibbons Burke writes: 

 Here is something I posted here before on this distinction…

Being called a gambler shouldn't bother a speculator one iota. He is not a gambler; being so called merely establishes the ignorance of the caller. A gambler is one who willingly places his capital at risk in a game where the odds are ineluctably, mathematically or mechanically, set against the player by his counter-party, known as the 'house'. The house sets the odds to its own advantage, and, if, by some wrinkle of skill or fate the gambler wins consistently, the house will summarily eject him from the game as a cheat.

The payoff for gamblers is not necessarily the win, because they inevitably lose, but the play - the rush of the occasional win, the diversion, the community of like minded others. For some, it is a desire to dispose of money in a socially acceptable way without incurring the obligations and responsibilities incurred by giving the money away to others. For some, having some "skin in the game" increases their enjoyment of the event. Sadly, for many, the variable reward on a variable schedule is a form of operant conditioning which reinforces a compulsive addiction to the game.

That said, there are many 'gamblers' who are really speculators, because they participate in games where they develop real edges based on skill, or inside knowledge, and they are not booted for winning. I would include in this number blackjack counters who get away with it, or poker games, where the pot is returned to the players in full, minus a fee to the house for its hospitality*.

Speculators risk their capital in bets with other speculators in a marketplace. The odds are not foreordained by formula or design—for the most part the speculator is in full control of his own destiny, and takes full responsibility for the inevitable losses and misfortunes which he may incur. Speculators pay a 'vig' to the market; real work always involves friction. Someone must pay the light bill. However the market, unlike the casino, does not, often, kick him out of the game for winning, though others may attempt to adapt to or adopt his winning strategies, and the game may change over time requiring the speculator to suss out new rules and regimes.

That said, there are many who are engaged in the pursuit of speculative profits who, by their own lack of skill are really gambling; they are knowingly trading without an identifiable edge. Like gamblers, their utility function is not necessarily to based on growth of their capital. They willingly lose their capital for many reasons, among them: they enjoy the diversion of trading, or the society of other traders, or perhaps they have a psychological need to get rid of lucre obtained by disreputable means.

Reduced to the bare elements: Gamblers are willing losers who occasionally win; speculators are willing winners who occasionally lose.

There is no shame in being called a gambler, either, unless one has succumbed to the play as a compulsion which becomes a destructive vice. Gambling serves a worthwhile function in society: it provides an efficient means to separate valuable capital from those who have no desire to steward it into the hands of those who do, and it often provides the player excellent entertainment and fun in exchange. It's a fair and voluntary trade.

Kim Zussman writes:

One gambles that Ralph and/or Rocky will comment.

Leo Jia adds: 

From the perspective of entering trades, I wonder if one should think in this way:

speculators are willing losers who often win; gamblers are willing winners who often lose.

David Hillman adds: 

It is rare to find a successful drug lord who is also a junkie. 

Craig Mee writes: 

One possible definition might be "a gambler chases fast fixed returns based on luck, while a speculator has time on his side to let the market decide how much his edge is worth."

Bill Rafter comments: 

Perhaps the true Speculator — one who is on the front lines day after day — knows that to win big for his backers, he HAS to gamble. His only advantage is that he can choose when to play. 

 Anton Johnson writes: 

A speculator strives to be professional, honorable, intellectual, serious, analytical, calm, selective and focused.

Whereas the gambler is corrupt, distracted, moody, impulsive, excitable, desperate and superstitious.

Jeff Watson writes: 

I know quite a few gamblers who took their losses like men, gambled in a controlled (but net losing manner), paid their gambling debts before anything else, were first rate sports, family guys, and all around good characters. They just had a monkey on their back. One cannot paint with a broad brush because I have run into some sleazy speculators who make the degenerates that frequent the Jai-Alai Frontons, Dog Tracks, OTB's, etc look like choir boys. 

anonymous writes: 

Guys — this is serious, not platitudinous, and I can say it from having suffered the tragic outcomes of compulsive gambling of another — the difference between gambling and speculating is not the game, the company kept, the location, the desperation or the amounts. The only difference is that a gambler, when asked of his criterion, when asked why he is doing this, will respond with "To make money."

That's how a compulsive gambler responds.

Proper money management, at its foundation, requires the question of criteria be answered appropriately, and in doing so, a plan, a road map to achieving that criteria can be approached.

Anton Johnson writes: 

It's not the market that defines whether a participant is a Gambler or a Speculator, it's his behavior.

Gibbons Burke writes: 

That's the essence of my distinction:

"gamblers are willing losers who occasionally win"

That is, gamblers risk their capital on propositions where the odds are either:

- unknown to them
- cannot be known

- which actual experience has shown to have negative expectation
- or which they know with mathematical precision to be negative

They are rewarded for doing so on a random schedule and a random reward size, which is a pattern of stimulus-response which behavioral scientists have established as one which induces the subject to engage in the behavior the longest without a reward, and creates superstitious as well as compulsive behavior patterns. Because they have traded reason for emotion, they tend not to follow reasonable and disciplined approach to sizing their bets, and often over bet, leading to ruin.

"speculators are willing winners who occasionally lose." That is, speculators risk their capital on propositions where the odds are:

- known to have positive expectation, from (in increasing order of significance) theory, empirical testing, or actual trading experience

They occasionally get unlucky, and have losing streaks, but these players incorporate that risk into the determination of the expectation. Because their approach is reason-based rather than driven by emotion, they usually have disciplined programs for sizing their bets to get the maximum geometric growth of their capital given the characteristics of the return stream, their tolerance for drawdown.

If a player has positive expected value on a bet, then it is not a gamble at all. The house does not gamble. It builds positive expectation into its games. It is a willing winner, although it occasionally loses.

There are positive aspects of gambling, which I have pointed out earlier in the thread and won't belabor. To say that "all gambling is bad" is to take the narrowest view. Gamblers who are willing losers (by my definition all are) provide the opportunities for willing winners (i.e., speculators) to relieve gamblers of the burden of capital they clearly have no desire to hold onto, or are willing to trade in a fair exchange for the excitement of the play, to enable their alcoholic habit, to pass the time, to relieve their boredom, to indulge delusions of grandeur at the hoped-for big win, after which they will quit playing, or combinations of all of the above.

Duncan Coker writes: 

I found Trading & Exchanges by Larry Harris a good book on this topic and he defines all the participants in the exchanges and both gambler and speculators have a role to play. Here is something taken from page 6 that make sense to me: "Gamblers trade to entertain". Speculators to "trade to profit from information they have about future prices."

He divides speculators into those that are well informed versus those that are not. One profits at the expense of the other. Investors "use the markets to move money from the present into the future". Borrowers do the opposite.



 "Those well-known experts who had pulled off a big windfall by going against the tide and winning were, over the long term, the worst at forecasting."

That sounds understandable to me, and there is a research to prove it.

The original article on Harvard Business Review requires registration.

Victor Niederhoffer writes:

This article provides confirmation of the idea that has the world in its grip. Egalitarianism prevails. Especially at Harvard. I will have to read the article to see all its biases. But it was guaranteed to be published in the HBR.

Rudolf Hauser writes: 

Not having read the HBR article, I cannot comment on that particular study. But I would note that the nature of the forecast and time frame are important considerations. The news article did note that the study only looked at three years of data. If the forecast related to only quarterly trends the conclusion that it might have just been a fluke forecast could be valid. But say someone had predicted the financial collapse we saw in 2008 with valid reasoning but was off in timing. In that case his or her forecast would be wrong for part of the time but someone who acted on it might have had some years of underperformance but avoided the debacle that was to come. That forecaster might be someone to listen to in the future. But even being right once for the right reasons does not mean that the person will be correct all the time on such major calls or even that they will ever be right again. In the end, one should listen to the reasoning but make one's own decisions.



 I heard someone the other day say the "wrong route be easy" whereas the "right path will be hard." I challenged them to defend this principle!!! This is an annoying empty platitude. Both in markets and in life.

If you want to be a poet, please recite the rhyme of the ancient mariner instead. If you want to be an ascetic, please get your philosophy correct. If you want to be a trader, recognize that pain means you were WRONG.

On what basis do you argue that "on the wrong road, you find success and happiness initially but in the end you lose; whereas on the right path, you suffer but eventually win."

By this standard, if you allow me to hold your head underwater for the next 2 hours, it's a winning "position".


Perhaps I should go back into my brain hibernation — from which you awakened me 50 hours ago!!!

Leo Jia writes:

Thanks for the wonderful argument, Rocky.

On a single trade, I am totally with you in that one should quickly recognize and correct mistakes. But on an entire trading career, this is generally not the case. I don't know how you learned to trade, but along my experience, which I believe is also quite similar for many successful traders, there have been a lot of difficulties. Should I or those many others have better quit early along the way? One simple example that perhaps best reflects this in life is on choosing careers. The easy (and likely the wrong) route is to get employed. The hard (and likely the right) route is to start one's own venture.

Stefan Jovanovich adds: 

I am the 3rd generation of Jovanovich to subscribe to the belief that "good business happens quickly". Depending on how you would include joint ventures/partnerships in the count, Eddy's Mom and I have started between 8 and 12 businesses and run them until they were either sold, shut down or the Peter principle applied to our management skills. In every one the test was the same: you made money within a matter of a few months or you never made it at all. These rules do not apply to venture capital or any other start-up where the loss of the money invested would make no difference to the lives of the investors. They apply absolutely to the opening of noodle stands ("broth runs deep in our veins, son") and other enterprises that start from scratch without any scratch.

The other rule is that sick businesses cannot be cured or "turned around"; they can be liquidated, as Secretary Mellon advised; but they cannot be saved as enterprises once the rot has set in.



 "Bringing People Back From the Dead" :

"While 45 minutes is absolutely remarkable and a lot of people would have written her off, we now know there are people who have been brought back, three, four, five hours after they've died and have led remarkably good quality lives,"

"after the brain stops receiving a regular supply of oxygen through the circulation of blood it does not instantly perish but goes into a sort of hibernation, a way of fending off its own process of decay."

It would be very interesting to know how long the brain can stay in this hibernation state. 



"How Knowledge Can Make You Stupid" :

Being unable to assess somebody else's beliefs with 100% accuracy is a problem, and if it's your own knowledge that get in the way, that means it's even more important to ensure the beliefs you hold are the correct ones.

This research is very interesting. How can we know better where the market will go? Does it pay for one to know more than what the market does? Or is it worth it for a trader to spend all his effort to absorb all the information? The research seems to say no. Knowing more doesn't make one more correctly predict what others would do.

Another situation to which this may apply is financial bubbles. We believe that bubbles are caused by people's irrationality. But perhaps that understanding is not enough. A bubble may just be caused by people's inability to judge others' thoughts. Since mostly everyone knows something that others don't, that information gets magnified in the bubble when people who know it assume that others would also use it to value the situation when in actuality those others don't really have that information.



Does anyone feel like an idiot when your system encounters a series of losses? I know it is not warranted, but subconsciously I have that feeling and I don't have a good way of getting rid of it. Any advice please.



"Computer Simulations Reveal Benefits of Random Investment Strategies Over Traditional Ones"

There is a link at the end of the article to the original research paper.

Would love to hear all dailyspec readers comments.

Alex Castaldo replies:

This article is written by some Italian physicists who like to play with stock market data. It does not tell me anything about real world investing.

The title of the original paper is "Are random trading strategies more successful than technical ones?". Somehow in the news article "technical strategies" was changed to "traditional strategies", distorting the meaning. The specific four strategies considered are 7-day momentum, RSI (relative strength index), reversal of the previous day and MACD (Moving Average Convergence Divergence).  (How many traditional investors such as mutual funds or pension funds use MACD etc. to manage their billion dollar portfolio?).

The paper measures "success" by the percentage of times the subsequent direction of the market was correctly predicted (a number between 0 and 100%). In the real world success is measured by the amount of money made, not just the success ratio and it has to be judged in view of the level of risk taken (which the paper does not consider at all).

This is an example of an impressive looking paper, with beautiful figures and charts, numerous (55) footnotes but *SIGNIFYING NOTHING* and having no value to investors or traders. It does not even tell us whether the technical rules would have worked or not with real money.



 I spoke with a dear friend in the SF Bay area. He's a real estate agent on the peninsula south of San Francisco. He indicated that the housing market there is so hot, it's hotter than it was in 2006-7, and rivals that of 1998-9, when houses on the peninsula and in Silicon Valley were sold within hours of listing. This seems to me to be unsustainable, except he said there's lots of demand from Chinese immigrants paying in cash, as well as other Asian immigrants putting down 60-70 percent of the purchase price and financing the rest. I don't think this will have a pleasant ending.

Leo Jia writes: 

It looks the Chinese buying will continue for sometime. They are crazy about housing. The decades or centuries of housing shortage must have altered their genes. And now when some have some money, they will chase at any price what they feel missing mentally. America (particularly the west coast, traditionally with more Chinese) clearly is a top choice for many.



One of the most valuable things I learned from the Chair is how not to do a study.

Let us summarize how to do a study. First define a pattern or event of some type. Then calculate the expected return subsequent to that event when the event happened. Then compare that return to the returns for all other non-event time periods. Do a t-test to establish significance at the 95% level.

That said the real problem is how can we insure ourselves against the possibility of biasing our study or otherwise completely messing up. the first thing that comes to mind is to never include data in your decision process that was not known at the time. For example Enron went bankrupt and then several years later after an audit the financial results were released showing that the original releases had been fraudulent. You cannot use the adjusted data based on the argument that it is the best data. Only the original data was known at the time so you must use that.

The same thing goes for price data. You have to use the prices that were known at the close if you are doing a buy at the close study. You cannot use retrospectively adjusted prices when the data is adjusted later than the supposed decision was made.

Always use tradeables. For example the S&P 500 index does not trade as an index. The S&P futures do and SPY does as well so one would use either of them as data for your study. The reason is that individual stocks can have stale quotes. Some of the smaller stocks in an index do not trade nearly as often as the larger caps. Thus the index can be behind the true position of the market. The tradeables trade and thus are subject to arbitrage that tends to keep them in line with the real market level.

This is a short list of things not to do. However it is representative of the fact that it is harder to learn what not to do than what to do. Other contributions would be welcome.

Victor Niederhoffer adds:

Always simulate what the chances were that your observed results were due to pure luck and take into account the path that your results would take and what that would have required of money management.

Consider the impact of retrospection on your results. The human mind is capable of ascertaining many regularities that occurred in the past, and is good at uncovering them in a study after the events occurred, but not very good at uncovering predictions based on new data that they are not already privy too. Never use range forecasts as they don't tell you whether you would have made or lost. Be aware of the difference between description and prediction, and statistical significance versus predictive distributions.

Never be overconfident. Do take account of the drift in your data, and the shape of the distributions you are drawing from. Mr. T, is not very good if only 2 or 3 observations removed from your sample would change the results.

To what extent are the regularities you believe you have uncovered been extant in the literature or the knowledge of shrewd fast moving traders. That changes things. What is the extent of regression bias in your results? 

Alston Mabry comments:

Something else, basically another riff on the Chair's comments: I find that statistics like means and correlations are, of course, useful, but they almost always hide important, idiosyncratic structure in the underlying data. In a sense, summary statistics are "intended" to do that, but I find it useful to unpack them and examine the structure in the data series, how the summary stats change over time, etc.

Anton Johnson writes: 

A couple of important things to consider.

Large changes in outcome resulting from small adjustments of a parameter is a sign of over-fitting and usually bodes badly for real-time results. Sometimes eliminating or finding a suitable replacement for the sensitive parameter will result in a more robust and usable model.

As a general rule, the number of parameters used in a study should be FAR fewer than the number of resulting trade signals.

Ken Drees adds:

Coach Bob Knight's new book The Power of Negative Thinking mentions "NO" being safer than yes. You can always more easily change a "no" into a "yes" versus the opposite–deciding to change your mind from positive to negative.

The gist of the book is to tamp down the uber positive thinking crowd–no, you can't do anything you want, no, you can't magically power your way to a fine end. PONT, Power of Negative Thinking is how Knight coached. He explains it that you must limit faults, limit mistakes–if we don't do these things then we have a chance to win. He keys on dealing with negatives to achieve a positive. He must have come across a lot of less disciplined approaches to coaching in order to come up with an against the grain type philosophy (PONT).

A lot of his points are probably already in the quiver of the sharpened spec. His hyper worried routines, careful study of the opponent, downplaying of good fortune and constant moving of yesterday's win into the rearview mirror broadens out into that persona you conjure when you think of him–that brooding face, those searching eyes–never smiling. The idea of "can't do it" was probably the most different from what we hear today–most are afraid to say "can't–that it means "I won't". Knight loves the honesty of a player saying I can't understand that assignment, or I can't push myself any farther. I would not recommend the book to cross over into speculation, but it's a quick read and there are more than some items to enjoy.

During it, I thought about player health in relation to speculating. I am my own coach. It's a luxury to have someone call your number and sit you down for a breather, to know you may need rest over more drill. How do I know that I am playing/ trading fatigued—only after a poor result? Knight seems to have the keen memory still in gear. There are some interesting stories about his games and Big 10 accomplishments.

Coach Knight will definitely tell you "No".  

Leo Jia writes: 

Very interesting, Ken. Thank you for sharing.

There seems to be some rationale in being positive. As I understand it, when one says "yes, I can do it" and envisions the actual doing, he actually plants a seed in his subconscious brain. The subconscious brain can be more powerful in many ways than the conscious. So planting a seed there is to use the additional powers of the brain, which are not accessible by the conscious mind normally, and thus increase one's chance of achieving a goal.



Here is another inspiring article for musicians, artists, and everyone else including traders.

"When You Win, Don't Atop: Tips for classical Musicians" by Cesar Aviles



"3D Printed Car is Strong, Light and Close to Production":

The car is strong as steel, half the weight of a conventional vehicle, and can be manufactured in a warehouse full of plastic-spraying 3D printers.

The teardrop-shaped 3D-printed car is an ecologically sound hybrid, and it looks cool, too.

Aerodynamic and futuristic, this car could be a total game-changer for the automobile industry, leading to a rise of small-batch automakers.



 You may be extremely upset by serious troubles just happening, but in 10 years, you will be feeling just fine about the current events.

"Persist until you bleed — otherwise it's not hurting enough." This article is for musicians, but I think it applies well for traders as well.

"Fly First, Then Land: Tips for Classical Musicians" by Cesar Aviles



 Complicated things of high quality don't just break down in a big cataclysm. Take a modern car. They are well built. The engine will last for half a million miles if properly maintained. However it is the little things that start breaking: the plastic ashtray falls out, the rubber seals wear, the bearing start getting loose, the fabric tears. These little things can get more serious. If the seal leaks, and the oil is low, the engine can wear prematurely. The shocks wear, and the ball joints go. The steering gets loose. Small things can lead to bigger problems. Take a modern city, like New York in the 70s. First it's some graffitti, then some broken windows, soon vagrants move in, garbage piles up and the city head to bankruptcy. It's the small things first. Take a huge economy like the US. The GDP isn't going to fall apart. Employment probably won't go off a cliff. It's going to be small things first. Take a corporation. The earning won't collapse right off. It will be receivables up, inventory up, sales down, or even smaller things. Maintenance up, or down. Take a market like the Nasdaq.

Leo Jia writes: 

These are very insightful. Our bodies are about the same. And while the destruction process happens this way, it is interesting to note the creation process is also quite like this. First, small trivial things get created, then the large more significant things. All things seem to move like this in circles. Bubbles start small, grow big, then shrink a little, then burst.

Jim Lackey adds: 

Hold on ther' hoss. The first thing we do, it wash, feed and stable the horses before the cowboys. This car post caught my eye. If the simplest part breaks, a mass air flow sensor, the engine runs rich and bad things happen. Yet we have a dummy light! Even back in the day we had dummy lights for high temp, or low oil pressure. These little 25-200 dollar parts break on brand new machines. Take the worn out 100k 7 year old car. Yes what you say is true. 35 years ago the 100k car may be dead in the crusher for scrap. Today what people thing of the heart of the car is the engine. With CNC , CAD and CAM all short for, computers do not have UAW contract for, tired nor sick nor go out of whack and slap together the last V-8 at the end of bowling night. Therefore the engines are designed and build and installed to Engineer spec. They do last for 250k. Most but not all of them do 250k except for the short cut copy cat Far East red flag waiving commies BYD my 6.

The little things that are build to spec yet cant possibly last for 7-12 years as you say rubber O rings, Balls joints, tie rod end,s brake rotors struts all must be changed or maintained. The most complex and weakest link of the chain on new cars is automatic transmissions. I made one the of the worst mistakes trading this week. I was taught about racing cars bikes and anything with an engine, failures. In a way we kept track of the max min wait time on a failure of a part. We change them at or before the median failure time. I forgot all about that for our trading. Didn't lose, it was much worse than that to a racer not winning is as painful as being on fire.

One spec posted a customer service report on cars and diamonds weeks ago. The gist was one man said change all parts. The other man said wait 5,000 miles. The implication was the second man said wait, and was best. What wasn't taken into account was two things. The performance of the car and his safety and time of a second trip to the shop. Other was the parts probably were not in stock at dealer B. There fore the guy simply told what most want to hear, no money today rather than we will have to keep your car over night as the parts are coming off the ship from Japan.

The discussion also goes to medical. too much of medicine is based on illness. When talking to my Docs and their ranges for normal I burst out and said, your kidding right? How do basic stats escape Medical training? How much better can we all feel if we did X and Y do the the people all wait until a breakdown and see the Doc for solution which prescribed as X. I know why. I did the same thing last week on my trading. I didn't consider wellness. I was waiting for the market to become sick then do trade X. My trading doc even warned me and kept me from having a bad loss. He was focused on wellness ( is best I can describe) I was looking for the illness. (Okay so the markets went 1530 to 1490 and I said why not wait for 1475 to come in? I pull my racing pits cap over my head and tell the wife, at least I didn't lose short)

How much better will a car perform with New tires brakes and rotors vs a car with 5,000 miles of anecdotal testimony to wait. I can give you the stats on new vs 20k or 40k miles and after one race on a real car. Racers change brakes and tires after each and every weekend. We rebuild engines most every weekend depending on class. In some pro classes we rebuilt engines after every single 1/4 mile run, new pistons, rods and bearings, Valve sprints and retainers, all seals and gaskets.

What the anecdote above states is the engine will run for 250,000 so then to should the car. Yet the car will not move with a broken ball joint. The engine will die with a broken timing belt and over heat with a bad water pump, that now last to 110,000 miles. So the engine system is still only good to run for 110,000 miles. The trans and rear end gears all die at 125-150 and the fuel pumps and all do the same. The catalytic converters die way before this. Most cars have a 5 year 100,000 mile warranty on the drive train. Its only 3/36 or 5/50k on bumper to bumper.. The emission control systems or parts are now only good for 80,000 miles.

So in theory your car is now worse than a 1969 model. It will break down and be non drive able 20,000 miles before the 1969 model died and went to the crusher. Yet your correct, at 80k miles your car will be fixed for 1,000 bucks and in 69 you needed a new engine trans and every hose belt and switch was dead.

This entire deal of failures was burned into my trading memory banks for life. I used it in some ad hoc way since MR Vic showed me in 2004. Yet the advances in his technology on how to quickly repair the trading engine and have it on the road to profitability was lacking by lackey.

The story I wrote about my teenager failing to appreciate the need for trans fluid made me dump the BMX van for 25% above scrap rates to a new friend. I am now shopping for a good used van. There is also a meme on pricing of used vs new cars. We try not use never always when it comes to life. Yet the financial advice out there has man a never and always do.

Too many men are all over the past 10 year return of stock at or about nil. The we are in a range trader calls have been falsified many times this decade. The SPU made a high in 07 the Russel or what ever made a high this year. Yet its true and maybe always is tr that not all stocks make a new high as the joke is many stocks fail to exist, survivor ship bias. Its all mumbo as they use all or this or that index.

Then to say all new cars have engines that run to 250k miles and do not fall apart all at once.. is also false. A brand new car has the ability to shit down or go into safe mode. Its broken according to our ladies who drive. It can only be idled at 35mph to your local shop. With palladium and platinum are such high prices the emission control systems are too expensive. The cars heart is not the engine, it never was the brain. It used to be the driver and the mechanic. Now its a computer. We have fire trucks that will not start if the diesel engines emission system is on soot burn mode.

Now we have computers in control of making markets for the global stock and futures markets. All economic reality seems to be lost in the short term. If political hack from Berlin says A and EU hack said confirm A and US is about to have a press conference you can forget about the next four hours prices being predictive. The markets computers go into safe mode. They will move and shut down quickly and we must, as traders idle at 35 MPH to our local dealer of data to find out what happens next after that part failure.

For what ever reasons I have gained my passion for markets back. Of course we know where we lost it. What makes men take risk? What makes risk takers skip a generation? Is that true? I had a friend as me this week about becoming a spec. I asked him to answer this one question. Would you rather trade your money and take risk per 500k account to eeke out a living or use another mans money and take 20% of profits yet no fees? I have asked this Q so many times and it reveals much about a mans capacity to take risk, yet most important to take pain. Ya see racers, we do not care about losing crashing or getting hurt. Its part of the game. We do not like losing, yet not winning that is so painful, like I said we wear fire suits and not winning is as bad as completely destroying your car on driver error and being on fire.

The gist of the answer is if your rather trad OPM you do not belong in the hours 1/2 day markets, ever. Do not do it..It has to be the hardest way to make a living. The easiest way if you have any capacity to sell or raise money is ride the tides and collect a fee. I am sure you can find a way to make a firm stand on the middle ground. Some fine research and pick some fine stocks and short some over plus commodities after the bubble has been busted and hold that roll that for years. Now you have the ability to take down a small fee and a profit incentive.

What has changed my attitude is being certain about one thing. These markets change direction and patterns change so quickly its fast, like racing and Fun! Where in the hades have I been the past few years not to look at all of this as a positive thing for, me. I love to go fast. lack

My motivational quotes for this week attached.

August 1908 issue of a periodical for bicyclists called "Bassett's Scrap Book". A short item contrasted the modern age to ancient times and presented a variation of the epigraph:

"Naram Sin, 5000 B.C. We have fallen upon evil times, the world has waxed old and wicked. Politics are very corrupt. Children are no longer respectful to their elders. Each man wants to make himself conspicuous and write a book."Johnson's often-quoted definition of genius, "the infinite capacity for taking pains."

"genius is inspiration, talent and perspiration." Kate Sanborn

The President of the Old Speculator's Club, Jack Tierney, writes: 

I seem to recall the name

Carnegie's "Gospel of Wealth" idea took his peers by storm at the very moment the great school transformation began—the idea that the wealthy owed society a duty to take over everything in the public interest, was an uncanny echo of Carnegie's experience as a boy watching the elite establishment of Britain and the teachings of its state religion…Since Aristotle, thinkers have understood that work is the vital theater of self-knowledge. Schooling in concert with a controlled workplace is the most effective way to foreclose the development of imagination ever devised. But where did these radical doctrines of true belief come from? Who spread them? We get at least part of the answer from the tantalizing clue Walt Whitman left when he said "only Hegel is fit for America." Hegel was the protean Prussian philosopher capable of shaping Karl Marx on one hand and J.P. Morgan on the other; the man who taught a generation of prominent Americans that history itself could be controlled by the deliberate provoking of crises. Carnegie used his own considerable influence to keep this expatriate New England Hegelian the U.S. Commissioner of Education for sixteen years, long enough to set the stage for an era of "scientific management" (or "Fordism" as the Soviets called it) in American schooling. Long enough to bring about the rise of the multilayered school bureaucracy. But it would be a huge mistake to regard Harris and other true believers as merely tools of business interests; what they were about was the creation of a modern living faith to replace the Christian one which had died for them. It was their good fortune to live at precisely the moment when the dreamers of the empire of business (to use emperor Carnegie's label) for an Anglo-American world state were beginning to consider worldwide schooling as the most direct route to that destination.

Mr. Krisrock writes: 

This happens when there is a world price for labor…that American foundations arranged for 100 years.

Jack Tierney responds:

I'll go along with the parts played by American foundations, but not the 100 years. In a recent book by David Horowitz, "The New Leviathan," he points out that many of the great foundations we still hear so much about have wandered substantially from the goals envisioned by their founders.

Among them are the Ford and Rockefeller foundations, as well as those of Pew and John MacArthur. Each accumulated substantial fortunes in very capitalistic endeavors…and expected their trusts to continue to promote efforts in that direction.

At first this worked as the initial appointed trustees were chosen by the benefactor. Over the years, however, (and this relates to my initial post) subsequent trustees went off in their own, very contrary direction. inevitably, they labeled these modifications as "progressive," a catchall phrase that seems to excuse almost any perversion of original intent.

Most of these changes in direction have occurred over the last 50 years as the original trustees passed away or retired. Only Olin was prescient enough to "sunset" his trust to forestall this drift.



 Irving Kahn is the oldest trader on Wall Street.

Here is a picture of Irving Kahn included in special free section of Nature on aging.

Mr. Kahn is now 107.


World's oldest Value Investor. Duly noted (hat tip to Mr. Melvin) that Irving Kahn is a former Ben Graham assistant and likes to buy and hold for long time– and not really a "trader" per se.

From the WSJ:

Discipline has been a key for Mr. Kahn. He still works five days a week, slacking off only on the occasional Friday. He reads voraciously, including at least two newspapers every day and numerous magazines and books, especially about science. His abiding goal, he told me, is "to know much more about the stock I'm buying than the man who's selling does." What has enabled him to live so long? "No secret," he said. "Just nature's way." He added, speaking of unwholesome lifestyles: "Millions of people die every year of something they could cure themselves: lack of wisdom and lack of ability to control their impulses."

Here is a link to his current portfolio (he includes a land-based driller). 

Leo Jia adds: 

Wondering if the strategy of buy-and-hold can make one live longer than the strategies of short-term trading. It may seem to have some merit in the sense that a buy-and-hold'er has a very long-term prospect, and the long-term mind in-turn affect his body in ways of body-mind interaction.



 "What These Ants Can Teach Us About Problem Solving"

Swarm Intelligence: a single ant or insect probably isn't very smart, their colonies are.

Perhaps one can learn from this for trading in that one trading system might be somewhat dumb but a group of those can be intelligent.

Gary Rogan writes:

The way I look at it is this: the goal of most (although definitely not all, but the vast majority) of the market participants is to profit from the difference between the current price and some future price. As such, their collective goal is to discover the future price. While certainly they have no desire to willingly cooperate, their use of error averaging and cancellation and applying any real information to the goal is little different than some ants trying to move a large piece of food towards the colony.

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