Best book of the year was "Myth of the Robber Barrons", second best one, about finished, is "Destiny of the Republic" its about much more than crazy Charley Guiteau…a historical thriller; learned a great deal.



 The men's marathon record was broken this week end at the Berlin Marathon, pending ratification, by Patrick Makau with time of 2:03:38. Beating the old record Sept. 2008 record by Haile Gebrselassie by 21 seconds. The record has been broken with some regularity since the mid 1930s when the depression caused men to look for any way to make a living or bolster their reputation to get and keep a job.

It has occurred to me that the record tends to be broken when the economy is in long term trouble and when the young are having hard time finding opportunity elsewhere. The record broken by decade is as follows: 1930, 3; 1940, 1; 1950 6; 1960 9;1970 3; 1980, 5; 1990 2, 2000 4, 2010 1st last weekend. Marathoning is a tough way to make a living and the competition, at least in my time, has appeared to get stronger as the stock market tanks and gets weaker as it is about to take off. I missed my opportunity by not taking up serious marathoning in 1992 but waiting till 1996, 1992 was when I was at my peak and the competition was weakest.

Below is a comma delineated file with the month the record was broken, the % change in the Dow Index 12 months prior (counting month record broke), and the 12 month after % change in Dow index.

Here are some key statistics:

12 month prior avg. 3.22% stdev 13.64% count 34 negative count 15
12 month after avg 13.59% stdev 21.06% count 33 negative count 7

Student T test 2 different stdev one tail, 1.14%

It would appear that the marathon tends to be broke at the turning points in the Dow, however with a wider deviation than prior and the last 2 times this did not work. A similar result occur taking out all but the first occurrence when the record is broke within 12 months of the last time, except the student T test is higher due to fewer occurrences.

Month Record Broke,Prior 12 month % change in Dow,Next 12 month % change in Dow, New Record

12/1/1967,15.20%,12.48% 2:09:36
5/1/1969,4.29%,-22.53% 2:08:34
7/1/1970,-9.98%,30.37% 2:09:29
12/3/1973,-16.58%,-17.75% 2:09:12
2/1/1978,-20.75%,9.00% 2:09:06
4/1/1980,-4.43%,27.76% 2:09:01
12/1/1981,-9.23%,16.91% 2:08:18
10/1/1984,-1.45%,10.10% 2:08:05
4/1/1985,7.46%,43.56% 2:07:12
3/1/1988,-13.74%,9.02% 2:06:50
9/1/1998,-1.29%,43.64% 2:06:05
10/1/1999,24.88%,3.04% 2:05:42
4/1/2002,-7.35%,-23.18% 2:05:38
8/1/2003,8.68%,9.81% 2:04:55
8/1/2007,17.37%,-21.91% 2:04:26
8/1/2008,-13.58%,-19.39% 2:03:59
9/1/2011 -0.15%, ?, 2:03:38

Kim Zussman queries: 

Russ, in your opinion, will the 2 hour mark be broken in our lifetime (you and I are about the same age)?

The 12 records since 1980 have dropped in a roughly linear fashion, which if continued extrapolates to about 2035

Russ Sears replies:

If you would have asked me in the 90s about this, I would have said no way, they are beginning to form an asymptote. However, I believe sport science has made considerable progress in 2 areas critical to lowering this record below 2 hours. 

1. There is a much better understanding of the altitude effect has in endurance training and how to maximize this effect.

2. There are now much more creative ways to exercise more with less detrimental stress but maintaining the positive stress and exercise specifics. See zero gravity treadmills and water running treadmills for example.

And perhaps it simply is competition creates its own opportunity and it is clear to me we are in a new competitive era for distance running.

Hopefully it will continue for the rest of our lives. But not because the economy will continue to flounder. Especially for the young, ambitious and talented.

Larry Williams comments: 

The math is all a runner has to do is knock 8 seconds a mile of his/her pace. Much easier said than done, but it's a goal within reach. 2:00:00 will be broken in next 10 years is my forecast. Mostly because of what Russ said–better training habits and knowledge. With science, a runner with lots of personal angst will break through. Must have personal angst (see current frank shorter article in Runners World) to get through the pain. 



 I just finished The Mighty Atom. It was a delightful read as well as educational on several levels.

Chris Tucker adds: 

This reminds me of a passage in The Psychology of Risk: Mastering Market Uncertainty, by Ari Kiev, M.D., (John Wiley & Sons, 2002) pp. 39, 40: 

Commitment is an example of what Joe Greenstein, a circus strongman in the early years of the twentieth century, believed was necessary to overcome what he called "impossibility thinking." He believed in a Life Force that we all have but fail to activate because we are constantly thinking, "I can't do that. I'll hurt myself."

According to Greenstein, the little voice in you - that instinct for preservation - does not give us an accurate picture of our capabilities. We all have mental and physical abilities beyond our own estimation, but to realize them the mind must be deconditioned from impossibility thinking. Only after this deconditioning does it become possible to do what you will.Greenstein believed you could do almost anything if you applied your mind and body to the task with enough diligence. The critical step to take is to overcome the instinct for self-preservation, which inhibits action. To do this, he believed, it is only necessary to become totally focused on the event at hand, with no reservations and fears of anything untoward happening. In traders, this instinct shows up in the form of such things as mental accounting and loss aversion.

Nothing could more vividly illustrate the importance of belief in a favorable outcome without reservations or fear than the large number of people who were able to run sub-four-minute miles *after *Roger Bannister broke the magic four-minute mile barrier on May 6, 1954. Until that time, the four-minute mile was no longer a vain, exaggerated dream but an attainable goal that could be reached by any runner who was capable of overcoming the pain, adversity, and anxiety involved in reaching it. Once the barrier had been broken by Bannister, the event itself suddenly became relatively easy. By the end of 1978, as many as 274 runners had broken through the "magic, impenetrable barrier."

Kiev then progresses into an interesting discussion about the nature of commitment. Highly recommended book along with his Trading to Win: The Psychology of Mastering the Markets, John Wiley & Sons, 1998



 A rather shocking study which shows that investors in mutual funds receive a much worse return than the actual return shown by the mutual fund through putting most of their investment in before the mutual fund goes down and least of their investments when mutual funds before the mutual fund goes up. The actual underperformance seems to be of the order of 3 percentage points of return a year, i.e, 6% versus 9%, with sector funds and specialty funds and growth funds showing much greater underperfomance. This must be a pretty good indicator of when to go against a particular sector.

Steve Ellison writes:

I read Mr. Swedroe's book Rational Investing in Irrational Times. This is very interesting data, but it undermines his main message, that the market is efficient and even professional managers can't beat it, so you should diversify and keep costs low by buying index funds. If mutual funds favored by the public underperform by a wide margin, something else must be overperforming. One might be able to beat the market by simply avoiding the hot funds and their favored stocks, like Bacon's technique of betting on all the other horses besides the overpriced favorite.

Mick St. Amour writes:

A great contrarian indicator. The retail investor is often guilty of chasing returns and as you can see this is a performance killer.

Larry Williams writes:

Aha, mutual funds are for the masses, while the elite managers of money: Cohen, PTJ, Dalio– are the winners for their clients. 

But hold on a moment here. Lots of professional managers have beat the market for many, many years. It can be done, and it is being done. But not all can do it. Just like not all teams will be in the final four, and while luck is part of the game, in the end skill carries the day. 



 Copper finally succumbed last night, and whether it leads the equity market, or equities lead it, they tend to mimic each other pretty well over the March/April reversal period for the next several months. If they hold this relationship, copper will now have a bit to make up to give this duo strength.

Anatoly Veltman writes:

1. it happened quite abruptly in North American session.

2. mass media explanation: potential premium fuel costs dim prospects for industrial demand.

3. over the years, I've often seen other metals follow next day - although there is no fundamental link. It always was: like players were too busy knocking one market down today; and they switch to the next market next day. Which will be interesting to note tomorrow, as one important nouveau element (cross-market algorithms) should have kicked in already today (?).

Larry Williams adds:

Dominoes is the next game?



The Ditch Digger's Daughter is the best book I have read in many, many years. I swelled up, reading it, choked up and cried.



 London & Hong Kong Traders:

Open interest has fallen almost 30%, but gold has only dropped 6%. Normally if you are a short in a market and you start to have an asset correct because of significant liquidation, you will see a precipitous drop in price. Given the sheer volume of contracts that has been liquidated, we should have seen a massive correction in gold. Instead it has stayed incredibly strong.

More here.

Larry Williams writes:

Open interest rallies or declines must be put into perspective of who is causing the OI move, which group of traders…to just mention OI w.out background is not a full meal.

Rocky Humbert writes: 

I would add the following to Larry's comment — which is something that makes today's markets quite different from decades past — and which changes the character of OI and CFTC commitment of traders data.

In a futures market, the long positions must EQUAL the short positions. Hence it's a zero sum game. This is not true in the physical gold ETF!!!

For example, when a long liquidates his gold futures, the short is also liquidating his short position. And the open interest declines. Larry and Anatoly believe that there is predictive information in this.

However, in the gold etf, there is no genuine reduction in open interest. Instead, when an ETF long sells his gold ETF position, the gold leaves the ETF system — and the physical gold finds its way to another holder outside of the ETF system. Because gold is (mostly) not consumed by commercial end users, the gold remains in existence in perpetuity. In theory, in a futures market, if the open interest is zero (and remains at zero), the price of a commodity will not change. The price will just sit there. However, in the case of physical gold, the open interest can never be zero — since the physical bullion will continue to exist (whether inside or outside of the ETF system.) This means that gold (whether entering or leaving the ETF system) has a quasi-permanent open interest.

None of this is necessarily predictive of the gold price– however, it's important to understand that the CFTC data on gold futures open interest misses this nuance. 

Larry Williams: 

Great points, thanks for making them.

Who are the players in the ETFs? Relatively small specs, I assume.

And on gold consumption it is consumed, not like wheat, but the physical inventory is turned into rings and things so the inventory needs to be replaced my commercial users. Commercials do take delivery. 



 Trading is hard with small kids around. I remember when I was trading copper. I'm long, and my actress daughter gets a bloody nose (of course she dramatizes it, she's a born actress). I forget the trade in copper, stop the bleeding….and….go back to see a 45,000 loss in copper. It would have been cheaper to med-evac her to the hospital.

Victor Niederhoffer reminisces:

Twenty five years ago I lost half my wealth between the first and second games of a racquetball game with Reuben Gonzales.

Craig Mee writes:

Shocking…It reminds me of a local interest rate trader, heavily
short, who went for a "quick" haircut, next door to the exchange in
Sydney…. BOOM. Reserve bank unexpected rate move …house wiped out. 

An anonymous contributor writes: 

Speaking of rapid destruction of wealth:

They [ed.: i.e. the French] had then learned how easy it is to issue it; how
difficult it is to check its over issue; how seductively it leads to the
absorption of the means of the workingmen and men of small fortunes;
how heavily it falls on all those living on fixed incomes, salaries or
wages; how securely it creates on the ruins of the prosperity of all men
of meager means a class of debauched speculators, the most injurious
class that a nation can harbor,—more injurious, indeed, than
professional criminals whom the law recognizes and can throttle; how it
stimulates overproduction at first and leaves every industry flaccid
afterward; how it breaks down thrift and develops political and social
immorality. All this France had been thoroughly taught by experience.

Everything was enormously inflated in price except the wages of labor.
As manufacturers had closed, wages had fallen, until all that kept them
up seemed to be the fact that so many laborers were drafted off into the
army. From this state of things came grievous wrong and gross fraud.

*- Andrew Dickson White, “Fiat Money Inflation in France”, How it Came, What it Brought and How it Ended*



 Stopped off to see a buddy in a large trading room here…apparently no one can speak above a whisper. It seems a strange way of doing any trading…it is imperative that one learns to curse at himself (often and with gusto) to do well in this business.

Mr. Krisrock writes:

They use buttons…one beep ok, two beeps get the fades out of my way, three beeps with one following get me a single coffee, two beats two coffees…

Jeff Watson writes: 

Interesting about the character of many trading rooms. While they might play music as background, the players are generally as quiet as church mice, concentrating very hard. On the other hand, at my tiny room, because of my floor based background, anything goes. Rabelaisian jokes, potty humor, pranks, lots of noise, telephone calls, nothing bothers me and I encourage discussion, stories, jokes, etc. I guess it all depends on how one was brought up. Floor guys are just different, much more animated and aren't as cerebral as screen guys. Just because there is a lot of money involved doesn't mean that one can't have a sense of humor, or gallows humor;Plus, it might be better if one can trade with distraction, much like floor traders had to deal with,, but this should be tested.



I don't think one becomes good at trading until we have been beaten so much that we no longer fear the beast…once you learn how to take any shot the market give you, success comes so much easier.

Jay Pasch replies:

There is wisdom in this post; it also emphasizes the importance of having enough skin in the game to experience its sensitivities especially when it comes to turning points– turning points start to hurt, they frustrate you, they wear you down, they rub you raw to a point where you think you can't take it anymore, to a point where you question your methods, why you trade for a living, to a point of throwing in the towel– it is then that the trader needs his perseverance the most and to stay awake.

Victor Niederhoffer asks:

What are the turning points and how can they be predicted? That's a good way of
trading I think. A turning point and run are pretty much the same with
proper definitions as a start.

Jim Sogi writes: 

There are enough niches and styles in markets that a person can find one in which his own weaknesses create the least problems.

Rocky Humbert writes: 

Craig wrote about Cyclone Yasi a few days ago. This is a monster storm, and may hit Queensland sugar (and other ag) production. It will be a couple of days before the markets "digest" the results.

Spot sugar is already in tight supply. If the Queensland crop is damaged, it could push up out-month sugar prices, and this might even feed into higher corn prices (i.e. corn syrup). Conversely, the ag markets are already extremely "hot," and we've not seen a bearish headline for ages.

Earlier this morning, the chair asked a most relevant question: "what are turning points and how can they be predicted?" The chair has also previously written that "reversals are more lucrative than trends." Over the past 12 months, sugar is up 65%, coffee is up 76%, cotton is up 125%. If reversals are indeed more lucrative than trends, I'd love to figure out when I should reverse these positions, since I keep wasting money on my hedges. Sadly, the only turning points that I ever see are with 20:20 hindsight.

Vince Fulco writes: 

There seems to be a prevailing reasoning in the trading world that "reversals" or "turning points" are something which must be predicted– while trading "trends" is something which is not predicted, but merely, reacted to. The latter, not requiring "prediction."

I think that prevailing reasoning is false. Being a trend follower still requires one to predict in the sense that he is predicting the trend will continue. Both approaches require prediction. (Similarly, a non-directional approach, a market-neutral approach, say, writing butterflies, is, by the same reasoning, requiring prediction in that one is predicting the market will stay sideways, or at least not go into a protracted trend).

So my question to the site is this: Is it possible therefore to trade and not predict?

Gibbons Burke comments: 

Method one: Book your profits in your mind, don't treat it as "house money" and decide right now, for each market, how much of your money you are willing to give back to the markets. Draw your line in the sand and let the market take you out at that point. If it takes you out and then goes back to make new highs, consider maybe getting back in.

Method two, which I prefer: take half of your positions off the table, cash in the chips and reward your self for being right. Let the rest ride with a stop set at the point determined by method one. If you keep being right, and start feeling like you want to reward yourself for being right again, take half off again. Keep raising your stop on the remaining positions to lock in your profits, and let the market take you out when it feels like doing so. And given the magnitude of the trends, the likelihood is that when it decides to take you out, it will keep going in lobogola fashion.

I've had this very argument with a well known trend follower/leader on his Facebook page a couple of times. He keeps insisting that trend followers are superior to the other species of traders because they don't make predictions. But my contention is that trend followers are simply deluding themselves if they think they aren't making predictions.

They are predicting that when they get a trend following signal that the market will continue in their direction by a magnitude that is more than twice the size of the risk they are taking on. They predict that this will happen maybe 20% of the time, and that when they catch those big moves they will make up for all the psyche-destroying losses of which they predict their method will keep small.

It is a different sort of prediction, but it is nonetheless a prediction.



 Farm Journal had a good article on the tightening wheat supplies.

Their contention that milling quality wheat is getting scarce (but not to 2007 levels) and the market reflects this, resulting by the ever expanding Chicago/Mgex wheat spread. The resulting scarcity of high protein milling wheat has caused all contracts of Minneapolis Wheat to trade at a premium to Chicago. A few months ago, Chicago Dec 2011 was trading at a 5 cent premium to Minneapolis, which was an anomaly as every other contract of Minneapolis wheat was at a premium, except Dec 2011. As Minneapolis wheat normally trades at a premium to Chicago (Quality trumps everything and transport and storage are basically a wash), Chicago trading at a premium to MGEX can mean a good trading opportunity, but one must be very careful. It can also mean ruin if the mistress of the market continues her irrational behavior as evidenced by the Dec 2007 debacle that bankrupted many traders caught on the wrong side. Right now, in the wheat market, the seven wild cards are the next crop (there is a wheat crop harvested somewhere on the planet every 3 months), China's demands, our other exports, what Russia will do, the dollar's value, and acreage yields, and numbers of acres planted.

(As a side note, the government's directives might result in a reduction of wheat acreage like 2007 in order to plant more corn for ethanol, but this is speculation and not fact as of yet) However, supplies of Chicago's lower protein wheat are not very tight as evidenced by the front month, March, trading at a 30 cent discount to May. If there was a tight supply, the front month would trade at a much higher price, possibly even a premium, to shake some wheat out of storage to accommodate immediate needs.

The milling wheat on the other hand is only trading at a 6 cent discount in the front month suggesting much tighter supplies. From a practical standpoint, I am noticing a substantial increase in the price of pasta at the grocery store, and fewer markdowns on a retail level.My milling contacts also are mentioning substantial price increases in the near future. Still, this upward drift of the entire wheat market is rather confusing as the fundamentals somewhat support the rise, but there's something else going on beyond the mere fundamentals. I'll leave it up to others above my pay grade to ascertain and explain the intricacies of the market.

Meanwhile, I will try to make it safely to port without any damage. My mea culpa here is that 8 months ago I was of the opinion that while there might be a slight upward drift in the wheat market, it would be orderly and negligable and I saw no real rally unlike other sagacious members of the list. I even reported this on Daily Speculations, on Jan 26th. Larry Williams was the hero of the day when he said, "Wheat is set up to rally." Kudos to Larry, and a hairshirt for me…. I was so wrong, but still providence was with me when I decided to not try to buck the ever rising market and keep my longs.. Thinking of all the times I have been completely wrong, (and I keep very exacting records) it's amazing that I have managed to stay afloat and am not working the overnight shift at the 7/11.

Larry Williams writes:

I hate to disagree with a trade journal, but my stuff is bearish on wheat at this time.



There has been a noticeable drop in Gold open interest. Since open interest is definitely declining, look at the players. Who is doing the buying here? The Commercials. Small Specs and Large Specs have been liquidating.



You can get as-reported earnings for the S&P 500 from 1988 on at Standard & Poor's website.

Using 12-month trailing earnings for each year's September quarter (the last that would be known by Dec. 31) to calculate an E/P ratio for the S&P 500 as of Dec. 31, I get a somewhat positive correlation of trailing E/P to year-ahead returns with t=1.10, R sq=0.057, p=0.29, and N=22.

Larry Williams writes:

My model for the DOW suggests a 12.25% growth for the year, slightly above the long term average growth.

For the S&P, I get 10.6 % barely above the long term average.

Bruno Ombreux writes:

There are two things I don't like in P/E or E/P studies.

1) Your regression is in the form:

-1 + P(t)/P(t-1) = f[P(t-n)/E(t-n)] + e we have the same variable on both sides, and even if it is lagged I am not sure standard regression is OK to handle this type of formula. Just to give you an idea, multiplying both sides by P(t-1), it is actually P(t) = P(t-1) + P(t-1)* f[P(t-n)/E(t-n)] + P(t-1)*e

This is certainly amenable to study, but not with the standard regression toolbox.

2) Price is more volatile than earnings. There is a subtle bias introduced by the fact that over the estimation sample, high P/E will be naturally followed by lower P/E, and vice-versa. This is a bit like regression to the mean but more subtle. This can lead to spurious mean-reversion.

Phil McDonnell adds:

The issue is not really the dependent variable. It is using the Shiller variable with its serial correlation. One way to use the Shiller variable would be to take every tenth month. That might work but you would have one tenth the data. You still might have the Holbrook Working flaw because of the averaging. The averaging also leads to the Slutsky-Yule effect which creates spurious sinusoidal artifacts in the adjusted variable when no such sinusoidal effect is actually present in the original data..



 One notes that:

1. NY Commuter rail fares will increase by more than 11.1% on December 30th (for the Harlem and New Haven lines.) 

2. NY Commuter rail fares will increase by more than 14.3% on December 30th (for the Hudson line).

Assuming a brisk walking pace, a Westchester County resident can make this round trip trek in about 12 hours. In contrast, a round-trip peak ticket costs $28.50 and train-station parking costs $6.50. Hence, a day-trip into Manhattan costs $35.00 per person. Assuming a 40% marginal tax rate (State & Federal Income Tax), the pre-tax cost becomes $58.33. This is about $4.86/hour.

It's therefore a relief to know that the New York State Minimum Wage is now $7.25/hour. So it still pays to work.

Victor Niederhoffer writes:

One would have to adjust Mr. Humbert's calculations based on the age distribution of the population. "One senior ticket and one child," Aubrey always says when the conductor comes. That's Keely's 7 bucks for me, but my walking pace has slowed, (as witness my failure to pass the California test for the DUI). Say I am at 3 miles and hour. It would take me 17 hours to get to Manhattan for my 50 miles. (I believe Elonra Sears, the lady squash champ, would do it in 16). If my time is worth more than 50 cents an hour or so, it pays to take the train, assuming I would not make losing trades. (In the past, when asked to do chores, I could always tell Susan, that the chore cost me 1000 or 5000 an hour when I could make money with impunity, but now that doesn't work and Susan often says that I'd save money by washing the dishes or changing the light bulb, or shoveling the snow.)

Russ Sears writes:

 A couple guys come to mind when you talk of going 50 miles a day to work.

Legend has it that Bill Rodgers headed for nowhere, working in a morgue delivering bodies, when his motorcycle was stolen. He started to run everywhere. This helped him to start running again after stopping after college track. He also was smoking before this. And he is the only guy I have heard of that doing more than 150 miles per week actually strengthen him. He topped out at 200 miles per week 16 in the morning 13 in the evening.

The other guy is Dr. Horton, who was a Phys Ed Professor at Liberty. He set the record for running the Appalachian Trail. He averaged I believe, near 50 miles per day. He had line up Churches to help him throughout the course. He would meet them at points most nights, so he could eat hardy and sleep and then next morning drop him off at the same point. It was getting to the meeting points that added to the distance to the 2,200 mile course. (now I hear 2 other guys have broken his record of 52 days) This was very tough on him and I heard from my CC coach that it took him over 2 years to shake the mental depression such distances placed on his mind and body.

At 50 miles: plans would have to be made to have plenty of liquids along the way some light food. then latter eat and eat hardy and well. A mile burns roughly 100 calories, for average weight guy. Plus the normal 2000 calories, would require about 7000 calories a day. Phelps is said to eat 12,000 calories a day.

One summer in college, I lived on a nickel to save for the next years tuition and road a bike near 30miles a day for a couple months to work. 100 mile days are normal for serious bicyclist.

Henry Gifford writes:

I used to compete in and win, 24 hour bicycle races– ride as much as you like, rest as much as you like. Some wimps even took naps.

At the level we were at, consuming enough food was a deciding factor during a race, and buying it was a major expense, for a race and at all other times. One year someone handed me up candied pineapple, which I had never eaten. I barfed, but still rode as hard as I could, but I was like the car in the Indy 500 with the torn gasoline fill pipe from a sloppy pit stop exit. I was able to keep up, but couldn't  refuel, surely coudn't have finished or won.

Someone helping run the team knew to feed me boiled potatoes, after which I was good to go. I ate everything on the next lap around. 

Larry Williams wrote: 

I also found boiled potatoes to be the key, with salt, to correct food for ultra marathons.



 Keynes was interested in markets, and did pretty well. What about Hayek?:

"Keynes was another Kelly-type bettor. His record running Kings College Cambridges Chest Fund is shown in Figure 2 versus the British market index for 1927 to 1945, data from Chua and Woodward (1983). Notice how much Keynes lost the first few years; obviously his academic brilliance and the recognition that he was facing a rather tough market kept him in this job. In total his geometric mean return beat the index by 10.01 per cent. Keynes was an aggressive investor with a beta of 1.78 versus the bench- mark United Kingdom market return, a Sharpe ratio of 0.385, geometric mean returns of 9.12 per cent per year versus Ð0.89 per cent for the benchmark. Keynes had a yearly standard deviation of 29.28 per cent versus 12.55 per cent for the benchmark. These returns do not include Keynes (or the benchmarks) dividends and interest, which he used to pay the college expenses. These were 3 per cent per year. Kelly cowboys have their great returns and losses and embarrassments. Not covering a grain contract in time led to Keynes taking delivery and filling up the famous chapel. Fortunately it was big enough to fit in the grain and store it safely until it could be sold. Keynes emphasized three principles of successful investments in his 1933 report:

1. A careful selection of a few investments (or a few types of investment) having regard to their cheapness in relation to their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments at the time; 2. A steadfast holding of these in fairly large units through thick and thin, perhaps for several years until either they have fulfilled their promise or it is evident that they were purchased on a mistake; and 3. A balanced investment position, i.e., a variety of risks in spite of individual holdings being large, and if possible, opposed risks.

Jeff Watson writes:

I could not find much about Hayek's investment performance and speculate that his work in getting a Nobel Prize and publishing seminal works probably attenuated any desire to actively play in the market. Granted, Keynes was a genius……completely wrong about everything, but a genius nonetheless. I notice no comment from his fans on the left about his legendary Anti-semitism, his frequent use of the N-word when describing American Blacks, and his dismissive attitude towards Russians, and other Eastern Europeans who he thought to be the unwashed masses and very ignorant. Still, in his complete wrongness, he provided a very bright beacon for those of us who wish to pursue the correct course. Keynes is our own perfect fade factor, a Douglas "Wrong Way" Corrigan of economics.

Larry Williams writes: 

What an article on this that does not mention Ralph Vince. Oh, I get it…much of his comments are lifted from Ralph, so why let people know he exists? Trade kelly and you are doomed to die.

Ralph Vince responds:

Thank YOU Larry. A couple of things on this.

1. Whenever people start talking "half Kelly," or other ad-hoc locations on a dynamic curve (with respect to the number of plays) I realize they don;t know what they are talking about. It doesn't mean they aren't good mathematicians, they just don;t understand their material well enough. Ziemba has been doing that for years.

How can a man look at the curve and not begin to discern the nature of it beyond that???

2. The "Kelly" Criterion answer is NOT what any of these guys thought it was. It is NOT the optimal fraction to invest. It is a leverage factor — a number not bound between 0 and 1 but 0 and + infinity. Thus, if you treat it as a fraction, you will inadvertently be using a fraction that is way beyond optimal in trading.

3. Once you discern what the real optimal fraction is to invest (and you won't get there with the Kelly Criterion) then you can make intelligent decisions on what value to use as a prediction of where the optimal fraction will be in the forthcoming periods.

All of that if you want to be growth optimal. Go ahead, have at it slugger. The REAL benefit to understanding the nature of the curve of the optimal fraction (not to be confused with Kelly's misguided criterion) is that you can use it to satisfy OTHER objectives aside from the incredibly aggressive growth optimal one.

I don't claim to be the mathematician any of these guys are. But I know I understand this material better than all of them combined.

And I have the real-time track record to prove it.



The mind set of a fighter is not much different than that of a trader. A great read: The Fighters Mind: Inside the Mental Game by Sam Sheridan.



Does anyone have good thoughts or conventions on how to factor entry/exit slippage in futures markets? I am trying to find a general rule and google searches of academic papers result in not a lot and what I do find is a bit in excess for my needs.

My thought was to assign a rule such as when my entry/exit sizes combined total <0.50% of the average daily volume it would be safe to assume 1 tick worth of slippage per side. Ex. bid/ask 500/500.25 then assume sell/buy price at 499.75/500.50 (assuming a market that trades in 0.25 increments). Granted this would not happen in all instances but very likely not all fills would be at disadvantageous levels so the average slippage over time of this magnitude seemed fair. The scale could be increased as the percentage of average daily volume increased (i.e. <1.5% assume 2 ticks, <3% 3 ticks, etc.). A time of day factor might also be useful (i.e. pit vs electronic hours) as the liquidity is certainly better at peak trading times. Without very robust data this is difficult to test/determine so I wanted to see what the specs think.

Larry Williams comments:

It depends on the market and also on news of the day. Sometimes there's no slip at all other times it's massive so a decent trader would factor such things into his or her trading style; the problem is mechanical systems have trouble doing that which an individual can do.

Phil McDonnell writes:

There is no slippage with limit orders. Either you get your price or do not trade. If your testing can make a decision based on previous time periods. Then a simulated limit order can be placed. If the low for the next period is below the limit then you got filled on a buy. If the high is above the limit then you know you got filled. The tricky case comes in where the limit is exactly equal to the respective extrema. In that case I would suggest two ways of testing.
1. Assume 50:50 chance of a fill, take them at random.
2. Assume no fills at the exact bottom tick or top tick.

I recommend doing both tests. The 50:50 is probably realistic, but the no fills scenario tells you if the system might depend heavily on getting these top and bottom tick trades.

Larry Williams writes:

Phil's point is why I buy a small partial position on stop, then rest on a limit. This has helped my short term trading a great deal.

Jim Lackey comments: 

One should always be a gentleman here. How to trade is the easy part. How much to trade, when to trade and when to exit a trade are the difficult questions.

You can get partial fills, sub penny or fractional orders. Your limit is like a big round number for order sniffers HFT's other traders once made public. Everyone knows we should scale into positions.

When volatility is very low and liquidity is very high it's much easier to enter with out slippage.

The original mechanical question should be adjusted for volatility. I remember 2 times in year 2000 and again in the fall crash of 2008 where I used basically market orders with a price limit. Simply bidding through the current price to start + X ticks to start a scale or to end one. Back in those days the markets might rally 3% in an afternoon so you had to get some on.

Opens and closes are best to use at the market orders. However for the mechanics market at open or closes can be the best or the worst price of the day then your in either deep trouble all in on the high tick, a trend down or lucky you caught a trend day up.

The problem has been that since the markets have become more mechanical its the big up opens that continue to go up and the down opens that have gone straight down. These are order ladders and the moves are over by 10am. It was confusing to see the markets gap big and the entire day over by 10 or 11am. Now we are used to it…perhaps time for a change.

What is wild is to see the govie bond markets move a couple percent a day and the SNP move 1% and the ebbs and flows between stocks bonds and those indexing commodity etf's for investment over the next 100 years are guaranteed to lose.

Chris Cooper writes:

I often have the problem called "adverse selection" with my limit orders, in forex or futures. This is not a problem with small orders, but when your order is larger, you may (frequently) see a partial fill, then the market turns around in your favor and you make a profit. But the profit is not as large as it would be if your order had been filled to completion. The times when your order is completely filled, the market has moved through your price point and past it, usually. You are sitting on a loss if marked to market, and that loss is for your entire size. In other words, you get the bad fills when you really want to be filled, and the good fills when you don't want them (in retrospect). It's a big problem for short term trading.

Similarly, in markets with a long order queue such as ES, by the time your order is filled the market has pretty much moved past you and you are sitting on a loss. Unless you can play games with pre-positioning your order in the queue, you will always see this slippage with limit orders.

Jonathan Bower writes: 

You "could" avoid posting your limit order for bots, hfts, etal especially if it is of consequence (size) by working it semi-"silently" in an attempt to not get "screwed". One of the earliest execution algorithms was the "iceberg" where a limit order could be placed in (user defined) pieces, once taken out another one will replace it until your order is filled. Of course this is easy for those who want to to sniff it out. More recently you can add variance to your lot size firing in somewhat random orders as part of an iceberg. Or you could set a timed order to release a limit order (or combination of orders) based on a print, bid, or ask with what/if OCO ammendments, etc etc etc.

The bottom line if you need to be and can be creative with order execution especially in illiquid markets. Of course being right about the trade idea is still the hardest part…

Chris Cooper adds:

GLOBEX does not have liquidity that is as good as the forex interbank market, especially in the Asian hours. If you are trading smaller quantities, in New York hours, then futures are a better choice than forex.

If you are not getting filled when you should be, then your forex broker probably has what is called a "last look" provision in their system. This allows the liquidity providers a chance, say for 30 seconds, to decide not to fill your limit order. This has been an annoying problem for me in the past. The solution is to switch to a broker without this provision. It could also happen if your broker is not an ECN, and in that case you should find a new broker.

Jeff Watson adds:

There were (and still are) some people in the pit who made an excellent living with just the ability to tell when the market is going from quarter bid to quarter sellers. That, in itself is a huge edge.




It has been three months since the confirmation of the Hindenburg Omen, and the S&P 500 is up 12% since then.

Larry Williams writes:

True on H Omen sell but….there was what I call a H Omen buy on 8/27 and 8/30. I am writing a paper about this.

Jim Sogi writes: 

Steve's point is why I believe that quantitative price analysis must be augmented with game theory such as Chair's infrastructural and and natural observations, but also with Mr. E's macro observation and political gamesmanship. This helps with the cycle analysis.



 Trend is the basis of profits; no trend, no profits.

Trend is a function of time. 3-5 hours does not allow for trend moves of any real magnitude; day traders play with a stacked deck. The dream of daytrading is in fact a nightmare for most everyone. It can be done, but not for massive profits.

Nick White writes:

There is an excellent discussion of the dynamics of this point in the gentleman from Amioun's first book.

I quote / summarize / paraphrase at length:

Take a regular dentist. A priori, we know he is an excellent investor and has an expected annual return of 15% over t-bills with a vol of 10%. Dentist builds a trading room in his attic, deciding to spend every day watching the market and drink cappuccino. He buys a bloomberg and lots of expensive PC's to automate his trading etc etc. His 15% return with 10% vol per yr translates to a 93% probability of success in a given year. But seen at a narrow time scale, this translates into a mere 50.02% probability of success over any given second. OVER THE VERY NARROW TIME INCREMENT, THE OBSERVATION WILL REVEAL CLOSE TO NOTHING,. Yet the dentist's heart will not tell him that. Being emotional, he feels a pang with every loss, as it shows red on his screen.At the end of each day, the dentist is knackered and emotionally drained Minute by minute examination shows that each day (given 8hrs / day) he will have 241 pleasurable minutes against 239 unpleasant ones. These amount to 60,688 and 60721 per year. Given that an unpleasurable minute is worse in reverse pleasure than the pleasurable minute is in pleasure terms, then the dentist incurs a large defecit when EXAMINING HIS PERFORMANCE AT HIGH FREQUENCY. In contradistinction, imagine the situation where the dentist examines his portfolio only upon receiving the monthly account from the brokerage house….67% of the months will be positive, he gets only four negative pangs of pain per year, and eight uplifting ones. THe efffect is magnified at the annual level where, for the next 19/20 years, he will have a pleasant experience looking at his annual statements.
Scale Probability
1yr 93%

1 qtr 77%

1 mth 67%

1 day 54%

1 hr

1 minute

1 second

The net net of all this is as follows:

If we look at the ratio of noise to non-noise then you get the following. Over one year we gets .7 parts noise for every part of performance. Over one month we get 2.32 parts noise per part of performance Over one hour, 30 parts noise for every part performance Over one second. 1796 parts noise per part of performance. Therefore:

Over short time increments, one observes the variability of the portfolio, not the returns…you just see variance and little else. This is emotionally difficult to parse…even though at any moment you see a combination of both variance and return, your brain can't tell the difference. This explains the burn-out rate amongst people who constantly expose themselves to randomness (especially given greater effect of negative experiences than positive experiences).

Kim Zussman writes: 

The analysis is flawed:

1. A regular dentist should not day trade because of opportunity cost and squandering what he paid for his profession's barrier to entry
2. One can only know their returns ex post. If you could know them ex ante there would be no psychological issues - fear comes from uncertainty.
3. Irregular dentists are another story

Rocky Humbert writes:

Kim writes: "If you could know them ex ante there would be no psychological issues– fear comes from uncertainty."

This is not correct.

Fear is a pre-wired response in most people, and can have little to do with the rational analysis of a situation or uncertainty.

Example 1: While waiting to mount an extreme amusement park ride (roller coaster etc), the symptoms of fear (sweating, elevated pulse, etc.) are a genuine physiological response regardless of the fact that the odds of injury on the ride are miniscule.

Example 2: If you are engrossed while watching a horror movie, your limbic system kicks in … just as if you were being chased by the Blair Witch.

Example 3: Phobias are real, and irrational. A person who is afraid of flying is not interested in the fact that his plane will almost certainly not crash. Yet, people are not afraid of driving to work — even though the odds of dying during a commute are much higher than on a cross-country flight.

The emotional fear/greed response to P&L mark-to-market are real– and I believe genetically pre-disposed. They are analogous to phobias and obsessive-compulsive disorders. Hence, I believe Nick's post about timeframes is extraordinarly profound and accurate.



As far as I have ever been able to ascertain, Larry Williams was the first to attempt to apply the Kelly Criterion to outright position trading, and the first to openly discuss it. His pursuit in this regard not only was my initial immersion to the ideas, but he funded those attempts. Whatever I've uncovered along the way is a product of that — Larry's unquenchable curiosity, fearlessness regarding risk, and willingness to fund pursuits others would never touch.

A couple of points further in the post worth mentioning here because I think the other interested members deserve to have light shed on some misconceptions, some of which are a little dangerous to ascribe to, but are widely held.

"One "plays" forever, or practically forever."

But no one does and no one can, and it is this very notion of there being a finite "horizon," that changes not only the calculation of a growth optimal fraction, but every other metric related to it, giving rise to an entirely new discipline in and of itself.

"If one is somewhat risk averse, one can establish a half Kelly criterion, essentially betting half one's full Kelly bet. This results in a lower probability of one's bankroll halving."

But why "half?" Why this arbitrary number? (Or any other arbitrary dilution for that matter?) Remember, we're dealing with a function that has an optimal point, implying a curve, and it is the nature of this curve that is important to us. Being at different points on the curve has vastly different implications to us. Further, the various and important watershed points almost all are a function of that "horizon" mentioned earlier, i.e. the points migrate about this curve as a function of that horizon. Advocates of a "Half Kelly," or other arbitrary point along this chronomorphic curve (with respect to the horizon and events transpired) are seemingly unaware of the implications of their arbitrarily-chosen points.

"The criterion is to maximize the expected value of the logarithm of one's bankroll."

Yes, that is the Kelly Criterion which, in trading, does NOT result in the growth optimal fraction but a far more aggressive (and dangerous, without growth-commensurate benefit) number. No one seems to understand this.. The number returned in determining the value that satisfies the Kelly Criterion can be converted into a growth optimal number (which I call the optimal fraction. or optimal f) but in and of itself, the value that satisfies the Kelly Criterion is NOT the growth optimal fraction in trading. Incidentally, the so-called Kelly Formulas (put forth by Thorp I believe, and market applications attempted by Larry Williams in the mid-1980s) do NOT satisfy the Kelly Criterion in trading applications, but DO in gambling ones (that is, in trading applications they will not yield the same results as the value which satisfies the Kelly Criterion. The Kelly Formulas do, for dual-outcome situations, return the growth optimal fraction). For more on this I can only refer those interested to the most recent Journal of the International Federation of Technical Analysts 11 (available at admin at ifta dot org) or the 2-day course on Risk-Opportunity Analysis I am having in Tampa Nov 13 & 14 see http://ralphvince.com)

"The biggest issue of application is that one makes many assumptions about statistical distributions, correlations, returns, etc. that are all wrong."

I agree. In a strange, ironic twist to my modest participation to this story, it was (again, but some decades later) Larry Williams (rather recent) insistence of a way to apply what I know of growth maximization in a robust way. As a result of the pollenization of these ideas by Larry, I can state unequivocally that there are clear, simple, mathematical solutions to these impediments — in short, if someone wishes to apply a growth optimal approach to their future trading, these impediments ARE readily surmountable. But be certain your criterion is growth optimality, and be sure you really want to get into the cage and fight the gorilla. Most just want to sit and watch Dancing with the Stars.

Nick White comments:

Dancing with the stars….brilliant and well said.

We're all fortunate beneficiaries of Mr. Vince's investigations into the intricacies of these issues.

Phil McDonnell writes:

Kelly originally wrote his paper based on race track examples with binary outcome. You won or lost with assumed probabilities and you knew the wager size and payoff. So strictly speaking his formula only applies to wagers with two outcomes. Even a blackjack hand has at least five possible outcomes (win, lose, blackjack, double down, split) and not just two so strictly speaking Kelly's formula does not apply. Some people have erroneously tried to modify the binary Kelly formula by using average win size and average loss size to compute. All such formulas are dead wrong. The reason is that, in general, the average log does not equal the log of the average.

As Larry Williams pointed out most people do not feel comfortable using the optimum log approach even if the math is done correctly. I believe there is a simple reason for this. Most people do not have a simple logarithmic utility function. Rather they seek to maximize ln( ln w), where w is wealth. This is an iterated log function and results in a much more conservative ride. I talk about this distinction toward the end of my book. Ralph Vince also has written extensively on this subject using his term optimal f.

There is another issue with simply maximizing returns and that is it may not really take into account risk in a proper manner. It is true that the log function weights the largest loss the most in a non-linear manner and reduces the weights of gains so that the largest gains are weighted sub-linearly. But that may still not be enough to satisfy one's real risk aversion. That is part of my argument for the iterated log form but it may be that an explicit metric such as standard deviation is still needed.

Larry Williams writes:

Optimal or Maximum Wealth (possible gain) only comes with Maximum Risk; therein lies the problem. Not loosing…risk…is more important than gain in the art of speculation business.

Chris Cooper writes:

More important, as far as my practical experience goes, is that one's estimate of the edge is always subject to uncertainty. The reasons have been discussed on this list before, but certainly include changing regimes, limited history for the models, curve fitting, flexionic machinations, scaling nonlinearity, etc. I relied on the Kelly formula extensively in the mid-'70s when gambling, and uncertainty in your edge was no less important then. The problem arises because overestimating your edge is so destructive to your terminal wealth.

It might be interesting academically to consider an approach, such as Bayesian, where your estimate of the edge is not stationary, but in fact must decrease when you hit a losing streak.

James Arveson writes:

I am a newbie on this site, but I can assure y'all that any finite amounts of outcomes can easily be handled by maximizing the expected value of the logarithm of one's fortune. I have also executed these theoretical outcomes for many years in AC and LV in BJ, and yes, in Bethlehem, PA in Texas Hold 'Em. See Mathematics of Poker for a better exposition of these issues than I could ever present.

Remember that each bet is a single bet, and one can bet forever. Leo Breiman has actually proved that (in the most general cases) that this approach DOMINATES all other strategies.

Now, IMHO, this approach is irrelevant to the market. NO ONE can get all the statistical assumptions correct-statistical distribution, EV, correlation, return, s.d., etc.

Have fun until we get to the next level. Same goes for Markowitz. Check out www.styleadvisor.com. I have no piece of their puzzle but wish I did (I might be able to get a write-off ski trip to Lake Tahoe where they are located).

Actualizing all of this crap may be the next Nobel Prize in Econ, but it will probably not help schlepers make money in the markets.

Ralph Vince replies:


Pursuing awards is for schlepers like Krugman or other academic dweebs –it's an award voted upon by dweebs for dweebs, and its pursuit bridles and constrains the mind (as *any* political pursuit will. Usually, the truth lies with things that - people off). To-wit, the lack of challenge to the notion that Kelly presents on p925 in the conclusion of his now-famous paper wherein he asserts that geometric growth is maximized by the gambler betting a fraction such that "at every bet he maximizes the the expected value of the logarithm of his capital."

This is accepted by the gambling community, and, by extension (falsely, mistakenly) accepted by the trading community. HOWEVER, a critical analysis of this notion reveals that it does NOT result in the growth optimal fraction, but rather in a multiplier of one's account to risk (the two are different indeed, the latter being less than or equal to the former, resulting often in over-wagering). In fact, the multiplier on one's stake equals the optimal fraction to risk only in certain, specific instances which manifest in gambling, but are rare still in trading (e.g. only on long positions, etc.). I would gladly go into this in depth put I cannot publicly do so as the paper on this has been publish in a current issue of a journal, and I have agreed to refer those interested to the article instead. The upshot is, that the Kelly Criterion, as specified above, is not what Kelly and others thought it was except in the special case I just mentioned — it is NOT the growth-optimal fraction, but something different, equal to the growth-optimal fraction only in the special case — a case that manifests in gambling with ubiquity, and oddly, in trading very rarely.

Again, the gambling community has accepted it for reasons mentioned –because it does give you the same answer for the optimal fraction to bet as the formulations for the optimal fraction in the gambling situations. But just because it gives you he same answer as the optimal fraction in special situations does not mean it is the formulation for the optimal fraction –it isn't.

Secondly, even the "optimal fraction"it is never optimal. Suppose you are playing a game with a 50% probability and odds of 2 to 1. Your optimal fraction is .25 (if you were to play forever). However, after the first pay, the phone rings, it;s your wife, and she informs you of an emergency and you have to bolt the game (with your winnings from the one play, make you a popular guy). If you knoew beforehand you were going to only play for 1 play, you should have bet 100% of your stake to maximize your gain. If the call came after two plays in this game, you should have bet .5.

Tomorrow, you come back to this game — and you bet .25, reconciling yourself that yesterday you bet .25. (so….the game possesses memory?)

Wait, it gets worse in trading, where we see that each individual bet is, in fact, NOT a bet. Let's say you trade only XYZ stock, and you put on 300 shares. Let's say you have a stop below your buy price but it;s a different level for each of 100 shares, so you have three stops below the proce for 100 shares each at different levels. Now, let's say onyl the closest stop, for 100 shares, gets hit, resulting in a loss on 100 of the three hundred shares. Weeks later, you sell out 100 shares at a profit, and, a few weeks after that, another 100 shares at a price higher than that.

But these are NOT three separate trades. This is ONE trade, one wager for the purposes of growth-optimal calculations. And the reason is because you are ONLY trading XYZ — there has been NO recalculation of positions to put on until the entire thing has been closed out. IF, on the other hand, you were having other trades throughout the course of your aggregate position in XYZ, then you WOULD consider each of these a separate trade.

Trading is not the same as gambling. There are similarities, but don't make the assumption that because you risk something and gain something that it is the same. There are things which are proxies for truth, that asymptotically appear to be truth, but they are only proxies (such as the Kelly Criterion) as well as the widely-held (in the gambling community, and hence the trading one as well) but incorrect notion that a wager should be assessed based on it's asymptotic mathematical expectation. This too is a mere proxy and an incorrect one that can, in extreme cases, lead one to accept bad wagers and reject favorable ones.

Again, critical thinking has been absent and trumped by the acceptance of industry catechism.

Finally, you speak of SD's and EV (mean-variance is dead incidentally, as dead as dead can be everywhere BUT academia) correlations, and Chris mentions the (valid) problems of assessing the edge in the future and the problem of non-stiationarity.

The solution to growth optimality in the markets, lies in NOT accepting the Kelly Criterion, but instead accepting what IS the growth optimal fraction– because that then reveals (in the simplest of ways!) how to address the problem of non-stationarity in the future and it doesn't require any of these parameters, or even a computer, it's really THAT simple if you want to attempt growth optimality in the future.

Phil McDonnell comments:

Ralph raises a lot of interesting philosophical questions. On some points I disagree, so let me elaborate. For the purposes of this piece I will assume one is entirely risk averse and seeks only to maximize expected wealth on a compounded growth basis.

First he raises the point that there is no guarantee that a game or investment opportunity will continue. Certainly a true statement. However it is also true that there will be a succession of such opportunities available in one's lifetime. Thus some rational basis for choosing bet size each time should include consideration of expected logs of the outcomes.

Philosophically I disagree with Ralph's analysis of bet it all on the last bet. His math is correct, in that it will maximize the expected dollar outcome. But there will always be other bets, so one's lifetime objective should still be to maximize the expected log not simply the arithmetic expected value. I believe Kahneman and Tversky made the same error in their Nobel winning papers.

I have an alternate take on Ralph's argument that it is hard to define a trade because you can put on 300 shares and exit 3 times at different prices, unknowable in advance. Rather than look on each trade as the basic metric one should look on the portfolio as the metric and a basic unit of time as the portfolio re balancing decision point. For example if you invested .25 of your wealth in a trade that doubled you know have .50 of your 1.25 wealth in the trade. That is too much if you want to maintain the .25 ratio so you need to sell .1875 to get back to your optimal ratio. But the simplest way to look at it is to look at the investment portfolio in each time period, be it a day, week or whatever.

One of the reasons the mean covariance model is in disfavor is that it seems to fail when everything hits the fan. In fact the model is incomplete in the sense that EV and COV are stochastic variables and vary over time. (I am implicitly including VAR here.) You need to explicitly include the correlations somehow in order to take into account how an entire portfolio will vary together. Using the formulas for optimal bet size on a trade level will always lead to serious over trading if there are multiple trades put on at the same time except in the case of a negative correlation between the trades. So it is misleading to calculate an optimal trade size for one system or one trade without consideration of any others that might be on at the same time. At best it is a dangerous upper bound for any single trade size. But it will almost always be an estimate too high. Optimization of expected log of wealth can only be done at the portfolio level.

Ralph Vince responds:


I am not raising ANY "philosophical questions." Just because people may have to think about them doesn't make them philosophical questions as opposed to facts:

1. The value that satisfies the Kelly Criterion is NOT the (growth) optimal fraction of ones stake to risk (although, in special circumstances which we find ubiquitously in gambling and not in trading, it is an equivalent value to the value that IS the optimal fraction). And the pervasive mistake by those attempting growth maximization in the marketplace of using the Kelly Criterion result puts then OVER exposed, to their unwitting peril. They are NOT growth optimal. In fact, the value that satisfies the Kelly Criterion NEVER returns the growth optimal fraction. This was a mistake on the part of Kelly and Shannon. The very fact that it is still accepted by others is testimony to the absence of critical thinking in this matter.

2. Further, what IS the growth optimal fraction is a function of the horizon of the game — and all games have a horizon, including the game of evolution on earth. Further, all metrics, including the analysis of drawdowns (including VAR where a horizon of 1 is implicit), even the analysis of whether a wager should be accepted or not, are a function of horizon. Disregarding the horizon leads us to incorrect conclusions at every turn in risk-opportunity analysis. In fact, it is the necessary introduction of "horizon" that gives rise to this entire burgeoning discipline.

3. Once we accept points 1 and 2 above, the obvious solution to solving for the non-stationarity of the distribution of outcomes we are dealing with becomes obvious. Growth-maximization, unlike attempts at it in the past, now CAN be performed with informed assessments of what the best growth optimal fraction value to use in the future will be.



 The leading historian says that he'll buy me a $ 8 cup of coffee under certain considerations. And I don't know much about coffee. But I've had occasion to have coffee at Stumptown Coffee, an Oregon firm with branches in New York now, and it's far and away the best coffee i've ever had. Next in line is the coffee at Kaffe that Mr. Florida surfer has recommended. The web mistress is a vegan, and I don't pay her that much to do all the editing and picturing so she usually doesn't put our stuff on barbecue up unless I get her mother on the case, which isn't that effective since she doesn't believe in coercion. Let us expand our mandate from bar b que to good beverages like coffee and tea.

Vince Fulco comments:

I wouldn't say THE top tier but for solid, day-in, day-out coffee, a NYC mail order institution which we order from is portorico. It's been around for over 100 years and we especially like their couple times a year sale with numerous versions of beans $5.99-7.99/lb, a veritable bargain when retail goes for similar prices for 10 ounces. They also have a weekly sale of one kind or another.

Jeff Sasmor writes:

For NJ suburbanites, the local roasting of primo beans and a nice college town quasi-hipster atmosphere is provided by Small World Coffee in Princeton. In spite of a Starbucks opening around the corner, Small World has actually grown larger.

David Hillman writes:

Stumptown is among best ever drunk here, too. We have a pound or two shipped in regularly. They ship the same day they roast and deliver in about 2-3 days, so coffee is very fresh. Currently in the cabinet is Indonesia Sulawsi Toarco and the African's are exceptional this year. An admirable direct trade business model worthy of support.

 Also, when in Portland, breakfast at Mother's. They serve Stumptown varieties in a french press at the table. That and the wild salmon hash is more than worth the long weekend a.m. waits.

Boom Bros. in Milwaukee is also happily recommended. Excellent roastmaster, their Velvet Hammer is the 'every morning' coffee at Cafe DGH.

Another favorite is this coffee from the D.R. Very cheap, very good. Best drunk in a cafe on the beach in Sosua. Maybe there's a Caribbean store of some sort in NYC?, but if not, there's always Bonanza:

"…..Always the most fresh production guaranteed! Manufacturer send my orders 3 times a week…..Thanks for looking!!!"

Chris Cooper writes:

Coincidentally, I have recently embarked on a quest to brew (consistently) the best cup of coffee. I have started roasting my own beans, and now it is evolving to importing my own green beans. Next month on the container arrives 300 kg of single-origin green beans from Indonesia from five farms. We call them Bali Kintamani, Java Jampit, Aceh Gayo, Sumatra Lintong, and Torajah Kalosi. I guess this may become more than just a hobby.

 While Mr. Surfer and family visited not so long ago, we served some Kopi Luwak, famous due to the journey of the fresh beans through the digestive tract of a civet. It turns out that there are various grades of Kopi Luwak, and since that time I've found a verifiably authentic version, which is rarer because often the growers will mix in other beans. I may try to import that as well, but it's very, very expensive, and I can probably only get 10 kg per year. The taste is really different, much earthier.

Larry Williams comments:

My cup runneth over with coffee from these guys, but thanks for the tips. I will begin my journey again for greatest java.

By the way, Overstock.com seems to have the best deals on espresso machine.

T.K Marks writes:

All this talk of coffee has gotten me nostalgic for one of my life's more squandered opportunities.

There was this little coffee spot on the Upper West Side, just a stone's throw from Lincoln Center, called Cafe Mozart. I used to spend much time there.

I would get a pot of coffee. Once even this thick Turkish stuff that perhaps made one look of Left Bank sensibilities, but tasted like tar. Would while away the hours there with reading, backgammon, or chess. It was a peaceful place.

So one night I'm sitting alone at my table reading when walks in and approaches, a woman.

A woman with a very fetching smile.

Bob?…she asked hesitatingly, as one would when meeting a blind date.

I stood up politely, smiled at her for a few seconds, and, No, was all I said.

Till this day I regret not lying through my teeth.

Had nothing to lose.

Jeff Watson writes:

 Many of my friends are coffee experts but I am sadly lacking in that department. One thing I do know is how to make is one of the better pots of coffee on the planet. The following recipe will even make even the most mediocre coffee taste good, and good coffee taste……delicious.

1. Wash an egg then break it into the bottom of an old fashioned metal campfire coffee pot, beating the egg slightly, leaving egg, shells and all in bottom of the pot..

2. Add a cup of very cold water to the pot, covering the egg and then add a pinch of salt.

3. Pour in a whole cup of course ground coffee to the water and egg mixture, and stir it up.

4. Pour enough boiling water over the coffee, egg, mixture to almost fill the pot up, and stir until mixed.

5. Cover the pot and plug the spout with a dish towel.

6. Put the coffee pot over a fire, heat it up to a gentle boil, back off, then let it simmer for a couple of minutes.

Take the pot off of the fire, let the coffee settle for a couple of minutes then add a cup of very cold water to precipitate the coffee grounds/egg mixture. Let the coffee settle for another minute, then serve.

My grandfather was taught to make coffee this way from some real cowboys when he went to the Arizona Territory for a trip sometime before 1910. He taught me how to make coffee when I was around 7 or 8, and put me in charge of the coffee every time there was a family picnic or outing. The secret to wonderful coffee is the egg, the pinch of salt, and good water. Coffee prepared in this manner evokes many good memories, and the good smell alone will attract any friends or neighbors in the near vicinity. Once in a great while, I will make this coffee on the stove and it's almost as good as on a campfire.

I have often wondered what a Kona coffee would taste like if prepared in this manner.

J.T Holley writes:

 I'm not a professional roaster or barista, but the keys that I learned in the 8-9 years that I mentored to roast, grind, and brew coffee are the following:

1) The time between roast and grind needs to be minimal (oils of the roast and storage important)

2) Method of brewing important to your individual tastes (percolate, press, or electric drip)

3) Water is 99% of a cup of coffee! Good tasting waters need to be used and free of chlorines, flourides, and impurities

4) Filtration choice and cleanliness of the brewer of choice imperative for consistent cups of good flavor

5) Once pot is brewed then stirring the pot and stirring the cup is important regardless of cream and sugar for consistency of coffee.

That's the basics!

All good shops should know this regardless if its a private house, private shop, franchise or friend.

Kim Zussman queries: 

How can coffee gourmets taste fluoride but not civet excrement?

Jim Sogi writes:

Chris's special Java java was distinctive and earthy. A treat especially in the palatial surroundings.

The key to brewing good coffee from whatever origin, is:

1. Be sure the parchment is sun dried, not machine dried. It has a much mellower smooth flavor.

2. Roast your own coffee. My favorite roast is 462 degrees, 11 minutes give or take based on humidity and ambient. Roast until the oil just starts to show, but is not oily. The oily roast is more for show. Roast only what you can use in 3 days.

3. Grind your own fresh roast. This is the most important of all. Don't try to freeze coffee beans.

When brewing in filter, only pour a little, not boiling, water through at a time.

Oh yes, Kona Coffee is without doubt the best in the world.



How would the speed up stuff (see below) work in trading?

Trading while standing up?

Trading with a gun rather than a mouse?

Taking a fast 4 ticks?  (guaranteed to lose money unless you have the infrastructure of a flexion)

Trading 3 markets in succession??? 

Larry Williams adds:

Going from yesteryear's 200 day moving average to a shorter one? Trading instant spreads? 

Jim Sogi writes:

It's a whole new skill set, both different motor and mental with a learning curve. Years of practice with certain tools cannot be discounted. Like switching from squash to tennis to ping pong. Or longboard to shortboard. 

Ralph Vince writes:

Great questions. Based on my own, limited, life experience, I would add that there is an element of a certain mental "groove," to all of this, necessary to success, not altogether very different than that of an athlete on the top of his game (we have discussed this at length in this forum– some great discussions on it I think) or when you are thinking a problem through– a very difficult, elusive one, threatening to drip off the edge of your consciousness…….and I'm not so sure that is even timeframe-specific, so long as you find your groove.

When I put on a trade, I KNOW I'm going to make money on it, I'm not worried about it one jot. You get into certain habits, which are a function of your cadence, and "settling in' to that, whereas I think it IS timeframe-specific, seems to be timeframe specific to the individual and how he trades.

I very much believe that the kind of "hurry up" trading you are describing here may fit certain individuals and may sabotage others. Even if on a purely mechanical basis. What comes to mind for me on this is trying to play simple, basic strategy blackjack at a table with a fast cadence– I can't handle it, and am certain to fumble it.

Ken Dreees writes:

It would be interesting to create a dynamic trading skills test in which you had mutliple positions open in multiple markets and were then given simulated info in a real time sense that caused market disruptions. You would be graded under criteria such as:

1. exiting safety

2. capital protection
3. Finding and exploiting panic etc.

Like a trading version of star fleet's test.

Jeff Watson adds:

Here's an interesting site with info on CBOT full seat prices from 1898-2004. There's a handy little excel download in the site with the high/low of CBOT seat prices on a yearly basis. 1942 was the year to go long the CBOT. 

Russ Sears comments:

My opinion is that building up the endurance to concentrate for long periods of time is not like riding a bike. If you've been away from it a while train yourself back into it.

Taking scheduled stress relief breaks should be required to be on your best defensively, especially in volatile markets. 




UO football

Oregon football: Ducks' success on offense is just a matter of time

Oregon's fast offensive tempo has baffled opponents this season, and USC will try to solve it Saturday

By Rob Moseley

The Register-Guard

Appeared in print: Wednesday, Oct 27, 2010

In college football, it's best to take things one week at a time - unless Oregon looms on the schedule.

Because of the Ducks' withering offensive pace, USC has increased its tempo in recent practices. And not just this week or during the preceding bye week, Trojans coach Lane Kiffin said, but even earlier than that.

"Over the last couple of weeks, even going into the Cal game, we've picked up our tempo in practice whenever we were going against the defense," Kiffin said Tuesday. "I just think that if you try to all of a sudden do it in the week you're playing Oregon, it's not going to help a whole lot. …

"We've been doing this for a few weeks and took a different approach to the bye week than if we were probably playing someone else, by the speed we practiced at and the way we approached it."

The list of top-ranked Oregon's scoring drives this season, entering Saturday's 5 p.m. game at No. 24 USC, includes 16 shorter than a minute, and only three longer than four minutes. To some extent that reflects the big-play ability of such stars as LaMichael James, Jeff Maehl and Josh Huff, and also some favorable field position owing to the 25 turnovers forced by the UO defense and special teams.

But it also illustrates the tempo at which Oregon's offense plays, and the minimal time the Ducks take between snaps. Mostly, that's determined by how long it takes officials to spot the ball after the previous play.

"We're playing at a pretty good clip right now," UO coach Chip Kelly said. "I think it's because our players have a really good understanding of what we're trying to do. We just try to eliminate that time between plays, and then just go play."

Snapping the ball just a handful of seconds after the previous play minimizes the time available for the defense to call plays, substitute or react to Oregon's offensive formation. It's a common occurrence to see defenders spend those moments with their hands on their hips, a sure sign of fatigue.

Oregon doesn't have such trouble signalling plays to the offense. The Ducks streamlined their terminology in order to play faster on offense when Kelly was promoted to head coach in 2009, he said, and they employ a complicated system of signboards and hand signals to indicate plays during offensive possessions.

The signs each include four images - faces of ESPN personalities are among the most recognizable.

Kelly said the signs indicate a package of plays, and hinted that they can sometimes be used as a decoy. Sometimes, he said, players aren't asked to "go to the board" to get the call.

"It's just another way to play fast," Kelly said. "The analogy I can give you is, iif you go to McDonald's and order a No. 2, that's all you have to say and you get a Quarter Pounder and a drink and fries, and you just say, 'No. 2.' If we send them to the board, one picture can mean the formation and the play and the snap-count. That's all it is. It's just another way to play faster."

The Ducks' tempo seems particularly suited to their spread-option offense, which doesn't feature excessive pre-snap shifting and motion to fool the defense, as in the scheme employed by Boise State, to use just one example. But Kelly said he'd look to push the tempo even if Oregon's personnel was best suited to packages requiring three tight ends and a fullback.

"You could play up-tempo no matter what you do," Kelly said. "You watch (Indianapolis Colts quarterback) Peyton Manning, they're not running any option but they play as fast in the NFL, in terms of him being able to get their plays in and the speed they want to play at. So it's not married to the system."

Kelly also quipped that, "The byproduct is, as the play-caller, you can call a lot of really bad plays, and people forget about them quickly because we're on to the next one." But clearly Kelly, whose offense leads the nation in points and yardage, hasn't had many missteps in that regard.

The potential drawback to playing so fast on offense is that Oregon's defense is on the field so long. The Ducks are 114th out of 120 teams nationally in time of possession, at 26:40 per game; the 516 plays defended by Oregon are more than anybody else in the Pac-10 but Washington State.

The Ducks try to mitigate that with a regular rotation of about 25 players at the 11 positions on defense.

But Oregon also uses about 20 players regularly on offense, another challenge for opponents.

"The different ways they mix and match that personnel in terms of personnel groupings and formations, you're trying to identify what their top runs are and their top passes are, and when there's more of them it's hard to really pinpoint what their favorite ones to do are and defend them," Stanford coach Jim Harbaugh said.

Kiffin and his staff at USC are trying to tackle that challenge this week.

"You don't know who's going to be in when," Kiffin said. "They do rotate guys in. I'm sure it's because they know they're going to play a lot of plays because their offense scores so fast and doesn't use very much time.

"The 14 touchdown drives under (54) seconds, that's unheard of for four years of games, let alone half a season. I'm sure that's why they do that. I don't think until this week I realized how deep they were. For them to play so many people on offense and defense, they've got great depth."

All of it speedy, as Oregon tries to keep pushing the pace of this historic season.

"We just try to eliminate that time between plays, and then just go play."

- Chip Kelly, Oregon Football Coach

Pitt T. Maner III shares:

On speed in practice:

Bill Walton on Wooden and UCLA basketball practice, from (With Steve Jamison) Wooden: A Lifetime of Observations On and Off Court, Contemporary Books (Lincolnwood, IL), 1997.

For us, it all started with our practices at UCLA, which were nonstop action and absolutely electric, super-charged, on edge, crisp, and incredibly demanding, with Coach Wooden pacing up and down the sidelines like a caged tiger, barking out instructions, positive reinforcement, and appropriate maxims: "Be quick, but don't hurry." "Failing to prepare is preparing to fail." "Never mistake activity for achievement." "Discipline yourself and others won't need to.

"At the same time he constantly moved us into and out of minutely detailed drills, scrimmages, and patterns while exorting us to "Move…quickly…hurry up!" It was wonderfully exhilarating and absolutely intense.

In fact, games actually seemed like they happened in a slower gear because of the pace at which we practiced. We'd run a play prefectly in scrimmage and Coach would say, "OK, fine. Now re-set. Do it again, faster." We'd do it again. Faster. And again. Faster. And again.

I'd often think during UCLA games, "Why is this taking so long?" because we had done everything that happened during a game thousands of times at a faster pace in practice.

Ralph Vince writes:

It's a game of evolution, the hurry up, with a mobile quarterback, an absence of putting a man in motion (and hence, plays that aren't contingent on defensive reads) and spread out receivers.

The counter to it is the part I am trying to study, and seems to be confusing blitzes (which are difficult to coordinate when faced with a no-huddle), middle zones and man for man on the outside (and, surprisingly, it appears the outside coverage man should take the INNER of to wideouts on the same side when that occurs). 

Russ Sears writes:

Football is a sport requiring quick short burst of speeds. Speeding up the normal pace of the game cause the recovery time to shorten drastically. An offense that knows before the position of attack can rotate the burst of speeds, where as the defense must all be ready and attacking. The stamina to endure these burst of speeds with short recovery takes a good month of training. This is, I believe, the Indy Colts advantage also.

In basketball, it takes even longer because of the aerobic base needed. Wooden and several other great basketball coaches practiced running stairs and full court press. As full court press is the basketball equivalent to no huddle offense.

In distance running the equivalent is cycles surging the letting up the pace. If you practiced this you could beat better runners who are not prepared for this.



PrechterPrechter says sell this rally off of yahoo finance headlines–no need to link, that's probably all you need to know about this move.

But if it is a market bluff, yesterday the market bet before the flop and today you should see the continuation bet on the turn and then a big bet to come on the river. If it's a bluff, then they gotta sell it.

Anatoly Veltman comments:

He's often quoted out of context, just like everyone else– thus everyone's track record may appear roughly same.

Prechter does certain analysis well. Those who understand his writings can benefit by incorporating some of his effort into own analysis. Those few who would actually enter trade on his conclusions– risk not knowing how/why to exit.

Ralph Vince writes:

Entirely true, Anatoly. I may not agree with his prognostications, but he does his work very well. What's more, he is often quoted in overly simplistic terms– such as to be a seller on this rally. I am certain he has a point where he would flip and go long, an alternate count or something. I am also sure he has a downside target– is it Dow 5000 ? Dow 10,500 ? These quotes of his floating around don't really tell you want his strategy is, and that's key. He's a guy who, if/when he is wrong, I have found he has not been wrong by much, often able to adapt to changing market conditions as well as any I have seen.

Larry Williams observes:

Prechter go long? Has he ever? His bearish book riding the wave came out the low the 2002, at the recent market low the clarion call was to sell. Be alert to broken watch correctness.

Dylan Distasio asks:

Hi Vic,

I'm genuinely curious as to why you lump Livermore in with the rest of the financial ne-er-do-wells. I'm not an expert on the man by any stretch of the imagination, but I've read assorted stuff on him, and while he was far from perfect in both trading and life (but then again who is?), I've never seen fit to paint him with that brush based on what I've read. Why do you have such a low opinion of him?

Larry Williams attempts an answer:

Livermore and the Reminiscences are two different stories. The Saturday Evening Post serial that became the book is oh-so well written but it is not just about Livermore it is/was a novel with a fictional character that paralleled Jesse but was also a collage.

In real life once Joe Kennedy took over the SEC, Jesse seems to have never made another penny; in other words he was most likely a runner of stocks not some brilliant trader like Steve Cohen, etc.



 This article on income mobility will put in perspective the malaise affecting our economy. It's the 40 % from each of the lower 2 quintiles who moves to the top 2 quintile that has made us beautiful and created the jobs and responded to the past incentives, and dolorously "prefers not to" create jobs and value now.

Australian Nick White comments: 

This is a great country. Being back here the last few weeks just reinforces to me how lucky America is– even if you're in a perceived funk right now. This is the country where anything can get done…that's not the case in any other western nation. You have freedoms that you take for granted every day (even post legislative amendments that may have eroded them more than trivially). You have every type of geography and lifestyle. You have 36 different choices of one brand of orange juice fer crissakes! (which you can drink while watching one of thousands of tv channels).

I don't know much, but I know that if America continues to focus on the the things that got them to here– without trying to reinvent the wheel– you will all be just fine. The only danger I see is increasing reliance on form rather than substance– but this is a malaise of the world in general, not just the US. 

Rudolf Hauser writes:

This data on income mobility does not give us a complete picture. Large gains or losses from realized capital gains/losses, special bonuses payments, decisions to take long breaks from work, etc. can all influence results for any one year. One would also expect income from most careers to advance with experience and age. What would be interesting to see but probably very difficult data to obtain would be an average of five years of data say at age 50 with those relative income positions of those households income compared with that in the same period in the lives of their parents. I suspect that there would be a good deal of upward income mobility demonstrated by such an analysis, but it would nonetheless be most interesting to have that evidence.

Russ Sears writes:

Isn't this the premise of the sitcom "The Big Bang Theory"?

A group of nerdy physicists meet their neighbor, a beautiful blond girl waiting tables at the cheesecake shop… but even she is hoping to become an actress.

But you miss the point– from the Will Smiths to the nerds in physics to the marathon runners to the Saints QB, they are all incredibly talented, even the WS geeks, not just the WS geeks.

And as someone seen how letting a small business owners put the money back into a sport can revitalize: it can change how everybody developed talent. In 1992 The US marathon trials were a joke, but these guys changed it.

The world will never know the talents that were not developed for lack of a few dollars, but I have seen first hand how thin the pie can be sliced at the top, and how a few centimeters thicker can change everything. 

Jordan Neuman comments:

It is interesting that you mention the varieties of orange juice. I just read The Paradox of Choice which argues that our lives would be better if we did not have so many choices. The varieties of grocery items was the author's starting point.

It would not matter unless such ideas had support in this Administration. The references to health insurance in the book are illustrative. And I found the interview with the author in the afterword absolutely chilling. This professor was sure he and his "expert" friends knew better.

Larry Williams writes:

Living in the US Virgin Islands means giving up many choices in foods, clothes, cars, etc. I have found that a wonderful thing; it causes one to focus on what is really desired (that can be ordered from off island). It makes for a simpler life style and turns ones attention from man made consumables to the ocean, the trade winds, local markets and such.

Sam Marx comments:

I remember one of the escaped English spies then living in Moscow, when asked what he missed most about England, he replied Lea & Perrins Steak Sauce.



Gold jewelry in ancient EgyptBeing a trader and not a math guy like our host I may not be able to prove there is or is not a seasonal pattern for gold to rally in August, but I am impressed when I create a seasonal chart for Au from inception to 2000 and see what looks like such a general pattern. I then run the same tool on data from 2000 to date and see about the same thing and, then again, I am very prejudiced on this seasonal concept as I wrote the first book ever on seasonal studies and even way back then we saw this pattern in gold. So to me it seems there is–at times–a trading advantage or bias here. (plus I am long as this is written from 8/11). My views on seasonals have altered since that 1973 book quite a bit; seasonals are not a mandatory thing but often offer confirmation and a suggestion of what is in store.

I have tried to attach charts to illustrate this point but size is to large (will send if you just have to have them), it is different opinions that make for horse races.

Happy Trails to all,


Victor Niederhoffer says:

The handball senator said about seasonality, the chair agrees with
the senator. I was too hasty involved in a position. With humble mien.



The small chart below is trade by trade buying on the open of the 13th, exit first profitable open or 3,600 stop. In the S&P 500 since 1982 there have been 46 trades. 80% were profitable and not stopped out– but, always a but…risk reward is .48 and drawdown was equal to a little less than 1/2 the net profits. Bottom line: looks like an advantage that might be traded by the nimble but a filter would help. Happy trails to all.







The perpetual edge comes from understanding the human condition.



 We all have an interest in not suffering through another day like May 6. And without violating our rule of never disseminating anything that is a meal for a day, i.e. a recurring regularity, perhaps you will forgive me if I attempt to open a discussion of how a day like May 6 where the market was at a minimum to start, open down and then went up and then dropped 110 points or more, a nice 10% to wipe out point– how such could have been predicted.

Ralph Vince comments:

What cost? If someone has stop orders in (fear of loss or missing a move to the downside), there is cost. If someone was, say, buying on a limit, it was a boon. If someone got shaken out of a position (fear) because they couldn't ride it to 0, I posit they were in too heavily. They were clearly people who were trading with money they could not afford to lose. (In my book, that makes them losers before they even put on the trade!)

Jonathan Bower writes:

I saw many parallels to "that" day on Wednesday. I'm curious if you all enjoyed Wednesday too…

Larry Williams replies:

I have enjoyed my luck which is soon to fade I suspect.



My grandfather grubstaked miners. I have grubstaked many many systems. Only one made money and then ok but no great shakes.



VIX Doesn’t Work as Signal for U.S. Stock Returns, Birinyi Says

March 17 (Bloomberg) — Investors looking for clues about the U.S. stock market should probably ignore the Chicago Board Options Exchange Volatility Index, according to a study of the VIX by Birinyi Associates Inc.

Speculation that equity returns will be positive after the volatility gauge decreases and negative when it climbs has little basis in fact, Birinyi said. "The VIX is alleged to be an indicative indicator and has become a staple of analysts and journalists alike," Laszlo Birinyi and analyst Kevin Pleines wrote in a report to clients.

The following is a table of the S&P 500's average gain or loss during periods after implied volatility climbed above or fell below the 50-day average: (since September 2003)

                      1 Month     2 Months     3 Months    6 Months

VIX 20% Below   0.09%       -0.49%        3.33%       5.84%

VIX 20% Above   1.25%        0.50%        0.95%      -4.51%

Source: Birinyi Associates

Larry Williams writes:

As I have always postulated, the VIX is just the Dow/S&P upside down. It's hard to predict A with A.

Jason Goepfert comments:

I'm not a VIX fanboy by any means, but that article was ridiculous. It only looked at returns since September 2003. And it only tested a strategy of crossing 20% above or below the 50-day average. Why 20%? Why the 50-day average? Why just since September 2003? Did they test anything else? Or is that the one they found that supports their (so far very correct) bullish view?

The ridiculous part is taking such a weak study and then proclaiming "the VIX doesn't work."

Allen Gillespie adds:

He doesn't have enough bins — bins of 5 show something different.

Kim Zussman writes:

  1. Volatility was extinguished by fiat liquidity
  2. The only double-dippers left are Jibao, Roubini, and Michael Moore
  3. Nothing to fear above moving averages

These two articles might shed more light on the above points #3 and #2.

Marlowe Cassetti responds:

I have always doubted the assertion that VIX is a measure of market fear and greed. Years ago I read Whaley's academic paper and I was not satisfied with the author's fear/greed connection. To me VIX is simply the volatility number you plug in to make the Black-Scholes option equation work.

Bud Conrad answers:

My detailed review of VIX concluded that the VIX followed stocks (inversely) a day later. It was not predictive. Longer term charts seemed to indicate opposite movements, but the data could not be used as expected.



 Trading hours upset the circadian rhythms of millions of people and we need to learn the side affects of sleep deprivation and how to deal with them.

Jim Sogi agrees:

When you don't sleep enough you get grumpy, uncoordinated, depressed, groggy. It's bad news.

Nigel Davies comments:

If trading does that to someone and he can't find a way around it — smaller position size, some kind of healthy stress relief — he should quit. It just isn't worth it.

Phil McDonnell explains:

A considerable amount of research has been performed into our nightly dream cycles. The typical cycle lasts about 90 minutes. So in six hours of sleep we get four completed cycles. In 7.5 hours we get fvie cycles, in nine hours we get get six. Note that eight hours does not give us an even number of cycles.

The importance of a full cycle was established a long time ago. When sleep researchers monitored test subjects and woke them at their deepest part of the dream cycle they were shown to be mentally impaired on simple cognitive tests. Awakened subjects could remember their dreams.

Subjects awakened after a full cycle performed much better on the same tests. The full cycle subjects could not remember their dreams.

Ideally sleep should be an even multiple of 90 minutes and one should awaken with no memory of the last dream. A corollary to this is that if one is awakened after, say, six hours and cannot remember a dream then it my be wise to get up. This is especially true if one feels refreshed and cannot stay in bed for another full hour and a half.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008



It is rather interesting that the ubiquitous 200 day moving average (actually 40 week ma) still works at all, because everyone seems to know about it.

Larry Williams replies:

Technical indicators, I think, can be widely known about and still 'work' because of the frailty of humans; as a group we have problems with following/sticking to rules. We can all know we should not drink and drive, speed, do drugs, smoke, etc… but most violate basic rules.



CurveHow can we avoid curve fitting when designing a trading strategy? Are there any solid parameters one can use as guide? It seems very easy to adjust the trading signals to the data. This leads to a perfect backtested system - and a tomorrow's crash. What is the line that tells apart perfect trading strategy optimization from curve fitting? The worry is to arrive to a model that explains everything and predicts nothing. (And a further question: What is the NATURE of the predictive value of a system? What - philosophically speaking - confer to a model it's ability to predict future market behavior?)

James Sogi writes:

KISS. Keep parameters simple and robust.

Newton Linchen replies:

You have to agree that it's easier said than done. There is always the desire to "improve" results, to avoid drawdown, to boost profitability…

Is there a "wise speculator's" to-do list on, for example, how many parameters does a system requires/accepts (can handle)?

Nigel Davies offers:

Here's an offbeat view:

Curve fitting isn't the only problem, there's also the issue of whether one takes into account contrary evidence. And there will usually be some kind of contrary evidence, unless and until a feeding frenzy occurs (i.e a segment of market participants start to lose their heads).

So for me the whole thing boils down to inner mental balance and harmony - when someone is under stress or has certain personality issues, they're going to find a way to fit some curves somehow. On the other those who are relaxed (even when the external situation is very difficult) and have stable characters will tend towards objectivity even in the most trying circumstances.

I think this way of seeing things provides a couple of important insights: a) True non randomness will tend to occur when most market participants are highly emotional. b) A good way to avoid curve fitting is to work on someone's ability to withstand stress - if they want to improve they should try green vegetables, good water and maybe some form of yoga, meditation or martial art (tai chi and yiquan are certainly good).

Newton Linchen replies:

The word that I found most important in your e-mail was "objectivity".

I kind of agree with the rest, but, I'm referring most to the curve fitting while developing trading ideas, not when trading them. That's why a scale to measure curve fitting (if it was possible at all) is in order: from what point curve fitting enters the modeling data process?

And, what would be the chess player point of view in this issue?

Nigel Davies replies:

Well what we chess players do is essentially try to destroy our own ideas because if we don't then our opponents will. In the midst of this process 'hope' is the enemy, and unless you're on top of your game he can appear in all sorts of situations. And this despite our best intentions.

Markets don't function in the same way as chess opponents; they act more as a mirror for our own flaws (mainly hope) rather than a malevolent force that's there to do you in. So the requirement to falsify doesn't seem quite so urgent, especially when one is winning game with a particular 'system'.

Out of sample testing can help simulate the process of falsification but not with the same level of paranoia, and also what's built into it is an assumption that the effect is stable.

This brings me to the other difference between chess and markets; the former offers a stable platform on which to experiment and test ones ideas, the latter only has moments of stability. How long will they last? Who knows. But I suspect that subliminal knowledge about the out of sample data may play a part in system construction, not to mention the fact that other people may be doing the same kind of thing and thus competing for the entrees.

An interesting experiment might be to see how the real time application of a system compares to the out of sample test. I hypothesize that it will be worse, much worse.

Kim Zussman adds:

Markets demonstrate repeating patterns over irregularly spaced intervals. It's one thing to find those patterns in the current regime, but how to determine when your precious pattern has failed vs. simply statistical noise?

The answers given here before include money-management and control analysis.

But if you manage your money so carefully as to not go bust when the patterns do, on the whole can you make money (beyond, say, B/H, net of vig, opportunity cost, day job)?

If control analysis and similar quantitative methods work, why aren't engineers rich? (OK some are, but more lawyers are and they don't understand this stuff)

The point will be made that systematic approaches fail, because all patterns get uncovered and you need to be alert to this, and adapt faster and bolder than other agents competing for mating rights. Which should result in certain runners at the top of the distribution (of smarts, guts, determination, etc) far out-distancing the pack.

And it seems there are such, in the infinitesimally small proportion predicted by the curve.

That is curve fitting.

Legacy Daily observes:

"I hypothesize that it will be worse, much worse." If it was so easy, I doubt this discussion would be taking place.

I think human judgment (+ the emotional balance Nigel mentions) are the elements that make multiple regression statistical analysis work. I am skeptical that past price history of a security can predict its future price action but not as skeptical that past relationships between multiple correlated markets (variables) can hold true in the future. The number of independent variables that you use to explain your dependent variable, which variables to choose, how to lag them, and interpretation of the result (why are the numbers saying what they are saying and the historical version of the same) among other decisions are based on so many human decisions that I doubt any system can accurately perpetually predict anything. Even if it could, the force (impact) of the system itself would skew the results rendering the original analysis, premises, and decisions invalid. I have heard of "learning" systems but I haven't had an opportunity to experiment with a model that is able to choose independent variables as the cycles change.

The system has two advantages over us the humans. It takes emotion out of the picture and it can perform many computations quickly. If one gives it any more credit than that, one learns some painful lessons sooner or later. The solution many people implement is "money management" techniques to cut losses short and let the winners take care of themselves (which again are based on judgment). I am sure there are studies out there that try to determine the impact of quantitative models on the markets. Perhaps fading those models by a contra model may yield more positive (dare I say predictable) results…

One last comment, check out how a system generates random numbers (if haven't already looked into this). While the number appears random to us, it is anything but random, unless the generator is based on external random phenomena.

Bill Rafter adds:

Research to identify a universal truth to be used going either forward or backward (out of sample or in-sample) is not curvefitting. An example of that might be the implications of higher levels of implied volatility to future asset price levels.

Research of past data to identify a specific value to be used going forward (out of sample) is not curvefitting, but used backward (in-sample) is curvefitting. If you think of the latter as look-ahead bias it becomes a little more clear. Optimization would clearly count as curvefitting.

Sometimes (usually because of insufficient history) you have no ability to divide your data into two tranches – one for identifying values and the second for testing. In such a case you had best limit your research to identifying universal truths rather than specific values.

Scott Brooks comments:

If the past is not a good measure of today and we only use the present data, then isn't that really just short term trend following? As has been said on this list many times, trend following works great until it doesn't. Therefore, using today's data doesn't really work either.

Phil McDonnell comments:

Curve fitting is one of those things market researchers try NOT to do. But as Mr. Linchen suggests, it is difficult to know when we are approaching the slippery slope of curve fitting. What is curve fitting and what is wrong with it?

A simple example of curve fitting may help. Suppose we had two variables that could not possibly have any predictive value. Call them x1 and x2. They are random numbers. Then let's use them to 'predict' two days worth of market changes m. We have the following table:

m x1 x2
+4 2 1
+20 8 6

Can our random numbers predict the market with a model like this? In fact they can. We know this because we can set up 2 simultaneous equations in two unknowns and solve it. The basic equation is:

m = a * x1 + b * x2

The solution is a = 1 and b = 2. You can check this by back substituting. Multiply x1 by 1 and add two times x2 and each time it appears to give you a correct answer for m. The reason is that it is almost always possible (*) to solve two equations in two unknowns.

So this gives us one rule to consider when we are fitting. The rule is: Never fit n data points with n parameters.

The reason is because you will generally get a 'too good to be true' fit as Larry Williams suggests. This rule generalizes. For example best practices include getting much more data than the number of parameters you are trying to fit. There is a statistical concept called degrees of freedom involved here.

Degrees of freedom is how much wiggle room there is in your model. Each variable you add is a chance for your model to wiggle to better fit the data. The rule of thumb is that you take the number of data points you have and subtract the number of variables. Another way to say this is the number of data points should be MUCH more than the number of fitted parameters.

It is also good to mention that the number of parameters can be tricky to understand. Looking at intraday patterns a parameter could be something like today's high was lower than yesterday's high. Even though it is a true false criteria it is still an independent variable. Choice of the length of a moving average is a parameter. Whether one is above or below is another parameter. Some people use thresholds in moving average systems. Each is a parameter. Adding a second moving average may add four more parameters and the comparison between the two
averages yet another. In a system involving a 200 day and 50 day
average that showed 10 buy sell signals it might have as many as 10 parameters and thus be nearly useless.

Steve Ellison mentioned the two sample data technique. Basically you can fit your model on one data set and then use the same parameters to test out of sample. What you cannot do is refit the model or system parameters to the new data.

Another caveat here is the data mining slippery slope. This means you need to keep track of how many other variables you tried and rejected. This is also called the multiple comparison problem. It can be as insidious as trying to know how many variables someone else tried before coming up with their idea. For example how many parameters did Welles Wilder try before coming up with his 14 day RSI index? There is no way 14 was his first and only guess.

Another bad practice is when you have a system that has picked say 20 profitable trades and you look for rules to weed out those pesky few bad trades to get the perfect system. If you find yourself adding a rule or variable to rule out one or two trades you are well into data mining territory.

Bruno's suggestion to use the BIC or AIC is a good one. If one is doing a multiple regression one should look at the individual t stats for the coefficients AND look at the F test for the overall quality of the fit. Any variables with t-stats that are not above 2 should be tossed. Also an variables which are highly correlated with each other, the weaker one should be tossed.

George Parkanyi reminds us:

Yeah but you guys are forgetting that without curve-fitting we never would have invented the bra.

Say, has anybody got any experience with vertical drop fitting? I just back-tested some oil data and …

Larry Williams writes:

If it looks like it works real well it is curve fitting.

Newton Linchen reiterates:

 my point is: what is the degree of system optimization that turns into curve fitting? In other words, how one is able to recognize curve fitting while modeling data? Perhaps returns too good to believe?

What I mean is to get a general rule that would tell: "Hey, man, from THIS point on you are curve fitting, so step back!"

Steve Ellison proffers:

I learned from Dr. McDonnell to divide the data into two halves and do the curve fitting on only the first half of the data, then test a strategy that looks good on the second half of the data.

Yishen Kuik writes:

The usual out of sample testing says, take price series data, break it into 2, optimize on the 1st piece, test on the 2nd piece, see if you still get a good result.

If you get a bad result you know you've curve fitted. If you get a good result, you know you have something that works.

But what if you get a mildly good result? Then what do you "know" ?

Jim Sogi adds:

This reminds me of the three blind men each touching one part of the elephant and describing what the elephant was like. Quants are often like the blind men, each touching say the 90's bull run tranche, others sampling recent data, others sample the whole. Each has their own description of the market, which like the blind men, are all wrong.

The most important data tranche is the most recent as that is what the current cycle is. You want your trades to work there. Don't try make the reality fit the model.

Also, why not break it into 3 pieces and have 2 out of sample pieces to test it on.

We can go further. If each discreet trade is of limited length, then why not slice up the price series into 100 pieces, reassemble all the odd numbered time slices chronologically into sample A, the even ones into sample B.

Then optimize on sample A and test on sample B. This can address to some degree concerns about regime shifts that might differently characterize your two samples in a simple break of the data.




If one can predict the market then there are better techniques than Dollar Cost averaging. But DCA is a decent strategy if two conditions hold:

  1. One cannot predict the market.
  2. One has an external income source available to be invested regularly.

Leveraged ETFs can grind investors up in unexpected ways because of the daily rebalancing. I suspect he will see that these ETFs are the exact opposite of a DCA strategy. In DCA your investment buys more shares after a dip and acquires fewer shares after a market rise. Overall your average share price is below the average of the market prices.

Leveraged ETFs employ the exact opposite strategy. When the market rises they are forced to buy more shares. When it falls they are forced to sell shares to maintain their constant leverage ratio. The net result is they buy shares at an average price above the average of market prices over the period. Thus the levered ETFs use an anti-DCA and that is what causes the grind.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Larry Williams comments:

I would add a third condition: Markets make new highs.



I'm sounding alarm. Amidst signs that:
1. Trading and Investment capital is continuing to contract.
2. Political and regulatory interferences are becoming more chaotic
3. Economic downturn's impact is widening
…it is harder than ever before to pin down intermediate-term opportunities. Those who've been trading in-and-out and even reversing every few days (albeit, with year-opener bias in mind), have done well. But in the course of February, year-opener directions should fade. Sector by sector:
1. SP: Commercials have been on the right side of every twist-and-turn. Raising Net Longs late Q4, shorting early Jan, buying again mid-Jan and selling again last week. Test of Nov lows is certain - and only then the panic will reach the pitch tone. However, it's important to not lose sight of the absolute diminishing values: what will look like the ultimate break-down - in fact, will have little room to forge ahead, relative to enormous Bear coups of 2008. When smaller players finally go overly Short on new lows, en mass - they'll find little reward.
2. Treasuries: 30y futures have retraced exactly half of their straight-line Q4 sprint 111->142, thus relieving unconscionable Xmas overbought. O.I. pattern is bullish at current juncture, dropping on down-days and rising on up-days.
3. Currencies: C.O.T. display intriguing divergence vis-a-vis equity-Bear posture. Yen commitments are Bearish, while SF Bullish. I'm getting ready for substantial reversals in both dropping European currencies and rising Yen. My scenario is that such reversals will be playing out against the background of equities' panic, and will catch Specs flat-footed.
4. GC commitments got predictably stone-walled in course of super-rally. Commercials offered scale-up across the precious metals complex. While long-term outlook for Gold is unavoidably Bullish (given few viable investment alternatives), I'd much rather be a buyer on any sharp profit-taking spells, than on any "strong trend". Copper O.I. pattern remains Bullish - but it will be up-hill battle against the back-drop of equity panic.
5. Energy contracts remain in disarray, with little of new indicators in the past week. Of note CL 6-week consolidation pattern that follows vertical 147->33 move, record HO O.I. levels, RB price out-performance (not supported by O.I. pattern) and NG price under-performance, nearing very important $4.05 low of 2006. My conclusion is that the complex will struggle with equities - and that important buying opportunity will form in the process.

George Parkanyi comments:

I admit that I apply COT like a simpleton, but time and time again I've noticed that aligning with the commercials in physical commodities (in the financial indices or currencies I don't even know who a commercial is, or if they're particularly bright enough to make a difference) generally gets you going in the right direction. THAT I learned to pay attention to from Larry's excellent books on the subject. (Unfortunately, Larry, I didn't follow your money management advice and eventually skewered my commodities account).

A guy called Barry Lees runs a site called cotfutures and basically all he does is reorganize COT data into a useful format -particularly a rolling 18 month 0-100 ranking representing the range between the maximum commercial net-short position (0) and the maximum net-long position (100). I've found the 0-10's to be pretty good markers for a downward reversal and the 90-100's for an upward reversal. Speculators would be at the opposite side of the spectrum. There are other factors of course, but these are pretty good ballpark indicators.

Right now, Copper and Rough Rice are at 100-0 extremes, corn 98-4, oats 93-1, cotton 93-20, lumber 92-14. The latter makes sense - it reflects the housing market and consumer staples (leprosy). Gold and oil are mid-range and inconclusive by this interpretation. The closest thing to a short are hogs at 24-63, which is not really considered to be an extreme. (Commercials seem to have not much of a market to sell into and must be cutting back production or holding back inventory because prices suck. Anyway, that's the way I might interpret it.) Would I rush out and by copper and rice right away? Not necessarily. But to buy copper stocks right now to invest for a couple of years might not turn out too badly.

Larry Williams adds:

Not that I know it all, but a little more than most I kid myself, so I will comment what Lees is doing is 10 years behind the times and fails to take into consideration price levels–a critical point.

COT is actually entering bullish area for hogs—2 weeks ago entered bullish are for lumber but not a great buy point due to price levels. Commercials buy all the way down as they take delivery and use the stuff—they are not spec buyers—and that must be factored in….same in copper sure there's been commercial buying, but low price levels induced it.

James Goldcamp writes:

Conceptually I've always had a hard time taking COT serious in markets where the futures markets are not a significant portion of the overall business such as SP(stocks). Isn't the SP overshadowed by the cash market for stocks (where many of the big players such as mutual funds don't use futures at all or minimally)? The same would seem to be true for the currencies. Perhaps you might argue (with respect to markets where the futures are not significant portion of the overall $ traded) the structure of who is positioned in what manner is indicative of sentiment ; however, I cant believe it's driving anything.

Larry Williams replies:

currencies have a very strong commercial influence; international corps protecting sales in various currencies.



lamaAlbert Jay Nock wrote of the regular recurrences of panic, of unreasonable and debilitating fear that takes over a society. Henry Clews wrote of the regularity of panics with the regularity of the seasons. In fact, on a recent visit to New York I actually saw the very same wealthy old codgers hobbling on canes on Thursday night in the splendor of their private clubs. I don't think I will ever forget them despite my own state of panic. It happened in Orson Welles's reading of the Martian invasion, it happened in ancient Greece.

I have seen panic in the water and the unreasoning behavior it creates. In our discussions of survival, I see how panic leads to mistakes, and then the mistakes can compound and lead to death. We're in a panic, no questions. I've felt it. Everyone has. It's an unreasoning blind fear that takes control of your mind.

But as empiricists, we need to take a look at what is happening and what will happen after, and what has happened after and avoid the series of mistakes that leads to death. Rather follow the path to survival. And like in Forrest Gump, mere survival might be success.

The Dalai Lama said that compassion is the key. I might modify that to say that compassion is the key to investing. By acknowledging that other peoples feelings are the same as your own, you understand their needs. In a panic their need is to stop the pain, stop the uncertainty, and have some cash. Your job as a compassionate investor is to give them what they want, despite your own similar feelings. You should be rewarded for such altruism and compassion.

Michael Cook agrees:

I like this point of view. It suggests investing from an "enlightened" point of view, which might also include: not being obsessively attached to outcomes, rather enjoying the process; being relaxed, maintaining an expansive, embracing view of things grounded in acceptance; being mindful; and relaxing and quieting the mind thus allowing spontaneous insight to manifest itself.

This does not necessarily mean assuming the demeanor of a Zen monk, or a Bodhidharma in a cave (although that might work); I think one can be "enlightened" and also be a man (person) of action. See Chogyam Trungpa's "Meditation in Action," for instance. But the best athletes are the most relaxed, aren't they?

The idea of compassionate investing has many more suggestive connotations — thanks.

Jeff Watson remarks:

SpockWith all of the volatility in the markets of late, my protege gets very excited every time he has a trade on. His knees swing, he chews through pencils, and he has to use the bathroom a lot. He develops nervous tics, and talks just a little too fast, a result of his brain going 900 mph. Contrast that with me: I approach the screens in a slow, languid motion, sit down and relax. I look at my positions and don’t panic because of the bad ones, I eliminate them quickly without vocalization. My good positions cause me to absent-mindedly ask questions to myself and ask him about arcane scenarios that might have some value. Since I’m rather dispassionate about the whole deal, he gave me the nickname “Spock.” Whether that’s good or not, I’ll let you know after this storm blows over. He can’t ever find out if I’m mad or glad after a trade, because I do the same thing after every trade. Take a breath, and drink from a glass of water, and change whatever song is playing. I still maintain a cheerful disposition whatever the outcome, the same disposition I had when played ”Chutes and Ladders” in first grade.

Nigel Davies writes:

I'd need some convincing that balanced emotional gearing is an essential for the pursuit of excellence; I think a lot of champs just learn to channel their emotions into doing the right thing at the right time.

Thus it was OK to vent one's frustrations on the cat on Friday as long as one didn't sell.

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005

Larry Williams comments:

The Dalai Lama is not a trader. There can be no compassion in trading; compassion does not make a wrong call any better.

The enlightenment is making the correct decisions, understanding and compassion are for marriage counselors, not investors. There are absolutes here; rocks are hard, water is wet, margin calls must be met.

Dr Williams is the author of How I Made One Million Dollars.. Last Year, Windsor, 1998

James Sogi adds:

I'm talking about the philosophical definition of compassion, i.e. awareness of others' emotional states, rather than the softer emotional state of kindness or pity with which the definition is mostly associated. The idea is to understand them in order to take their money, and hence some irony in the definition and its utility in speculative life. Sometimes they are willing to pay for the solace of giving up the position. Tends to be at the worst time. I know — I've done it.



J SogiThe use of fixed mechanical resting stops seems to be an admission of inability to trade your way out of a paper bag. It is also an admission you are undercapitalized. It is one thing to realize you were wrong. It is another thing to give up on the bottom tick.

Isn't it better to trade your way out of a bad situation rather than give more of your money to the opposition in defeat? It is a harmful mechanical crutch. It is better to watch for a better opportunity to exit with some grace. It is better to know the market, and know yourself.

Larry Williams objects:

What if you cannot exit with grace — market goes limit down 10 days? No way to trade your way out of that…

Stops prevent failures and allow one to regulate the size of the loss.

I'm talking trading here; not investing… value investors buy and hold until value changes or overall market gives a sell, that seems to be best strategy.

Shui Kage adds:

The old Japanese market proverb: "Mikiri senryō".

"To ditch a small loss is worth a thousand ryō" (In today's language: is worth one million dollars).

Most amateurs are unable to take losses at small size and most amateurs are not very good traders.

Phil McDonnell dissents:

PhilIf the market goes limit down (or up) against you then stops will not help either. The stops will not be executed. In that case only proper position sizing in the beginning or an option hedge will protect your position. There is no guarantee a stop will be executed at your price or anywhere near your price in the event of a gap open.

There is no theoretical basis that stops should work either. I have written about this here on numerous occasions. Thus the best advice is to back test, taking stops into account explicitly. When testing stops one should use great care to increae the assumptions regarding slippage. Invariably stops will be hit during fast markets when slippage is the greatest. Compare that to a back test without the stops. If the test using stops gives a superior overall risk reward profile then it is reasonable to use stops. One should never think of stops as the sole money management technique because of the slippage and gap issues discussed above. Rather stops are more of a trading tool to reshape your risk reward profile.

There is another reason to consider stops and that is psychological. Many of us are simply unable to pull the trigger when we get into a losing situation. Suppose you had a trading model that predicted that tomorrow would be up by the close. The obvious way to trade that would be to get in and get out by the close tomorrow. But if your system was wrong (and they all are sometimes) then you may find yourself holding the position simply unable to admit the loss and freezing on the trigger. It is easy to come up with all sorts of rationalizations for this behavior. "The drift will bail me out" might be one. Suddenly your plan has changed from a one day trade to hold it for ten years until the long term drift bails me out. So if you find yourself doing this too often then having a preset stop may be the psychological crutch you need to be successful. Better than that, of course, might be to simply write your plan down and execute it as planned.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Janice Dorn adds:

J DornI would add to this that placement of stops is both art and science. It is among the most difficult concepts for a trader to grasp, and there is more confusion surrounding stops than almost any other aspect of trading. How often do we hear: “They see my stops” or “There is clear stop-running going on” or something similar re: stops. That is why when I trade ( not invest), I use multiple contracts, keep taking profits and trailing stops ( on a good trade) and get out as quickly as possible when the trade is not going right for me. Also, I am prepared to lose on a certain percentage of all trades per my trading plan. I used to hate and could not accept getting “stopped out” but now accept it as part of the cost of doing business.

Also, it is very challenging for most traders to “stop out” and then get back in again. Part of the reason for this is inexperience, and the other part is the way that losses are seen by the brain. Losses are weighed about 2.5 times as heavily as gains. This means that if you are down 10% on one position and up 10% on another position, you are break even on paper, but are down 25% in your brain. There is a complex process that goes on inside the brain of the trader that is looking at losses. But that is another topic and I have already digressed from the “stops” thread.

Dr. Dorn is the author of Personal Responsibility: The Power of You, Gorman, 2008

Jeremy Smith tries for the final word:

Everyone uses stops.

Some put them in immediately.

Some keep them stored in gray matter for later deployment.

Some wait for the margin call.

Kim Zussman exclaims:

Kim Z"Say uncle!"

If you trade less than 100% of your investable capital, that is a stop.

If you trade predominantly the capital of others, that is a stop.

If you let the account blow up without borrowing against your home or retirement accounts, or hitting up   friends/family, that is a stop.

If you decide to trade small enough to preserve your marriage, sanity, or life, that is a stop.

Even the Kamikaze had stops.

Nigel Davies suggests extending the discussion:

What about broadening this discussion still further to include the 'reverse-stop', ie a profit target? I don't see much difference between the two from a conceptual point of view, the issue here being psychological (one represents a loss, the other a win).

Can one be ideologically opposed to stops without also being unable to take a profit? I don't see how we can discuss one without the other and they all come under the category of 'planned exits'.



L WYou can allude to the mistress or gods of the markets, but the best analogy I have found comes from American Indians who honor the coyote; some tribes saw the coyote as a god, most all label a coyote as "the trickster".

"The Trickster alternately scandalizes, disgusts, amuses, disrupts, chastises, and humiliates (or is humiliated by) the animal-like proto-people of pre-history, yet he is also a creative force transforming their world, sometimes in bizarre and outrageous ways, with his instinctive energies and cunning. Eternally scavenging for food, he represents the most basic instincts, but in other narratives, he is also the father of the Indian people and a potent conductor of spiritual forces in the form of sacred dreams." Native American Trickster Tales.

The trickster is responsible for mosquitoes; that was the first legend my grandfather told me about the trickster, a short summation is the coyote killed the monster and cut him into a million bits so he would be dead and never bother anyone again. The bits became mosquitoes, evil cannot be stopped and there are unforeseen consequences to all good acts.

Dr. Williams is the author of The Right Stock at The Right Time, Wiley, 2003

George Parkanyi replies:

I don't know. I don't see the market as a trickster. I see it as a dumb, lumbering creature of habit, unpredictable only in its timing and its reasons. It likes to go back and forth, often gets confused, is easily distracted by shiny glass, and can be as easily startled by its own shadow. Occasionally it smokes something it shouldn't and tears off inexplicably (Internet bubble) or doesn't watch where it's going and face-plants into a big hole (1987). No matter where it goes, it eventually likes to come back to the familiar.

Who knows why or when it does what it does? But it keeps doing the same things, and going to the same places, over and over again. (And each of its offspring, except for a rare few, behave the same way). So instead of expending all this time and energy on the next move of what is essentially a moron, why not just pick a spot, or spots, and relax and wait till he comes by?



LarryCan stops depress returns? You bet, and that's a problem if you have a perfect system.

If you don't have such an approach — and feel it might be to your advantage — to not wipe out your account (been there done that, it is depressing) then stops of some sort are the only tool at a trader's disposal.

[A blog referenced by a reader] so stupid and upsets me so much — geez these guys will insure their house but not protect a trade… it takes only one — just one — trade to kill you; the loser you held.

Happy trails to all.

Dr. Williams is the author of The Right Stock at The Right Time, Wiley, 2003

Bill Rafter replies:

Dr RafterPermit me to play Devil's Advocate, and in the process insert philosophy into the exercise of making money.

Some people use stops because they cannot decide when a trade has gone bad. That is, they admit that they cannot forecast the future of that trade, so they put a stop on it, solely to save money (or so they think). However the very act of doing so is in fact a forecast. Thus the conflict: they know they cannot successfully forecast, but they forecast anyway.

Other people use stops and place them at particular points specifically because they know that statistically if the price goes to point A, the odds are very small that it will revert.

My contention is that the latter person will be successful and the former will not. Thus I encourage those who use stops to question themselves as to the reason for the stop.

Our own situation is illustrative of knowing your weaknesses and circumnavigating around them. We know that we cannot forecast individual asset prices. We get reminded of that daily. Consequently we never use stops. We can however forecast the outcome of a basket of assets with some reliability. Many have been the times where we lost say 20% in an individual stock, but redemption has been found in the basket.

Dr. Rafter is the author of The Moving Trend, TASC, 2002



Larry WDo not subscribe to what I consider a massive market myth…

that "super traders" will detect market inefficiencies, trade them and then the advantage disappears. Here's why: There are no super traders (with the exception of Steve Cohen).

All traders/managers have ups and downs, no one consistently makes money, no one has ever cornered the game. Everyone gets off track, off his game, even when trading a known advantage.

So advantages can persist longer than traders focus and concentration.

Proof: I have told several traders exactly what I do, some made money, some lost…but all of us had the same rules (supposed advantage).



Obama comes at a time of dispair and disillusion and offers hope. There are two formulas for politics,

1. Hate+Fear =Power
2. Hope+Benefits =Votes

Obama is working both of these, the first more subtly, but he understands the dynamics. The ghost of Gene Burdick is alive and well.

Craig Bowles adds:

There are similarities to JFK. Young, good looking guy coming in after housing had a demographics boom that pushed it up right through the recession. Hope the rest of the story doesn't follow the same line.

Steve Leslie offers:

The most recent Gallup polls support this as Obama has opened up a 10 point edge over the Junior Senator from New York. All of this from a candidate who was not even on the political radar screen even nine months ago. Comparing and contrasting their policies, there is very little difference between the two.

Therefore there is something else going on here. It is almost like playing the game of Clue. Was it Professor Plum in the kitchen with the hammer or Miss Scarlett in the anteroom with the gun?

Obama may just be a more likable person or perceived as such. We can only offer conjecture as to this.

He could be seen as more trustworthy. He does not claim to have invented the Internet, been a decorated war hero, or named after a famous mountain climber who landed in war torn Bosnia like Rambo under intense fire.

He may be the repudiation of 20 years of a direct stranglehold of the Executive Branch of the Government by two families. Perhaps the American people feel that a new path should now be taken over traditional politics and now is the time.

It could be that his speeches include hope and opportunity and strike a chord with those who feel that they have been disenfranchised for too long and that their voices will be heard through him.

In all likelihood, it is a melange of the aforementioned. Whatever the reasons, he is very much a frontrunner and he stands a very real likelihood of winning his party’s support and backing at the convention in Denver in August.



AltmanIn the March 3 edition of Barron's there was an article by A. Bary entitled "Risky Bets". The author cites a number of stocks that are down 40% or more from their highs; he believes investing in these companies could be very profitable if the credit markets begin to normalize and the economy recovers.

There are a number of companies other than those he cites that are down 40-50% or more that may be two or three baggers when the stock market comes back. The question is, "Are they reliable companies or future bankrupts"? I've been using Value Line and Morningstar to determine the financial risk of some of these beaten down companies.

However, I'm also aware of a formula called Altman's Z-Score that predicts future bankrupts with 85% accuracy among stocks with a low Price to Book Value. A Google search yields a number of articles describing the approach and financial data to use.

The data to use are:

1) Earnings Before Interest and Taxes (EBIT)

2) Total Assets

3) Net Sales

4) Market Value of Equity

5) Total Liabilities

6) Current Assets

7) Current Liabilities

8) Retained Earnings

I have, with varying degrees of success found these data in the Yahoo, CNBC-MSNBC, and Morningstar Financial Pages. But the data are 6 or more months old or incomplete. Value Line was a big disappointment.

1) Is anyone aware of where more up-to-date and complete financial data may be found on the web?

2) Or is there a web page that lists companies along with their Z-Scores ?

Gordon Haave replies:

For those of you with Bloomberg (the system, not the mayor), there is a Z-Score function built in.

Larry Williams suggests:

For more up to data company financial data try: MSN Money or Kiplinger.

Allen Gillespie cautions:

Altman Z-Scores is designed to work for certain industries. You might have to use several different scoring methods to cover all industries.

Eric Falkenstein offers:

I just created a website with free default probabilities for public companies, US and worldwide. Better than anything else I've seen, and I've seen 'em all.



Resistance/SupportThe concepts of support, resistance and pivot points became such widely accepted market concepts that one is amazed how every market book mentions them freely as if the reader is supposed to know what they mean and how they should be traded.

In Alchemy of Finance, even the philosophic palindrome mentions them in his real time experiment and how he trades them. Same with, dare I say all the immortals including Paul Tudor Jones among others.

Now, I will not debate the validity of these concepts nor will I question the wisdom of the immortals here but I have a very genuine question about applying these ideas to indices.

You hear all the time that the (pick your index), let's say S&P500 hit a major support (pivot) point that should be watched very closely and if broken will signal the beginning of the bear market. A statement one hears frequently nowadays.

Now, if you consider that the S&P is made up of 500 companies, these 500 companies have each their own support and resistance levels that are tradeable in the same manner as the index, doesn't that mean that the S&P500 index resistance and support levels really reflect nothing and only represent arbitrary numbers that reflect where its components are at, and that the main premise of pivots, support and resistance levels on the index is a faulty concept?

In other words, if we take the extreme case where all the 500 companies are trading at a support level, this doesn't necessarily mean by definition that the representative index is trading at a support level on the chart. It can be trading at one arbitrary point on the chart with no significance to a chartist. Yet, this point is indirectly significant since it represents a colllective support (all the 500 companies are at a support level).

The other extreme case is where none of the companies is trading at a support level but the S&P is trading at what chartists call a support. In this case, what is the significance of the support level of the index (or the pivot point), if all the components of the index are trading in the more fluid level of no support.

For the sake of public disclosure I do not believe in support or resistance levels but am trying to get educated on how the other side thinks so one is well prepared to react or even change one's mind in extreme situations.

Larry Williams chimes in:

I am a doubter of support and resistance, but I am a user or short term highs and lows as they can be mechanically constructed and tested.

And, furthermore, even something that does not work (in my book that would be Support/Resistance, Fibonacci, etc.) may be of value if it forces a trader to use those points as stops or targets. At least you have an approach and something that says get out; limit your losses, or well enough; take profits. Yes, even if they are meaningless they can be of value if they add some form of discipline.

Steve Leslie offers:

I agree that the indices are fluid and not static. Individual stocks are added and subtracted all the time. Therefore it is quite difficult to draw conclusions based exclusively on this and across time. This is akin to comparing athletes across different generations. However two points can be made. First, they can be a good indicator of the general mood or tenor of the particular market that one is studying. The psychology if you will. And the psychology of the market is very critical to performance. Second, If one studies the overall market, one should study the various submarkets as well. The S&P 500, S&P 400, Transports, Utilities, Russell 1000, Russell 2000, NASDAQ, Value Line, Wilshire, etc. A composite can develop. A pastiche. Remember that as in all things, trading is a business of imperfect knowledge and imperfect information. Therefore nothing is absolute. Better to err on the side of caution at times and try not to extract too much from something that can not provide it. As we know, even the very exceptional traders have tough times and lose money. The key to trading is money management.

Eric Blumenschein writes:

The S&P financial contracts are traded for different reasons then the component companies that make up the S&P Index. I know it is obvious but it has not been stated yet. Certainly there are correlating movements some of the time and with some companies and often a lot of the time with a lot of the companies, but in the absence of a definable edge which may already be in use in some blackbox algorithm, it's all just noise. I suppose an edge worthy to explore for me as a daytrader is to know what percentage of the 500 companies currently register on some intraday interval, either above or below their previous day close. That may or may not be relevant to a trade I would take on the S&P eminis. It may make a difference to equally weight each of the 500 companies or slant the weighting to the largest ones or perhaps the smallest ones. If I was a position trader then perhaps there should be separate percentages to defensive issues vs speculative ones. That may or may not be valuable. 



NYMEXI read an amusing recount of that $100 oil trade in the paper the other day at the NYMEX. They said that it was a local trader that bid $100 for a one lot in the pit, and was immediately speared in the trade. The article further said that the local pitched his long position with a $0.60 loss. I was shocked to read that they were saying that this trade would be investigated by the NYMEX because the electronic trading (which trades most of the volume) was at a lower price and this local must have been engaging in some kind of market manipulation, wanted bragging rights, or whatever. The article then editorialized about how the electronic markets are so much more efficient, and that the open outcry method is destined to the dustbin of history. They might be right about the dustbin part, but the writers haven't a clue about locals and their purpose in the food chain. One of the jobs of a local, besides providing liquidity, is to see what price the market will trade. If wheat is trading at the top of the daily range, a local will bid the price up a quarter cent just to see what kind of orders might be up there. The local will also sell the market at a new low just to see what's down below. Good locals get a feel for where the stops might be, and try to steer the market toward the stops. In my experience as a local, I bought the top of the daily range and sold the bottom almost every day. In fact, if I didn't buy at the top and sell at the bottom, I felt I wasn't doing my job with 100% efficiency. Although I lost money on those trades, I made sure they were only one contract, and it usually cost me only $25 to see where the edges of the market were. To me, it was worth $50 a day, which is a small price to see the market range. Those losing trades represented good value to me, and the strategy of pushing the market in that manner was very profitable in the long run. In the 1980s, I sold one contract of oil at the NYMEX at the all time low, and didn't feel a bit stupid about it.

Victor Niederhoffer remarks:

Many exotic options might have been triggered at $100 in oil and the trade might have created massive fictitious losses or gains for interested parties.

Larry Williams offers:

Larry WilliamsJeff stikes a nerve with me on electronic vs open out cry.  I'd love to go back to open outcry or one session markets. If there were one session, electronic or pits, with defined time zones it would be a much easier game. Now, thanks the electronic wizadry we have three sessions; 1) the twilight zone after the pits close, no liqudity, lots of false moves — and lots of real moves, massive slippage; 2) volume picks up 1-3 hours before the pits, still erratic but trades better, a little less sloppage (I mean slippage); 3) the real deal hours, better fills, moves are for real.

Anatoly Veltman recounts:

In open outcry Gold futures trading at the Comex in 1989, my volume equaled 10% of the total exchange volume on quiet days — although I was not in the pit, and didn't own a seat at the time. Contrary to popular belief, floor brokers and locals were not raping every customer order going into the pit. Things got progressively worse, as seat prices skyrocketed at the start of this century; it eventually cost $1,000/day for floor rights alone, not to mention all kinds of overhead and error risks! And that's how demand destruction for floor trading took hold. Current electronic execution is much more disadvantageous, from where I stand. Black boxes at a handful of firms scan the exchange order books every millisecond and automatically execute algorithmic trades, ripping any conceivable advantage away from participating public. They are the casino, with structurally embedded multi-billion annual profits — leaving everyone else on the other side of the zero-sum game. Question is: what evolution event will lead to eventual demise of their empire?



CBOTI probably have enough info gleaned from old-time pit traders to write a large book. I loved to hear the stories and teachings those old guys had to share, and sought out as much of it as they were willing to tell me. However, much of that information is anecdotal and it would be hard to apply the scientific method to most of it. I did learn a whole bag of tricks for extracting extra cash while trading in the pit, but most of the tricks are either mechanical in nature, or educated guesses (such as estimating how much wheat is for sale in the pit at any given time).

I did learn one slam-dunk way of pulling out money out of the pit. I worked hard at identifying new, inexperienced traders who were certain losers, and fading all their trades. This technique worked out very well for me. However, identifying certain losers is a skill in itself and takes time to develop. Pit traders can have a special insight/feel for the market, but only the net winners have that feel. A majority of those who step up to the plate to trade don't make money, and fade into oblivion.

Steve Leslie responds:

In poker, the professionals are sharks; they prey on the weak, in poker vernacular, the dead money. That is why they are called fishes or pigeons. Professionals avoid tangling with each other — it is far easier to exploit the weakness of the youthful or inexperienced rather than the wizened veteran. Therefore the professional uses time to his advantage by patiently waiting for the amateur to venture out into the waters and make a mistake. It is similar to the Highlander television show from some years back. For the Highlander to gain more power, he must kill his adversary by taking off his head. Same in poker, by destroying your opponent you assume his chips and as a result, his power.

Larry Williams extends:

While the gummint guys say, and rightfully so, "Past performance is no assurance of future success" there is one exception to this I have found and isolated: Advisors, funds, newsletters, etc., that have not done well in the past will not do well in the future. Jeff's pit wisdom does spill over to outside the pits as well.

Phil McDonnell adds:

I performed an analysis a year ago that showed that among mutual funds the worst performers were predictably among the worst in the next time period as well. The results were statistically significant for the worst group. However among the best performing funds there was no correlation. Superior performance did not persist probably because many people  mimic the trading styles of the most successful traders of the last time period. It is a bit like the generals who are always fighting the last war.

Steve Leslie writes:

Ken HeebnerI hope this complements Dr. McDonnell's work since I am sure he did some deep research on this. With respect to his comments a few points can be made.

First, I assume that he is talking about open-ended mutual funds. There are significant differences between open-ended funds and close-ended funds. And even open-ended funds who no longer accept new accounts but only money from existing shareholders. This is a very complex field, evaluating performance of mutual funds because there are so many variables that exist in the arena. Fund managers change, inflow of capital, hot markets such as large cap growth, value, international, etc. With respect to performance my first question would be how performance was measured. Was it against an index or against a peer group? For example if a fund were a midcap growth fund, was the evaluation against other midcap funds or against the Russell 1000, S&P, etc. In short, were these absolute performance or relative performance comparisons?

When I was a broker, I know that if a fund had exceptional performance the prior year, the sales rep for the company would come in and push performance. Then the brokers would take the literature and push it to the clients. Money would flow into the fund, making it more difficult for the manager to manage. Therefore the fund was a victim of its own success and performance would suffer. The most startling examples of this were in the late 1990s and 2000 when tech funds had great absolute numbers. Every sales rep who came into the office was pushing these funds. Dramatic amounts of money would flow into the funds thus putting tremendous pressure on the managers. All the clients wanted to buy were the hot funds. Nobody would buy value funds, which over the next several years would have been the proper investment.

Next is, what style does the manager employ, growth vs value, largecap vs midcap vs smallcap vs international? One year may be too short a time to evaluate superior performance of mutual funds — 3, 5, 10 year numbers are much better barometers of perfomance. Trends in the market can last longer than just one year. For example over the last 3-4 years international funds have had their day in the sun. I am confident the worm will turn and they will begin to tire. The next hot sector may be largecap U.S. growth, or other sectors. The jury is out on this. In fact, the Morningstar five-star ratings system is based on 3 year past performance. I believe the highest-rated Morningstar funds for the past three years tend to be worse absolute performers the next three. Conversely, the worst performers the last three years, the one stars, can be the best performance group. Once again the dynamics are in place for things to change.

Finally there are some fund managers who have withstood the test of time. Ralph Wanger, Kenneth Heebner, Bob Olstein, Bill Miller, to name a few, all have had stellar long term results but even they have had bad years.

Ken Smith remarks:

Performance in youth does not predict performance in aged. Performance in pre-marital bed does not predict marriage results. Performance in school does not predict performance at work. And so on.

Dr. McDonnell worked on performance of top mutual funds, found we can't predict future from present results.  I have looked at charts for many years, in fact I began at age 22.  Now just short of age 79.  Of course there was a hiatus when charts were not available.  Overall my experience determined a squiggle on a chart from five years ago will not correlate with a squiggle I will find when the market opens next year.

Marion Dreyfus agrees:

What Ken says in regard to former performance not being valid for future success should be received doctrine, and yet seems not to be. In terms of financial investments, people extrapolate out as if the law is concrete: If it returned 8% in the past 10 years, it will continue to run that way in the future. We take a lifetime to unlearn easy mistakes.



HGHGiven the remarkable performance of older players like Clemens and Pettitt, has anyone pointed out that perhaps one of the main thrusts of investigation should be whether there would be a beneficial effect for all of us in using moderate replacement quantities of substances like steroids and HGH that decline significantly with age?

I for one would like to know more and would appreciate article citations, book recommendations, and information on physicians specializing in the field.

Chris Cooper replies:

Such beneficial effects are apparent to anybody with an open mind. Nevertheless, the idea that a performance-enhancing drug might actually make you healthier is the kind of message that is not acceptable to the mainstream.  Aging is not "normal", it is a disease, and should be attacked like any other disease, with an eye to minimizing the deleterious effects.

What you are referring to is often called hormone replacement therapy (HRT).  The approach is to use drugs and nutrients to bring the body's hormonal balance back to what it was when you were a young man.  Is it surprising that if you achieve this, you actually feel much more like a young man?  Why does our culture consider this to be undesirable?  My goal is not simply to be healthy as it is commonly defined, but to strive for optimal health, a very different concept.

A good book to start with was written by my doctor Philip Lee Miller, called Life Extension Revolution: The New Science of Growing Older without Aging. Dr. Miller is in the SF Bay area. Also I've heard good things about the Kronos Centre in Phoenix.

Janice Dorn writes:

One of the contributors to my just-released book is a world-renowned authority on optimal health.  I took nine years of my life, and traveled 1.5 million miles outside of the United States to every country in the world (some many times) in search of life extension and radical wellness methods. Needless to say, it was an incredible journey, and it continues to this day.

Caveat Emptor. There are many charlatans out there, and we are in largely-uncharted waters. It is a passion for me, and I believe that the goal in this area of life is to delay, avoid and eventually reverse death.

Jim Sogi suggests:

SurfPerhaps a better way is hard effort. I still get out and surf 20 foot waves last week and take time to surf at least four times a week and train when there is no surf. No pill will keep you in shape without effort. Just the thought of a pill is enough to kill the will to motivate effort required to maintain and build strength, flexibility and stamina. It's like technical analysis, it offers an easy way without the work, and will lead to more harm than good. I see many men really going downhill. They don't stay active. Laird Hamilton says, "Keep Moving!" That is the best way to stay fit. I compete with the young guys everyday in a competitive lineup in the water for waves. I can't outperform them, but have other strengths which give advantage.  It's hard work. It takes hours everyday to stay moderately fit, and more to build strength. That's the problem, most don't and won't take the time and effort to maintain and build strength and gradually lose it. Strength from a pill won't help without the agility, flexibility and stamina that are the other components of fitness. Don't worry about the pill, just get out and spend the hours everyday to stay fit.

Chris Cooper responds:

BodybuilderYes, a better way is hard effort. I have gotten more benefit from the sports that I train for than I have from the drugs that I take. The drugs are an incremental benefit, though, and I am certain that I am better off with them than without them. And you may find, as I do, that instead of being de-motivating, they actually increase one's desire to participate.As an example, suppose you are taking testosterone. If you are not exercising, it will do little to build muscle. You still get the other benefits, such as general feeling of wellbeing, increased libido, increased optimism. It enables you to build muscle faster, because that only happens if you put in the effort. It's not magic, you still have to do the work — but testosterone also makes it possible for older men to train as hard as they did when they were younger, because your body will recover more like it used to. 

Larry Williams opines:

The flap about HGH in baseball is pure propaganda, based on my personal extensive testing of it. I concluded it was expensive and of little, if any help, in waging the war against old man age — a view that is now also backed up by science.

Ken Smith responds:

Studies are studies and not reports from individuals. I am an individual. The studies cited older people. I am an older people. My individual report differs from the studies as reported.

I can tell you resistence exercise will promote better body tissue and that the same exercise will tear tendons, ligiments, induce on-going pain. There came a time when the benefits diminished and the pain increased.

I am reminded of a story told by an author about his last visit with his grandmother. She was quite old, in her 90s As they conversed during her feeble days, on one of those days, her last it turned out, she asked him for a small glass of wine, told him there was a time for everything, sipped the wine, closed her eyes and passed on to the next dimension.

Russ Humbert remarks:

I would not be so quick to rule it out Growth Hormone for enhancement. The Chinese women seemed to have had much success with using it for distance running in the mid 90s. Several of the women were running times better than the men. However, they also ran extreme high mileage and were practically starved while setting several women's world records before their coaches where caught transporting drugs through customs before an international competition. Several of the stars went insane under such a regiment. 

Charles Pennington enquires:

Dr AliI'm open-minded about this, and I went as far as to buy the book written by Chris's physician, who seems like a reasonable guy. But the Life Extension directory of doctors isn't re-assuring. There is just one doctor listed in Manhattan, Dr. Majid Ali, whose website is Fatigue.net. Featured there are "Hydrogen Peroxide Baths and Foot Soaks" "The Oxygen View of Pain Management," "Bowel Detox," "Water Therapy," and "Dr. Ali's Castor-cise."

I also checked for a practitioner nearby in Connecticut. Doctor Warren Levin, in Wilton CT, is at Medical-Library.net. The general garishness of the site, the endless list of specialties — "Magnetic Field Therapy," "Juice Fasting Therapy," "Auriculotherapy" — and even the Ron Paul promotion (Ron Paul == more permissive environment for quacktitioners [which is fine]) all leave me skeptical.

I wonder if Chris's physician could recommend someone in Manhattan who has a more rigorous, scientific approach than these guys.

Chris Cooper replies:

Perhaps these links will be more productive:

American Academy of Anti-Aging Medicine

The American College for Advancement in Medicine

Steve Leslie extends:

Philip MorrisI think back to the 1960s when the medical profession and the tobacco industry discounted the evidentiary link between lung cancer and smoking as anecdotal. And for 40 years after that the tobacco industry still fights in courts as to smoking and COPD, lung disease, heart disease and emphysema — long after they have paid billions of dollars to settle various class action lawsuits and agreements with attorneys generals throughout the country and have watched 450,000 American citizens die every year from smoking related illnesses.

I watched my father wither away and die as a result of a lifetime of smoking cigarettes.

Now some want to debate that the beneficial effects of steriods and HGH in adults outweigh the anecdotal risk. And I think of those in professional wrestling such as Chris Benoitk who committed multiple murders of his family and then suicide, professional footballers such as Lyle Alzado, dead from brain cancer, professional baseball players such as Ken Caminiti, dead and an avowed steroid abuser, high school boys by the tens of thousands who experiment and take steroids and commit ‘roid rage and suicide, and the untold thousands of recreational users who develop enlarged hearts and forms of cancer such as prostate cancer while juicing just to get bigger muscles.

Chris Cooper clarifies:

Chris BenoitThere is no medically documented connection between suicide and anabolic steroids. The medical data also say, "Supraphysiological doses of testosterone, when administered to normal men in a controlled setting, do not increase angry behavior." 'Roid rage is a convenient media myth. Steroids may very well cause changes in feelings, but that is far from causing major behavioral changes like those suggested above.

Take Chris Benoit as an example. When doctors examined his brain they found that it resembled the brain of an 85 year-old Alzheimer's patient. It had suffered so much trauma and had so much dead tissue that normal function was not a possibility — while dangerous personality, behavior, and temperament changes were more than probable. During his time as a professional wrestler with the WWE, Benoit had subjected his body to head trauma hundreds of times, most notably with his signature "Flying Head Butt" as well as dozens of other highly flashy (and dangerous) moves.

Steroids are being unjustly demonized, just as marijuana was in Reefer Madness, followed by equivalent media behaviour regarding LSD, Ecstasy, and many other drugs. Certainly steroids have their downside, and just as with recreational drugs, should certainly not be used by minors. But perspective is not allowed in times like these, where fear is inflamed to further the objectives of those who will benefit. 

Steve Leslie continues: 

Taylor HootenI dispute Mr. Cooper’s assertion that the is no medical documentation connecting steroids and suicide or rage. That is ridiculous. At a Senate Caucus hearing Don Hooten testified that his son Taylor, while in high school, began using and abusing steroids and committed suicide.

Mr. Cooper furthermore claims that Chris Benoit murdered his family and then committed suicide because of years of suffering numerous concussions and possible dementia. Did he personally perform an autopsy on Mr. Benoit? Has he examined the autopsy report? Where does he draw his conclusions from? In short, what specific research does he quote? Furthermore, what are Mr. Cooper's qualifications in forensic pathology and/or psychiatry?

Mr. Cooper further argues that it is some sort of a myth, steroid usage and its association with massive mood swings and subsequent rage. He then compares steroids to marijuana and says that it is being demonized by an uninformed public. Not to stop there he equates such unfair demonizations with LSD and ecstacy and “other drugs.”

He diminishes the risks to an absurd level and I am severely shocked and alarmed.

Chris Cooper responds:

Don Hooten runs the Taylor Hooten Foundation, established after his son committed suicide. Now Mr. Hooten runs around the country telling everybody that it was because of steroids, when there is no evidence pointing to that. According to Steriod.com,

There had been no active anabolic steroids in Taylor's body for two months prior to his suicide (according to a report on the THF website) At 17, when he killed himself, his hormone levels had likely returned to completely normal, and only metabolites of nandrolone (not active compound) were still detectable.

And no, I didn't personally perform the autopsy. But here is a quote from the doctors who did, via SportsLegacy.org,

SLI's tests showed that Chris Benoit's brain had large amounts of abnormal Tau protein in the form of Neurofibrillary Tangles (NFTs) and Neuropil Threads (NTs). Multiple NFTs and NTs were distributed in all regions of the brain including the neocortex, the limbic cortex, subcortical ganglia and brainstem ganglia, and were accompanied by loss of brain cells, a condition for which no other neuropathological evidence for any chronic or acute disorder could be found.

Gordon Haave adds:

QuoteIt is silly to say that one can't quote the work of someone else. That is, one can't comment on an autopsy unless one performed it himself. If we took such an approach all of the time, there would be nothing to write about.

Furthermore, in the interest of scientific inquiry, providing anecdotal stories to a statement about a lack of research does not prove anything. I have no dog in this fight, but I admire people who challenge orthodoxy.



Victor Niederhoffer reviewed Luck, Logic & Whies Lies by Bewersdorf which discussed computational methods for optimal and pure strategies for various games based on simplified models. In the even/odd marble guessing game the optimal defense by the simpleton against the smart player to foil the advantage is to use a random choice. This is the basis of using a behaviorally optimal "mixed" strategy to foil the opposition who is guessing your strategy by alternating between two advantageous strategies.

The market could be modeled as a zero sum game with imperfect information. The goal is to find the pure strategies or behaviourly optimal strategies against opposing strategies than the ones already being used and by how much could the winning expectation be increased? The market modeled can be further simplified as a two person game in which one bids, one offers. The initial choice is whether to bid and offer. If the market goes up, bidder wins, if it goes down, bidder loses. If the market was random it would be a coin toss, but due to drift the odds favor the upside. This pure strategy conclusion is not trivial.

However there is more to the game. To profit one must exit. The next decision is when to exit. Analyzing the buy side of the decision tree to model the situation, buyer wins by selling before his opponent with a profit. If he waits too long or for too much, and seller sells before he sells, and price goes down, he loses. The balance is between time and profit. To find the optimal strategy Bewersdorff models an analogous poker betting situation on a decision tree. The optimal strategy requires some sort of mixed strategy for optimal results. He speaks of a realization plan using a sequential form of analysis. A way to solve this involved a linear optimization method developed to solve military procurement. The linear optimization was applied to the decision on what quantities of various products should be produced to maximize profit realization given a choice of resources. The limits of the resources and the limits of capacity or given by a series of inequality formula and are solved by looking at the largest profit distribution. This analysis might be applied to a trade by looking at the profit potential and probability of various time/profit target lags and solving for the optimal. Or it might be applied to leverage calculations. It is solved with the Simplex Algorithm. The method would be to choose two strategies say x period or y period, or x percent or y percent. But therein lies the rub. I have not tested these simplex solving tools.

Larry Williams replies:

Simplex ain't gonna work…

"Simplex is quite good for solving static, linear (and thus rather well-defined) problems."

… markets are not well defined. I suspect hold on to winners with trailing stops and ditch losers is much more elegant.



 The usual way to quantify intraday range is some comparison of high to low. But this misses another dimension - the length of the path traveled by price, which is related to speed of the market (since o-c time is constant, for the entire session  market speed = path length). For example there could be two days, between 930-415 ET (405 min), both with H-L = 20pt (ES). One goes steadily from low at open to high at close, a path length of 20 pt and rate 20pt/405m = 0.05pt/min. The other is a wild day, with a 20 pt gain followed by a 20 pt loss (net unchanged). The wild day path length is (simplifying) 40 pt, which is a rate of [20 + 20]/405 = 0.1pt/min.

Considering just the constant open-close daily period, market speed = path length (a potentially potent area of study is the reaction to market speed in short time intervals, but I will leave that for later). Exact path length would require summing tick data for each day, but for a reasonable estimate here I use 5 minute closing prices and estimate path length as sum { abs(5min moves) } for each day from 930-415. Here are the largest o-c path lengths since 1/07, along with the o-c return (ES points):

date     sum_abs oc
08/16/07 233.25  24.75
08/10/07 212.50    5
11/08/07 185.25  -7.75
08/01/07 185.25  12.25
11/20/07 176.50    9.5
07/26/07 175.75 -20.75
08/09/07 173.25 -20.75
11/02/07 161.50   -2.5
07/27/07 154.50  -31.5
08/17/07 151.00     -7
10/24/07 150.25   2.75
11/09/07 148.75  -3.25
08/15/07 148.25 -15.25
12/12/07 146.00    -22

Notice the big move yesterday is only 14th longest path length YTD. Since that path length is a form of volatility, I compared o-c return with contemporaneous path length and found the usual negative correlation:

Regression Analysis: oc versus sum abs

The regression equation is
oc = 4.49 - 0.0648 sum abs

Predictor      Coef  SE Coef   T      P
Constant     4.490   1.636   2.74  0.007
sum abs    -0.0648  0.019  -3.27  0.001

S = 11.7078   R-Sq = 4.3%   R-Sq(adj) = 3.9%

Gibbons Burke asks:

Do you consider in this calculation the distance from the previous day's close to the current period's open? If not, then a gap day's net price path sum won't include the overnight move in the path.

Larry Williams adds:

It is not just the range and such but which side is moving the market on that path. It is clear to me the gap from last night's close to today's opening is public activity, the path from today's open to the close much more professional activity; that's the key to the numbers as I see it.

Jim Sogi remarks:

I agree with Larry, but for different reasons.  Rather than just pro/public, the night session is related to the global situation and large gaps seem to be a whole new area recently developing. Yet another new different unseen cycle. 

Paolo Pezzutti suggests:

There are at least two dimensions in play: one is speed, which is somehow associated with concepts such as range and volatility. Another is related to directionality. According to different combinations of these two dimensions you could build a matrix of market behavior. The areas would be:

1. volatile; directional
2. non-volatile; non-directional
3. volatile; non-directional
4. non volatile; directional

The problem is related to indicators to be used to efficiently define these areas. How you identify the borders/lines of contact between areas? This classification can be useful when trying to identify the proper tools and techniques to use in each area. What kind of indicator could one use to take into account speed? What can we use to identify directionality?

Steve Ellison responds: 

In his book "Trading and Exchanges", Larry Harris identifies two types of volatility. Fundamental volatility results from changes in fundamentals. Transitory volatility results from excesses of uninformed traders who move prices away from fundamental values. Price moves caused by transitory volatility are likely to reverse as informed traders take advantage of bargain prices to buy or rich prices to sell. Price moves caused by fundamental volatility are much less likely to reverse.

A hazard for a contrarian trader is falsely assuming volatility is transitory when it is in fact fundamental. Dealers and market makers protect themselves from this risk by widening spreads when the order book is one-sided.

I propose a 2×2 matrix of the actual type of volatility and the market's perception of the type of volatility:

.                     How most market participants
.                     perceive volatility
.                     Fundamental          Transitory
type of
.                     Price quickly        Price trends
Fundamental           establishes a        as disbelievers
.                     new equilibrium      change their
.                                          minds one by
.                                          one
.                     Market reverses      Price quickly
Transitory            dramatically         reverts to
.                                          previous levels

For years, the trading literature was very heavily slanted toward trend following as the road to riches, which biased many traders toward assuming any volatility was fundamental. However, with much money having been yanked from trend following funds this year, the upper right quadrant is occurring with more frequency.



I played football against the then-named Bobby Knievel. Best story was barreling along a Montana freeway late at night — when there were no speed limits — at about 180 mph. My other 'Butte America' buddy, Billy Peoples (handball champion) told Evel we'd had enough, he could slow down.

Knievel replied, "Billy, at this speed you won't feel anything, anyway."



Barry BondsI read the entire indictment; Barry Bonds says he did not knowingly use steroids. I did not see any evidence to the contrary in the indictment. The indictment looks more like a football game of pile on; if he did lie notice how the charges are extended to obstruction, being evasive (duh, who would not be evasive under that conditions, you can bet his lawyers coached him on that — plus if you read his testimony, it does not appear evasive; he answered the questions put to him.) There is no contradicting testimony in the indictment. Will be interesting to see if the prosecutor can present factual evidence otherwise. Typical DOJ stuff.

Russ Humbert adds:

It seems to me that they are trying the "Martha Stewart" trap. They got one of his trainers or someone in the know in jail. They will tell him they broke him, hope he spills it to get even. But if he doesn't they will hope he lies about something. Since the ancient games politicians have a history of using athletes for personal gain, public villain or hero.

David Lamb remarks:

Why? I doubt it's the hallowed homerun hallowed mark. I think it's because Barry is rude to the media and to anyone who he doesn't want to sign autographs for. And what if he is rude? Matt Williams was just caught but he still couldn't hit and retired the next year. Perhaps Barry knowingly took the 'roids in order to break the homerun record. As if nobody else is trying to do the same thing on the same juice. He just can hit the ball and is extremely picky on what pitches to hit.



VNThe importance of practice in music can't be overstated. There are hardly any musicians of great competence who took up their study after the teens, and most have been practicing intensively since the age of seven. The problem is that most people hate practice, stop at an early stage, and waste their time when they do this. Michelle Siteman in her magnificent book, "The Pleasure and Perils of Raising Young Musicians " has a chapter "Practice Makes Perfect " in which she gives 10 techniques for improving the quality and quantity of such practice.I have received completely positive feedback from musicians who have read this book that the techniques she suggests are ingenious and useful. I believe the have universal value, and I will try to apply the lessons from Ms. Siteman's chapter to improve the practice of trading with a few of my own practice techniques from racket sports thrown in. This is a subject that has received much too little attention as practice makes more perfect in every field including our own, And this would apply to any trader despite his natural proclivities and abilities. It is common to think that a quality for greatness in a field is to love to practice it. But Vladimir Horowitz, Glen Gould and many other musicians, including Beethoven, hated practice when they were young, but they were able to conquer their aversion, usually with the aid of a firm parent who applied some of these techniques. Presumably the head of a trading team should insist on practice regardless of the qualms or machismo of some of those whose recent track record is good, or believe they were to the manor born. Emulate Pablo Casals and Yehudi Menuhin, who practiced eight hours a day, every day of their lives.

It's not enough to say: practice trading. Most people don't know how to do it. And most are bored while practicing so there has to be something that makes it interesting. Musicians handle this by mixing in some easy beautiful pieces with the scales, finger exercises and and arpeggios.

1. Group activity. One universal technique for making practice more interesting is to make it part of a group activity. Somehow those who play instruments in orchestras stick with their instruments to a much greater extent than piano, and this is why many impartial observers suggest that orchestral instruments are better for a child to play than piano, because they stick with it. Practice sessions for traders should be in groups.

2. Money rewards. And what follows from this is that monetary rewards are a great motivator for musicians to practice. Some parents make their kids pay part of their lessons with their allowance money. This has a very salubrious impact on the efficacy of practice. Group trading practice should have monetary rewards. It's amazing how many of us will stoop down to pick up a $5 bill.

3. Record keeping. Record keeping is an important part of a good practice session. A systematic account of what has been learned and what the goals are is always helpful as a foundation. It's also helpful to be able to review the mistakes and winning forays that went into a successful trade.

4. Parental presence. All musicians find it boring to practice alone. Having a parent around to observe reduces boredom. If it's important enough for the parent to insist the child do it, then it's also important enough for a parent to take an interest. The same would apply to a trading manager, who all too often leaves the trading practice to the subordinates without taking an interest in it.

5. Proper logistics. Practice should be at a certain time, and a certain place and there should be good lighting. That way there's no chance that a session can be missed because of a conflict in schedule that arose because the child or trader didnt know that it was scheduled for that day and time. A proper environment without sibling or other traders squawking that they are hungry also improves results.

6. Consistency. Practice every day is essential. The markets are always changing, and after a day or two all the skills begin to detiorate. I once practiced squash every day, 365 days a year, for 10 years. A trader should practice trading each day, or if a hiatus ensues, should practice steadily for a number of days before entering into the fray.

7. Read books about the techniques that other great musicians used to improve their techniques. What worked for them probably would put you on a path that has at least been tested. Eschew the techniques of traders that were not successful, for example the boy trader.

I would be interested in ideas readers have on improving the training and practice of traders.

Larry Williams adds:

Larry WilliamsI have always thought mastery is a largely the function of repetition.

Obviously you have to repeat the right things. Today's great home run hitters all have instant access in the dugout to videos of their last time at bat to review and repeat the right techniques and stop the wrong. Many scoff at paper trading — sure, it is not as emotional, but still provides valuable lessons.

Chris Ledoux won the world bareback riding championship with very few rides in actual rodeos. He was so banged up he practised on a bucking machine (also wrote a good song about it) to prevent further injury and shocked all the bettors who had never heard of him as he accomplished his gold belt-buckle dreams.

Jim Sogi suggests:

Jim SogiMy Karate teacher said, "What is the best practice and training for fighting? Fighting. You can run all day, you can do 1000 sit ups, 1000 push ups, 1000 sprints, and 1000 punches. But the best practice is fighting with an opponent. "My father once said, " The only difference between a small case and a large case is the number of zeros behind the 1."

You can read 1000 books about trading, study data for hours, but the best practice for trading is trading. Even if you do small size, which is best for practice, it keeps your wits sharp and emotions tough and keeps you in the game.

Keep a place set aside for only trading, always ready to go, 24 hours a day without having to clean up, scoot others away. Same with music practice. Have a set aside place or room for music with all the instruments just ready to walk in and pick up and play, even for 10 minutes before dinner. Pretty soon it becomes a habit.

Allen Gillespie takes it further:

Scales and etudes and pieces played with different bowings, speed, rhythm, etc. Breaking down a passage into shorter component parts. For example, if there is a long passage of quickly played 16th notes, first practice with separate bows for each note, then two on a bow, then three, etc. then change the rhythms from just 16ths notes, then just play the key notes from the scale so the ear hears where the passage is headed as many of the notes are fillers, understand and anticipate the pattern. Learn to play by ear. Finally, Always Play/Practice Musically (i.e. even when practicing the notes do not forget to include the crescendos, etc.)

For the trader,

1) Imagine as many scenarios as possible.

2) The distance between lows or highs or between lows and highs might give an indication as to the key

3) Some notes/days are more important than others

4) Trade smaller during times of practice

5) Test different combinations of variables - first separately then two, etc.

6) Despite all the practice, sometimes the best performances are not straight from the page

7) Finally, trading is an emotional game, so play with passion and remember there is always a low note and a high note and many notes in between.

Sam Marx reminisces:

Practice is important and in my sport in high school I practiced quite a bit but always felt that I had a limit because of physical limitations. I was 6 ft. tall but my hands were below average for my size. I couldn't get a good grip on a football or palm a basketball.

Once I was seated at a dinner table next to Bart Starr, former Green Bay QB. That man had huge hands. I have no doubt that enabled him to better control the football and made him a star. Another time I was in close proximity to Gil Hodges and I noticed that he also had huge hands. I believe he was a first baseman. I could just picture him with an oversize glove catching balls or scooping up grounders that would be missed by the average infielder.

A friend of mine was an excellent boxer. His arms were extremely long, also, his head was smaller than it should be for his size. He could just move around his opponent and jab him silly while keeping his head tucked behind his shoulders. Standing up with his arms dangling on his side I thought he looked like a chimpanzee. He had no desire to become a professional boxer but I've seen professionals in the ring with those characteristics. Kid Gavilan comes to mind.

On the options trading floor I noticed that some traders could hear trades from across the pit. Their hearing was acute.

Practice is important, but don't dismiss physical and mental ability, especially abilities in the 3 plus sigma range.

Don't tell your kid that he can accomplish anything if he practices enough. Offer this advice only when justified. Tell him he can greatly improve with practice but don't offer false hope of attaining the impossible. It can be frustrating if you're not in the 3 plus sigma range in the field you're practicing in.

Nigel Davies recalls:

David Bronstein once advised me to prepare for tournaments by studying chess at the exact times the games were scheduled. And I understand that Vladimir Kramnik took this concept one stage further by solving endgame studies (particularly demanding work) during the last hour of such studies. The last hour of a playing session is known to be the most critical, with most games being won or lost at this time. And it does seem that he got the better of Veselin Topalov at this point in the games.

Easan Katir mentions:

I spent one recent Saturday evening at the Hat and Hare Pub in the basement of the Magic Castle, with two accomplished card men, Aaron Fisher and Tony Picasso, discussing their art. Aaron instructed, "to improve, perform at any opportunity, for anyone." The club was full. He said, "C'mon, let's find you some people." So he rounded up a spontaneous audience comprised of three giggly young things, and gave this amateur the opportunity to perform modestly baffling illusions.

Live performing, live trading. No solo practice or paper trading like it. Mind sharp. Managing audience expectations, unexpected reactions and distractions. The joy of good execution. The thrill of conquest. The glow of accomplishment.

Much theoretical study, counting and practicing correctly precedes such moments. For trading I suppose the advice "perform at any opportunity" could be ambiguous enough to become a way to diminish one's capital, unless one adheres to tested guidelines for what constitutes an 'opportunity'. It works for me to transfer these skills to trading.

Evan McKeown writes:

John McEnroePractice is such an important topic. I have always believed that if you do what you love, and love what you do, then success will eventually come your way. Success itself means different things to different people.

I am a 5.0 tennis player, and love playing tennis. No matter how much I played, or practiced, I never was able to reach a level much higher. Notwithstanding my dedication or love for the game, I have enjoyed other success by meeting wonderful people that share my enthusiasm and we enjoy our weekly matches. John McEnroe once said he hated to practice, so, instead, he played in doubles tournaments. John had one of the best net games in tennis which is unusual today thanks to his devotion to being a doubles player as a substitute for practice.

I am a trader. Once again, I love what I do. Trading is not a job, it is a way of life, my passion. I trade every day, and practice every day. Practice for me, comes in many different forms. Just as in tennis, there is on the court, and off the court practice time. Off the court (or ticker screen) I stimulate my mind with financial literature. The best book I ever read, and the only book I ever read for a second time, is "The Education of a Speculator." This work of art should be required reading for any college finance class. Long before this book made me any money, it first saved me thousands. Years ago, when a perfect storm of events had collapsed my portfolio and nearly had me on the verge of ruin, I sent an email to Vic and Laurel for some word of encouragement after the market had crashed through a 200 day moving average, financial condition in the market that is not unlike the one we see today.

To my amazement, Vic and Laurel wrote me back with a few simple words that inspired confidence. Not so much advice, as it was knowledge on how to handle adversity. I not only made back the 50% that my portfolio had declined, I ended the year with a 27% gain. That email changed my life forever. Instead of placing a sell order and taking a loss of half my assets, I took the pearls of wisdom and made the most of the opportunity.

Thank you Vic and Laurel, for sharing your knowledge and experience of the markets, for being an inspiration for common everyday traders such as myself, and for taking a few moments and write such an inspiring email that changed my life forever!

Pitt Maner III says:

Many years ago I went for 3 days of tennis lessons at Nick Bollettieri's in Brandenton, Florida. An evaluation was done of each player's ability and then we were separated into groups and sent out to practice for about 5 hours each day (with a lunch break at mid-day to watch films of Agassi playing). Thank God it was not in the dead of summer, but at 80 or so degrees it was still quite brutal for moderately trained weekend warriors.

One of my teachers was a former Rhodesian paratrooper named Ian who picked up very quickly on my poor footwork (even for a 3.5 or 4.0 player) and tendency to "float" or not properly set my right foot when hitting a backhand. The school also emphasized the need to follow through on strokes and to keep hitting the ball deep and allowing for sufficient height of trajectory over the net. In other words give yourself a margin of error and don't try to hit winners all the time from the baseline–play it a bit safe and wear your opponent down.

The tendency of beginning tennis players love to hit winners even at the expense of hitting several poor shots and losing games was discussed. Players were taught to recognize the importance of swing points (ie. 40-30 or deuce or 30 all) and to be more aggressive at 40-0 or 40-15. At the pro level students were shown film of Agassi running Lendl and not finishing off points right away if Andre could get Lendl to "lunge" one more time and thus exert more energy. Tennis warfare by attrition.

Tennis at the highest levels was indeed a different game then what I imagined or had gathered from watching Borg and Conners on TV or reading about in Tennis magazine.

On the adjacent court one could watch the 10 year old Anna Kournikova practice with her coaches under the vigilant eyes of her Russian mother. The tennis school had a quite rigorous schedule for the kids–lots of running in the morning, tutoring–school, weightlifting, and hours and hours of hitting tennis balls. At the time Anna said she loved to play tennis and did not mind the practice. We watched as she played practice games in the afternoon against boys her age or slightly older.

At the end of 3 days my toenails were breaking off from my swollen feet (note to file–never come to a tennis camp with new tennis shoes!) I had experienced my first and only time with tachycardia after running side to side "suicides" on the court. My game had been broken down and I was now playing like a sorry 3.0 player and not able to incorporate or integrate all the intensive things that had been taught. There was a German banker who said he worked 60-70 hours a week at home and came to the camp for "relaxation"–masochism at its finest!

But the lessons were learned and not forgotten and months later my tennis game improved and my appreciation for the game greatly expanded.

Steve Scoles makes another point:

An important requirement of successful practice is getting proper feedback in a timely manner — touching a hot stove teaches you pretty quickly not to do it again. Markets, because of their probabilistic nature, are really horrible at given this kind of feedback. In investing and risk management, the short-term outcomes are often  unrelated to the quality of your decisions and it may even take years to be proven "right" or "wrong". I don't think this is a new idea to the world of trading, but I have always found playing poker to be a good way of practicing dealing with the probabilistic nature of markets.

Poker has several similarities with investing with some key ones being:
- imperfect information
- probabilistic outcomes
- emotional involvement is in play as money is on the line and your failures and successes can be monitored & commented on by the other players.

The advantage of poker over the markets is that the decision-outcome relationship is usually more analytically simple to learn from and thus the feedback loop is a lot better than what you get from the markets.

Three things that I have found poker helps you develop that can be carried over to the markets are:

1) to learn and internalize how gains and losses are really probabilistic outcomes rather than successes or failures;

2) to improve your ability to evaluate decisions on a basis other than the outcome;

3) to improve your ability to maintain emotional stability through the various ups and downs.

Jim Sogi makes his second remark:

In Japan the Sumo wrestlers live a strict regimen of diet and training. They avoid emotional upset that might affect their appetite. This is like trading. It has to be approached as a competitive sport. Physical training, proper sleep, good food, avoiding drugs and alcohol are necessary during the trading week to be in top shape when in the fray. If something upsets me or I fall out of training, the trading can be affected.

Alan Millhone follows up:

I will speculate that the Sumo's do not watch much TV nor hear any negative news while in training ? Mental discipline in Sumo, trading, board games,etc. is critical. When I attend any Checker tournament I get my rest, eat properly, no TV when on the road. Mr. Sogi is correct that being upset is a big deterrent to functioning properly in any endeavor. Staying focused is Job # 1 and critical to proper performance. The avoidance of drugs and alcohol holds true in any event we pursue. 



Face of FearA talk at the November 1 Junto by Robert Higgs on the importance of fear elicits many thoughts of relevance to markets. Higgs is best knows for his theory of the ratchet effect of crises on government activities. He shows in Crisis and Leviathan that during times of crisis, government powers are increased and that these powers are never reduced.

He started his talk by saying that he wished he had realized many years ago that fear is the foundation for all such increases and that fears are manufactured according to normal production curves subject to the laws of diminishing marginal productivity and depreciation.
He views fear as the key emotion. And believes that fears are invented to create an opportunity for the Leviathan to expand . He groups fears into categories: fear from government itself, fear of real dangers from which government protects us, and spurious fears which are invented so that power can be increased. Planks in his theory deal with the origin of governments in conquest, the alliance between church and state, the tactics of stationary bandits who exert power from a fixed position, the creation of an ideology of fear, the economics of fear, the growth of fear during wartime. He ends with the hope that we can conquer our fears and thus go about our normal humdrum activities in a more productive way.

Against LeviathanI was quite critical of his theories believing for example that many other motivations of human behavior are more important than fear, including the five levels of Maslow's motivations, starting with physiological, safety, love, esteem, and self actualization. Of these hierarchical levels, only the safety level could in any sense be related in part to fear. I felt that much of the support for his theory was based on anecdotal and isolated events such as King Canute's assassination for collecting high taxes. I also questioned whether there was any predictive value in his classification, whether his theories could ever be refuted, the absence of cost benefit calculations in his condemnation of any and all government actions, including its function of providing for internal and external defense, and how it could be differentiated from other theories of power and behavior. I also disagreed with his wholesale condemnation of the use of fear including his condemnation of the United States entering the First and Second World War, after what he decries as false propaganda concerning the evil intentions of our enemies.

Neither Liberty Nor SafetyHiggs' current book Neither Liberty Nor Safety details many of these theories. And needless to say, he believes that the acts that followed 9-11 served mainly to legitimize a wish list of bureaucratic interventions that had been sitting on desks for 15 years, but never were able to see the ligth of day until crisis hit. He believes they did not increase our safety but took away our liberties, and never will vanish even when the need for extra patriotism recedes.

And yet, I found many parallels to the market's fears. There are 1.5 million conjunctions of fear and stock market on the search engines and many of them relate to maintaining the stock market citizen in a state of subjugation, and contribution to the upkeep even greater than that described by Higgs in his many anecdotes, and revision of his crisis and leviathan theory.

I would be interested in your ideas on the influence of fear on markets, the most recent being the fears of recession, the fear of no further rate cuts, the fear of the subprime crisis spreading, the fear of brokerage house bankruptcies and financial liquidations, the decline of the dollar, the spread of epidemics, the comparison to the crises of 1987 and 1998, the increase in volatility and what that portends, the declining earnings growth, et al., the role in fanning fear by former officials recently retired, as well as those who have long predicted Dow 5000 et al.

High on this list would be the typology of fears that have existed each year since the beginning of stock markets, and how this has engendered the 1 million % a century growth which Mr. Ellison has kindly updated here before.

Alston Mabry adds:

Happiness HypothesisIn The Happiness Hypothesis, author John Haidt uses an interesting image our human brain which has developed over vast amounts of time to handle so many tasks: he likens the mind to a rider on an elephant. The rider is our conscious, rational, aware mind - our neocortex. The elephant is everything else and is trained to be pessimistic, defensive, status-conscious, and many other things that might contribute to survival and success, but not necessarily be conducive to happiness. The rider can see farther and is smarter than the elephant, but the elephant often decides where both will go. Haidt then argues that many ancient traditions understand this dichotomy and know that the brain must be disciplined and trained for happiness.

In trading, I find there is a basic division: analysis versus execution. Analysis can seem so sure and easy, when the market is closed and one is simply crunching numbers - the elephant is asleep, as it were, and the rider is alone with his thoughts. But as soon as the market is popping, and one must put real money on the table - as soon as there is *risk* - the elephant awakens. The mind actually changes, perceives and processes the same data differently from the night before.

Perhaps the discipline of the ancients is the answer. Would Lao Tzu, or Bodhidharma, or the Desert Fathers have been successful in the pits?

Phil McDonnell writes:

MaslowAn alternative approach to Maslow's Hierarchy might be to consider the hormonal make-up of human beings. The two powerful hormones adrenaline and nor-adrenaline control our fight or flight response to potentially dangerous situations.

However they are much more than that. They directly or indirectly influence our heart rate, breathing, blood pressure, serum glucose levels and even our memory. They are a significant factor in motivating us to action. For example researchers have found that after receiving adrenaline human test subjects were more likely to take action in contrived circumstances which potentially involved even physical violence. Humans cannot easily distinguish between true emotions and those induced by adrenaline.

Other research has shown that rats will develop stronger memories when adrenalin is administered. There appears to be a simple physiological basis for this in the neurons. In particular rats that lacked the particular receptor did not develop the stronger memories in the presence of adrenaline. The important point is that memories which are formed or reinforced in the presence of higher adrenaline levels are much stronger that those which are not.

Charles Darwin was the first to study the evolution of emotions in: The Expression of the Emotions in Man and Animals with Photographic and other Illustrations (J. Murray, London, 1872).

Emotions originally developed as a way of avoiding dangerous situations as well as signaling to others the state of a particular individual. For example when an individual is in an emotional state such as extreme anger others may be warned away and learn to avoid confrontation. But when the irrationality of anger is not present others may attempt to reason with the individual. In effect the perception of an emotional state signals to others how an individual might respond in a given situation.

As traders we can turn this knowledge around. Large movements in the markets can induce an emotional reaction in other traders. In particular these movements induce an adrenaline response associated with the fight or flight syndrome. In turn the adrenaline reinforces the memory of the particular gyration in the market. So the memory is stronger and has more immediacy and in a sense more recency. So when a similar event happens again the memory is stronger, generates more adrenaline and is reinforced again.

Each time the effect of the adrenaline is to predispose the trader to action. Traders are more likely to act and act irrationally. Trading volume tends to increase. In effect the market begins to control the emotional actions of traders causing them to think with the more primitive portions of their mind. In the logic of the primitive mind losing money is equated to loss of food and ultimately loss of life. Every drop in the market is met by selling at the worst possible time. Market rises are greeted with herd like buying after the rise has occurred. It is all an emotional dance orchestrated by our own chemistry. orchestrated by our own chemistry.

Micheal Cook remarks:

Yin & YangIt is commonplace to say that two principal drivers of the market are fear and greed. I agree that there are many other higher level motivators, such as Maslow's hierarchy of needs, but the market exhibits crowd behavior, and the crowd is the lowest common denominator of human emotions. The "masses" don't seem to have a hierarchy of needs.

In the context of the market there seem to be two basic fears: fear of loss, and fear of missing out. This latter fear is a form of greed, so maybe fear and greed are two sides of the same coin, the yin and yang of markets.  

I heard a talk recently in which it was said that the market is driven by the irrational emotions of fear and greed, and that rationality consisted in finding the right balance. I found that amusing and ironic, the idea that rationality was finding the optimal mixture of two irrational emotions.
I also find that people seem to spend a lot of time worrying about things that in no way impact any current decision they might make. Things like "will there be a recession," "will the subprime crisis spread?" This strikes me as an expression of free floating anxiety, a channel, a displacement, a sublimation… 

Russ Sears augments:

Perhaps the widest and the true foundation to build on is not "fear" but "pride". Pride that is turned into "us vs them".

Granted that this "patriotism" is often used to create fears to expand powers. When used with fear this can be the most evil and complete expansion.

However, pride or "we are smarter than them" also creates a very stable base to expand love/family to create a counterfeit charitable hand.

That is: the Maslow hierarchy is built upside down to expand government.

Self actualization: what separates "We" from "Them" is "we" are the only ones with a true "need to know" the truth. We here is defined broad, to include all but "them"

Esteem: "We are smart enough to rule everybody's life". "We" here is defined narrowly as those of "us" that are in the government. Everybody else should follow the yellow brick road to see the wizard.

Love/family: "It takes a village" government will replace the dysfunctional family, which is all of "them"

Finally, the expansion into safety: government will protect "us" from "them".

From this view fear is the roof, or exterior, not the foundation. The expansion of government occurs with each level, not simply fear.

This can of course can be seen as a clear pattern in doomsdayist prophecies. "We" are the only ones smart enough to seek the truth, at all cost. Tomorrow is bleak without "us" to warn you and turn bad on its head and into good.

It is a good exercise for the reader to read many of the recent credit crunch articles with this view,  as current propaganda. This of course can be expanded beyond the markets and political readings, even into such areas as religion and popular pseudo science such as Dawkins for instance.

Tom Ryan enumerates:

The influence of fear:

1. The reliance on social proof rather than logic (looking to the herd for confirmation)

2. The tendency to extrapolate past events out into the future

3. The tendency to respond to contrasts more than absolutes

4. The tendency to non-linear weighting of probability (Kahneman & Tversky)

6. Emotional reaction to loss tends to exceed that of gain (Prospect Theory)

7. The tendency towards being consistent in one's behavior despite the financial pain in order to avoid the mental pain (fear of regret)

8. Overreaction to scarcity (scarcity programming - as one who has gone bust before I have this in full measure)

9. Strategic conventionality ("no one ever got fired for buying IBM")

Larry Williams contributes:

Fear is the greatest enemy of long term investors as it kicks them off track, off their game plan… that, coupled with short term 'gain-greed' seems to be why there are few truly long term investors.

Where does the fear come from?

Deep within our hearts and minds I postulate there is a fear mechanism—for our survival—but those fires are fanned, now, twenty four hours a day by media. Media= Negativity (fear)= Subscribers/Viewers.

Solution? Best I've heard comes from John Prine, "Blow up your TV, eat a lot of peaches, ya gotta find Jesus on your own"



Marathon records are amazing. One fellow did one every day for a month — this is very hard! I used to do one on a Saturday and then one on Sunday — I cannot imagine a steady diet of 26 mile runs. A buddy does lots of 100 mile runs, all in the mountains, at elevation) I asked what was the most difficult part about it. He replied, "the second sunrise."



Suppose you bought any Friday where the stochastic indicator was oversold at the close. What is the percentage of winning trades, placing a sell limit order of c+x points for Monday? I checked in the past 10 years all the situations. If the order is not filled, you exit at Monday's close.

 3 points 96%
 5 points 86%
 7 points 80%
 9 points 70%
11 points 65%
15 points 63%

Larry Williams explains:

the problem is  such an approach has massive equity drawdowns and small average profits per trade. The losses, when they come, are much bigger than the gains. Accuracy alone does not make for a good system or trader. Risk/reward trumps accuracy every time. Eventually large losses devour strings of wining trades.
To evaluate such an approach, look at the equity curve; not just the numbers.

Jim Sogi adds:

The equity curve Larry talks about is a thing of beauty. We all know what happened after 1987 as well. The survivors prospered. If you want to argue sample, only time will tell. History unfolds in mysterious ways and you can never know the future. If you always look at 1987, you'll never trade. One way to avoid annihilation in addition to money management is to stay nimble in addition to having deep pockets. Wall Street has deeper pockets than you.

Phil McDonnell writes:

Phil McDonnellAs an augmentation, the following discussion of the features of a normally distribued random walk with absorbing upside barriers should prove helpful.  Naturally as traders this simply means using the theoretical distribution with an upside profit target.

Using a profit target will:
1.  Double the probability of being at or above that target at the end of a fixed period of time.
2.  Have no impact on your expected gain or loss.
3.  Reduce your variance and standard deviation
4.  Result in larger losses than gains

This result derives from the fact that the normal distribution is symmetric and self-similar.  Thus it obeys a property called the Reflection Principle. Each price path has an equal and opposite mirror image.  Each price point reached has a distribution of points past it and an equal and opposite distribution of points which were 'reflected back'.   Elementery proofs for the analogous case of stops, using nothing more than high school algebra, are given in my book Optimal Portfolio Modeling.

It should be emphasized that this is the theoretical model.  To the extent that one can find empirical evidence that the market does not conform to this, there may be something tradeable.  But just because you can manipulate your distribution to double the probability of a winning trade does not mean that the average winnings will be any better My Motto: You need an edge — never let your money leave home without it.



Not directly market related, but Wally Wallington will cause you think about how you think about things…



Breakup of Drug Ring Is Momentary Victory
Published: September 29, 2007

In 2005, Operation Gear Grinder, billed by the US D.E.A. as the largest steroid bust in history, led to the prosecution of eight other Mexican factories that supplied an estimated 82 percent of illegal steroids in the United States.

OK, now imagine if the DEA from, say, Iran, came to America and busted a bunch of no-goods. How would you feel? That your country was intruded upon, that your country kowtowed to the Ayatollah, or was impotent to handle such problems?
At the very least, would you not find it disturbing that your sovereignty was invaded or compromised by another power's entering your country and taking contol?

And you can buy most steroids legally in Mexico, without a script! So the Ayatollah comes to the States and busts someone selling wine, as it is illegal in Iran and gets smuggled there (I have had good American wine and even better Russian vodka in Tehran) — how would you feel?



pink sheet companies
issue red herrings
once they are in the green
to become blue chips



2012, from Larry Williams

September 10, 2007 | 3 Comments

The Mayans did not say the end of the world was 2012, but rather that a new cycle begins then. It was not an end-time prediction. Nor, based on what I have read and what I have been able to transcribe, was it a big deal — just a new cycle.

Their calander wheels are fascinating, as are the road systems they had, and the countless pyramids. Plunderers find the north point never has anything of value, while lots of goodies are available at the other points. Pyramid builders got all the way up to Wisconsin — some say Canada.



I was saddened by the death of Luciano Pavarotti, not only because he was the greatest tenor of the past 50 plus years, but because I was fortunate enough to see and hear him at his very best. What makes him the greatest is simple: none of the other tenors is/was capable of singing bel canto and Verdi's Otello. An amazing voice.

A recent broadcast of Rossini's William Tell reminded me of Pavarotti's superb recording. This really puts his greatness into perspective: How many tenors have recorded (or performed) this opera or the main, brutal tenor arias and Otello? To the best of my knowledge no one has done this between Pavarotti and Tamagno! And Tamagno was the first Otello.

Larry Williams adds:

These words are from the wife of one of Pavarotti's competitors and fellow singers, retired now, whose name is legendary in opera circles.  Many purists were not wild about Pavarotti — but here's as inside a look as you can get:

Luciano had a beautiful, clear voice, with an excellent technique, and a real connection to the Italian style. He did whatever he wanted. His control went beyond music and he understood his place and mission with no pretensions, unlike, say, Callas. I loved the individuality of his voice. You could never mistake him for anybody except himself.  I loved the ease with which he sang and the joy he took in performing.  He was an outsize personality that was able to spread the love of opera to many people, and for that the operatic world should be forever grateful. Operatic singers seem to be blander now, more cookie-cutter alike. I wonder if he would have made it in these times.

Eli Zabethan rues:

Despite having a parterre center box at the Met for many years, sadly I never got to hear the Maestro except on CDs. I was always traveling and missed his performances.



There are many types of intelligence. A short list would start with academic, creative, and practical intelligence. Academic intelligence is the easiest to measure and hence is over-emphasized. Similarly, the readily available American football statistics of yards gained and touchdowns scored provide no way to evaluate the linemen who never carry the ball, but are critical to team performance. My observation is that practical intelligence is a larger determinant of success than academic intelligence.

Larry Williams remarks:

I failed lots of classes — I was a goof-off and did not care one twit about most classes. I snuck into college on a football scholarship. Never had any idea I'd end up as a trader — I was an art student. Then I found my great intellectual love, and my life changed. But at 13, 15 18, 20 I was a was a wandering generality — just like most kids.

Shui Kage adds:

My first attempt at a British A level:

Maths... Grade F (fail)
Chemistry... Grade F (fail)
Physics... Grade U (unclassified)
Biology... Grade U (unclassified)

On my second attempt I managed to enter the University, with honours in Chemistry as a bonus. I know I am not intelligent, I just worked hard. Kids should never be deprived by a one-time exam result alone. In fact, besides academic exams there are more important traits kids must learn at schools: common sense, manners, honesty, integrity, social skills. Jeff Skilling was a Harvard grad. He might be intelligent but totally lacks integrity.

I did not learn as much at University as when I was at a poor local state school where I saw the reflection of society: single parents, the physically disabled, the talented, the poor, the affluent, gangs, the terminally ill. I learned how to respect others and get along with all.



Hardly equitable: ruin a team, a school, kids' lives — and spend 24 hours in lockup. This defines travesty. How do the students regain themselves, hundreds of thousands of dollar in legal bills and  a year or two of their lives? Very sick, but shows how the judges treat insiders. Disgusting.



 The best movie ever on outliers, randomness and red bandanas is The Deer Hunter.

I "have worn that red bandana of speculation" and late at night miss it –not unlike the Kingston Trio's refrain "once you hear the whistle blow, you can't come back."

Nothing is like the rush being long "too many contracts" whether they go with you or against you. Every second vibrates — it becomes a hundred yard dash and you are the fastest man on the planet, totally in the flow, winning or losing. An altered state.

In that state I encounter speculative Nirvana, and found it is a most dangerous place to visit, winning or losing, because it is so addictive. Either way the endorphins surge, mainlined into the larger vessels. Life is just one heartbeat. There is nothing else.

Not unlike your first bareback ride, getting in the chute, settling down on the horse, then giving that nod, the gate swings open and life begins or ends. Addicted to danger: what a great way to live and love.

Ken Smith replies:

I know that feeling. For three or four years I have not used realtime data, trading on marco information and end of day charts. Today I began using real time again and the experience brought me to life. Realtime boosted my spirits and the lift aroused my motivation to get to work. A good day to be alive.



 Jim Jubak of MSN Money is the guy who never gets the chair when the music stops — he's a bottle of ketch-up. But Singapore has so much going for it: the meeting and banking point between China and India. Lots of action there and the best, by far, crab dinner in the world, Singapore Pepper Crab. To die for.



What's the likelihood of folks' "painting the tape" on a very illiquid Friday 8/31? This applies less to liquid securities than equities or index futures. As an example, I have seen it done in high yield — or at least it appeared to have been done. Call reports and other mark-to-market/model issues will be interesting to watch, especially TRACE.

Larry Williams replies:

You believe in that? I never did. Suspect it's an old wives’ tail. But I’ve never been that close to the fire. If they paint the tape, buy to drive prices up, they have increased their longer term exposure for a momentary gain.



What newspapers and periodicals are helpful and useful from an investing and speculation perspective? My favorite reads include WSJ, Barrons, Economist, and Investors Business Daily.

Larry Williams replies:

Mother Jones, Foreign Affairs, National Enquirer.

And, never forget what Mark Twain said:

If you don't read newspapers you are uninformed. If you do read newspapers you are misinformed.

 Alan Millhone adds:

On a related topic, I have several newspaper stamps in my stamp collection, some of which will fill the palm of your hand. They were made in 1865 by the National Bank Note Company — there are eight of them and luckily I have all eight in my collection. In 1875 the size was greatly reduced and printing was done by the Continental Bank Note Company, the American Bank Note Company and then later by the Bureau of Printing and Engraving. The face value of each stamp runs from a few cents to sixty dollars, but as collectors' items they are obviously much more valuable now.



 Worry is in the air. Concern over financial collapse is in the news. The sky is falling. Markets are down. The circle of life and markets needs a period of reconstruction, of regrowth. Thirty percent more bidders are joining the queue.

The year is positive. The market is almost six percent off its lows of last week. It is difficult to hold. Many worry whether the rally will last. What are the mechanics of the wall of worry? The Rose Garden Theory provides that markets are the social adjustment mechanism and prevent excess of politicians in upcoming election from giving clues as to timing. The idea that the market must provide for its own upkeep by the powers that be shows how knocking price down provides a profit by year end for the strong.

The timing during the summer holiday gives time for the process over several months and to accomplish the maximum haircut when players are out of the office and vulnerable. The current rally is the flip side of the "weak longs" bailing out. Only the strong are left to reap the harvest. As the markets rise additional players jump on board. As old highs approach, those that bailed try to get back on so as not to miss, but again at the wrong time, behind the form. The maximum pain trade, buying at point of maximum pain, seems to have been a reflection and antidote to the common natural reaction. Avoiding the herd down and up is always very hard for social creatures. It’s like walking up stairs during rush hour in the New York subway.

The formulae for Sharpe ratio, Black Scholes, Fed model have a risk-free factor keyed to the risk-free rates. The risk-free yields have dropped affecting the pricing of options, Sharpe ratio, and Fed model, all in favor of equities and giving equities a higher future expectation. What does all this subprime credit stuff have to do with equities anyway?

Larry Williams remarks:

"The quants froze" is what one of the most successful presidents of a hedgefund told me regarding what happened at his firm at the recent low. He had to step in for his traders — they just locked up. Great indicator! 



 One myth is that Hollywood song and dance men, actors, etc., are not all that smart or business-oriented.

The death of Merv Griffin reminded me of the substantial fortunes Merv, his good friend Clint Eastwood, Bob Hope, Michelle Pfeiffer and many other Tinseltown wonders have created.

In 1982 I was on Merv's show discussing my book How to Prosper in the Coming Good Years. Our pre-show green room chatter made clear Merv knew a lot more than I did! He was a superb long-term investor, accepted risk and paid great attention to details.

We both dated the same girl about then; that issue was not discussed!

Steve Leslie adds:

 I remember as a youth watching the Merv Griffin Show at 4pm. He was introduced by British actor Arthur Treacher, "And here is the dear boy himself, Mervyn." He waltzed out, smiled and waved to Mrs. Miller in the front row, and opened his Botany 500 sport coat to expose a garish lining, his trademark.

He worked as a talk show host for 25 years, then went on to syndicate the two most successful game shows in history, Jeopardy and Wheel of Fortune. He was also an incredibly successful real estate investor, part owner of Resorts International in Atlantic City and the former Atlantis resort in the Bahamas.

Quite an outstanding life for someone who began as a singer with the Freddy Martin big band.



If we gap down 15 points or more I'm a buyer. Such gaps, at times bonds are in an uptrend, are generally pretty good trades. Also, the Dollar Index ratio to S&P 500 is getting bullish for stocks.



 Ularu, Ayers RockI just spent a few days at Ularu, Ayers Rock, in the middle of Australia.

The reality is it’s a fascinating example of sedimentary layering followed my uplift in terms of geology. The myth is the original land owners say it was built by 'hands' and is sacred.

There are more market myths than reality. One I think is that the markets are pretty much always the same, supply and demand coupled with emotions.

I had a delightful dinner this week with the largest bookmaker in Australia (it's legal here). I asked if I wanted to crunch numbers through a computer to understand winning horses what would be the most important thing to look at?

His reply was oh, so telling. "Right now pace, that means more now than speed ratings".

He went on to explain how things have changed in racing (I thought it was just horses running around the same track as for the last 50 years). to his trained eye it all changes, all the time. Seems the markets and races have lots in common.



If there really were a Plunge Protection team why didn't they come save the world this week? Could it be there isn't one, as certainly this week they were needed?

Charles Pennington comments:

Government likes plunges because they provide an excuse to seize new powers and enlarge the government footprint. It certainly worked out that way during the plunge of the 1930s.

If there were a government Plunge Protection Team, the government would heavily publicize it and its heroic role in stopping plunges. The Hong Kong government openly stepped in to buy stocks in the midst of the 1998 Asian market collapse — the intervention was announced in August 1998 — and to my surprise, the announcement just about coincided with the market low.

My theory, then, is that governments relish plunges and would only intervene if done with great fanfare to take credit. 

Kevin Eilian writes: 

Sometimes "plunge protection" can take the form of a wink and a nod, like the 1998 Russian meltdown/LTC deal. The knight gathered together the biggies from all participating banks (so I understand) and "asked" them to "coordinate" a de facto bailout. Now with huge consolidation among world financials, this type of pp (reminds of me of JP's role in the 1900s) should be easier.

The government will use plunges to assume new power - if it lasts (i.e., the 30s or the late 60s/70s for example). Since most of the world's politicians do not really understand economics (growth causes inflation, static budget analysis, cap gains balance the budget, etc.) the attempt to gather more power in light of a prolonged plunge is worrisome ("double whammy" potential).

I think most politicians dislike the uncertainty and potential shorter term election implications of a typical plunge and/or dislocation, so they'll do what they can to bring in a plunger. To me, whether it’s explicit (like r*bin), informal (like the knight in 98) or just day to day (central bank coordination) they are around. We just need to be careful what we wish for! 

David Wren-Hardin writes:

We're in just the first episode of a multi-episode drama. It's like in the comic books or cartoons where the evil overlord rises up, and a second tier superhero team from another country like Alpha-Flight or Justice League Europe tries to take him on, only to be crushed. Then the real superheroes come in.

We saw Plunge-Protection Team Europe take a swing. Bernanke is still ensconced in his Fortress of Solitude, waiting to call on the rest of PPT-USA. 



 It's about having meat on the table for dinner.

I grew up on five deer a year, two antelope, and an occasional elk. As soon as the kids left home, Dad stopped hunting for the most part. Our family, like so many in Montana, depended on game to live. We did not go to exotic places, drove as few miles as possible to hunt, and made every bullet count, just as our neighbors did.

Assuredly some hunt for the bang of it all, but I think they are fewer in number.

Robert McAdams adds:

Every fall while growing up in Michigan I witnessed the mass exodus of auto workers from the big cities to the Upper Peninsula to deer hunt. These people made plenty of money to eat and usually came back with nothing. There is just something basic about getting out in the wild!

East Sider advises:

Always check that it's a real deer -


Harare (dpa) - With meat now in desperately short supply in Zimbabwe, a
group of men from the eastern city of Mutare is urging residents to try
eating dogs, a local newspaper reported Friday. In a case that has
shocked city residents, four men barbecued and ate a dog they had
stolen, the Manica Post reported. On being quizzed, the men first
claimed they were barbecuing a buck. But when a member of the family
that had lost its dog looked carefully at the meal, he was not
convinced. Bits of fur still on the meat matched those of the missing
canine, the newspaper said. 



 I once learned a very costly lesson in the art of banking. Talk about alligators! It's a long story, but here is a very short version:

We bought the bank for no money down as a friend was effectively being kicked out of it by the regulators, the FDIC. So we took over not realizing how bad the bad loans were and then had a good loan turn bad on us. Local banks have to maintain cash ratio to loans and we were behind from the get-go.

About the only money we made was on a position in Long Island Light and Power bonds that were way below par with expiration coming soon. In an election year we bought a bunch of them; I did not think the government would let them default on the bonds and I was correct.

The FDIC flagged that as one more risky move on our part. More capital was called for, and it became clear they wanted us out of the business.

The good news was the bank was a small bank so we only lost 'small' — a few million.

Lesson learned: don't buy on margin, or if you do take just a small position. Also, best to stick to what you know with people you know.



Here is a simple simulation about how easy it is to get lucky and rich trading futures. Continuous S&P 500 emini futures daily return 97-07 was used to find mean daily and standard deviation:

mean  0.126 pt
sd     13.452
count  2477 days

This mean and standard deviation were used to produce random series of daily changes (normally distributed), for 1000 days for each of 100 hypothetical traders (HTs). HTs don't have any skill predicting the market; they trade hypotheses in chat-rooms but buy and sell index futures at random. All the HTs start with $100,000 equity, and trade single emini contracts 1000 days until we check their performances. (This is about 0.75X leverage; $50 for 1 emini, less $6 vig for both sides of each trade. Effects of taxes, account fees, platform fees, research costs all = 0).

Of the 100 HTs trading just 1 emini at a time, the average final balance was $98,965; loss of about 1%. None went below $10,000 equity ("bust"); the lowest point for the worst trader was $41,500. The winner finished with $153,751; a gain of almost 54% (his hypotheses about markets was like Ayn's).

There was another group of 100 traders, the HRHTs (High-rolling-hypothetical-traders). This daring crew also started with $100,000 each, but traded five mini contracts each 1000 times (About 3.75X leverage; $250/pt, $30 vig round trip). The HRHTs average final balance was about $95,000, but this erroneously includes those with large negative equity at the end. Turns out 40/100 HRHTs busted somewhere along their 1000 trades (defined as equity < $10,000. OK they give up too easily, but if they were allowed to borrow from mom the worst HRHT would have ended with -$189,000). However the winner of the HRHT contest finished with $368,756!

Even without market prediction skill, leveraged trading in updrifting market can be profitable just by chance. And the more leverage used, the higher the possible return and risk of ruin.



On average, in the last 28 years bonds have begun a short-term rally on the 9th trading day of June (6/13 this year). This is a trade I have taught in seminars and taken for the last 10 years. I don't have a clue as to why this happens — maybe readers have some ideas. Perhaps it's just happenstance. But next year I will take it again just as I have in the past.

Kim Zussman replies:

I tested the suggestion of a bond rally from 9th trading day of June using TNX (10 yr bond yield) back to 1980. From the 9th day, holding for 5d, 10d, 20d, here are the results:

One-Sample T:

Variable     N   Mean     StDev        95% CI         T       P
5d           27  0.0006  0.0239  (-0.009, 0.010)  0.13  0.899
10d          27  0.0041  0.0364  (-0.010, 0.019)  0.59  0.561
20d          27  -0.002  0.0500  (-0.021, 0.018) -0.19  0.849

Using TNX, there were not significant gains in 10yr bonds for the three holds. Note that TNX is yield, so increased bond price would be decreased TNX.

Here are the data:

Date        5d     10d     20d
6/13/2006  0.040  0.050  0.028
6/13/2005  0.002 -0.046  0.012
6/14/2004 -0.037 -0.027 -0.080
6/12/2003  0.054  0.114  0.148
6/13/2002 -0.031 -0.018 -0.059
6/13/2001 -0.011 -0.006 -0.006
6/13/2000 -0.015 -0.003 -0.003
6/11/1999 -0.030  0.002 -0.047
6/11/1998  0.011  0.006 -0.004
6/12/1997 -0.012  0.003 -0.037
6/13/1996 -0.006 -0.026 -0.024
6/13/1995  0.003  0.002 -0.005
6/13/1994  0.014  0.014  0.051
6/11/1993  0.000 -0.022 -0.037
6/11/1992 -0.019 -0.026 -0.055
6/13/1991 -0.005 -0.002 -0.010
6/13/1990  0.018  0.014  0.012
6/13/1989  0.007 -0.017 -0.030
6/13/1988  0.012  0.003  0.019
6/11/1987 -0.029 -0.032 -0.023
6/12/1986 -0.036 -0.070 -0.085
6/13/1985 -0.007  0.018  0.002
6/13/1984  0.016  0.024 -0.001
6/13/1983  0.005  0.033  0.062
6/11/1982  0.050  0.060 -0.004
6/11/1981  0.019  0.029  0.047
6/12/1980  0.003  0.036  0.079

Jeff Rollert remarks:

I'd suggest not using TNX, especially when there are auctions — it doesn't handle those well in the series. I use TNX only for checking on general levels when using my cellphone browser at school functions.

Larry Williams replies:

Dr. Zussman's comments on my bond seasonal trade were confusing to many readers, so here are the details: What I tested was buying bond futures on the open of the 9th trading day of June, using a $1,600 stop and exit on the first profitable opening plus two ticks. In the last 21 years there have been 20 winning trades. That's how I've traded it for the last 10 years. Dr. Zussman tested 10 year cash bonds; I trade 30 year nearby futures — apples and oranges. Hope this clarifies.

Larry Williams continues:

My tests, using nearby active contract in Genesis Data, with no stop, exit X days later:

 5 days  52% wins      + 3,270
10         63%              + 6,926
15         79%              + 8,301
20         63%             +16,676

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