Example 4 in this interactive geometry textbook shows the procedure I used to teach Aubrey where to hit it in air hockey to score. The table is 7 ft by 3 1/2 feet. If he hits it from 2 feet from his end of the table, from the middle, he will have to aim on the right side, 2 1/2 feet away from the current position of the puck on the right side to land it in the pocket. If he hits it from 2 feet from his end of the table but all the way to the left side, i.e. 3 1/2 feet from the right side, then he will have to aim 2 feet from the rite side of the opponents goal, (3 feet from where started from.). x/(5-x) = 3 1/2 /5 where x is the required distance. As seen it's also the way to calculate the height of any object in the distance when you know how far away you are from it and you have a mirror or can visualize angles. I find that 7 years ago I went through a similar exercise with my youngest daughter Kira who recently completed her first year at Columbia Engineering.  I find many applications to movements of prices in markets here. What are the best applications you see?



As Beethoven was told by Countess Razumovski when he thanked her for letting him use her summer mansion for three summers: "Oh maestro, that's the least we could do"… "That's Riiit!" B. answered, vis a vis Dave G's response about the "disgraceful use" in the "Stops" post below.



I'm reading old posts on Daily Spec, specifically an interesting discussion on the topic of Stops, that took place in 2003.

At the end, Faisal mentioned a paper of Dr. Eric Berger on calculating the probability of hitting the barrier (stop or price of the knock-out option).

Could anyone share this paper?

And, any other improvements on the discussion?

P.S. What I find difficult in those answers about not using stops, "no stops required", "stops will double your probability of loss", etc, is the time horizon. We have to give profit to our clients every month, otherwise they will fly away to another firm. How does a "no-stop" policy deals with this? And… in the event of a year such as 2008, (or 2011, in Brazil), a no-stop approach isn't a sure path to greater loss?

And for those not using stops, what's the time horizon? Do they NEVER take a loss? When will the loss ever be taken? (They put that part of their portfolio in a box, never to look at it again?)

Phil McDonnell writes: 

In introductory Stat there is almost always a section on calculating the probability of a certain sized observation in a normal distribution. That calculation tells you the probability of being at or above a certain level after a fixed period of time. To calculate the probability of having touched that level at some time during the fixed period of time simply double the probability. The reason is the Reflection Principle. For every path which wound up past that level, there is an equal and opposite path that was 'reflected' back from the level.

The same thing applies to stops on the downside. Note that all of this does not assume an infinite time period, but rather a fixed period of time - kind of an investment planning window if you will. The reason for this is that the variance always grows as time is extended. Given large enough variance then almost any price will be hit eventually both up and down.

Newton Linchen replies:


This is the subject that I have read several times in your book, but still can't imagine how this would fit someone who must give monthly performance reports, instead of a well-capitalized investor who can stand some period in the red…

This approach doesn't seem to fit short-term trading (trading with less than 30 days), unless you exit the position until the end of the month, which would be your final "chance" for the position to work.

And in the time horizon of one month, one would have to ensure protection against the ineluctable downside.

Phil McDonnell adds: 

The main point is that stop losses will double the number of losing trades at your 'maximum loss' level. So you will report more losing months. Is that what you want? So if not stops then choosing a prudent position size for a trade is really the way to control risk.

Most of my comments are made on the theoretical basis based on what should happen. But in fact in my empirical tests, reality is worse. Using stops actually hurts expected returns in most cases. Theory says that should not happen. Theoretically expectation should remain unchanged if you use stocks but that is not the case.

Attached is a little table excerpted from Larry Connors and Cesar Alvarez's book Short term Strategies That Work. It shows that for a particular simple system the average P/L was .69 per trade. with 69.81% winners. But when you add a stop at the 1% level the return plummets to .19% and only 26.89% winners. For all stop levels tested up to the 50% level the returns were lower when one added stops to the strategy.

So looking at probability per trade and return per trade stops seems worse. But theory says that they may help by reducing variance. So far as I can see that is the only good thing about them.


Dave G writes: 

Hedging makes more sense than the antiquated and disgraced use of "stops".



For military history addicts.

This is — by far — the best general map-timeline resource I have found for military history; and it has the knack of removing the blinders of the daily headlines from one's view of what is going on in the world now and in the past.



 To a non-hand-eye-athlete this article "Nadal's Lethal Forehand" was very interesting. Nadal's top-spin of 3,200 RPM versus Federer at 2,700 and Sampras at 1,700, is aided (if I understand correctly) by his palm pointing towards the sky prior to contact. At the same time his body angle and straight arm provide added force. To the novice spectator it would seem most players must concentrate on developing one or the other as increased ability in one area is detrimental to the other, at least in the same shot.

This reminds me of combining mean reversion with trend following. I started by constructing separate strategies in each area and using them as non correlated members of a portfolio. Later I found that I could do better by using the information from each in the same system. Note that I track performance statistics separately for risk management, but have combined the signals. Best of both worlds?

The article also notes how Nadal finishes his swing either at his shoulder for high hit balls or over his head for low hit balls. For any onlooker (though they may not be able to react) one can see if the ball is high or low but I think this is a good example of adapting the same strategy to multiple scenarios, if not even a regime.

Lastly, Nadal's returns bounce an average 33 inches on hardcourts and 64 inches on clay courts. In my humble opinion it seems as though the already increased volatility of global markets has provided an environment where macro driven price action is more likely to move further than usual. I understand that implied volatility is highly correlated to historical or realized volatility, but might it be predictive, or… might it allow for (not cause) more extreme moves? Vol rises, spreads widen, the same order can now move the market further?

Just thoughts. Any information on the tennis side of this post would be greatly appreciated! Wm

Paolo Pezzutti writes:

I find very interesting that he tends to use his forehand as often as he can. The main lesson here is that he focuses and leverages on his strength. Normally we tend to work on our weaknesses to reach a balanced performance. Rather, this is an example about it is more rewarding to insist and further exploit to the extreme your best shots. Nadal uses his backhand only if he really has to do it. Instead of working hard in order to become an average performer in many different areas, it is much more rewarding to concentrate your mental and physical energies to exploit the talent you have in one specific matter. This is something I may have realized too late in my life, but it is a good lesson anyway. Paolo



You have to hand it to the market mistress. Friday's decline at open was the worst since march 15 at 21 points and only happened twice in 2010. In the year 2008, it happened 18 times.

Number of declines at open of more than 20 points:

1996-1997 0

1998 3

1999 3

2000 9

2001 5

2002 1

2003 to 2006 0 each year

2007 1

2008 18

2009 6

2010 2

2011 2

12 years 50 occurrences. 4 a year. Chi square about 50. Expectation is number of years -1 the degrees of freedom. Standard error (2 x11) square root. Value is 7 standard errors from expectation. 1 in millions. Probability. Definite evidence of clustering of big down opens. Definite evidence of clustering.

It is interesting to note that there were 38 big up opens of more than 20 during that period, lower but not significantly so than the 50 big down opens. Some evidence that at opens the volatility on the down side is greater.



More taxes aren't really a solution for anything. Should China should be punished because of our inability to compete? A good philosophical question to ponder….Is it a bad thing for a neighbor like China or India to get rich, or will it only benefit us down the road? From a personal note, I think that the world is better off with as many rich countries as possible…..more customers for us to sell things to and more choices for us as customers to buy.



 David Graeber is a brilliant guy; and, if your mind is not completely put off by the Marxist undertone, his book on Debt has some very good history. He also understands money's origins far better than the guys across the hall in the economics department. Money, he writes, exists because the king and his scribes need something to collect in taxes on which they can earn the rewards of seignorage. As Graeber points out, if it were simply a matter of collecting enough grain and gold, then the tax farmers could go on collecting the grain and gold. But, with what our American Constitution calls "Coin", you have a standardized Measure of wealth that the government both produces and collects and produces more and collects more; and, with each transaction, the scribes can collect an interest beyond the value of the metal itself. Graeber's explanation for how this alchemy begins is also sound; money has its origins in war. You can keep peasants working in the field with simple force; but you need to pay soldiers to make certain the sharp ends point away from you.

Where Graeber fails - utterly - is in his understanding of the origins of debt. He makes a great deal of the existence of debt bondage and the fact that peasants could end up losing their chattels to money lenders and out of that creates the equation of debt=slavery. But, as his own investigations should have shown, outright slavery has always been the far larger evil. When Adam Smith wrote that "the property of every man in his own labor is the most sacred and inviolable foundation of all property" he was not talking about the abuses of debtors' prisons.

So, why does Graeber focus on debt at the root of all evil? Because, if you are trying to mount a campaign to abolish debt as the root of all the world's misery, you cannot acknowledge that people have an inclination to deal with one another and will, if allowed, begin swapping credits all on their own. You will not find a single reference to Hayek in any of Graeber's writings that are online (I just did a search and came up empty); after all, if you acknowledge Hayek's wonderful insight - that a system of money that finds its origins with war and absolute authority can evolve over time into one of individual rights to property and open dealings in credit - then how can you rescue the labor theory of value and find capitalism as a vestigial appendix to be lopped off?

You have to believe that "kings, throughout history, …..normally encourage markets, for the simple reason that governments find it inconvenient to levy everything they need (silks, chariot wheels, flamingo tongues, lapis lazuli) directly from their subject population; it's much easier to encourage markets and then buy them. Early markets often followed armies or royal entourages, or formed near palaces or at the fringes of military posts. This actually helps explain the rather puzzling behavior on the part of royal courts: after all, since kings usually controlled the gold and silver mines, what exactly was the point of stamping bits of the stuff with your face on it, dumping it on the civilian population, and then demanding they give it back to you again as taxes? It only makes sense if levying taxes was really a way to force everyone to acquire coins, so as to facilitate the rise of markets, since markets were convenient to have around. Here is Graeber's explanation for how markets developed: "since kings usually controlled the gold and silver mines, what exactly was the point of stamping bits of the stuff with your face on it, dumping it on the civilian population, and then demanding they give it back to you again as taxes? It only makes sense if levying taxes was really a way to force everyone to acquire coins, so as to facilitate the rise of markets, since markets were convenient to have around."

Yeah, right. Merchants were convenient to have around; markets were those pesky things that even the merchants were tempted to believe they and the king could abolish.



 As a resident of the South, I particularly love that old Southern institution, the Waffle House. While every business might close during a hurricane, Waffle House has a great plan for keeping their restaurants open, and they manage to do a great job keeping their doors open, even with windows boarded up.  The FEMA director can tell how bad a disaster is by looking at how much of the menu at a Waffle House is available. He's created a sort of Waffle House natural disaster index index.

The test of the index is:

If a Waffle House store is open and offering a full menu, the index is green. If it is open but serving from a limited menu, it’s yellow. When the location has been forced to close, the index is red. Because Waffle House is well-prepared for disasters… it’s rare for the index to hit red. Incidentally, the the different state legislatures are legislating Waffle Houses out of business. My local Waffle House manager told me that business is way down at the locations nationwide because of the laws banning smoking inside the stores. Smoking bans do have unintended consequences, just ask any bar owner. Since many Waffle House customers are smokers, they are making other plans to eat.



 From Steve Huntley of the Chicago Sun-Times:

In another job, with another employer, at another time many years ago, I was a union activist. I edited a union newspaper, recruited new members and promoted the union whenever I could. Then I became its grievance chairman. For 2½ years I spent 95 percent of my union-work time defending the incompetents, the lazy, the malingers and the malcontents. And they got paid the same as my fellow workers who showed up every day and gave their all to the job. What's more, I saw how union rules frustrated management innovations to improve our journalistic product. A few years later I moved on to another journalistic enterprise without a union. I saw merit pay raises given to the hard workers, no salary hikes to those who didn't or couldn't do the job, and eventual dismissal of anyone who couldn't measure up to the demands of the magazine. Thus began my journey from liberal to conservative.

When I asked my Dad how he, like Reagan, went from being a Roosevelt Democrat to a corporate Republican, his answer was much the same as Reagan's. The change came from seeing what unionism actually meant in real terms, from his Uncle who was a shop steward at Dodge Main and spending an entire afternoon sitting in the man's office while he and the other stewards played pinochle and waited for the shift change.

The older I get the more I find myself following John Morley and being "a cautious Whig by temperament, .. a Liberal by training, and … a thorough Radical by observation and experience". All monopolies are evil, but the ones that exist in law - labor unions, criminal sentencings for private conduct - are truly vicious because they can avoid the test of experience and keep playing their idle games while never having themselves to pay the costs.



 A terrific seasonal movie — a film that reignites the flagging human spirit.

A charming–and true!–'tale' based on misfortune overcome, it focuses on strength and overcoming, has a refreshing feel throughout, features believable people–especially the always exceptional Ashley Judd, the engaging, masculine, relatable Kris Kristofferson, and the rugged, very intelligent Harry Connick, Jr.–and seems unusual in that adults can enjoy it alongside kidlets. I was at first under the impression that it was animated, since the beginning sequence with dolphins scooting about underwater did not look real, and I was prepared for animated storyline follow-up–but was relieved to see it was live action.

The Florida film is extrapolated from a real dolphin, Winter, a playful mammal who was caught up in netting and other human detritus now jetsamming and flotsamming the seas. With his tailfin gone from apoptotic cellular death, now rudderless, will Winter develop incurable spinal calcification difficulties and die prematurely? Winsome and not-too-precious kids take over plot machinations to rescue depressed dolphin Winter. Adults listen and assist.

The take-home of this sweet and no-naughty-anything entertainment is that science is busily working toward perfectability. In the film, it is a partially disabled dolphin, but the solution of her handicap, or "fin-icap," more precisely, is also the direction being taken for returning disabled soldiers and those born with physical challenges.

Fishy thought: I think 'Winter' here, the dolphin star, has a splashy career ahead of her, possibly in Esther Williams film remakes. Or surfing sagas with animal companions.



 Before you have a system for something, I believe you really need two crucial pieces that most of us never really contemplate because they are hard to think about and the answers are often mushy, but they are the necessary foundation to a system (in anything)

1. A criterion you seek to satisfy (what is it, specifically, you are trying to achieve — it may be more than one thing, or, often, it may be something that you have no business doing given the potential risks)

2. A paradigm or "template," a "model" of how things work from which to craft rules (a system) to satisfy #1.

Lastly, a quick golf story: 

In the 1973 PGA Championship, as an adolescent, I got a job retrieving balls that were hit over the fence at he far end of the driving range, onto the 14th fairway. Two guys were teeing it up and hitting it over the fence routinely, out of the entire field. A guy name Tom Weiskopf, and an old geezer named Sam Snead. I remember being amazed at how Snead, 300 yards away, as taking this seemingly effortless swing, and just firing missiles seemingly right at me, when all these other fellows, younger and stronger than him, weren't even coming close.

Incidentally, Jack Nicklaus won that tournament, and the $32,000 first place price. About an hour after receiving the trophy, I was (on the wrong end) of a 3 on 1 fight in the bagroom when I saw my assailants fleeing, looked up and saw a now-well-showered Nicklaus, tell me in that high-pitched voice of his how much I appreciated the work, and he duked me a hundred bucks. Quite the generous guy.

Craig Mee writes: 

Thanks, Ralph.

What you say in point #2 is very true. People are looking to trade systems for "something", without understanding the price action or what market price represents. Instead they just focus on the next contract.

Point #1 sounds to me like it goes back to your criteria of time horizon…and if you haven't thought the whole procedure through, and if you keep chopping and changing and being undisciplined and inconsistent, you are going to be forever with your back to the wall.

That's only my interpretation of this, please correct me if I'm wrong. 

Ralph Vince replies:


Pretty much. I think the "Criterion" aspect is troubling to many. People want to "make money" but with respect to what? If someone is truly looking to simply maximize profits, f = p/2 gets the job done but I don't know too many willing to endure that — or, as I have said, everyone wants to wrestle the gorilla till the door opens.

Many, I find, when you boil it down, are NOT in it to really satisfy any criteria other than "entertainment," a very dangerous proposition.

And yes, that criterion/criteria is nearly always a function of horizon, something which needs to be defined in defining horizon. Some people do all of this reflexively, and, in my observations, tend to be the most successful. 



And, then, we have Mr. Hoover:

I declare I never saw any but technical corners until 1931, when the Farm Board had title to all the visible supply of wheat in the United States. Theirs was an unsuccessful deal of fabulous proportions…. Broadly speaking, the purpose of the Farm Board was to obtain for farmers better prices for their products. In the hope that it might accomplish this, it was intrusted with powers broader than were ever before conferred upon any board or commission of government; and the $ soo,ooo,ooo of which it had unlimited control was more money than ever before in peacetime was put at the disposal of an independent group of Government employes. Now then, what they did with this power and money was to speculate in farm produce. Fix that firmly in your minds; and then realize that all their speculation resulted in failure. Whether they bought wheat, cotton, livestock, dairy products, soy beans, wool, cherries or what not, prices declined.



How do they say Lobogola in the South.

Gibbons Burke writes:

"The South's Gonna Do It Again!".



 I have been watching this happen under my nose here. All kinds of manufacturing is coming back on, especially here in the great lakes region. It's amazing how cheaply I can lease an entire factory, under really ANY terms I want — and how I can, in the 2011 world, steal the machine drawings of really anyone (because so much is manufactured with machine drawings that are required to manufacture components to a certain spec) and be producing anything in about 30 days at such a minimal investment.



The next Junto speaker will be Richard Epstein on the topic of "simple rules for a complex society".

Please join us, Thursday, September 1st, at The Mechanics Institute at 20 West 44th Street.

The meeting starts at 7 pm and the speaker speaks at 8 pm. There will be feedback. 

All are welcome.

Victor Niederhoffer commented on the night: 

Richard Epstein a genius. Totally great. v

Eric Dennis writes:

It was an impressive performance, and characteristic of him from what I've seen.

While I agree that interpersonal value measurement is technically not well-defined, I think the larger problem for Richard Epstein's case is the historically demonstrated inability to constrain state power by stretchable, aggregate welfare-based rules. There is little doubt that if an army of Richard Epstein clones were to adjudicate, e.g., eminent domain proposals, they could find some cases where "takings" would increase aggregate welfare, however imprecisely defined. The problem is that we don't have an army of Richard Epsteins. We have bureaucrats with no appreciation for the Hayekian knowledge problem, bureaucrats who are incented to maximize votes and campaign contributions by means of talking about economic efficiency rather than by means of achieving it.

The innovation of defining laws by reference to rights rather than to notions of aggregate welfare is that the former provides a clear limit on state power comprehensible even to the simpleton. Once the principle of private property has been subordinated to some kind of collective goal, we rely on the ability of the simpleton to decode polticians' vague arguments about whose property it will be necessary to sacrifice in the name of that goal. We might as well just enact the New Deal at the start.

If we can get 95% of the way to some hypothetical Epsteinian efficiency by means of a system of rights-based law, why try to eek out the residual 5% by striking at the heart of that system's robustness? If there is a detailed historical case for why it's not actually just a 95/5 split, I'd like to hear it; otherwise, I think his own acknowledged presumption for non-coercion ought to be applied to at the level of legal philosophy rather than simply at the level of individual "takings" cases.

Gene Epstein comments:

Well put. I agree with what you just wrote, Eric–especially since you agree that the term "general welfare" is "imprecisely defined." You're certainly right that Ultimate Ep's world, if people like him were administering things, would be vastly superior to the one we live in.

However, as libertarians–or even as classical liberals–our default position is presumably to respect property rights, to recognize that all value is subjectve–hence recognizing that terms like "just compensation" also have no precise definition–and also to recognize that refusal to sell, or refusal to sell at the "just" price being offered–is a necesssary part of property rights.

On the other side, Ultimate Ep seems to be arguing that, if we respect these rights, roads will be built, but not quite enough roads to suit him. Even if he's right–and if you appreciate what entrepreneurs can do, it's debatable–private ownership of roads would bring other benefits, especially the more efficient allocation of this scarce commodity.

But Ultimate Ep is always a treat. And thanks again, Vic, for hosting the event. 

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