Aug

22

One would imagine the Sunday open to close in Israel might be predictive of the open in the US on Sunday night, and possibly the open to close of us on Sunday. By Israel open on Sunday, the US has already passed Friday close. And Israel would be catching. Of course the US Open is not a predictive thing since it can't be acted upon, but a descriptive one. The whole subject of the influence of Indian, European, Asian, and mideast markets on the US is an interesting one and calls for much counting, correlation, and finesse.

Anatoly Veltman writes:

I'd be the first one to stress the equities "rolling wave" over the timezones, as well as inter-market influences (as in currency-gold-stocks-bonds-oil, etc). Being said, there are two clear new ingredients that make historical statistics less than meaningful: central meddling and modern algos.

1. What can possibly be the use of percentile correlations and sequences observed over any historical duration, if current market interventions and near-global ZIRP are unprecedented.

2. Modern algos thrive on constant change/adjustments. To paraphrase Jim Simons: what feeds "our" fascination is that our former immersion into discoveries (within pure science) would eventually yield an ever-lasting law or theorem — while (market) discoveries we achieve today will only live a blip of time, and so you have to journey on (almost daily) to your next discovery and implementation.

So in consideration of the above major influences, my current MO would be: do not rely on hard stats. Do rely on your instincts, understanding of the new world financial order and good occasional privileged information — and trade discretionary.

Chris Cooper adds: 

I can accept Anatoly's "two clear new ingredients" but reach different conclusions. My conclusions are:

1) Trade at a higher frequency so that you can get enough recent stats to be meaningful.

2) Trade fully automated, not discretionary, so that you don't fool yourself about your alpha. Also, it's the only sensible way to trade at a higher frequency.

"Relying on your instincts and understanding the new world financial order" are important only at the meta-level.

Paolo Pezzutti adds: 

I think:

1. Cycles are ever changing. Today it is because of ZIRP, tomorrow it will be because of new rules or products coming on that influence market structure. I don't know if cycles will be shorter or longer. You trade them until they work. Counting still works.

2. Frequency depends very much on commissions. Some regularities at shorter time frames cannot be traded if your commissions are too high. Frequency depends also on technology you have available. Also, one should trade a frequency where you have less competition.

3. New cycles means new patterns to come up and old patterns to die. Keeping track of ongoing patterns is important and also establishing criteria to determine a pattern has stopped working. Early discovery of new patterns is vital for your performance. But how much data and evidence do you need to validate a new pattern? More importantly on the tech side is how you implement the search of new patterns. A continuously running search can scan the data according to certain criteria and propose pattern to be evaluated further.

4. Trading should be fully automated to trade higher frequencies, more markets simultaneously, and decrease stress.

Newton Linchen writes: 

Dear Paolo,

You said: "Keeping track of ongoing patterns is important and also establishing criteria to determine a pattern has stopped working."

I once asked this question (how to measure the "death" of a trading strategy) to the List, and the answers were disappointingly vague. ("They work until they don't anymore", and such kind of answers).

To my knowledge, this is a vital question.

Recently, I backtested a strategy a colleague was trading, to discover that in the last 6 years you would lose your entire wealth trading it. But he kept trading it, due to an anchoring with an event when "it worked", plus a kind of empirical testing of only few months.

This means he was caught by the siren song of a series of "lucky strikes" within a larger distribution of years of losses.

This behavioral concept ("anchoring") is quite interesting, and we smile at the poor guy who don't count.

But what concerns me is that we can behave the same way, (although counting), when we face a regime shift (ever-changing cycles) and keep trading the defunct strategy… Until when?

Perhaps a rough answer would be to establish a drawdown metric related to the maximum historical drawdown? (i.e., we trade it until a drawdown x% larger than the greatest historical, and then quit?)

Or maybe the reason to trade a strategy must be quantitative whether the reason not to trade it anymore should be qualitative? (i.e., acknowledgement of the regime shift…)

A final thought would be a strategy based on market microstructure — in the way it is present in ALL regimes.

Any thoughts?

Newton.


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8 Comments so far

  1. douglas roberts dimick on August 22, 2011 5:44 am

    Einstein Quote of The Day…

    At my customized Google Home Page, I found this of interest regarding both the Chair’s observation on correlations of opening markets and AV’s emphasis to systemic order (related to what I identify as Quantitative Relativity)…

    Ethical axioms are found and tested not very differently from the axioms of science. Truth is what stands the test of experience.

    For purposes of sharing, here is my current selection of home page gadgets…

    CNN.com
    Date & Time
    Weather
    Gmail
    Quotes - quotes4all.net
    Dictionary
    Word of the Day
    Comedy Central’s Jokes.com: Joke of the Day
    http://www.gstatic.com/ig/modu
    India News, Latest News in India, Live News India, India Breaking News - Times of India
    BBC News - UK
    NationMultimedia.com - Regional
    BBC News - World
    NPR Topics: News
    Default- News - USATODAY.com
    Uninsured in America (Health Insurance)
    Mexico News
    Military Top Stories Center
    The Economist: Daily news and views
    Philippine National Statistical Coordination Board (NSCB)
    Aljazeera.Net English - Home Page
    Political Animal
    News & Politics
    Michael Moore - This Just In
    Wash Post Politics
    Recent decisions of the US Supreme Court
    Wash Post Federal Page
    TIME.com: Top Nation and US stories
    The Smoking Gun RSS
    FOXNews.com
    Currency Converter
    En-Ch Dictionary
    How to of the Day
    CBC | Top Stories News
    BBC News - Technology
    Channel NewsAsia Asia Pacific News
    BBC News - Africa
    Fact or Fiction
    Movies
    Finance-Economy-News-The Economic Times
    BBC News - Home
    Chinese Proverb quotes
    Quran Guidance of the Day
    VietNamNet - Báo điện tử VietNamNet
    CTV Canada
    Healthy Eating Tips
    Today in History
    Einstein Quote of the Day
    msnbc.com: Top msnbc.com headlines
    Wikipedia
    The World’s Healthiest Foods
    Latest news and comment from Britain | guardian.co.uk
    Search Ebay - All Countries
    Men’s Health Home Page
    The Hindu - National
    Business: BreakingNews.ie
    NYT > Home Page

    Also note that youtube.com provides members with a subscription list, so news providers and channels can be automatically monitor ed with notification when new content is uploaded.

    In effect, provide that one does not live in a communist country that controls media and blocks Internet freedom, we have the liberty to become our own producers of news and entertainment content.

    Many of you may say, “geesh, the guy is just realizing that now?”

    I have been living in Communist China since March 2006.

    Last year, a student gave me a software program to access an American located uncensored ISP (originally funded by the US Government) to escape the Great Wall of Communist China’s Internet state security forces, so that I can view my home country’s and international news, including dailyspecuations.com.

    Enough said…

    dr

  2. Nim Chimpsky on August 22, 2011 10:04 pm

    @DRD, Quantitative Relativity is not the answer. The answer to everything is here.
    http://www.youtube.com/watch?v=aboZctrHfK8

  3. John Chesnut on August 23, 2011 10:34 am

    Bruce Babcock wrote a paper in which he argued that you should resume using a system after it has most spectacularly failed.

    He had an unusual faith in the stationarity of market statistics and reversion to the mean.

  4. Anatoly Veltman on August 23, 2011 2:13 pm

    I loved Bruce thru the 80’s and 90’s, and I loved all markets pre-2009. What year did he put his paper out?

  5. douglas roberts dimick on August 25, 2011 12:20 pm

    Hi Nim,

    I watched three times.

    First, know that QR is not an answer. It is a process of a special application of Relativity. Moreover, it only applies to electronic exchange markets, specifically those of financial instruments — though in principle has applications with any kinetic energy systematic that is subject to the Theory of Relativity.

    Second, as the Deep Thought computer indicates in the vid, any answer is governed by the question — we call this “rules-based” construction of any given fallacy — I say fallacy here given the scientific paradigm, whereby a negative presumption is applied, though, a question per se does not have to be predicated on any given argument.

    Hmm, we can come back to that, if you like…

    By the way, why is the supposed most super of super computers operating in a woman’s voice, British to boot?

    The Brits, French, Japanese, us… only the Germans have their own money — factoring in here that the Chinese Commies have our (US-EU) money in the form of paper (IOUs) — and thus who (being the Germans) could afford to build such an elevated level of artificial intelligence.

    Skipping the movie critique, though, your point is well taken…

    Presuming here that your point is that people (and therefore the markets) are in a constant struggle to attain “the answer” within a static, supercilious framework. V’s Sunday dissection of open-close relativity here lends itself to that quest to find “the answer that answers all questions.”

    Have you pondered why Deep Thought instructed the two munchkins to return in 7.5 million years?

    dr

    Ps. Hint… See Quantitative Relativity…

  6. Nim Chimpsky on August 25, 2011 9:24 pm

    @DRD, as I have said before on these very pages, with Quantitative Relativity I have found that having given the number of instances respectively in which things are thus and so, in which they are thus and not so, in which they are so but not thus, and in which they are neither thus nor so, it is required to eliminate the general quantitative relativity inhering in the mere thingness of the things, and to determine the special quantitative relativity subsisting between the thusness and the soness of the things.

  7. douglas roberts dimick on August 27, 2011 1:51 pm

    Hi Nim,

    I take it you are writing in some code – someone did that before with me here at daspec – whereby letters or syllables or words are translated into numeric statements, all of which being well beyond me. Regardless, I can at least address your comment in two parts.

    A. First, you state…

    in which things are thus and so,

    in which they are thus and not so,

    in which they are so but not thus, and

    in which they are neither thus nor so…

    Concluding that x (or the number of instances) is first required to distinguish general principles to then determine the special relativity of the motion in question.

    Are you indicating that there are both special and general principles of QR as with Relativity itself?

    B. Second, you appear to predicate this notion of measurement on “given the number of instances respectively” before you address this first query concerning special and general principles. Why?

    Einstein discusses systems of co-ordinates distinctively in function compared to classical mechanics. I am not an expert (or physicist) here, perhaps you are…

    My point (or a central tenant of QR) is that the notion that determining the number of instances as a condition precedent may be a fallacy for purposes of quantifying how bodies (or price action for that matter) change their position in time and space; specifically relative to QR is the x/y axis measurement of any given electronic exchange market series of transactions.

    Your use of “thus and so” is actually a good point a la the relativity of such (price action) when compared by two seperate co-ordinate systems (see E’s writing on “The Principle of Relativity (In The Restricted Sense)”. Again, from my lay understanding, as Victor has often addressed the issue of independence.

    That discussion leads us to issues to include dimensionality and linear mapping. See…

    http://www.dailyspeculations.com/wordpress/?p=4353

    http://www.dailyspeculations.com/wordpress/?p=4012

    I hope this information helps clarify the ambiguities of the Theory of Quantitative Relativity to which you so rightly allude.

    Have a nice day…

    dr

  8. douglas roberts dimick on August 28, 2011 2:58 pm

    Movie Recommendation: Einstein and Eddington

    One of my book projects is sequencing a train of famous quotes as we speed along the tracks of daily life. One of some 42 selected to date (since January) — Nim, a consilience with your Deep Thought splice — states…

    “Any space is as much a part of the instrument as the instrument itself.” (Pauline Oliveros)

    My midnight movie recounts the first proof validating Einstein’s Theory of General Relativity. The film is successful by dramatizing the space (or time) within which science challenged the wills of those also blessed with great minds.

    http://en.wikipedia.org/wiki/Einstein_and_Eddington

    Einstein and Eddington provides an entertaining juxtaposition of the scientific, academic, intellectual, emotional, and physical sacrifices made with WWI as the backdrop during that other world shaping event — reordering of the universe.

    What the movie reconfirmed for me was that spatial stimuli – for example, as Victor discuss about music and sports relative to markets — have a varying, relative impact on what my first year law professor terms to be “the switching tracks of time.”

    dr

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