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James Sogi Philosopher, Juris Doctor, surfer, trader, investor, musician, black belt, sailor, semi-centenarian. He lives on the mountain in Kona, Hawaii, with his family.

5/17/5
The Sciences of Hitting and Trading

Ted Williams's The Science of Hitting is the one of the best books for trading I have read ever and at the price of $4.95 for a used copy, the best deal in the investment world.

Ted's top advice:

1. The single most important thing for a hitter is to get a good ball to hit. Bacon calls it the overlays. Wait for the 80% play, when p = .0005. Wait for the layups. Why strike out?
2. Proper thinking. Have you done your homework? What's this guy's best pitch? What did he get you out on last time? Hitting is 50% from the neck up.
3. Be quick with the bat. Don't sit there and stew over the entry. When the signal hits, enter the orders. Adjust as you go. When you have a good profit and play is run, take it. Don't sit and gloat over the profits till they're gone.
4. Don't let anybody change your style. Your style is your own.
5. Know where the strike zone is. Learn where your high percentage happy zone is. Everyone has his bag of trades. Look where the odds are the best, and swing. If its not in the strike zone, pass. Know what the range and percentages are. Know the expected variance or risk and your margin. Know where the sweet spot is.
6. Guess! That means anticipate where the ball will go. In baseball you read the pitcher. In the market if like last week, the market is dropping, the pullbacks are going to be hard. They were. Anticipate that. This week, its going up like gangbusters, no pullbacks. Anticipate where the market is going to go in the situation. The pros are watching certain numbers, in anticipation.
7. Mechanics. Study the mechanics of the swing. Know your gear and platform and the rules. When is the market open. The mechanics of your system.
8. Don't hit at anything you haven't seen. Williams always let the first ball go by. He learned from it. In fact he waited for a fast ball. In the market, how many buy at the market on open? Take a bar. See what it's got. Take a few. When you see what it's doing, then be quick.
9. Adjust. The reason hitting is so tough is that even the best can't hit all the balls just right. To do so is a matter of corrections every minute. Adjust your approach to different market conditions. In a breakout market entries will be different than in a range. Down market entries differ from rallies. Adjust.
10. Get in the game, know what's going on, know the reason when that pitcher takes the bread out your mouth.

As to batting, Ted breaks the strike zone into about 40 areas, with the .400 zone right in the sweet spot in the middle and the odds dropping towards the edge. The market doesn't pitch sweet ones all day, but when it does, it's a good time to swing. On less than sweet pitches he talks about swinging for average, "getting some wood on the ball". On 0-2 he talks about conceding the to pitcher and batting defensively. Choke up, push the swing, get the ball on the ground. He talks about anticipating the pitch. If the pitcher struck you out on a curve last time, watch for the curve. At 0-2 swing for the curve. In the market, after it has been dropping for a month, after the turn, the pull back won't be 100% or more like in April.

The trader has the big advantage, hopefully beating Ted Williams .342 average. The trader is always on home field, always can watch pitches. Can walk all year long with the risk free rate of over 4%. Can hit grounders all day long for .850 or better. Can watch all the others. We have our odds all set out for us ahead of time. Most systems should bat over .600. The trader can adjust leverage to bunt, single, or swing for the fences. The trader can cancel orders, move them around.

Tom Ryan responds:

I was coached in the philosophy of "just don't swing at bad pitches", rather than "wait for the perfect pitch". The problem with waiting for the perfect pitch. E.g. Barry Bonds's lifetime stats:

After 1-0  .340
After 0-1  .235
After 2-0  .299
After 0-2  .123

I propose trading is not altogether different. It's not the perfect pitch we want -- just a good pitch to swing at.

Philip J. McDonnell offers:

Good Pitching Dominates Good Hitting

A Long Time Ago in a Galaxy Far Away I was a PAC 8 pitcher at UC Berkeley. Some may recognize it today as the Pac 10. The point of this essay is that good pitching dominates good hitting. All of the lessons apply to trading.

The pitcher's goals are to obtain strikes while providing as few pitches to hit as possible.

My rules:

1. If the batter swang at the last pitch and missed, then he proved that he can't hit that pitch. Back it up (Repeat the pitch).

2. The Inside Pitch. Hitters like to pull the ball. The idea is that the bat starts on the shoulder and if the pitch is inside (close to the batter} then the batter wants to hit the pitch in front of his body. He thus has a long path from his shoulder to the point of impact in front of his body. The greater distance allows more time for acceleration of the bat. The slang is that the batter can "pull" the ball resulting in maximum distance. The disadvantage to the batter is that time to swing through the longer zone simply takes longer. The rule for the pitcher is "hard in". Do not give the batter time to react to the inside pitch.

When the market makes a move, it moves quickly. It doesn't allow traders time to react.

3. The Outside Pitch. From the batter's perspective the outside pitch is the hardest pitch to see. It is farther away. For the batter the idea is to wait and hit the ball with the fat part of the bat to the opposite field. This means right field for a right handed batter. The delay makes the batter susceptible to timing tricks. So the strategy from the pitcher's perspective is to alter the timing. He pitches slow on the outside part of the plate.

The market continually changes timing. It is quiet, only to be followed by volatility. The trader is kept off balance.

4. Throw strikes early in the count. Many hitters look at the first pitch. When a pitcher gets ahead in the count the batter suffers. Many hitters look for a fast ball when they are behind in the count.

Many good rallies begin with a succession of positive days which surprise traders. Traders get caught watching the very profitable early leg of a new rally.

5. Curve Balls. A curve ball is a good pitch to throw when you have two strikes. With two strikes, the strike zone is larger. The batter will swing at pitches which are "close" to the strike zone. The deceptive arc of a curve ball seduces the batter into swinging at a pitch which is near the strike zone but not necessarily "in" the strike zone.

Near the end of a move many margin accounts which have been wrong footed will be close to the edge. The markets are notorious for a final deceptive move in the direction which will force liquidation of losing margin accounts.

6. Another good pitch with two strikes is the high fast ball. Many pitchers consider this their strikeout pitch. Hitters will often chase a high fast ball especially when they have two strikes. High fastballs should be thrown with a four seam grip. They will tend to rise, thus deceiving the batter into chasing a pitch out of the zone.

7. Pitch to the situation. If you need a double play and have a runner on first a good pitch is a fast ball at the knees. This should be thrown with a two seam grip which will result in a slightly sinking ball. The goal is to get a hard ground ball which will get to the infielder quickly in order to allow a double play.

The market seems to know the positions of the players. Often the news will serve to expropriate funds from the many. News, such as announcement of "an oil spike", seems to come exactly when needed by major market participants.

Tom Ryan again:

"If you don't mind my saying so, the better the pitch, the harder one should swing. "

That may be true, but as a daytrader my point was that a takeaway from Williams' book on the take the first pitch and the sage has used this several times in his homilies, Is that one should wait for the "perfect pitch". However we know in baseball, that once you get behind on the count, on base, hitting and slugging %'s all suffer. Taking the first pitch as a fixed system is bound to put you behind in the count more often than not. I propose that most daytraders know intuitively when they are behind in the count and that is when we tend to swing at bad pitches. Better to be prepared to always swing at the ball whenever it is in the right zone even if that is for example, right at the open.

From Kim Zussman:

In a duel, if your opponent shoots first and misses, you can:

1. Aim carefully and kill him.
2. Aim carefully and not kill him (if he is crippled he may follow you forever).
3. Aim poorly and miss him. A tie.
4. Decide not to shoot and walk away a hero. How far you get depends on whether your opponent picks up your pistol.
5. Aim intelligently and kill the woman you are fighting over. Then go with your opponent for some beers.

Big Al adds:

Which brings up a subject not visited in a while: movies, especially heroic realism. If you haven't seen "The Duellists" (1977) in a while, check it out. From a Joseph Conrad story, directed by Ridley Scott, starring Keith Carradine and Harvey Keitel. Officers in Napoleon's army, Keitel decides that Carradine has insulted him, and Keitel's Feraud is not the kind of man to let go of an insult. Ever. Grand human themes brought to life in a very specific story.

And back to Jim Sogi:

The reality in gunfights is that dozens of rounds are fired with few hits. In warfare the bullet/kill rate is low. In old duels the fighters often reloaded numerous times before one lost nerve or was injured. The market is the same. Many shots are being fired. Many misses, reversals, failed breakouts, many pivot point failures.

When hunting big game, the hands shake, the heart pounds and the gun wavers. Hunting large boar with dangerous tusks, acute smell and night vision, that travel in packs and can run 30 mph in the dead of night requires some edge. Night vision with infrared scope, multiple magazines, back up weapons, gives an edge. I watch their foraging patterns and wait for them to come along. They are predictable. One shot drops them, but even then, their throat needs to be slit to bleed them so the blood doesn't go bad. Good to develop the killer instinct: like trading.

from Abe:

If my opponent is visually picturing me as a target while walking his ten paces he most likely will do so by mentally extrapolating "a straight line" from B [his place after ten paces] to A [starting point] further to guess C [my place after ten paces]. In this case a very good strategy is to deviate from the straight path while I am making my ten steps so that when my opponent turns around I will not be where he visualized me to be, that is, rather at C I will be at D [somewhat off the straight line]. He should be confused for a split-second.

It might be advantageous staying 'formless' [having no rigid expectations] but having 'scripts' for different scenarios.

The best guess for tomorrow price is today's price [extrapolation ABC] but sometimes the market will be off by "a lot" [D]; the reason why big moves tend to take one by surprise?

There are certainly more subtleties to think about for example which way my opponent will turn around etc. Besides, should I think at all about what my opponent could possibly be doing or should I rather concentrate/meditate like in Zen where they would say that the bullet is one with its target as soon as the ego is transcended; possibly an analogy to program trading and the arbitrage business or is this rather analogue to having an automatic weapon?!

A Southern Spec Chimes in:

At ten paces you think thats a fallacy? I can only speak for myself and use my hunting skills and instincts based on observed math and probabilities over my lifetime but, at ten paces Abe I will gladly take the first shot. distance, velocity, and target all taken into consideration. mMvie aside, when Mr. Eastwood said "go ahead punk, make my day" the gun was already pointed, aimed and ready. he took the first shot. Counting for the first time in my life over the last three years has done just than. It allows me to take aim, get ready, be prepared and objectively look at something and then take a shot at it, instead of sitting back and waiting for the perfect pattern, trade, signal or such. That's all i meant. If i am on a range, lookin' down in the valley and see a turkey near its roost at some distance then obviously the first shot is not the one taken. If i am Mr. Sogi in the bush of HI and a wild boar comes upon me at a distance of 50ft away, then the first shot is taken! inflexibility, and not paying tithe to law of ever-changin' cycle is something this six shooter doesn't try to do anymore. for a little countin', after the first shot i tend to have five more bullets in their appropriate chambers, so if the first doesn't do the job then hope springs eternal with the others.

Abe rejoins:

I understand it is ten paces for each person, so the real distance is double, in fact, twenty paces. Anyway, you might be right and it is generally better to get the first shot but I understand that this doesn't mean I should shoot immediately and without aim. The real problem in a duel situation is the 'accurate aim' period. The longer I delay the better my aim will be and the greater my chances of hitting the opponent. At the same time, the longer I delay the higher the odds will be that I am not the first who shoots. So there is a pay off between aiming [being slow but accurate] and being the first who shoots [being fast and inaccurate]. We will be the first by not aiming and shooting immediately but will we hit? I understand that the likelihood of hitting the opponent of a distance of twenty paces by an inexperienced shooter by turning around without aiming and a heightened pulse rate [!] to be very low, probably less than 5%. Of course, there are other factors involved as well like whether we shoot with an 18th century pistol or a Walter P99.

When we construct a correspondence between "counting" and "aiming" then aiming in a duel situation is equivalent to counting during [!] and not before the trading session. So then, in fact, a duel situation is not a good analogy for trading because in trading you can count before the action takes place which, as you wrote, "allows me to take aim, get ready, be prepared and objectively look at something and then take a shot at it, ..." which is exactly what I cannot do in a duel situation.

"Counting" or proper trade preparation in trading can be likened to a time option in a duel. You effectively have something like "three" seconds to aim AND shoot first, that is, being accurate but first!

Back to Southern Spec:

While you are walking you are countin' in your head 1,2,3,4,..... you are preparing by visually picturing your target before you turn around fire? I sure ain't thinkin' what you are thinking when walking those steps "I am thinking 10, turn and shoot, your thinking 20 steps total, time vs. shooting, optimal strategical value". Same thing for me at least when looking at ticks real time, or price patterns while trading "in act "of or "preparing". shouldn't we both be prepared before we duel? Dueling certainly isn't something we should do for fun? trading/speculating/investing ain't something i do for fun. Is a bid vs. ask not a duel? Profit vs. loss sure seems like a duel to me? You can keep that zero sum game thought in your pocket because when I loose it means I am broke and that might as well be death.

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