This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
I agree with most of what LP said in this comment. Now if he would quite being a statesman, and get back to the name calling!
Unlike Bill I do believe in black swans. Not that not believing in it is bad either. (that’s the statesman in me). The problem is that I’m torn between two opposing philosophies. On one hand make money quickly and on the other hand make money slowly. Now the common misconception is that you can’t make money quickly without blowing up and if you make money slowly, you won’t blow up. And I not saying that either one is right or wrong. It’s how you design your risk, rules and the system.
Quant or no quant, I consider quantery as being similar charting. There is a right way and a wrong way to do it. Much like self proclaimed great chartists, the quants pop their collars too. We knock chartist for coming out with some very subject processes but yet we think that if we are presented with a bunch of number in excel, they will represent the truth. It’s human nature to find patterns. The mind is geared towards patterns. Maybe the best system is to look for the exception. They usually cost very little to bet on and pay out a lot even if it means that you may have to bet bunch of times more.
The bottom line is that we don’t know when catalytic events will take place. These events could be bad as well as good. Take Andrew Lahde for example, he took advantage of a prime opportunity that was skewed with extreme greed. So he made his money quickly. On the other hand we have heard countless stories of people making money slowly and giving it all back quickly.
The question is not how quickly or slowly we make the money, it more about how do we protect ourselves from the unknow. We shouldn’t seek to find out the unknow but rather just protect ourselves from the various possibilities. As Richard says “Trading is simple, you are complicated”. The smartest traders don’t mess around with chop but rather take appropriate bets at the most opportune times in the markets. Most of the great traders we know, tend to stay out of the markets until they have a clear edge, and even then they tend to risk appropriately and scale in as the position becomes more favorable. We dumbasses on the other hand tend to trade frequently and and scale out every time a position becomes favorable. This is all about fear and greed. It’s not about indicators, or trendlines or excel sheets.
So in a nut shell I am more interested in price, volume and extremes. The best part about the combination of those three is that you’ll know when you are right and when you are wrong fairly quickly.
This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
January 31st, 2008 at 6:48 pm
Hmm. Since you posted the comment, I’ll comment my reply to the comment. Or something like that …
You got me wrong, LP. I definitely believe that market returns are conditionally heteroskedastic, it’s just that I think it’s obvious to anyone who’s studied market history or distributions of returns - making Taleb’s premise (that bad things happen more often than one would expect if using a normal distribution) obvious, as well. Also, there are “golden swans” where the returns are much better than one would predict using a normal distribution, and they happen just as often as the black ones.
It’s hard to ratchet up the returns without ratcheting up the risk, too. Hard to control risk without dampening returns. It’s a tough problem.
January 31st, 2008 at 9:38 pm
I like this statesman thing. We are traders and gentlemen.
I still vote for the Trader’s Onion. Long live Jay. Now that all you you are dumber, yes Bill it’s really freakin tough to control risk. not only do you have market risk but you have psychological ones too. This is why beeytaches like me stick to daytrading while dreaming of swinging. I’m sure you guys have thought of this before (not swinging), but lets assume you have $100K at risk, would it hurt performance a lot if you did the ol Taleb routine:
Figure out the beta of your portfolio and buy the appropriate amount of very short term SPY or $SPX.X Put options to cover a negative X% of risk.
So basically you would need to look at one day risks in the history of the markets, develop a probability of it happening and obviously what conditions it took place under and then buying those puts. Just a brain fart, but theoretically not ludicrous.
Also, in the event the portfolio is very profitable. Then you could loosen the requirements so that you are break even at worst. Thus you would pay very little for those way out of the money options.
January 31st, 2008 at 9:41 pm
BTW, way Bill…heteroskedastic…sounds Jurassic
http://www.metacafe.com/watch/175202/brian_fellows_safari_planet_guest_matt_damon/
That has nothing to do with Jurassic but sounds jurassic…
February 1st, 2008 at 4:18 am
this post is just heterofantastic
February 1st, 2008 at 4:20 am
and bill, LP and John are heterofabulous
February 1st, 2008 at 4:23 am
yay
February 1st, 2008 at 5:05 am
jay: heterofabulous sounds very hetero-gay!