The ACD Method

justrading said:
Excellent piece featuring a clearly erudite man. I especially note his points about understanding physical product flows and where there is a place for Technical Analysis.
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There is a nice tie in there with what Arnold was talking about and ACD. Anyone want to take a stab at it?
 
Maverick74 said:
ER: How would you describe your approach to fundamental research? How important is it to understand physical fundamentals as opposed to other considerations that might affect a trading decision, such as market psychology?

JA: Fundamental research has always been the underlying basis for my trades. However, it is certainly not the entirety of it. A lot of people have good fundamental research, especially today, as third-party services provide much of it. The real advantage is when one can pair fundamentals with a deep understanding of market psychology and flows.

At Enron and Centaurus, there was little use of technical analysis. I view technicals as a crude proxy for market psychology. If one is trying to follow many distinct markets at a given time, technical analysis is a reasonable strategy. My view was that by focusing on only one market, watching every tick, being the most active market-maker and having active market discussions, I could understand the flows and psychology infinitely better than looking at trend lines and moving averages on a graph.

ER: As far as I am aware, no natural gas-focused hedge fund has had the same successful run that Centaurus enjoyed for many years. How would you explain that?

JA: I have always had difficulty answering this question because it was not one thing. Our success was a combination of an acute and unsurpassed focus on fundamental research, adept traders, a culture of teamwork, having the confidence of our investors to withstand rough patches and luck. Without any one of these things, we would have been much less successful. Many other shops had many of these attributes; I think we were unique in having them all.

ER: During your time at Centaurus, what was your philosophy in terms of hiring? Were you basically looking for star traders with a track record of delivering profits or was there more to it?

JA: Hiring traders is an exceptionally difficult task. I never found one trait that 100% correlated with trading success. The best traders I've come across have had wildly varying personalities, risk tolerances and styles.

Further, track record is not always a great way to hire a trader. Start with 32 people in a room and one of them is going to toss heads on a coin five times in a row. In hiring, how do I know the person with a good track record of five years didn't just get lucky? Further, trading at a bank or energy marketer is different from trading at a hedge fund. How do I know one person's track record can translate to a new environment?

When interviewing, I wanted to see a respect for the market, as my belief is markets are generally, though certainly not perfectly, efficient and hard to beat. Next, the candidate had to convince me that he could identify the market inefficiency that created the opportunity to make money. And lastly, the interviewee had to be able to convince me he was the best person to exploit the identified market inefficiency.

ER: Why did you ultimately decide to close down the Centaurus Energy Master Fund in 2012?

JA: I started in energy trading four days after graduating college and worked in the field for 17 years. For the first 14 years, I loved every day of it. During the next two, the passion I had greatly diminished. By the last year, the days started to feel more like work than fun. I had the very fortunate financial position of being able to change direction when the work became tedious and I took advantage of it. Trading is an intensely competitive field and I did not feel I could be successful without giving it 100% focus.

ER: Over the past five or six years, US financial regulators have been moving to rein in large speculators in commodity derivatives, most notably through the position limits rule proposed by the US Commodity Futures Trading Commission (CFTC). What do you believe the ultimate impact of that will be?

JA: The CFTC is well intentioned in its efforts. However, the potential risk of any regulation is unintended consequences. History is littered with examples whereby changes in financial regulation to better one aspect led to new problems, inefficiencies or exploits.

Certainly, financial markets require very strong regulation. But the reason I testified in front of the CFTC and proposed a modified rule [in 2009] was that I foresaw unintended consequences of the position limit rule as proposed. Commercial demand for hedging energy price risk is great and there is not always a natural offset to the transaction. Speculators are necessary to price, warehouse and manage the resulting risk. Thus, regulators need to balance the ability of the speculative community to warehouse very significant industry risk with concerns over the potential for one player to distort the market.

It is a complicated problem made harder as each market is somewhat unique in how producers and consumers hedge. Thus, trying to write a set of general rules for all commodity markets that do not distort particular markets is very difficult. While regulators dislike doing so, there is a need to understand the particular characteristics and customise rules to individual markets, rather than treat all commodity markets the same, to limit unintended consequences.

ER: How do you decide which causes to support through the Laura and John Arnold Foundation?

JA: I have always been interested in market inefficiencies and failures. My wife, Laura, and I were attracted to some of the large policy problems this country faces.

Many of the problems exist not because policy experts have not agreed on a more optimal solution; rather, the current public policy is often suboptimal because there is a market failure. This failure can be caused in many ways, including: diffuse costs and concentrated benefits; political expediency; artificially high discount rates (that is, people are bad at sacrificing now for their future benefit); asymmetric or bad information; the power of special interests, including business and labour groups; the collective action problem; and misaligned incentive structures.

We are very interested in using the foundation's financial and human resources to address market inefficiency, and help to move certain areas of public policy towards a better equilibrium."
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Thanks for the post Mav.
 
copyplus said:
Mav, I have some questions....

I've been reading Steenbarger's blog and notice he often mentions some of the indicators he has created, and gives updates on what they are indicating about the market. He tracks several different metrics across all NYSE listed stocks because he believes it gives him information that is not obvious from simply looking at a chart of the Spooz. Since you read the blog also I'm sure you know what I'm referring to.

Do you think this is an area worth exploring? The reason I ask is that I have some ideas inspired by his work, except within the ACD framework. Do you think I could be on to something?

The second question, assuming the answer to the first question is a yes, is do you have any suggestions how to come up with a stock list for a project like that? Given that I'm a home-gamer with limited coding ability, going over all NYSE stocks each day manually is not an option. LOL. But I also question whether the information I get will be as valuable if I am getting it from too small a list of stocks, or from 30 or so sector ETF's. Thoughts?
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Hello CP,

I track the daily monthly, quarterly and yearly A up/downs on the broad market. I'm accumulating a fair amount of data and their appears to be some info here. Anyway, if I can be of any help send my a pm and I'll code it up (if possible) and shoot you the results.
 
copyplus said:
Mav, I have some questions....

I've been reading Steenbarger's blog and notice he often mentions some of the indicators he has created, and gives updates on what they are indicating about the market. He tracks several different metrics across all NYSE listed stocks because he believes it gives him information that is not obvious from simply looking at a chart of the Spooz. Since you read the blog also I'm sure you know what I'm referring to.

Do you think this is an area worth exploring? The reason I ask is that I have some ideas inspired by his work, except within the ACD framework. Do you think I could be on to something?

The second question, assuming the answer to the first question is a yes, is do you have any suggestions how to come up with a stock list for a project like that? Given that I'm a home-gamer with limited coding ability, going over all NYSE stocks each day manually is not an option. LOL. But I also question whether the information I get will be as valuable if I am getting it from too small a list of stocks, or from 30 or so sector ETF's. Thoughts?
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Thanks for referencing the blog.

It reminded me of a Master Mav post back on 10/26/11 where he said: "Read this guy's entire blog. http://traderfeed.blogspot.com/ His books are outstanding as well. Also read Nassim Taleb's book too."

I haven't done that yet and will certainly start.

Thanks again.
 
Maverick74 said:
There is a nice tie in there with what Arnold was talking about and ACD. Anyone want to take a stab at it?
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The bit about understanding flows and market psychology being infinitely better than looking at trend lines and moving averages. ACD is about being early and beating the crowds, understanding when lots of people are trapped, not coming in or leaving when the masses rush in or out.
 
Right. So the point Arnold is making and what most traders over look is that price is the outer layer of the asset. It wraps around the asset and denotes it's value. But the actual makeup of that asset is embedded underneath that outer layer. So Arnold talks about pipelines and physical gas flows. This is granular analysis we talk about all the time on here. Simply looking at Henry Hub front month natty is just giving you a large outer layer. You have to go deeper then that to get a full understanding of what's happening. Simply drawing a trend line or a moving avg is not going to give you that understanding.

In ACD land we get that deeper granular knowledge through number line analysis. That is analogous to pipelines flows and studying the physical gas flows around the country. The number lines are explaining to us how capital flows from one asset to another. It's revealing a more intimate nature of the buyers and sellers vs just looking at a chart and drawing levels.
 
Hello fellow HomeGamers,

How's the retirement ETF and mutual funds doing?

Sunday night monthly recap of a few broad market ETF's:

DIA: My short term NL's confirmed positive on the 27th.

MCG: Short term NL’s confirmed positive on the 28th.

IJT: Short term NL’s confirmed positive on the 29th.

IYR: Short term NL’s confirmed positive on the 20th and 30 day on the 28th.

IYZ: Short term NL’s confirmed positive on the 21st.

JJC: Short term NL’s confirmed positive on the 13th and 30 day on the 14th.

KRE: Is short term confirmed positive.

UNG: Short term NL’s confirmed positive on the 29th and 30 day on the 30th.

XLK: Confirmed 30 day on the 28th.

XLP: Short term NL’s confirmed positive on the 21st.

XLU: Short term NL’s confirmed positive on the 20th.
 

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