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Trading Wisdom for Aspiring Hedge Fund Managers
- Thread starter darkhorse
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Quote from darkhorse:
Trading Wisdom 03: Exiting Losers to Maintain Objectivity
"The more you lose in a trade, the less objective you become. Exiting a losing trade quickly clears your head and restores your objectivity. After a breather, you might put the same trade back on if you can intellectually justify it, but you have to constantly remind yourself that there's a myriad of opportunities in the marketplace. By preserving your capital through the use of a stop, you make it possible to wait patiently for a high-probability trade with a low-risk entry point."
- Marty Schwartz, Pit Bull
JS Comment:
How quickly do you exit your losing trades?
Do you lose objectivity when the market goes against you?
Do you use time stops as well as price stops? What is your optimal cut time - based on analysis of past trades, that statistical point at which "if it hasn't worked by now, it's probably not going to work at all?"
If you experimented with cutting losses even faster, what might happen?
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Ironically enough, this week I saw the two extremes that come with my way of setting stops. The first trade was in Crude and I got stopped out by a single tick just before that big post-Fed Minutes rally. Fortunately, my rules got me back in and I caught the rally, but I'd already taken the loss on the first trade. There, I definitely had to maintain objectivity to get into a trade a mere couple of minutes after getting hammered, especially since one trade right after another is almost the antithesis of my usual way of trading.
The second trade was yesterday in the Euro. I got in on the spike at 8:30 at the top tick. The Euro then proceeded to drop around 40 pips until it was 2 away from my stop. From there it reversed and, per my rules, I got out at breakeven.
I usually don't have that much adventure with my initial stops, but for some reason, this week they came into play on two trades.
Trading Wisdom 15: Busting Out of the Box
"They are born, then put in a box; they go home to live in a box; they study by ticking boxes; they go to what is called 'work' in a box, where they sit in their cubicle box; they drive to the grocery store in a box to buy food in a box; they go to the gym in a box to sit in a box; they talk about thinking 'outside the box'; and when they die they are put in a box. All boxes, Euclidian, geometrically smooth boxes."
- Nassim Taleb, The Bed of Procrustes
JS Comment:
How do you avoid getting boxed in?
What are the long-term costs of conventional habits, conventional wisdom, and conventional thinking?
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"They are born, then put in a box; they go home to live in a box; they study by ticking boxes; they go to what is called 'work' in a box, where they sit in their cubicle box; they drive to the grocery store in a box to buy food in a box; they go to the gym in a box to sit in a box; they talk about thinking 'outside the box'; and when they die they are put in a box. All boxes, Euclidian, geometrically smooth boxes."
- Nassim Taleb, The Bed of Procrustes
JS Comment:
How do you avoid getting boxed in?
What are the long-term costs of conventional habits, conventional wisdom, and conventional thinking?
Buy The Bed of Procrustes on Amazon
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Quote from logic_man:
Ironically enough, this week I saw the two extremes that come with my way of setting stops. The first trade was in Crude and I got stopped out by a single tick just before that big post-Fed Minutes rally. Fortunately, my rules got me back in and I caught the rally, but I'd already taken the loss on the first trade. There, I definitely had to maintain objectivity to get into a trade a mere couple of minutes after getting hammered, especially since one trade right after another is almost the antithesis of my usual way of trading.
The second trade was yesterday in the Euro. I got in on the spike at 8:30 at the top tick. The Euro then proceeded to drop around 40 pips until it was 2 away from my stop. From there it reversed and, per my rules, I got out at breakeven.
I usually don't have that much adventure with my initial stops, but for some reason, this week they came into play on two trades.
There is definitely an art and a science to using stops. I think a lot of traders who experience frustration with stops are missing some key considerations, or hitting up against mismatched aspects of their methodology, or failing to internalize the reality that net profitable rules in the long run can still bear a short-run cost.
And as you point out too, sometimes a trader just gets juked (and has to take it as part of the game).
Quote from darkhorse:
Perspectivism recognizes, on a deep level, that there is no such thing as 'ultimate truth', only viewpoints and assertions rooted in specific historical / environmental / situational context.
But at the same time, as a perspectivist you are wholly free to objectively critique the quality of various viewpoints and perspectives on a logic and utility scale. I will not try to argue there is a universal standard as to what constitutes good music, for example, but I can certainly make arguments as to why Mozart is preferable to Nicki Minaj (and why Nicki Minaj is not worth listening to).
What about the statement "I think, therefore I am", or basic mathematical axioms?
Also, how would you prove that Mozart is preferable to Minaj? If someone hates the sound of Mozart and loves the sound of Minaj, isn't that an undeniable fact?
Yes, I agree with the theory in principle, but the practice is very difficult, I find... I imagine that, in the world of trading, it's actually quite hard to obtain all the information above. For example (and this is something I have mentioned before), some of the people who I think are "greats" are hardly ever mentioned, simply because they operate well below the radar. People like Seth Klarman, who you just never hear about. I think he's no less a "great" than the other, more commonly mentioned characters. Same for somebody like Alan Howard, who is so reclusive and secretive that you would struggle to find his picture on the Web.Quote from Ghost of Cutten:
Top performance against the best competition for a sustained period is usually the criteria for greatness in any competitive field. So for trading, that would be anyone who has an excellent CAGR to max drawdown ratio, in relatively efficient markets, for say 10 years or more (the longer, the better). I'd say you need to make a relatively decent sum also i.e. 10 million+. No need for investors - that is fund management, which is not the same thing as trading (they intersect but obviously you can trade without ever managing client money).
Great returns from very inefficient markets, or those with structural edge (e.g. Salomon Brothers in the 1980s) would be great 'money-making' but not great trading IMO, the reason being that it is not sustainable, and not the result of world-class skill but rather the result of weak opposition (a bit like an NFL team beaing Minor league teams all the time).
Quote from Ghost of Cutten:
What about the statement "I think, therefore I am", or basic mathematical axioms?
Also, how would you prove that Mozart is preferable to Minaj? If someone hates the sound of Mozart and loves the sound of Minaj, isn't that an undeniable fact?
Hofstadter argued that consciousness is "a hallucination hallucinating a hallucination." Hawkins suggests consciousness is merely what it feels like to have a neocortex. A buddhist monk might task you to prove your reality is not a dream in the mind of an ant.
As for mathematics, paradox lies at the very heart of mathematics. Russell tried to stomp it out and he couldn't do it. Godel's incompleteness theorem, the set of null sets, Euclidean geometry interchangeable with Riemannian, Zeno, the liar from Crete, etcetera.
Point being that paradox and uncertainty are woven into the very fabric of reality itself. We cannot even logically argue that logic is logical or truth is true, without making self-referential true / logical statements that are against the rules.
And yet, the perspectivist need not give a shit about any of that, because he is able to judge "truths" based on their utility and reliability.
Hume pointed out that it is impossible to know, with certainty, that fire is hot. Somewhere a fire may burn that isn't hot - it may be that we were fooled into coincidental correlation all this time, based on the limited set of fires we have experienced.
And yet, were a perspectivist to adopt as a basic functioning truth heuristic the fact that "fire is hot," this notion would, probabilistically speaking, almost certainly serve him in good stead. Expand that idea to the full set of useful and persistent rules - the apparent truth of gravity, physics, behavioral science, free market economics, etcetera, and you see how one can construct a useful guidebook of belief (and moral code) without necessarily committing to the universal or permanent truth of anything, which, when it comes down to it, becomes an unnecessary and extraneous burden once one recognizes the point of all beliefs are to facilitate useful outcomes and / or uphold desirable aesthetics.
(A personal code of ethics, a moral code one holds to, is a form of aesthetic by the way - and to say as much is not at all to diminish its power. An individual who chooses a code of ethics under their own volition for aesthetic reasons, and then holds fast to it, is arguably more noble and moral than the religious individual who adheres to a code of ethics for hope of eternal reward or fear of eternal punishment.)
As for Mozart versus Nicki Minaj - again, I can't "prove" anything because there is no absolute proof, no higher order benchmark. There are only varying opinions.
With that said, one could make a detailed and credible argument as to why Mozart is better, assuming the listening party agreed to a certain mutually respected set of criteria that both musicians could be judged against: musical harmony, complexity of rhythm, tonal preferences of the human ear, impact on brain waves, and so on.
Basically, there is no higher standard when it comes to subjective opinions - but, if one or more individuals can agree on a set of benchmark criteria, then it becomes possible to judge one song, painting, investment portfolio etc against another by the standards of such criteria.
And last but not least, if someone loves Minaj and hates Mozart, then they are welcome to have her. Just not in my car, or on my stereo system, etcetera, because, with aesthetics as a final arbiter, I can decide someone else's opinion is crap (just as they can decide the same of my opinion).
On the whole, what you have is a consistent system - as consistent as possible in a reality where paradox resides at the heart anyway - that makes logical use of utility and aesthetics, embracing certain "truths" on a usefulness and persistence basis, without resorting to claims on reality that are in fact unsupported (absolute truth, objective standards beyond personal or collective opinion for music, beauty, optimal societal structure etc).
Quote from Martinghoul:
Yes, I agree with the theory in principle, but the practice is very difficult, I find... I imagine that, in the world of trading, it's actually quite hard to obtain all the information above. For example (and this is something I have mentioned before), some of the people who I think are "greats" are hardly ever mentioned, simply because they operate well below the radar. People like Seth Klarman, who you just never hear about. I think he's no less a "great" than the other, more commonly mentioned characters. Same for somebody like Alan Howard, who is so reclusive and secretive that you would struggle to find his picture on the Web.
Seth Klarman is a hero of mine once removed. I am no value investor, but I have taken a lot (and learned a lot) from value investing friends and value investing theory over the years. I have a PDF copy of "Margin of Safety" and absolutely love Klarman's Baupost letters. (Wish they weren't so damn hard to get.) Klarman is a true value investing great -- he towers above Buffett in my book. (Buffett was great once upon a time, but morphed into a government leech / quasi-private equity guy years ago).
Alan Howard of Brevan Howard is another I have great respect for... known for structuring his trades brilliantly for maximum reward to risk... though he hasn't written much to my knowledge (or if he has I haven't gotten my hands on it).
Were I ever to have "fame" of a sort (and I certainly may not), I would hope it is a Klarman / Howard sort of fame... I would actually prefer to be a complete unknown to the masses, and more appreciated in true practitioner circles.
Trading Wisdom 16: The Vital Importance of Risk Control
"...at the end of the day, the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control."
- Paul Tudor Jones
JS Comment:
Would you agree that risk control is 90 percent of the ballgame?
What does this observation say about certain prominent money managers today (who seem to have no risk control at all)?
How would you describe your attitudes and orientations regarding risk - your "risk philosophy" if you will?
Have you ever thought about it?
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"...at the end of the day, the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control."
- Paul Tudor Jones
JS Comment:
Would you agree that risk control is 90 percent of the ballgame?
What does this observation say about certain prominent money managers today (who seem to have no risk control at all)?
How would you describe your attitudes and orientations regarding risk - your "risk philosophy" if you will?
Have you ever thought about it?
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The number itself is perhaps a bit arbitrary, but it conveys the point very well. Trading is less a game of probability than it is one of uncertainty. And risk control is paramount in an environment of uncertainty. So "90%" drives the point home nicely. Theories/hypotheses on where, when and why the markets are going to go are wrong about as often as they are right, if not more so. So the risk control backstop is key. I remember reading somewhere that Soros's son once said his dad was "full of shit" in that he would construct an elaborate theory on where the market was going based on all manner of criteria, and then he'd reverse his position seemingly at the drop of a hat when the market went the other way. I have only respect for Soros, but I raise the point to illustrate my agreement regarding the importance of risk control above all else. So, yes, I am inclined to agree with PTJ.Quote from darkhorse:
...Would you agree that risk control is 90 percent of the ballgame?
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