What Works in Trading & Why: Part I
Part 1: The Big Ideas
I use a trading model that's unbelievably effective and robust. Anyone who disbelieves this can simply follow my trades in real-time using out-of-sample data (which is the only data that really counts) -- and verify for themselves (info provided below).
It's built around some very simple, but very big ideas. Ideas you can probably use to your own benefit as a framework for developing a trading plan. Now, simple does not mean easy to execute. On the contrary, high-probability trades, ideal trade location, in any market is often counter-intuitive and psychologically a difficult place to do business.
Big Idea #1: Clifford Asness is a quant. A 39-year old who, last I checked, was pushing $13.5 billion around in market in '05. His wildly successful hedge fund AQR Capital is built on two insights that seem contradictory : "Cheap assets outperform expensive assets more than they should" and "Momentum portfolios work better than they should."
Now Asness, like most with an edge, tends to be pretty secretive, but I've got a few quant friends in that world and I understand, in general, what he does. He sorts stocks (or whatever assets he's trading) into deciles from cheap to expensive, and he buys when stocks in the cheap decile group trigger a momentum buy; he then shorts roughly an equal amount of stocks in the expensive decile group as they trigger a momentum sells and rides this market neutral portfolio. His personal cut for doing this runs $25-50 million a year.
Big Idea #2: Joseph Hart is an obscure technical trader who wrote a course on technical trading called Trend Dynamics (http://trend-dynamics.com/TD_Products_Self_Guided.htm) which I had the privilege to edit. Someone in Elite forum called it "one of the best courses that nobody knows about". Hart's one of those old school technicians who hand-charted markets before PCs were ubiquitous and whose market insights are credited with helping more than a few turn their trading avocations into trading careers.
One of his insights (and he has many) that I've embraced is what he calls the 7th Law: "That dramatic price movements tend to unfold from price structures that minimize profitable participation." In brief, he focuses on trade location around swing extremes and identifies where longs (or shorts) are likely to get stopped out (their participation minimized) and fades that.
Big Idea #3: Pete Steidlmayer, a legendary independent floor trader since 1963, started teaching his unconventional ideas about reorganizing and reading price data (market profile) in the 80's to standing room only crowds at the CBOT. These weren't the typical crouwd of retires managing IRAs and wannabe daytraders flocking to some trading symposium, but pros already trading on the floor. Personally, I think Steidlmayer may be the premier market thinker of our time, and little understood or appreciated.
Something he said that I certainly appreciate is that: "Under most circumstances markets are either readable or reliable." Here's another seemingly contradictory idea. He is saying that high probability entries (i.e. reliable) are difficult to identify; or to turn it around, entry levels that are easy to identify using conventional tools are probably not reliable and low probability entries.
I've been at this market analysis and trading business for a long time, some 28 years now, and ideas like this coming from guys who really walk the walk, frankly tend to be a little off-the-wall & are often contradictory because -- markets ARE perverse and to really thrive in markets you have to view things in a strange way, there is no edge otherwise.
In Part II, I'll provide a couple examples of how I translate these ideas into trading....
PS: If you want my detailed list of the exact actions taken in stocks (and commodities) and my daily trading plan you can always drop me an email at my blog or send me a PM: Use the "Send me your BUY LIST" button, right-hand column at: http://www.street-noise.net/articles/
Part 1: The Big Ideas
I use a trading model that's unbelievably effective and robust. Anyone who disbelieves this can simply follow my trades in real-time using out-of-sample data (which is the only data that really counts) -- and verify for themselves (info provided below).
It's built around some very simple, but very big ideas. Ideas you can probably use to your own benefit as a framework for developing a trading plan. Now, simple does not mean easy to execute. On the contrary, high-probability trades, ideal trade location, in any market is often counter-intuitive and psychologically a difficult place to do business.
Big Idea #1: Clifford Asness is a quant. A 39-year old who, last I checked, was pushing $13.5 billion around in market in '05. His wildly successful hedge fund AQR Capital is built on two insights that seem contradictory : "Cheap assets outperform expensive assets more than they should" and "Momentum portfolios work better than they should."
Now Asness, like most with an edge, tends to be pretty secretive, but I've got a few quant friends in that world and I understand, in general, what he does. He sorts stocks (or whatever assets he's trading) into deciles from cheap to expensive, and he buys when stocks in the cheap decile group trigger a momentum buy; he then shorts roughly an equal amount of stocks in the expensive decile group as they trigger a momentum sells and rides this market neutral portfolio. His personal cut for doing this runs $25-50 million a year.
Big Idea #2: Joseph Hart is an obscure technical trader who wrote a course on technical trading called Trend Dynamics (http://trend-dynamics.com/TD_Products_Self_Guided.htm) which I had the privilege to edit. Someone in Elite forum called it "one of the best courses that nobody knows about". Hart's one of those old school technicians who hand-charted markets before PCs were ubiquitous and whose market insights are credited with helping more than a few turn their trading avocations into trading careers.
One of his insights (and he has many) that I've embraced is what he calls the 7th Law: "That dramatic price movements tend to unfold from price structures that minimize profitable participation." In brief, he focuses on trade location around swing extremes and identifies where longs (or shorts) are likely to get stopped out (their participation minimized) and fades that.
Big Idea #3: Pete Steidlmayer, a legendary independent floor trader since 1963, started teaching his unconventional ideas about reorganizing and reading price data (market profile) in the 80's to standing room only crowds at the CBOT. These weren't the typical crouwd of retires managing IRAs and wannabe daytraders flocking to some trading symposium, but pros already trading on the floor. Personally, I think Steidlmayer may be the premier market thinker of our time, and little understood or appreciated.
Something he said that I certainly appreciate is that: "Under most circumstances markets are either readable or reliable." Here's another seemingly contradictory idea. He is saying that high probability entries (i.e. reliable) are difficult to identify; or to turn it around, entry levels that are easy to identify using conventional tools are probably not reliable and low probability entries.
I've been at this market analysis and trading business for a long time, some 28 years now, and ideas like this coming from guys who really walk the walk, frankly tend to be a little off-the-wall & are often contradictory because -- markets ARE perverse and to really thrive in markets you have to view things in a strange way, there is no edge otherwise.
In Part II, I'll provide a couple examples of how I translate these ideas into trading....
PS: If you want my detailed list of the exact actions taken in stocks (and commodities) and my daily trading plan you can always drop me an email at my blog or send me a PM: Use the "Send me your BUY LIST" button, right-hand column at: http://www.street-noise.net/articles/
