OK, who here doesn\'t understand the simple concept
 

Okay, who here doesn't understand the simple concept that, if it weren't for people betting stocks would continue in the direction they're going, stock prices would generally tend to continue in the direction they're going?


In other words, the best indication of "true" demand for a stock is an extrapolation of the immediate trend in demand. Also, the fact that prices are fairly random proves the existence of "investors" who make money without reading a single research report.


So here are two charts:


http://bigcharts.marketwatch.com/qui...&freq=1&time=9


http://bigcharts.marketwatch.com/qui...&freq=1&time=9


Lookign at these two-year daily charts of GE and LAB, which one looks over-fished - meaning it tends to reverse - and which one looks trendy - meaning it tends to continue in whatever direction it is going?


Why might a chart of a less liquid instrument look trendier? How badly would a trend trader have gotten chopped up in GE in March of 2000? I only bring this up because it seems people are SO inclined to look just about anywhere - and believe just about any theory - but at the actual demand for a stock!


leroy

Re: leroy you did it again
 

you think way too much there leroy. the price of a stock over a period of time is solely determined by its earnings potential plus a little for breakup value of the company. forget about market demand and all the other theory from the books. that may tend to push a price for a while but not for too long. except for the last too long bull market where fools bought on every downclick.

if you are going to trade in and out you are correct that things are not always in wack but for just about all the world its buy and hold.

Re: leroy you did it again
 

In the very short term, of course demand for a an individual stock drives up the price, like during the IPO madness of '98-'99 or during an hour's trading. But demand for stocks is fickle. It went away in '73 when companies were still making money and it came roaring back in '81 when risk-free t-bonds were yielding 13%. To profit abnormally, you'd have to figure out what the demand for a stock will be before anyone else is able to, suggesting clairvoyance. And you'd have to bet big to avoid getting chewed up by expenses, thus taking on a lot more risk.


By all means, if you know more about how a company's stock behaves than its millions of other investors and you can afford the risk and expense of trading, momentum investing could work for you. I'm not nearly that smart. Good luck, Russ.

GOOD GRIEF!
 

From books, Ray?? For crying out loud! I am only talking about the strategy used by all the greatest speculators in history, as well as the predominant one used on every trading desk or floor in the country! However, I have NEVER seen it mentioned in ANY book.


Smart, Russ? That is just my point! The people, over and over, whom I see making money doing this, are dumb as boards! You want to show me smart, tell me your claptrap theory about why you are so sure the stocks S&P puts in their index will rise over the next 35 years?


And trend following works in ALL timeframes! From Keane to Livermore to Dennis to Borsellino to Saidenberg, From Houtkin to Tognetti, from Cambell to Dunn! NOW you know why I posed the question with such an attitude! Because you people are thick, and are immune to the truth!?


You go to the poker forums, and you have a whole bucnh of people posting who are actually making money playing poker day-in and day-out. They don't say "Well, the only way to make money gambling is to buy a casino." That's actually what I get when I talk about poker in the trading forums!


I've talked to traders everywhere. You see Art Cashin on the NYSE, or Lewis Borsellino on the CME, or Chris Bankovitch on the PSE options floor, on CNBC every week, I've met all those guys, I've worked around them, even for them, I've met and talked to traders from every end of every product, you go to Stark's CTA database, I exchange emails with half those guys on a regular basis, I've even worked for some of them, too!


I'm just telling you what works, and everything else is camouflage! Because if this is a forum about your company automatically depositng X% of your paycheck into your 401k, and it being forwarded to Fidelity to compound without you having to worry about, we won't have a whole lot to talk about.


leroy

Re: GOOD GRIEF!
 

Actually, when it comes to forms of gambling other than playing poker, the only sure way to win is to own the casino...


You are correct in your assessment of my personality and investing style. That psychic ability, plus a superior momentum trading strategy, are sure to earn you fame, fortune and happiness, and I am glad that you are sharing these pearls with the rest of us. Peace out.

Re: GOOD GRIEF!
 

If you check the archives you can find some posts I wrote about why trend following works. By the way, what do you know about Dunn? ... Just curious.

about dunn
 

Whoops, I was thinking of Eckhardt!


So far as Dunn, he got killed in the bond last month, his system signals are too coarse, I think he has accepted too much money into his program recently, and I have reservations about his portfolio-diversification strategy. I think... aaaah, not today:) I'd really be pushing it to get any more technical than that anyway!


He is a brilliant mathematician, a great all-around guy and manager, and a tireless innovator, but I don't think he is on the cutting edge so far as trading philosophy. Put simply, I don't like his signals, they're too specific, too aggressive, and too risky, and I guess I'll leave it at that! But that's nothing new anyway, that's what everybody says.


My most important opinion is that I don't think the markets will treat his systems favorably in the near future, too much interleave! Bad days for surfing ahead, and he's not on the lookout!


In all honesty, I don't really know much about Dunn. But call Florida, they're pretty open and friendly! They'll probably tell you their plan, as I'm sure they're cooking up a good one, and will want folks to know that!


What do you know about Dunn? Aparently more than you do about those other names I dropped, and probably more than me! Funny, you picked up on the one unintentional name I named by accident.


**************************************


Is my brain broken? When I love people, their brains occupy a different spot in my brain! As I meant to say Eckhardt in the original post, I decided not to delete the following comments which I wrote first:)


I know that Eckhardt uses 17 variations of three systems, adapted to different instruments and to neutral variaton of entry points, to scale in and minimize impact.


I know that, for many years, he had been worried about the proliferation of trend traders creating false breakouts, or cross triggering of systems. I know that after some tough months in the mid 90's, he introduced a chop filter to try to avoid this and only capture robust trends.


I know that as a result of this filter, his systems have been sitting largley idle through the recent tough periods for Turtles, but that many of his investors are disappointed with his relative performance in some of the key moves of the last 18 months. I know some other stuff, but this is all just general stuff off the top of my head.


Besides, I don't think Eckhardt would appreciate my speaking on his behalf even to the extent I just have!


Eckhardt, in my opinion, is at the top of the heap so far as responsible management of client accounts, acceptance of new accounts, professional integrity, trading theory, you name it. He is...


What, specifically, do you want to know?


Leroy

Re: GOOD GRIEF!
 

but we are not on the floor. we are stuck watching the boob tube or our computer screens. we get the worst of the price on trades and are always seconds too late in the moves. so, perry what do we do then?

Re: about dunn
 

From what I've seen of trend followers, it sure seems like they have a tendency to blow up when they get big. I came across a report about Dunn earlier this year and was wondering if you might have an update. Actually, I only recognized two other names in your list: Livermore (who is long gone), and Dennis. Can you provide us with more info about the latter than what's available in Market Wizards?

I don\'t know too much about Richard
 

As you know, Richard Dennis started a fund a few years back, 1 or 2 hundred million, ran good for a year or two, lost some money the next couple quarters, and shut down. I don't remember the numbers exactly.


His stated philosophy was approximately to "enter trends when volatility is low, and exit once it has increased." That can be implemented a number of ways, but basically think of exiting a big trend when the daily range gets equally big relative to the monthly range or something.


The ulterior motive is to attempt to enter inside of other Turtles and John Henry-types, and then unload into them, or into big random chop after the disclocation. Whereas Eckhardt, I imagine, is today trying to go outside or around the other Turtles - their entry signals, for the most part, having smoothed out and become more delicate and gradual around the micro-chop.


I suspect that Richard's pleasure comes from figuring out how to beat the market, rather than from actually beating it. I don't think money makes him happy, except to the extent he can spend it on women's shelters or political causes -which never pan out - or something.


He likes working with people, and studying them, and the people who have known him seem to really revere him as some great and generous religious figure - which he sort of is! So far as his trading ideas, though, I suspect they may have stagnated. Plus, I suspect he needs to react to the market, and learn on the fly, but nobody will give him money unless all the algorithms are set in advance. It's no fun.


I am honestly curious as to how he really makes a living today, how much he is trading his own account, how much money he has, and so on. After all, I have quit trading "for good" from time to time myself, and there just isn't a whole lot else out there!


Anyway, Dunn just had his worst month in many years. I am under the impression - and this is just hearsay - that his fast-exit system had already gotten flat in the interest-rate products, got long again when 30-years were declared dead, then whipsawed in the washout which I talked about selling in an earlier post.


I think Dunn will fix it or add something, like he added TOPS a few years back, but I don't know if it will be enough. On the other hand, you also don't want to put your money with an uinknown, un-evolved quantity, and Dunn doesn't seem like one to move too fast, assuming he even moves at all.


When you bet with Dunn, I still think you're betting on major moves, which you aren't going to get. Dunn also seems to implicitly assume others won't get killed in chop and he alongside, and that all moves are a trend. Whereas Eckhardt filters and never enters, Dunn never exits, if I understand it right.


Are you thinking of rating them, or putting together some kind of, like, Morningstar report on CTA's? If so, you should give me an expense account and a letterhead, and I'll go out and pick every brain on the list, from the bottom to the top. I'll explain to you whom you can expect to make money, who is doomed, who is a gamble and, more important, why.


Then you can form your own opinion! But they might not talk to you like they'll talk to me, because you're not a chart-junky. If I had to bet today, I'd go with Eckhardt, Shanks, Campbell, Crabel, Neundlinger... actually, there are more, but I wouldn't bet at all, not on any of them, until I'd done some more research!


leory

Re: GOOD GRIEF!
 

Actually, with today's bandwidth, I don't think you would have any trouble executing, out of your home, the same scalping strategies the sharks use at, like,


http://www.schonfeldsecurities.com/


or


http://www.icapdirect.com/index2.htm


for instance.


There is always a new fast/intraday game being found and played somewhere, and the best way to discover it is to just move around and tag along with whomever is hot in a given year. The better talent - which requires more smarts than just being a copycat - is to understand why the different games work when they do, so as not to get left high and dry when they stop working. A lot of used Ferrari's get passed around.


Anticipating your response, I intentionally weighted my list of heroes to off-floor characters. I wouldn't be surprised if, among the S&P-futures traders I am familiar with, the bigger score isn't being made off-floor. The CME pit is mostly empty half the time, and it's local-on-local - with no fish - the rest of the time.


In fact, other than maybe Mike Milken or Tom Baldwin, I have trouble thinking of any of these traders whom you "can't possibly beat" who actually made huge fortunes. And I promise you, you go to the NYSE floor, or UBS in Stamford, you wil find people who would have trouble beating 2-4, they have dropped to the level of their advantage. It's just mass production.


They just vegetate around their advantage like moss, and that moss is receding as the advantage dries up. It's just a million fractions of pennies anyway, being processed by half-conscious factory workers. The ones who get a clue strike out to manage money, or to build a new software tool for the factory workers, or something.


Really, your only option is to learn the off-floor game from someone who has already taken the losses. But, unfortunately, there aren't any solid books on the underlying theory, nothing like TTOP. And it's a little late in the game to become a Turtle, though that is the longest-term, easiest in-your-spare-time way to get started.


But the long-term futures game is still the big game. Understand that NOBODY has an advantage in long-term futures - because nobody has any local information from, like Japan, and nobody is using any economic model that is worth diddly. Soros' "reflexivity" model, for example, was actually pretty half-baked.


The reason Soros had an edge, in my opinion, was not only because he had put in endless late-night reps as a grunt currency arb, but because he truly LOVED the geopolitical drama of Europe. There aren't too many people who know the first thing about economics who give a hang about Europe. But that was also Soros' undoing, because he made like a $2 billion philanthropic contribution to Russia at his clients' expense!


I promise you, Ray, Russ, and everyone else:


NOBODY HAS AN EDGE ON YOU IN PREDICTING WHERE THE YEN WILL BE NEXT YEAR. It's wide open! And the best your competition can do is to buy when it starts going up, and sell when it starts going down. If you can take it an inch above that - nothing like 40-80 hi-lo mind you - you win.


Besides, you know why most people who lose at poker lose. It's not because they're not smart enough, or because there's not enough information at the table, or because the odds are stacked against them from square one. It's because they're too lazy to learn, and too emotional to execute it even after they have learned. They're safer punching a clock than counting on themsleves to not call 75o.


The off-floor game is wide open to people with discipline, people who can function when their whole day isn't mapped out safely in advance. Most people just don't like walking minefields, it makes them miserable, when the mines are their own errors.


perry

two ways to achieve game selection
 

The first way to achieve game selection in the markets is to see how much other people are making, and then copy them. It's like the 1.5 BB/hr in hold'em, it is extremely helpful to know what you are shooting for, and if there even is anything to shoot for.


But the problem is that you're always late to the game. And, since bad periods are common, you can't know the game has gone bad until you've had a number of them in a row.


The second method of game selection - and where I hope to have some luck as a pioneer - is by watching the game, and being able to tell by eye how much money is there, and how to go after it. People have been using computers to do this but, since everyone has a computer, the stuff you can sniff out with a computer tends to get eaten up very quickly.


It's not unlike poker, where, once you have learned everything else, you realize it comes down to game selection. But you had to struggle against unbeatable games, and sweat all the details, to get there.


You know what to look for that will enable you to win, and how to adjust to what you see. You finally rise above just playing tight because you are used to loose games, or just playing loose because that is your disposition, and instead you learn how to adjust.


leroy

why trend followers blow up when they get big
 

The reason trend followers blow up when they get big is because CTA investors are so afraid of blowups.


So, when they invest, the primary thing they're looking for is, like, a whole decade without a big drawdown. They think that, well, if it didn't blow out last year, it is has a better chance of probably not blowing out this year. But it's precisely because it has had such a good stretch that it has become precarious.


Now, every style can make money. And when a particular style is going to blow up is anybody's guess. But when a particular program goes for a protracted period without a big hit, it is just luck.


And the result is these huge, unbalanced concentrations of money in styles which, for no particular reason, have gotten lucky.


And it's just a simple product of the longer a run a particular thing has had, and therefore the more people you have chasing after it, the worse the blowup is going to be when it does come.


It's like, any old forest can support deer. But if one partuclar forest happens to be extra bountiful for a few seasons, so that every deer on Earth walks away from a perfectly habitable forest to move there, of course the first drought or whatever and ther're going to be carcasses everywhere.


If only managers could tell clients where to put their money, and had the heart, they'd clue them in that you have to be contrarian. Good is bad. You want to live in a forest where the weak dear are constantly being shaken out, never a paradise.


Paradises are too hard to conceal. Drawdowns in a track record are good.


leroy

Contrarian trend following?
 

Your explanation of why big trend followers blow up is more crucial than the one I posted a while ago. By itself, my explanation (the larger your position, the more trouble you have exiting) might only result in declining performance as the trend follower acquires more assets under management. But put them together and that explains why the most successful trend followers blow up the worst.


Now my question is: how can you be a contrarian while following trends?

main thing is knowing what NOT to learn
 

In essence, the single manager's strategy appears unchanged - both to him and to the client.


But the strategies of all the individual clients have changed, when they have allocated their money to him.


It's basically a misapplication of back-testing involving game theory. They think they are repeating, when in reality a great deal of learning on the fly and adaptation is taking place! They ARE doing something different.


Contrarian is figuring out what people have learned, and doing the opposite.


It's not because they are big that blows them out, being big is just a symptom of fluid discovery and concentration. It's because people have happened upon a way to pick what strategy other people are using.


It is worth noting that, if you bought at-the-market every day at 1:00, and sold at-the-market every day at 2:00 - and did this as reliably as the sun will shine every day for years and years - your strategy would be nearly immune to losses. Market particpants would at first be surprised, then compete to fade your orders non-redundantly, and eventually evolve to absorb and offset them perfectly.


So there is hardly anything "new" that works, whereas older things are safe by nature. If I reallocate some of my money from A to B, B has to allocate it to doing what A was doing anyway, or the whole dance falls out of whack. It's all evolved and interlocked.


elroy

low drawdown strategies and backtesting...
 

If there is a strategy, or a philosophy, that has had no drawdowns over the last 10 years, it is almost impossible to run a computer across the chart and not catch some piece of it. It's like a pyramid with a thousand tips, no matter where you start digging, eventually you'll uncover the whole thing.


Whereas if a strategy has even one large drawdown, that effectively pollutes the entire neighboring region. You uncover any sub-piece that includes that section, it will be magnified by the probing, hit-or-miss nature of experimentation. As a result, you'll start working in a different direction.


What this means is that the recent whipsaw in the bond will send charthounds off on the wrong scent for years to come - until it stops happening.


leroy