Rhody Trader

Vincent Fernando at The Business Insider did a post comparing the current economic situation to that of the early 1980s. The upshot of the post is that when one looks at inflation, unemployment, and interest rates as they are now and as they were then things don’t look quite so bad right now.

Actually, from my perspective things now remind me more of the early 90s. That was the time of the RTC after all those thrifts were shut down across the country. In Rhode Island the governor shut down all the credit unions on New Years day 1990, which really did a number on the state economy for a couple of years. I was only a kid in the early 1980s, but I do remember it wasn’t a great time. The cities were in rough shape. I think anyone who was in NYC at the time would agree.

Seperate, former colleague Jamie Coleman at ForexLive posted  a fun look at the yen situation. The Japanese have always stood ready and willing to intervene in the currency markets, either directly or verbally. That, at times, creates some very interesting press and market action – as it did last night.

I’ve been involved in what you could rightly call a long-running project. It involves a neural net based trading system which a professor friend of mine has been very slowly bringing up to being something useful. Needless to say, if I were running the show things would have moved much more quickly. It being under the control of an academic, however, snail’s pace doesn’t even do the progress justice.

Anyway, he finally got something producing visible trading indications a bit over a year ago. The results were fantastic. It focused on stocks and was generating monthly portfolio gains in the 10% area and better. That didn’t account for what would be meaningful transaction fees given the trade frequency, but even factoring that in the gains were quite exciting.

Now, my big issue with all this was that we needed to produce a much longer and deeper back test to see how the system would do in alternate volatility environments. Meanwhile, the professor was fixated on reducing the loss %, which ran about 20%. I keep trying to tell him that in trading 80% is a good win rate, especially if your winners generally exceed your losers. He’s kept tweaking, though, eventually to the point where he broke something – not surprisingly, as far as I’m concerned.

Aside from the researcher’s need to keep improving things - which I understand – he’s got a metric that he wants to meet or exceed. To provide a quote:

Back to AT, the 5-6 papers / symposiums we attended were reporting error rates under 5%.  I can believe that because their models were superior to what we have created.  No surprise there becasue we just didn’t get back to the model building stage.  What they lack (and what we have to my surprise) is extreme creativity on how we (and other American firms) have built a self-managed AT system – in our case using basic micro parts.

AT means “auto trader”, in case you’re wondering. When he says “they” he’s referring mainly to European researchers, who apparently have an edge on us Yanks in the more quantitative aspects of finance. Error rates means incorrect directional calls – losing trades. What I don’t know is how the winning trades compare to the losing ones.

I keep trying to explain that it’s a question of expectancy and frequency (with transaction costs accounte for), not win %, that determines trading success. The effort to increase win % almost invariably reduces the ratio of size of winning trades to losing ones. At some point it usually means tipping over the edge into declining performance.

Hopefully one day we’ll actually have something we can put into productive use. In the meantime he wants to help a student do some parallel work on the forex side.

At least I’m not dealing with one of the professors who believes his knowledge of financial theory guarantees him of trading success. Those kind of arrogant academics often fine themselves getting bitch slapped by the markets.

There’s a bond fund manager on CNBC now (as I write this) who supposedly has a 24 year record of no losses and a 60% return over that period, if I heard correctly. This is supposed to be impressive? Sue certainly made out to sound that way.

The compounded annualized rate of return that 60% implies over two dozen years is under 2%. That’s not beating inflation by any stretch of the imagination.

And who cares if a bond fund doesn’t take any losses? That’s easy. Just hold to maturity. Ta-da!

I suppose I can’t really complain too much today. It’s been a grind, to be sure. I had to write earnings previews on for stocks and will be listening in on a conference call later this afternoon. You know how much that thrills me. Here’s where the nice part comes in, though. This morning I suggested to readers of the product I work on that NILE was a good short play. At this writing it’s down 8%. I also indicated that in the mid-950s the S&P was a really nice risk/reward long play. It’s been up 25 points from there.

Call it a silver lining on an otherwise drudge work filled day.

I’ve recently been in an exchange on Trade2Win with a member looking for a copy of a video known as Trader. It’s a documentary of the now legendary Paul Tudor Jones. The cover describes it as:

An inside look at a real flesh and blood Wall Street Trader. No fictional character will ever equal him.

Basically, Trader is a 60 minute look into the life and trading of Jones, who is one of the elite money managers of our time. I believe it was originally a PBS showing. It shows him trading and talking about about the markets, and it shows some of his life outside trading.

The filming for Trader took place in late 1986 and early 1987 and in the footage Jones talks about his expecation for a major stock market decline to come. Basically, he’s predicting on film the Crash of 1987. In fact, Jones is featured in Market Wizards, the interview for which was done a little while after the Crash, providing an interesting bookend with the video.

Here’s the rub, though. Finding a copy of Trader is nearly impossible. I’ve heard talk before that Jones has gone around buying up all the copies he could get his hands on, presumably because he’s now a respected fund manager and philanthropist and doesn’t want to be thought of as the brash character which comes across in the documentary. I don’t know if there’s any real truth to that, but a New York Times article from last fall does say that he request of the producers sometime back in the 90s that no more copies be made available and that they’d seen prices of $295 and up online for copies on offer.

And yes, I do have a copy – one I’ve had for many years.

A former colleague of mine is a big time trader. Actually, I should restate that a bit. He was co-founder back in the early 1980s of the company I for which I work.  He’s a fellow Rhode Islander (yeah, another Rhody Trader ) and someone I consider a mentor. Back when I was new to the company he and I often rode the train home together. Needless to say, being able to listen to him share from his wealth of experience (and bad jokes!) was a huge benefit to me as a young professional.

When I say he trades big, I mean BIG. You won’t find many individual traders operating at his level. He’s active in all kinds of markets, with different objectives, and in size. For example, the last time I visited with him in his office (he left the company I work for and started up a new venture several years ago) he told me a story about making $1,000,000 in profits on one stock trade in the past.

The big trade he’s in now is Cotton futures. He’s been telling me about it for a few months and has been in longer than that. I think he said he bought the Dec. contract at 58. It could be that I’m off in my recollection and that it was a bit higher, but regardless, he’s made great profits givent Cotton’s run up of late.

Here’s what makes a guy like him really special. He thinks of things in trading that a great many of us wouldn’t. In this case, when Cotton reached it’s recent peak he decided to take some money off the table (he sees it eventually going much higher still). Rather than just selling off some of his position, though, he actually sold calls because the implieds were upwards of 70% on the options. In doing so he was able to effectively sell at a higher point than he could have in the contract itself.

If I remember, in a future post I share what he did in Gold to dramatically increase his profits.