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Randomly Finding your Religion

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Dear Mike,

 

I am trying to make it into the AxiSelect incubation program. You can follow my journey in real time here:

 

Mike’s Freestyle Account:

Performance from Inception    +13.95%,

Performance for the week        – 3.89%

PsyQuation Score                    50

Sharpe Ratio                            5.15

Expectancy (per trade)            0.05%

 

It was a difficult week for me, I have also made some modifications to my trading approach. I have been running a fairly tight stop loss until now of around 0.4% per trade. I am going to try and increase my stop loss range to roughly 1%, this will hopefully give me more space to catch bigger moves.

 

My targeted R multiple for trade setups is around 3. That means I want to make 3 times the amount I am risking. You can see in this simple table that if I am risking 1% to make 3% and my target is to make 3% per month, all I need is a win rate of 26%.

 

If there is one lesson I can give over from this is that you need to view trading as a probability game. In my strategy I only need to be correct 26% of the time. Make peace with the fact that you will be wrong most of the time. Research suggests most people cannot handle being wrong most of the time, it leads to despair, insecurity, abandonment, anger, doubt and every other negative emotion. Surrender the ego and trust the probability numbers.

 

 

PsyQuation Community Stats 

 

We look at the number of accounts that have a monthly return of more than negative 50%. You can see that Feb, especially March, April have a relatively higher number of accounts dropping big time in a month.

 

 

Book Reviews

 

Over the last couple of weeks I have been doing a lot of reading. I have read 4 books that I would like to review:

 

Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading.

I think Peter is a living legend and one I have had the privilege of meeting face to face. There are not many discretionary traders who have a track record as great as his and his spans 40 years, now that is impressive! I enjoyed the book, it is full of wisdom and it is very businesslike. Don’t read it if you want fluffy stories. It shares how a pro does his job and is constantly looking for ways to improve.

 

The Rule: How I Beat the Odds in the Markets and in Life

 

I loved this book from beginning to end. I listened to a podcast with this guy on Chat with Traders about 4 months ago and loved it. He is your typical New Yorker with colourful language.  He featured in the original Market Wizards book series. This book is full of wisdom and stories. It is about Larry Hite, a dyslexic who is blind in one eye and half blind in the other. You will walk away feeling so empowered with the wisdom shared, but Larry doesn’t give you any get rich tips. Its all about risk management for him and the fact that he screwed up almost everything he touched as a kid so he became used to being wrong. This conditioned him to accepting that most of the time his trades will be losers. See above my reference to 3R trading setups.

 

Trend Following: How to Make a Fortune in Bull, Bear and Black Swan Markets

 

I don’t know why I kept avoiding this book. Michael Covel is one of the legends of trading books. His book the Complete Turtle Trader was an instant best seller as was his Trend Following book. He has recorded more than 900 podcasts on trading, including speaking to Nobel Prize winners and many of the most successful traders in the industry. He wrote the forward to Larry Hites, The Rule which got me to give it a read. Wow this book is amazing it covers such enormous breadth, you only have to read the Amazon reviews to get a sense of how great this book is. The way Michael presents the book is like someone who has found religion and wants many others to join. I cannot recommend this book enough for all who are passionate about trading. It will teach you about everything you need to know including stuff on behavioural finance, etc….

 

Trading Evolved: Anyone can build killer trading strategies in Python by Andreas Clenow.

 

Andreas has written a great book. He has an incredible gift for taking complex subjects and making them simple to the reader. In this book he takes you into the world of coding in Python. My programming skills are extremely poor but Python is certainly my language of choice. For me this book is more of a nice read, just because, but if you are interested in the systematic trading world and want to challenge yourself to grow in programming skills then you have to read this book. Do not think that once you have read it you will be proficient at coding. Coding requires hours and hours of battling through the code.

 

Randomness

 

The subject of randomness is huge and anyone who has a definite view on this subject is probably not understanding it properly.

 

Market randomness has been the subject of a number of conversations I have had with people over the last week. Yesterday I decided to listen to one of Michael Covel’s podcasts (Trend Following author from above). The one I randomly chose ? was with MIT Professor of Finance, Andrew Lo.

 

There is an important backstory for me with Andrew Lo. It goes back close to 20yrs. I had chosen to become a professional trader and abandon a corporate career. I was becoming established with clients, charging the standard 2 & 20% fees. Then I read a book called A Random Walk Down Wall Street by Professor Burton Malkiel. I loved the book, he put forward the thesis of the efficient market hypothesis (EMH) in easy to read prose with real life examples. However, it was very confronting. It was like suddenly being told that God doesn’t exist. Here I was charging clients fees for my ability to outperform the markets and this best seller of a book was telling me it was all random and that I was a phony. I recall going to a lecture by Professor Malkiel when he came to town and getting a signed book. I love meeting the authors of books that have an impact on me. While the book had a profound affect on me, I was still not completely sold. Then came out a book called A Non Random Walk Down Wall Street by Professor Andrew Lo which gave me renewed hope.

 

The podcast I listened to yesterday with Michael Covel and Andrew Lo starts with Lo’s discovery that the markets are not entirely random. He was schooled in the religion of market efficiency and his discovery was sacrilege at the time. I recall buying his book the moment I heard about it to help put my conscience at ease. I have his more recent book called Adaptive Markets: Financial Evolution at the Speed of Thought which I am sure I will discuss at some point in the future.

 

The point I am trying to make is that  wrestling with the subject of Randomness in the markets is like wrestling with the subject of God and Religion. Every trader needs to go through this rite of passage and if you wish to make a success of your career in the markets and life you need to find your religion.

 

We are in the Grip of Something Do Machines Have Feelings