What is the difference between the professional traders and all the rest?

What is the difference between the professional traders and all the rest?

What really works folks?

I think the real question is what really works now?


1. The difference bewteen the professional traders and all the others

The difference between the professional traders and all the rest is that the professional traders are trading systems that are working now. There is not a compromise, either you are trading actually a winning system or not.

My mentor told me once that what I need is to make a system that is working now. When the system works now I will put a capital on it, when the equity lines develops I would use the money earned by the system as an insurance.

Do not get fooled the barrier between the professional traders and all the rest is very high.

So for the professional trader its main concern is how to manage the risk from already profitable system. That is because every system fails sooner or later, every system has its systemic risk.

For the Euro Swissy system we had even a life example for that. The question was when and how to protect the capital generated by the already succesful system. The system had generated 100 % gain on couple of days and the system had a drow down. We wanted to analyse why that happened and at what level to stop the system. How to manage the system risks.

I really appreciate the book Fooled by randomness by Nassim Taleb. However by randomness he does not mean purely stochastic processes (as the markets are obviously not a purely stochastic process). By randomness he means our inability to have full information on the system at cause.

Imagine the example.

A pregnant woman. For you it is 50/ 50 boy or a girl. For its physicial ot is 80% sure that is a boy because he did a echograph scan after 13 weeks. However if you do an ultrasound scan you can know the gender 46 % of the cases at 12 weeks.

This system is fully deterministic but for you as you do not know it is random.

There are systemic risks you just cannot avoid.

I really like the example with the turkey from the book The Black Swan. The problem with the Big institutional traders is mainly how they manage their risks resulting from their profitable systems. And do they create systemic risk for all the society.



2. The 99 % majority

All the rest 99 % (not even 95 % LOL) are (we are :) ) not knowing what they are actually trading, how their system perform in the past. A typical approach is to read a book and to trade according to the book.

Let say it straight. 99 % do not even have a trading system (by system I understand trading procedures as a whole) that is working now.

The 99 % majority do not have even a system that is working now.

99 % have no idea what a risk management is. There are number of ways to be a looser. It is easy it is natural. LOL. At least it comes easy to me.

And to loose accordingly.

And that is completely counter - intuitive. When I first started several years ago, I had an idea that this is like any other work, I would spend hours reading the basics I will train, and I will get from it a steady income.

Nope. It does not work like this. I did not know that most of the books written on the subject are not helping a lot. They give the ABC of the game but they just make you a part of the crowd.

Most of the writings on technical analysis are written actually by people who actually do not trade but are paid for writing articles.

However as Curtis Faith says in the video in this section is that now it is easier to learn how to do it but it is much difficult than ever to do it when you know how to do it.

Just the markets now are not what they were before. Look at the Euro. Now it is a completely different market than it was 3 years ago. A completely different market, period. And the indexes, they are a completely different market now. Actually is is really hard to achieve a diversification.

Before the game was how to achieve more alpha now the question is if still the buy and hold strategy can actually work?

Source from 

Ehlers Cycle Strategy

This week - end I tested one particular strategy for cycle trading from Ehlers.

The strategy is from the Book: MESA and Trading market Cycles. from Ehlers on page 39.

"The action of the half cycle moving average and full cycle moving average suggest a trading system. You would sell the the half cycle moving average crosses the full civle moving average from bottom to top, because this is where the sine wave has its peak value."

You would buy when the half cicle moving average crosses the full cycle moving average from top to bottom because this is where the sine wave has its lowest value.

Note that his trading rules are exactly the opposite of the rules for short and long moving averages in trend following systems.

As the half cycle moving average lags the sine wave exactly by 90 degress.

The fulla cycle moving average in theory should be at the zero point, regardless the phase angle position of the window: there are as many as positive than negative points.

as you can imagine I wanted to try to test this strategy by csusotmizing an EA. The results are.

Unfortunatey a disaster.

OK. When I try to test below 4 h, the results are consistent loosers. Really consistent.

On 4 h time frame sometimes it catches some cycles. On 1 day time frame it also catches some cycles.

However this worked only recently when tested on longer periods of several years, loosers again.

The expert EA is here.

Basic Ehlers Cycle Strategy

This is the expert I used to test the basic Ehlers basic Cycle Strategy. More details about this EA you can find here.

Installation:

You need to install the Cycle period indicator unless you already have it in your indicators folder.


Critical appreciation:

Unfortunately it is not for the category what is working now. I made this custom mod of the Universal Moving average EA specially to test the trading strategy of Ehlers from the book. MESA and Trading market Cycles. by Ehlers p. 39.

You know when you read books you have always to check the ideas against the reality. And the reality breaks the most idealistic and beautiful mathematical representations.

So globally it is not working.

On the other hand this has to work only if the market is in cycle mode, and we cannot blame Ehlers that the market is not in cycle mode :). And the poor results can be explained by the fact that the market was in trend mode.

So the question is if it is working well when the market is in cycle mode.

On 4 h and the daily time frame it was able to trade very well some recent cycles.
Look at the screen shot with the test on the daily period. No optimization here. It fails when a trend develops and works nicely on cycles detecting well the reversal points. I think that after all it may be useful.

What impact would have the Tobin tax in Europe?

This is of course a highly controversial paper. Some big guys are scary that they would use their edge.

Whatever they will tell you SPEED is an edge.

And of course many forget what the market is. The market is its true role is to create information by balancing the supply and the demand.

The market is not the cow of the HFT and it has never been intended to be so. The market can exist only if all the market participants have the equality of chances.

Now thanks to the HFT guys and their algos the market is giving fake signals to the economy. And that is wrong.

The original idea of the speculators is to favor and enhance the signals that the market is giving to the economy.

Please look at this analogy.

Imagine Christopher Colombus in his first trip to America.

He sees that there is not food left during his trip in the Atlantic. What he would do he would reduce the rations of his crew and by this way he would save some food.

The speculators are doing the same. When they see that an item is becoming rare, they buy it, when they buy it they make its price to increase. When the price is increasing they send an information to everybody to start to save and use not so much from this item.

That is what speculation is, and that is why HFT is not usefull because it creates structural risks that creates very high possibility of creating wrong information by the markets.

The HFT guys say that they are adding liquidity and they are the lubricant of the markets. This is a complete bullshit.

Trade Stocks and Commodities with the Insiders: Secrets of the COT Report by Larry Williams

I recommend this book. This is quite a different book about trading. It is original because its author explains how the COT report may be useful in your trading. For me the COT report is necessary in order to have a long term on the market. That is why I decided to write this brief review.

The main idea for me is that the market as the Forex market is a zero sum game, and we have to be very carefull and to monitor what the big guys are doing and what is their open interest.

My idea is that for short term speculation matters the information by Oanda. And as we know 99 % of the volume in the Forex market is by its nature. However it would explain theoretically only the short term volatility and can be used for short term volatility patterns. I try to decipher several patterns in the group the Oanda oracle but still it is an open project and everyone is invited to participate.

However we may look for a longer outlook in the market. And this outlook can be achieved thanks to the COT report.

The idea is that the Big Guys the large speculators cannot hide their positions because they are obligend by the law to disclose them in the COT report. And we could use that information.

In theory the ALrge speculators, or the so called smart money thay have a clearer picture on the market than all the others. There is some kind of insider information that is communicated only among them in closed circels and of course we are not allowed in that information flow.

What really matters is not the fundamental outlook but how this fundamental information is analysysed and processed by the inders Fundamental Research departments, and most of all what decisions the insiders will take based on that information. As you can guess there may be a gap between the fundamental information and its interpreations.

The analysis of the COT charts allow to see the decisions that are making the large speculators and in fact that is really what matters. By seeing what they decide you can evaluate with some degree of probability from all the fundamental data what they believe is more important and monitor that information as predictive fundamental information. So every change in the COT reposrt should be compared with the most probablilistically important fundamental situation. In that way you can have a feed back, that is inexistent with the analysis alone. I think the COT data is more reliable as feed back than the price, because in the market a lot of things happen and some of the events are stochastic events.

Here in the book Trade Stocks and Commodities with the Insiders: Secrets of the COT Report written by Larry Williams you can find a lot of interesting information and I may say this book is not as the others.

However the information in this COT report could be analysed with machine learning algorythms. I had some very interesting but still theoretical and in sample results.

In that direction an new look in the COT may evolve.

Any Use of the Google Prediction API for financial time series prediction models?

Guys can we use it for Forex?

I had this mail today from Google:

Hello There!

The Google Prediction API originally launched as a private beta at Google I/O 2010. Since then we had a fantastic launch at Google I/O 2011 as a Google Labs product and have released a host of new features: utility functions, confusion matricies, PMML support, data anomaly detection and more. We reached another milestone last week: Google Prediction API graduated from Labs with version 1.4.

We have made incredible progress in the last few months. We think Google Prediction API is now ready for prime time. So take it for a spin if you haven’t had the chance yet - sign up at http://code.google.com/apis/predict

If you are wondering what Google Prediction API is all about, watch this fun introductory video:

http://www.youtube.com/watch?v=u39rCNFWDEA

Happy Predicting!

-Zach Goldberg

on Behalf of the Google Prediction API Team

p.s. Some other helpful Google Prediction API Links:

Hello World Getting Started Guide (http://code.google.com/apis/predict/docs/hello_world.html)

Sentiment Analysis Application Tutorial (http://code.google.com/apis/predict/docs/sentiment_analysis.html)

Modelling Best Practices (http://code.google.com/apis/predict/docs/developer-guide.html#designrecommendations)

Hmmm................................................

Anyway I am not certain that is good idea. Because:

http://code.google.com/apis/predict/docs/general_discussion_forum.html

The question was:


"Hello,

I've just came by Prediction API which is something of a great interest to me. I run a company which focus on this kind of solutions, supplying clients with prediction/recomendation systems. Thus, I'd love to ask a few questions.

Actually the quality of training/prediction is still not amazing. Training process doesn't accept any parameters other than learning data itself so I am wondering what algorithms do you use (SVMs, neural networks, Bayesian networks)? You must be using some implicit learning parameters - how about exposing them to public in order to make learning more efficient?

I will keep an eye on this interesting project. Hopefully I might be of some help."


The answer was:
"The Google Prediction API auto-tunes its parameters to give the best results for your specific model, so you have less up-front work to do. Regarding the algorithms, we are constantly evaluating and improving their type, extent and performance so we don't comment publicly on the specific algorithms used by the prediction API.
Marc
Google Prediction API Team

Greek crisis explained: some dark, very dark humour

This is the most concise explanation of the Greek crisis:

Maybe the problem is much bigger because it is a crisis of trust. I mean that the EU is based on mutual help and solidarity. Most of the landers are European. And a big part of the debt is German government debt exposure, and French private and bank lending. If Greece refuse to pay that means the foundation of the EU is out of balance. The idea of solidarity among European countries.

And Greece does not want to pay because Greek people want their life style back. And that is impossible without spending and borrowing money.

It is a dead end Catch 22.

They are bad because they have spent too much. They can have their life style back only if they can spend more and borrowing money.And most of it there is a big social psychology here.

But they will receive money only if they refuse to spend too much by accepting the deal.

If they bail out they will not pay back but in the same time nobody will give them back money.

In both cases they are f..... (bad).



From European perspective it is dead end too.

-If they do not make a nice deal to Greece, greece will bail out. And will pay nothing at all. And all rules about the euro are a joke, as they are. And Greece could not comply with the rules for the Euro.

And Portugal and Ireland etc. may do the same choice.

-In the same time if they give them way too much haircuts. The other countries will want this too.

And Portugal and Ireland etc. may do the same choice.



The problem is that it is a precent that will be an example in similar cases that concern some other nice countries.

However I think that the analysts are missing one very, very specific point. They do not understand the psychology of the Greeks. Did they know Iliad and how Greeks have conquered Troy. They did that by deceipt. And that is what they are as a whole: warriors that value deceipt.

What they really want is

-total hair cuts;

-new money allowing them to keep the same level of life style;

-and that until the next baloon when everybody will be allowed to borrow anyway.

What can the global community do. Where can we find the missing billions?

Of course.

Kill Kadafi and steal his billions to compensate the Greek losses, that is exactly the amount of money we needed.