Jun

12

I have much respect for many people I have come across along my travels since executing my first transaction in 1992. (For the record it was buying 71 SPI Futures on the Sydney Futures Exchange. I got it wrong and sold them. My superior at the time, an incredible trader and strong protector, made me stand on one leg for 10 minutes practicing the hand signal in front of everyone while they all threw sell tickets at me! Funnily enough it worked and one did not make said error again. Lessons like that handed out to a junior today would see you lose your career in this HR obsessed environment.

I digress. Anyway, I have noted four styles of trading that I have observed over extended periods of time on large assets. As with all styles, they are subject to Baconion cycles and survivor bias but put that aside for one moment. These styles are of varying degrees of 'quantifiability' and I do not use any of them oneself, but in respect to other ways of doing things I thought it might be interesting to list them:

1. One person divides history into regimes, starting with the Fed's stance amongst much else and then uses statistical analysis on each of those regimes to see what worked and what didn't work. He would then take current conditions, look for the closest historical 'regime analogue' and trade accordingly. All of the factors used to create regimes were the same. So, for example, if there were 10 factors that created a regime, then each of those 10 factors must have existed since records began. My guess would be he is 90% quantitative and 10% discretionary.

2. The next style is not really a style but rather a way of getting into trades. Quite simply, this personage ( a brand name in the macro space) takes a trade at the level where his stop loss is. So, for example, if if likes a market at 10 and wants to to risk 3 then he will only take the trade if it trades down to 7. This works for the person concerned as they are very active. This strategy and be quantified fully and combined with some probability work to great effect I believe.

3. A purely discretionary process wherein the protagonist decides what holding period the 'market' has at this point and then ensures that she has a bigger risk profile and longer time frame than the market. I.e she seeks to outlast the short term price fluctuations with wider stop losses and longer holding periods. More than a little horse sense in this. I have quantified half of this, but the other half remains elusive.

4. A pure quant who ensures me he still has no idea what the difference is between a bid and an offer uses a very intriguing approach - he treats each new futures contract as a brand new beast. He assumes that on the first day of trading the market has never traded before and starts amassing high frequency statistics from the get go of the new contract. He says that this allows full objectivity.

One hopes a few things can be taken from each of these.

Have a great day and weekend.

P.S. The U.K. has experienced a record breaking 2 days (yes TWO WHOLE DAYS) of blue skies and moderate (but not warm) temperatures. Apparently the old and the young are dying. Relief is at hand though. Massive thunderstorms are on the way to relieve these temperatures that at one point nudged up against 70 degrees Fahrenheit.


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