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Apr 20, 2016

First They Slow Down - Then They Break


Interesting article.

How Systems Break: First They Slow Down
Thank you for sending me the link.

For more on the inevitability of system failure, see my book, Govopoly in the 39th Day, at resources, above.

See below, for another example of the curiously counter-intuitive and elegant dance of prices under the influence of goofy-nomics.

Japanese bankers, following standard practice, try to stimulate the economy by lowering the central bank interest rate.

Normally, you might expect this to weaken the yen, stimulate exports and discourage imports.

In this case, however, now that Japan has negative interest rates, rational depositors withdraw cash from their demand deposit accounts to store it elsewhere.

This winds up creating a shortage of spot Yen, arguably helping to drive its price higher.

Speaking of goofy-nomics, retail bankers, traditionally long currrency, with lots of leverage, might like to consider running a pro-forma balance sheet and P&L statement assuming the possibility of negative interest rates and a 10X increase in asset prices. 

You might ask your bank how it plans to pay higher wages, rents and utilities while still having to collect low interest on pre-inflation loans.

Japanese Yen / U.S. Dollar

Apr 20, 2016

System Design

Hi Ed,

Thank you for sharing with me your wisdom last week. I asked you about instrument specific optimization.

I did some research and experiments such as out of sample testing, and decided that robustness, which gives you confidence, is more important than optimization.

You would rather trade a moderately performing system with faith, than second guess a system that has superb backtest results.

I would also like to share with you a new system that I developed. It is kind of a hybrid of the exponential lag system and the double support resistance system.

Instead of using the highest high / lowest low in a look back window as the resistance / support, I used the exponential lag of the past highs as the resistance, and the exponential lag of the past lows as the support.

It only takes long signals when the price is above the slow lag resistance, and only takes short signals if the price is below the slow lag support. You should be able to understand the rules by looking at the attached picture, which shows an example of trading the Gold market using 200/20 as the lag parameters. (Figure 1)

The next picture is a parameter screening using the portfolio [GC SI ZS ZC CL NG GE JPY ZN ZB], where Bliss=ICAGR/DD. The settings are: Heat=0.2 portfolio risk, 0.02 per instrument, Skid fraction=0.1, Commission=$2.5 per contract. The skid is small because my account size is less than 100k, and I trade only 1 or 2 contracts per instrument. (Figure 2)

Using the optimal parameters 180/15, I produced the equity curve as attached, where the benchmark is an equal weight index of the instruments in the portfolio. The result is: ICAGR=0.248, DD=0.254, Bliss=0.976. (Figure 3)

Then I did an out of sample test using the portfolio [HG ZW SB CT HE CHF GBP ZT GBS NQ]. The result is: ICAGR=0.148, DD=0.368, Bliss=0.401. It is clearly not as good as the optimized result. (Figure 4)

The system is kinda robust, but I think the real merit of it is that you can easily create hundreds of versions using different parameters, and reduce the overall skid of the account.

Let me explain: a 10 day Donchian Channel and a 11 day Donchian Channel very often have the same value, but a 10 day exponential lag and a 11 day exponential lag are almost always different. If you have 100 channel breakout systems with different parameters, many of them actually place their stops at exactly the same price. Similarly for the crossover system, several systems might produce a crossover on the same day, and execute their orders on market open on the next day. As for my system, the 100 stop orders placed by the 100 systems might form a continuous price range. Trading each of them with 1% equity should greatly reduce the skid.

Another interesting feature is that the entry risk does not vary too much. If you examine the first GC chart, the distance between a pair of lags varies within a factor of 2. I tested the system using 2% margin per trade, instead of 2% risk per trade, and the result is not significantly different.

May I have some of your opinions on the system? Thank you very much!

Best regards,

Figure 1 - Signal Generation

Figure 2 - Performance Map

Figure 3 - Optimization

Figure 4 - Out-Of-Sample test

Thank you for sharing your process and research.

Skid does not have much effect in quiet markets.  In wild markets, where skid does show up, sub systems with slightly differing parameters might all take the same hit.

I wonder how your double-band system performs relative to a single-band system with similar time constants, after you optimize the supporting parameters.

In general, the long-term system defines the secular trend while the short-term system trades in and out.

Many moving average systems also feature some sort of dither filter - to prevent strings of whipsaws around the crossovers.  

Some systems use average true range (ATR) to keep the original protective stop out of range.  Your system seems to use a band between average highs and average lows.

Again, you might run some robustness tests to find out your system sensitivity to skid assumptions.
Apr 19, 2016

Web Tribe Report

Dear Chief,

Tuesday April 12 we have a Web Tribe meeting.  I have difficulty joining the video conference.  I feel that I am being disruptive.  I wish that I  was present for all the Tribe interaction and that I had all the information. 

My romantic relationship has recently ended.  I share this with Tribe. 

I share that I behave badly in he relationship. I choose to ignore my commitments and agreements.  I am dishonest.  I feel unwilling to discuss my behavior with my girlfriend.  I am glad that the  relationship is over.  The dishonesty feels itchy, I find myself moving away from an intimacy-centric relationship towards a series of mostly physical encounters. 

The tribe hears me. They do not recoil in horror,  It is good to be able to bring my failings to Tribe.

I find myself tired during the Tribe meeting.  I struggle to pay attention and be present.  I intend to get more rest prior to the next Tribe meeting.

Another Tribe member takes the hot seat. He works on issues of judgment and fairness.  I am pleased with how well we work together even over the video. 

We are learning.  We are growing.  

Thank you for sharing your process and insights.
Apr 19, 2016

Bailout and Opening Up

Dear Ed,

At our last virtual tribe meeting I bring to my Tribe's attention feelings I do not like when doing something while someone watches.

I may do a project as simple as hanging a picture alone and have issues with the anchors and the level or just the process itself and be okay with it until i successfully complete the project. 

However, when someone watches, like my wife, I feel the obligation to get angry and show my anger at every little issue.

Recently, as a part of my project I begin sharing  my process as a trader trading a discretionary account with my Tribe. I am okay sharing the winning days, however I become emotional when faced with reporting the losing days. I do not work on the issue in the Virtual Tribe and tackle it in the regular Tribe meeting a few days later.

At the meeting I get into my feelings and recollect an incident where an older kid jumps the lunch line in front of me. I tell him that it is not right, to which he proceeds to punch me in the stomach.

Stunned, I hold back tears and do nothing. A couple of minutes later, my father, who is vice-principal at the school sees me upset. He finds out the other kid punched me. My father slaps him and I leave with him. I remember leaving the school with him teary eyed.

We role play the incident in Tribe and I am watching another Tribe member that is playing me use my resource of shutting down and do nothing. I begin crying, and realize I do not want to be that person anymore.

I see that I often shutdown in the face of a large challenge or adversity looking to be bailed out and looking for pity.  I do not want to do this anymore. I want to be powerful and in charge.

It takes the Tribe awhile before we find the right resources as we all share similar resources in edgy situations, like shutting down.

As i go through the process of using the new resource and feeling empowered, I am experiencing one of the best feelings ever.  No fear, full presence, and  joy of challenge. I breath heavy when receiving the new heart rock as my body is going a little numb from oxygen overload.  I feel so present that those few minutes feel like an eternity. I feel endless joy and gratefulness to Tribe for being there and helping me. It feels like "one of those moments".

Since the Tribe meeting I feel different, I notice people reacting differently to me. I feel certain, strong, powerful. I intend to get used to my new resource heart-rock and use it forever.

Thank you Ed for introducing these methods into my life and thank you to my Virtual Tribe, as well as my physical tribe, assisting me in my growth.

Thank you for sharing your process and insights.
Apr 19, 2016

Reconnecting with the Music Within

Hi Ed,

I’m just wondering how you are doing?

I am back on violin practice for a while. I feel glad I still have the feel and the sound quality on my right arm.

And the sound feels even more solid, confident, patient and mature than what it was before I stop many years ago. The Fred seems to grow it. I wonder where I get it without practice for this many years? 

It must come from some other special training … |-)    And I am spending time to revitalize my technique on my left hand fingers.

This time if I encounter any technique barrier, I want to bring it to my Tribe.

I intend to stick to it.

Thank you for inspiring me to have my force awaken,

Have a good evening,
Thank you for sharing your process.
Apr 18, 2016

Dealing with Ex-Wife

Dear Ed,

You must be fine and making others wise and healed.

My ex calls regularly. I get irritated by just her voice. I suppress that feeling.

I remember your words, all feelings have positive intentions.

Ex always behaves selfishly. Whenever her calls come it's for something she wants or needs. She is least bothered about me.

Though I have given her full alimony and legally not liable to do anything, most of the time I end up doing what she wants. Though I feel like helping her since she is my children's mom, I develop the resentment.

She feels like a winner after she has extracted something from me.

Some people do not change because they do not want to!

In this way they get what they want.

I = R! AHA!

Thanks a lot

Hugs again!
Thank you for sharing your process.

You might consider taking your feelings about <irritation> and <resentment> to Tribe.

In Tribe

We don't forgive the perpetrator.

We fore-give the Rock
back to the Rock Donor
Apr 17, 2016

Virtual Tribe Meeting Report


During the virtual Tribe meeting I worked on winning and fairness.

I heated up when I felt <anger> around my intention to  constantly monitor for fairness.

The monitoring feels like swimming through molasses as I judge my impact on others.

I wonder to the group if it is possible to win without someone else losing and if it even matters. I back away from the feeling and do not complete a process.

Thank you.
Thank you for sharing your process and insights.
April 15, 2016

Losing Weight - Seeking Pity

Hi Ed,

Thought I'd quickly check in. I am doing fine with my commitment to lower my weight and be more mindful of my health. I continue to log everything, notice how the inputs and outputs relate, and make changes that support my goals when I "get it wrong".

No rebellion so far, but that usually happens when I near my goal, so I'll stay attuned for that message. So far the scale ticks downward a bit at a time, and I am happy with the system I have in place. I'll give a quantitative report at the end of 30 days from starting to track things.

Here is a link to a video of a guy that weighs a lot more than I do and seems to do just fine at writing and performing heartfelt music. Amazing artist. I realize it can work both ways, and I am trying the lighter side.
Thank you for checking in.

Per the hook in the song:

"I beg steal and borrow
I'm so darn good at sorrow
and you don't care enough to cry."

You can re-write in SVO-p:

I have low motivation and ethics.
I specialize in self pity.
You don't choose to enable me.

While she doesn't seem to buy in, I notice he has little trouble moving the audience.
Apr 15, 2016

Heavy Metal

Dear Mr. Seykota,

I would like to thank you for the wonderful work you have done in promoting the trend following system in particular, and the ideas of courage and reason underlying them in general.

I just finished reading Michael Covel's book "Trend Following", and am starting on Andreas Clenow's book "Following the Trend", they all seem to have you in common, so I shall be acquiring your books as well.

I am a electrical, and computer engineer with a deep physics background and normally my eyes glaze over when any subject regarding finances comes up.

But Trend Trading is like physics, and suddenly it made sense and became intensely interesting to me. I am now writing my own own trend trading platform software - I feel it's the best way for me to truly understand how it works at an intuitive level.

Besides, you you play a banjo! I play a heavy metal guitar. It's obvious!

Thanks again for sharing your wonderful insights, I shall be reading your site and books with great interest.

Thank you for sharing your process.

Some Heavy Metals,
in order of density

Metal Density
Platinum 21,400
Plutonium 19,860
Tungsten 19.600
Gold 19,320
Uranium 18,900
Mercury 12,593
Lead  11,340
Silver 10,490
Molybdenum  10,188

Some Heavy Metal Bands,
in order of quirky thrash power units
(QTPU / album):

Black Sabbath
Iron Maiden 
Judas Priest 

Heavy Metal Alloy

Kiss / Momoiro Clover Z

Apr 15, 2016

Some Questions

Hi Ed,

It's amazing how you find the time to answer all the questions that come to you over the years!

Here are some of mine:

- With the advances in deep learning (eg. recent tournament results by Google's AlphaGo), what kind of performance, in your opinion, might be achieved with such programs when used in trading? 

- On a somewhat related note, wouldn't it be more profitable for many tech firms to apply their AI technology directly to trading the markets, and potentially even win market share in the asset management business from traditional financial service firms? But while there's been great advances in the effectiveness of machine learning in solving complex problems, there hasn't been much carryover effect to trading, at least in terms of a big change in the returns (or top quartile dispersion) seen in current investment firms / hedge funds?

- Perhaps along these lines,  there's a recent Bloomberg article that reported on the returns of a Japanese day trader who grew his account to over US$150 million in about a decade, trading from his home. It seems his trading is done manually -- might such returns be equivalently generated through a sufficiently advanced trading program, with no human intervention? Or are there specific qualities of human cognition that are valuable in trading, but  cannot be replicated in programs?

Thank you, 
Thank you for raising these issues.

- Markets act to discount situations that arise in this ever-evolving moment of now.  

Theoretically you could have perfect trading machines competing against each other for the grand prize of $0 per year.

More realistically, you have people trading with their emotions and people printing up money and spending it and you have weather and you even have politics. For more on this, see my book, Govopoly in the 39th Day.  

I have a hunch that simple trend-following systems may continue working, within limits, whether or not you code them up on smart machines.

- Tech firms can easily design a trading system. They can not so easily follow it or market it or get it through compliance, or  explain the inevitable drawdowns to investors or fend off lawsuits.

- To make those returns, you have to risk a fairly large percent of your equity - and you have to keep your ego out of it.  

This guy now trades in front of a large Twitter audience, indicating high risk of contracting King Kong's disease. Pride, the great equalizing banana peel, may appear to work its magic. Keep eye on trader.
Apr 14, 2016

More on System Design

Hi Ed,

Thank you for your clarification. It was very helpful.

I did exactly what you suggested. I did a parameter screening for a portfolio that consists of 8 instruments: [GC, SI, ZS, ZC, CL, NG, ZT, JPY], each with 0.5% risk budget, making a total entry risk of 4%.

Here is the result:

My optimal parameters lie in the shorter regions because I only trade 1 or 2 contracts per instrument, and the skid is very small. I selected the optimal parameters (159, 16) and ran a backtest. The benchmark is an equally weighted index of the 8 instruments in the portfolio. The result is attached below:

ICAGR = 0.0519, DD = 5.93%, Bliss = 0.876. That is very promising result.

I have another question though - I used the same parameters across all instruments.

The result would certainly be much better if the parameters are optimized for individual instruments.

What are the reasons not to do so? Do we run the risk of curve fitting? Or are there any other concerns?

Currently I use unique parameters for each instrument in actual trading, and I feel a bit worried whether this approach is justified.

Thank you very much!

Heat Map

Equity Trace

Thank you for extending this thread.

You might consider testing your system against various values for skid, say, 0 for the best possible fill (no skid) and 100 for the worst possible fill (high or low of the day).

You might also test your system to see if your Bliss holds up for more Heat, say total risk of 5% to 50% in 5% increments.

You might not find much of a market for a futures trading system that returns 5.19% per year.

Per your question about instrument-specific parameters, you might generate a spreadsheet showing the instruments on the vertical scale and, across the top, the calendar years for your test.  

Then, fill in the boxes with the optimal parameter set for that year.

1960 1961 1962 1963
Silver 159/16

Per your worry, you might consider taking your feelings about <justifying your approach> to Tribe as an entry point.

Apr 14, 2016

System Design - Portfolio Selection

Hi Ed,

I am an undergraduate student from [University] studying Physics and Computer Science.

I would like to thank you for the wonderful resources that are available on your website. I have been studying trend following techniques and doing system design and back testing in the past year.

The attached picture is an example of a parameter screening for the natural gas contract.

I recently started to manage a small amount of money from my friends, using a combination of several trend following systems.

I just realized there’s a missing piece in the puzzle regarding portfolio selection.

Sometimes you receive signals from multiple markets/systems and run out of capital - which signal do you take?

I do not feel good about making discretionary decisions like this, taking some signal and ignoring others, which essentially gives you the freedom to not follow the system.

I’m also not very comfortable with equal Heat(risk) allocation across all portfolio components. As an example, I prefer the Japanese Yen to Silver because it gives consistently better Bliss across a large range of parameters in backtests, and it also produced a nice profit recently.

Could you please give me some hint regarding portfolio selection and portfolio weighting?

Thank you very much!

Best regards,

Heat Map

Thank you for raising this issue.

You show a parameter screen for Natural Gas; you might consider running your screen for an entire portfolio over several decades.

In your simulation, you might consider using what I call the Starting-Gate Method.  

Say you have eight instruments in your portfolio.  You then create an instrument risk budget - as one eighth of your total portfolio entry risk. 

Position size = risk budget / position risk.

Then, for eight instruments and a risk budget of 1/2% of equity, you can have up to 4% total entry risk

Note: your portfolio naturally self-selects as you stop into the trending markets and ignore the rest.

Starting-Gate Method

Each horse
gets the same width.

Some traders like to perform some or another type of pre-ranking of say 40 futures in order to select the best for the portfolio.

While this might work, it also invites listing whipsaws as instruments appear and disappear from the portfolio.

Ultimately, you have to come up with something that fits yourself - and that you can implement with emotional alignment.
Apr 13, 2016

Definitely Defiant / Defiantly Definite

Dear Chief,

I acknowledge that it is my intention to include (at least one)  the typo in my FAQ update.

Thank you for adding emphasis to my typo. I wrote "defiantly"  where I think I meant to write "definitely".

The idea of defiance fits in well with feelings of judgment, being watched, fairness and other topics that we work with last night. 

I'm sending you a big hug. Thank you for finding and sharing a signal in the noise
Thank you for sharing your process.
Apr 13, 2016

Tribe On-Line

Dear Chief,

Last night we have our first "TTP oriented" on line Tribe meeting. At the meeting we focus on the feelings that come related to our Lab projects and things that are happening in our lives.

All four Tribe members are present. We experience a lot of technical difficulties that interrupt the flow of the meeting. Even with the glitches, the meeting turns out well and continues to feel like Tribe.

After the initial check in, no one actively expresses willingness to be on the Hotseat. One of the members express concerns about being able to get into it with the on line format and another member shares his concerns about being overheard by his family and being too loud.  No one has a specific issue they want to work on.

We decide to go with the flow and see what comes up by repeating a check-in/feedback process.

We take turns checking in again, in a series of check-in rounds. Each member shares feelings and checks in on what's happening for them and we take turns adding to the check-in with our own feelings and feedback for each other. 

The connection feels good.

The ongoing check in continues.  A member starts reporting an itchy feeling as he gets into telling us about <telling the truth >, <getting what he wants > and < keeping commitments >.

He scratches his arms.

The member that initially expressed concerns abut being able to get into it immediately picks up on what's happening and assumes a PM role of encouraging more scratching, the Tribe joins in and encourages Hotseat to do more.

Hotseat starts to really ramp it up more, feeling itchy and scratching and suddenly his connection drops. W The disruption feels jarring. PM is concerned for Hotseat's wellbeing.

Hot seat is unable to rejoin effectively for a while.  We wait for him to come back. He continues to experience issues, intermittently connecting and dropping off.  Two versions of "him" appear in the chat. I notice it mirrors his check-in about < telling the truth> and having two versions of himself: One version where commitments are kept and the other,  "off balance sheet" version. It's not clear if we can effectively continue the process.

We eventually go back to taking turns checking in, sharing and responding to each other.
We keep going with the flow.
With each round, we seem to arrive at consensus that there are some common issues and feelings coming up and resonating all of us:

< winning >
< get what you want>
< fair/fairness >
< being watched/observed >
< judging self/others>
< telling the truth>
< keeping commitments >
< being honest >

The feelings and issues feel related.

We continue sharing feelings and feedback.  While it is my turn, I notice I feel irritated with myself and my talking as I reflect on feedback about how I judge my trading.  I say it aloud "I feel like telling myself to shut up".  I hear PM say "Do more of that!" I find it very easy to close my eyes and scrunch up my face. I get into it. I hear encouragement.  I grumble  "shut up [Self]".  I hear more encouragement. I feel that I am in the field of acknowledgment. The Tribe is with me, providing a medium for the experience. It intensifies. I'm really into it. I think I'm moving. I'm grumbling. I sort of hiss and grumble more. I keep scrunching up my face. The Tribe encourages me until I get to a freezing point. It happens very quickly.

I recall laying on my bedroom floor. I'm 12 or 13 years old and I'm drunk with a friend. My friend is saying nasty things to me and telling me to shut up whenever I reply. I realize in an instant that I learn all about being critical and judgmental from him. I judge myself very harshly whenever I feel unsure about my value or worth to others. I judge others too. I judge my friend. I say "He's a dick. He's a f--king dick. He's just a critical, judgmental dick!" I use the harsh judgment to medicate <lonely> and want a friend.  I feel a wave of relief and clarity as I understand and recognize this for the first time.

I come out of the hot seat state feeling very clear. I forgive my childhood friend out loud to the Tribe. I do it again a few times as I explain what I see and remember. We don't actually practice role-play. I still feel clear, I choose heart rock instead,  I forgive the judgment rock and no longer feel it with me. I no longer feel any judgment about my friend. I see he uses the judgment rock exactly the way he taught me to use it. I'm glad I forgive him and the rock. I'm glad I am reminded that I deliberately choose heart rock.

We pause for a minute. I reflect on the lack of formal process and propose to the Tribe that maybe once we see the pattern we know what to do and it is a matter of choosing... I forgive him again out loud and re-affirm my choice of heart rock, I know what to do instead. I feel a sense of connection with this lost friend and with my Tribe. It feels like the conclusion of Rocks Process.

PM checks to see if there is anything more I would like to do with the process and I say "no, I feel clear."  PM calls for a checkout on process. We all feel glad about the process and note that it's possible to do work in our on line format, even with the technical difficulties that come up.  Everyone thanks the PM for really pushing the process forward and providing the steady encouragement that allows the process to unfold.

I feel willing to do this again and to support other people in their processes.

I would like to acknowledge and thank Ed for Rocks Process and Tribe. They are most defiantly the foundation that support our meeting last night. I think that our Tribe's familiarity and comfort with real world TTP process make this kind of exploration and experimentation much more fruitful.

Thank you.

Thank you for sharing your process.
Apr 12, 2016

Radial Momentum - Catch

Hi Ed,

I just spent some time reading your Radial Momentum article and I really enjoyed it. Just for you know, above the "business card levitator experiment" there is a paragraph which I believe contains a small typo, "He says that when I see the the card sticking to the slit". I'm just trying to do my part to help prevent Bernoulli Abuse.

I hope you have a great week,
Thank you for the catch.

You may see the page, with correction, at:
Apr 11, 2016

On the Path

Mr. Seykota,

I am eternally grateful  for your mentorship this past Saturday. It was truly an honor.

The journey continues with your recommended reading and learning from the ground up via back testing in Excel.

I will keep you posted of future progress.
Thank you for sharing your process.
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