Intraday Volatility Calendar

http://www.forexfactory.com/calendar.php

This is an example of an economic calendar that I prefer calling it as “Intraday Volatility Calendar”. The default time stamp is in Eastern Time, so do adjust it to local time to get a better sense of it.

This is where i consider some fundamental analysis- to some extent- is acceptable, that is for volatility anticipation alone, not for directional analysis. And I prefer the word “anticipation”, because I don’t like the word “prediction”, lol.

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M*nkey

“A domino of thoughts”, if you like.
My friend who read my previous blog entry, wrote a deeper thoughts on quals and quants’ approach in investing. He said that both quals and quants share the same key in their investing: consistency and understanding.
And that reminds me of many technical traders who use technical tools like trend lines, mathematical indicators, basic or exotic technical tools, but they never have any consistent method in their trading. They just do a ‘comprehensive analysis’ in each trading decision to be made. And to my knowledge, comprehensive doesn’t necessarily mean applying any method/strategy consistently.
An even more sarcastic coment from a fellow is that he call technical analysts as Mony*t (M*nkey). lol.

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A Technician is Not Necessarily a Quant

An interesting discussion with one of my CFA teacher over emails after our brief discussion in the class the days before. At the end we both agree that technical analysis is a fail approach in investing.

On Mon, Mar 17, 2008 at 1:57 PM, P.M. wrote:
Untuk yang waktu itu nanya ttg John Simmons, (sorry, lupa namanya), here is the link to John Harris Simmons.
http://en.wikipedia.org/wiki/Renaissance_Technologies#_note-WSJ
http://en.wikipedia.org/wiki/James_Harris_Simons

——-start quote—–
Like many other quantitative funds, their RIE Fund had difficulty with the higher volatility environment that persisted throughout the end of ummer 2007. According to an August 10th article in Bloomberg by Katherine urton, “James Simons’s $29 billion Renaissance Institutional Equities Fund has fallen 8.7 percent so far in August when his computer models used to buy and sell stocks were overwhelmed by securities’ price swings. The two-year-old quantitative, or ‘quant,’ hedge fund now has declined 7.4 percent for the year. Simons said other hedge funds have been forced to sell positions, short-circuiting statistical models based on the relationships among securities.”
———-end quote————–

My comments:

John’s track record and methodologies have not stood the test of time.
Almost $4 billion of his total net worth of $5.5 billion only earned in 2004, 2005 and 2006. Last year, his fund suffered as market has swung wildly. Compare that to Warren Buffett’s track record for over 30 decades, which consistenly outperforms market about twice the rate of Standard and Poor’s performance.

And I dont think investment decisions should be delegated to computers.
After all, investment is very subjective and deals heavily with human psychology, which can’t be quantified.

If things get worse, and if the computers still tasked to decide which action to take, we will see another comparable for Long Term Capital
Management, a bankrupt, quantitative hedge fund that also utilised computer model, and had two Nobel prize winners as the directors: Myron Scholes and Robert C. Merton.
Check: http://en.wikipedia.org/wiki/Long_term_capital_management
Attached is the latest letter from Buffet to the shareholders.
Have a good day,

regards,
PM

On 3/17/08, Darma wrote:

Dear Pak PM, a very interesting comment of you, Pak..

we — the quants’ fans — have been very aware of what happened to LTCM.
We’re more considering LTCM as a sample of a mistake that also happen frequently to many discretionary traders. Barings’ Nick Leeson, and the more recent gigantic loss experienced by Societe Generale caused by a reckless discretionary trader is an example of what a big magnitude of a loss, a discretionary trading practice can cause.

In the case of LTCM, those Nobel prize winners were very confident that the low probability events will not happen, much like betting the market wont swing too far away from the twice of it’s standard deviation. Their biggest mistake were they didn’t expect the unexpected to happen. They were dead wrong, and it cost them big.

But a durable quantitative models isn’t about prediction, which we believe is impossible to be done consistently even using any sophisticated mathematical models.

Some durable market models are even done using some simple common sense to exploit some recurring simple market pattern like the “turtles” or any other mechanical trend followers have been doing.

This particular breed of Quants are even expecting the unexpected to happen, an event that will drive the market to make exploitable movement. Some links on this are:

http://www.turtletrader.com/trend_followers
http://www.tradingblox.com/originalturtles/
http://www.turtletrader.com/why.html

You might also want to check on these names: Richard Dennis, Paul Tudor Jones, John W Henry, Ed Seykota, etc.

Although it’s the most popular, but trend following isn’t the only kind of strategy that’s adopted by Quants. Some other kinds are: the range trading strategies, the opening range breakout strategies, etc.

There are a very diverse universe of mechanical trading strategy, ranging from the very short term to the long term strategies. Trend following is only one of them.

I’m getting more interested in knowing your comment on this, Pak. After all, i’m just a learner, a “Quant’s wannabe”, if you like. hehehe…

And I’m very glad to be knowing you, Pak.

—
rgrds,

Darma

On Mon, Mar 17, 2008 at 3:59 PM, PM wrote:
sorry lg sibuk

tapi brief comments: value is not the same with price. Value is what you get, price is what you pay. and this can’t be quantified

and the names that you mentioned never come to my radar. Dont know whether the names appear on the radar of any non-quant fans. If possible, give me the the web links to their strategies, and most important, the performance.
And we will take it from there.

I doubt that their performance will match that of the fundamentalists. If they already outperformed the market for around 20 years (means that they already experienced the bearish period of 1990s and early 2000), then the names may be worth analysing. But if their performance are only accounted for during the bullish period (where everyone is making money, and those who borrow make even bigger money), then these methods have not passed the test of time.

The problem with the trend following is that the method cant predict the turning points (bull all the time during bull period, or bearish all the time during bearish period. The method cant tell when the bear or bull market will end. This is the single biggest weakness of quant (and its siblings: the technical analysis).

Most of us will live to our 70s or 80s (hopefully……..), so I am interested to know which method will pass the test of time so I can live comfortably when I am old. So far, only 2 investment methods worth mentioning: the fundamentalist (if you know what you are doing) and the index investing (if you dont know what you are doing). Other methods, to my knowledge, have failed.

rgds,
PM

Darma to PM

ya pak. very true.
i think an important note is that a true trend following quantitative models arent trying to predict those turning points. predicting turning points is not what “following” means. and i also consider those technical analysts as a dumb group of people, using those lines and mathematical indicators to predict market, trying to outsmart the market. but as long as they still trying to predict, they’ll never be able to perform better than the market.

thanks greatly for the discussion, Pak. I’m learning a lot from it, especially on the test of time thing :):)
–

rgrds,
Darma

PM to me 4:54 PM (18 minutes ago)

sama sama
btw katanya quant fans. Koq sekarang komennya lain? Jadi no fans? yg bener yang mana neh?

rgds,
PM

Darma to PM show details 5:12 PM (2 minutes ago)

hehe, saya quants fan, pak. but not a fan of technical analysis.
they two are very different things. technical analysis and quantitative trading are very different. i always mention technical analysts as “tukang ngecap”, no better then a broken clock. even a broken clock is right twice a day. lol.

using trendlines, mathematical indicators, and all those sounds like sophisticated mathematical formulas, doesn’t mean that one trading using a quantitative strategy, Pak.
the common thing I’ve seen is those technicians trade the market using discretionary strategy, they even don’t know what a positive expectancy of a strategy is.
Yes, they use those technical analysis mumbo jumbo, to give a rocket scientist like of explanation to back their BS prediction. hehehe..

rgrds,
Darma

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Prediction is Nonsense

.
Thanks to R who consistently posts useful articles in his journal. This time he posted a link to an article at the economist.com. The most interesting thing for me in that article is these paragraphs. It is stated that,

To show how this works, Messrs Frydman and Goldberg examine the PERSISTENT failure of economists to predict movements in the currency markets. According to Kenneth Rogoff, an economist at Harvard who has long attempted to find rational models for predicting currency fluctuations, “it is stunning how hard it is to explain movements in exchange rates.”

All the models based on rational expectations now say that, on fundamentals, the euro is overvalued against the dollar, he reckons. But does that mean the dollar will soon rise? Mr Rogoff says he has no idea.

In rational-expectations theory, a range of variables including inflation, interest rates and growth should have a predictable impact on currency movements, but in practice this theory has proved less useful for forecasting than tossing a coin. Among rational economists, the debate is over “whether the glass is 5% full or 95% empty,” he says. Only over longer periods—say two to four years—is there any evidence of exchange-rate predictability, which is far too long to be useful to traders or policymakers.

So, isn’t it clear now.. just stop predicting.
Develop a trading model. Not a prediction model.

(*)

F is for Final

After the sharing session, I do this small change to the algorithm, where it does the money management part of it.

volume = NormalizeDouble(
(AccountBalance()*prm_gearing_ratio)/
(prm_pair_diversify*MarketInfo(Symbol(),MODE_LOTSIZE)),
prm_lot_resolution);

This will automate the process in determining the position size based on a fixed number of gearing ratio.
I have a 5.33 gearing ratio, this will be the value of prm_gearing_ratio.
prm_pair_diversify will be 2, since the system will be run on two pair: EUR/USD and GBP/USD.
When trading on a mini acct, the MarketInfo(Symbol(),MODE_LOTSIZE) will automatically return a value of 10,000 or 100k when trading a standard account.
With this piece of code, i dont have to calculate some basic arithmetic on waste papers anymore. LOL.
This version is tagged as vy5f. So the version is StealthTrader_vy5f now. I hope F is for Final. he he he..
Good luck to us !!!

Big Dogs: Quantitative investors

One of them :
James Simons
Renaissance Technologies
Size: $24 billion
Style: Quantitative investor
Location: East Setauket, N.Y.
Former math professor is king of the “black box” investors—funds that use top-secret algorithms and invest largely by computer. Shocked peers when he set a target of $100 billion for his latest fund. Charges 5 & 44, a fee structure without peer in the hedge-fund world—but nobody’s complaining. Net worth estimated at $4 billion.
More reading.