Trade only the price

This article in Covel’s website once again shows how profitable traders/fund managers do their trading.

Despite

I met with an old pro trader yesterday in his NYC office. He runs one of the largest clearing firms on the NYMEX. He has his unique way of doing things and clearly is not a trend follower. That said, his concern about knowing how to take losses properly echoed the wisdom of Wall Street’s great trend traders. His most interesting comment was about the word “despite”. He loved to see the word. For example, if you see the talking heads saying, “Despite bad news Apple stock went higher”, he would view that as an opportunity to go long even more. Conversely, if he saw “despite good news, Apple went lower”, he would go short. He wasn’t trying to preach fundamentals or “news” reading, but just wanted to pass along his insights from the last 20 years. Sure, it was short and simple wisdom, but then again most good Wall Street wisdom is that way, the hard part as he reminded me is the execution.

A quick note: DESPITE of whatever the news and fundamentals say, they trade the price. But this doesn’t mean they use technical analysis mumbo jumbo. Not analysis. Not prediction.

Short Term Trading

———- Forwarded message ———-
From: Darma
Date: Feb 18, 2007 5:28 PM
Subject: short term trading
To: indotraders@yahoogroups.com

Dear friends,

sharing dikit ya…
kalo ada pihak2 yg kurang berkenan, mohon maaf sebelumnya ya.. maklum deh saya ini masih belajar..

pertama2 saya mohon maaf karena selama ini jadi jarang posting di milis kita ini.
Itu karena selama ini sibuk sendiri, riset, fokus (ngikutin saran/sindiran dari jack, jussi dan eugene,hehehe).. No time for gossip milis…
Sekaligus saya mau sampaikan maaf juga dari teman2 lainnya yg dulunya adalah frequent poster di sini. Mereka juga asik trading, riset, etc.
Dari beberapa yg saya temui beberapa bulan ini, mereka sempat bilang: “aduh gak enak ama temen2 di milis, kita jarang sharing2, abis lagi seru sih, lagian kalo sharing2 ntar malah dibilang sok pamer” he he he.. Maklum deh, belakangan ini sering ada black campaign dalam rangka memajukan milis tertentu, padahal apa sih untungnya punya milis yg rame ya, kecuali utk orang2 pengangguran yg gak punya kerjaan lain, he he he…

Oke, enough for the basa basi.. Now let me start..

di lembaran2 yg lalu, saya selalu sebut: profitable trading dengan long term trend following itu jelas2 nyata.
Saya selalu sebut contoh turtle system yg dari curtis faith, yg kemudian kami bikin EA nya exactly as the said rules, hasilnya bener2 profit. Kami modifikasi, hasilnya bahkan lebih cantik lagi. Begitu juga dengan sistem “Aberration” yg pakai deviasi, alias Bollinger band, yg juga mengadopsi filosofi long term trend following, jelas2 profitable.
Gak ada prediction, gak ada hal2 canggih, hanya averages, deviasi, true range, etc..
Profitabilitas sistem2 di horizon long term itu sangat ditentukan oleh lengkapnya suatu sistem. Gak cuman entry – exit. Karena kalau mengandalkan entry-exit polos, sistem yg entry di 55 day b/o, exit di 20 day b/o, pasti bakalan losing. Apalagi yg entry di b/o bands, exit di b/o bands lainnya. Ugly banget deh..
Tapi ternyata, karena adanya komponen risk management (position sizing, pre-determined SL), trailing exit, dan multiple entry utk memanfaatkan trending session semaksimal mungkin, akhirnya suatu sistem yg sangat simple malah menjadi profitable.

Itu cerita saya di lembaran2 yg lalu. Namanya juga org lagi belajar selalu kena sindrom kaget, baru tau kayak gitu saya pikir: “that was the ONLY answer”..
Tapi ternyata perjalanan belum selesai. Sistem long term kayak gitu nggak feasible utk dijalankan kalau hanya mentradingkan capital $5k, apalagi cuman $400. Kecuali kalau trading itu hanya hobby. Baru layak dijalankan secara komersial kalo ada capital 100k ke atas, itu pun dengan efisiensi di komponen2 fixed cost. “Gak nendang” banget deh…

So, akhirnya, berangkat dari hasil belajar sebelumnya, lanjut bertapa lagi, riset lagi.
Kerangkanya masih sama: systematic trading, yg ujung2nya bisa di-mekanisasi.
Hasilnya: Short term trading si doable. Mission very possible.
Kuncinya:
– FX market punya pola volatilitas intraday yg sangat siklik. Hal ini termanifestasi pada batasan penggunaan suatu sistem tertentu pada jam2 tertentu saja. Akhirnya bakalan ada saat2 di mana kita menggunakan prinsip mean-reversion, dan ada saat2 di mana kita bisa menggunakan prinsip momentum.
– Profil Risk-to-Reward ratio per single trade nya ternyata inverted.
– Penentuan SL dan TP mengacu pada gerakan rata2 historical per satuan waktu tertentu, dilakukan dgn menarik value dari ATR (average true range), sehingga didapat suatu sistem yg sangat robust: menggunakan parameter yg sama utk semua currency pairs, dan profit di semua pairs. Robust.

Jadi, teman2 seperjuangan ku di sini, let me tell you here: jangan menyerah. Jangan berkecil hati.
Kalau gak percaya my story, berikut saya sertakan kutipan tulisan dari blog nya covel, komentar ed seykota dan covel tentang short term trading:
http://www.michaelcovel.com/archives/000314.html

Rgrds,
Darma

===========================================

http://www.michaelcovel.com/archives/000314.html

Ed Seykota was recently asked in his forum:

“I am new to trend following and wish to ask you what your favorite chart is for determining a given market’s trend? Daily, Weekly, Yearly, Hourly?”

Ed responded:

“Hmmm…your list seems to lack scaling options for minute, second, and millisecond. If you want to go for the really high frequency stuff, you might try trading visible light, in the range of one cycle per 10-15 seconds. Trading gamma rays, at around one cycle per 10-20 seconds, requires a lot of expensive instrumentation, whereas you can trade visible light “by eye.” I don’t know of even one short-term trader, however, who claims to show a profit at these frequencies. In general, higher frequency trading succumbs to declining profit potential against non-declining transaction costs. You might consider trading a chart with a long enough time scale that transaction costs are a minor factor – something like a daily price chart, going back a year or two.”

I agree with Ed’s pithy wisdom, but he is not saying short term is impossible.

There do exist shorter term systematic traders who have done quite well (Toby Crabel, Jim Simons). They would agree with Ed that their style is hard. The shorter you go the more you need great execution, fantastic data and multiple systems. To be a great shorter term mechanical trader is a different animal than trend following, but it is a style that a select few have mastered.
============================================

..

Goldman Sachs Research: Fundamentally Bad

Following my previous post titled inside Goldman Sachs, here is an interesting article taken from covel’s site. Note the interesting part at the end of the article.

Goldman Sachs Research: Fundamentally Bad

Here’s the bad news: Not all TurtleTrader readers receive Goldman Sach’s daily research. Now here’s the good news: The ones who don’t aren’t missing anything. TurtleTrader is not a client of Goldman’s nor do we endorse them in any way. We just happen to be on the mailing list. Okay. So now we’ve dispensed with the disclaimers.

Goldman daily research is extremely detailed. Projections abound. Discounted cash flow valuations, balance sheets and income statements overwhelm. It’s all there — the market performers, trading buy recommended lists, etc. as well as Goldman analysis. Tons of information right? Yes, indeed, but mostly useless.

For example, let’s take a look at PlanetRX, the online drugstore. Goldman has been promoting this baby as a great buy since shares sunk from the mid-teens to its most recent value of $2 a share. All of Goldman’s promotional analysis is based on its research minutia involving fundamental factors. None of the analysis is based on what the stock is actually doing, which is tanking. If the analysis was based on what the shares of PlanetRX were actually doing, any successful trader would know you would sell, not buy.

Why do large, respected brokerages go through the time and effort to produce such useless drivel by large salaried fat cat analysts? When you are a broker who earns monster fees and big commissions off pushing stocks and underwriting IPOs, you better make the package pretty don’t you think? How does this packaged information help someone who actually trades or invests? It doesn’t.

We would like to know how much of Goldman Sachs’ proprietary trading capital is actually invested as Goldman’s research suggests. It would be difficult, even for a Goldman Sachs investor, since the research never gives the reader solid advice regarding price levels at which to buy or sell. If the truth be told, we believe that Goldman’s trading capital is well positioned with hedge funds and trading firms worldwide that, as you might guess, trade trend following models.