When Ed Seykota talks, trend followers prick their ears up, travel from far and wide, and listen. One of the greatest traders of our time, his thoughts and words are thought provoking and inspiring.
Jon Boorman recently had the good fortune to spend an evening listening to Seykota in Seattle. Jon has posted up his recollections of that evening here, together with his own thoughts on what Ed was saying.
It really is essential reading, and our thanks go to Jon for taking the time to share the thoughts of a true 'Market Wizard'.
Saturday, February 28, 2015
Calmar ratio
As regular readers of the blog will know, I plot a number of performance metrics to keep me on track. These can provide clues as to the robustness of the system or alter me to a possible change or deterioration in performance. These are shown here.
One metric I use to keep track of performance is the Calmar Ratio. This is a quick and dirty metric, measuring returns against drawdown risk and is calculated as follows:
Annualised annual return of last three years/maximum drawdown.
One metric I use to keep track of performance is the Calmar Ratio. This is a quick and dirty metric, measuring returns against drawdown risk and is calculated as follows:
Annualised annual return of last three years/maximum drawdown.
Saturday, February 21, 2015
Performance update - trending upwards
Back in early December I talked about how trend followers can go through periods of non-performance, and suffer a drawdown, before there is a sudden reversal in their returns, often taking them to new highs. Here is an extract from that post:
"Trend follower Bill Dunn is a case in point – his fund suffered a drawdown of 40% over a twelve month period in 1999/2000. That was fully recovered in the next quarter. In late 1981 they had lost 42% over the preceding year. The very next month, they made 18%, and over the next 3 years they made more than 400%!
As a result of this, it is quite possible for a trend follower to suffer say 10 months in every year with little in the way of profits. Then, in the other two months, you can suddenly capture a major trend or two and easily end well up for the year. That is the nature of the beast.
Dunn was able to a ride out these periods as he had complete
faith in the robustness of his approach. Remember, trend following in its purest
form is an absolute returns approach. The downside is limited as far as
possible, yet the potential upside is not limited in anyway. This is why, when
major trends start to take hold, they can go through explosions of significant
out-performance. Equally though, the drawdowns can be larger than most people can stomach."
"Trend follower Bill Dunn is a case in point – his fund suffered a drawdown of 40% over a twelve month period in 1999/2000. That was fully recovered in the next quarter. In late 1981 they had lost 42% over the preceding year. The very next month, they made 18%, and over the next 3 years they made more than 400%!
As a result of this, it is quite possible for a trend follower to suffer say 10 months in every year with little in the way of profits. Then, in the other two months, you can suddenly capture a major trend or two and easily end well up for the year. That is the nature of the beast.
Thursday, February 19, 2015
Webinars
Since the start of the year I have been holding weekly webinars for those traders that I mentor. These generally are between one and two hours in length (although one did go on for almost 2 1/2 hours!) Over the course of the year, this adds up to an additional 50-100 hours worth of trading support within the group environment, and is on top of the email/Twitter/Skype support that is already available as part of the programme.
The beauty of these webinars is that I am not the only one setting the agenda - while I may have specific things I want to talk about, I actively encourage the members to let me know what aspects they want me to cover too, and to ask questions as we go along.
The beauty of these webinars is that I am not the only one setting the agenda - while I may have specific things I want to talk about, I actively encourage the members to let me know what aspects they want me to cover too, and to ask questions as we go along.
Sunday, February 15, 2015
The ups and downs in a typical week for a trend follower
This week was your normal week as a trend follower - a couple of positions got closed, including one which gapped against me after earnings were released (but I was still able to bank a small profit), a couple suffered an erosion of profits before bouncing back, while others carried on trending impervious to any external news or volatility in the general market.
The end result was of it all was that, while I now have fewer positions open, my open profits (in terms of R) are identical to that at the end of last week.
One guy in our group got into a stock where suddenly it became the subject of takeover speculation, creating multiple R profits in only a few minutes. He didn't know that when he put the position on a few days beforehand - all he was doing was identifying a possible new price trend starting, and decided to hop on for the ride.
The end result was of it all was that, while I now have fewer positions open, my open profits (in terms of R) are identical to that at the end of last week.
One guy in our group got into a stock where suddenly it became the subject of takeover speculation, creating multiple R profits in only a few minutes. He didn't know that when he put the position on a few days beforehand - all he was doing was identifying a possible new price trend starting, and decided to hop on for the ride.
Wednesday, February 11, 2015
Profit erosion and position sizing
Just as fast as you make money in the markets, they can also take those profits away from you just as quickly, if not quicker. So far this week, there has been an erosion of open profits on some positions, resulting in stops being hit, with those trades ending up as small winners/small losers.
While it is frustrating, it has to be expected. What we don’t know is, when prices starts to move in the opposite direction, whether this is some whipsawing or noise, or maybe the start of a sustained price movement in the opposite direction. But, at the same time, you need to allow your trades some 'wiggle room' so you do not end up being stopped out on some minor price noise.
On that basis, having stops in place at all times, while only risking a small element of your equity on each trade, should help take the emotion out of your trading decisions.
While it is frustrating, it has to be expected. What we don’t know is, when prices starts to move in the opposite direction, whether this is some whipsawing or noise, or maybe the start of a sustained price movement in the opposite direction. But, at the same time, you need to allow your trades some 'wiggle room' so you do not end up being stopped out on some minor price noise.
On that basis, having stops in place at all times, while only risking a small element of your equity on each trade, should help take the emotion out of your trading decisions.
Tuesday, February 10, 2015
Dealing with earnings
The chart below shows a European stock in which I had a long position open, and this shows once again how earnings can work for you or against you.
Price broke out on 08 January, and thereafter a nice, quiet uptrend started to develop, to the point that profits equated to about +3R as of last night. This morning, the company’s latest earnings were released. Although the candle shows a drop throughout the day, in actual fact this was a gap down, while the trailing stop moved up today, so the stock opened up below the updated stop level. The end result was losing a significant chunk of those open profits.
Price broke out on 08 January, and thereafter a nice, quiet uptrend started to develop, to the point that profits equated to about +3R as of last night. This morning, the company’s latest earnings were released. Although the candle shows a drop throughout the day, in actual fact this was a gap down, while the trailing stop moved up today, so the stock opened up below the updated stop level. The end result was losing a significant chunk of those open profits.
Sunday, February 08, 2015
A tale of two traders and risk
Imagine two traders, who are looking at the same potential set up, and are supposedly using exactly the same method, with the same expectancy, to determine their entries and exits.
Trader A risks 10% of equity on every trade. He takes the signal, and ends up generating a +3R profit on the trade before taking his profits off the table, for fear of losing them.
Trader B on the other hand, only risks 2% of his equity on each position. He also takes the same entry, and lets the trade play itself out fully before an exit signal is given. He holds the position for much longer than Trader A, and he makes a +7R profit.
Trader A has made more than double (in monetary terms) than that of Trader B. So was it a better trade?
Trader A risks 10% of equity on every trade. He takes the signal, and ends up generating a +3R profit on the trade before taking his profits off the table, for fear of losing them.
Trader B on the other hand, only risks 2% of his equity on each position. He also takes the same entry, and lets the trade play itself out fully before an exit signal is given. He holds the position for much longer than Trader A, and he makes a +7R profit.
Trader A has made more than double (in monetary terms) than that of Trader B. So was it a better trade?
Saturday, February 07, 2015
A role reversal
It is funny how traders can move in and out of profitable phases at different times, even if they utilise similar trading approaches. In the second half of last year, I went on a record-breaking (for me) run of losing trades, whereas other traders were doing very nicely, thank you.
So far in 2015, the roles seem to be reversed. I've noted that some traders on social media who look for trends to trade have commented on how tricky the markets have been so far this year. Indeed, if you look at the chart of the indices such as the Nasdaq below, you can clearly see an increase in volatility and a lack of direction since 2015 started.
So far in 2015, the roles seem to be reversed. I've noted that some traders on social media who look for trends to trade have commented on how tricky the markets have been so far this year. Indeed, if you look at the chart of the indices such as the Nasdaq below, you can clearly see an increase in volatility and a lack of direction since 2015 started.
Tuesday, February 03, 2015
Early 2015 - the recovery continues...
In this post I talked about my trading plan for 2015 and the areas I was going to concentrate on. Well, despite all the volatility and lack of a clear direction in the markets this 'new-old' approach is continuing to show promise, not only for me but for other traders in our mentoring group.
Simply by concentrating on the price action and its trend in the stock or instrument I am looking to trade, the results are starting to show.
Simply by concentrating on the price action and its trend in the stock or instrument I am looking to trade, the results are starting to show.
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