Wednesday, September 29, 2010

Some tips on handling drawdowns - Kanter's Law - Emini system trading

I was recently reading some articles on and came across one which referred to Ms. Rosabeth Moss Kanter. Ms. Kanter is a professor at the Harvard Business School. Following the links in the article led me to this interview which I thought was interesting and I would like to share with you.

One of the things she is known for is her Kanter Law. This law states that, “everything can look like failure in the middle.” If you have been following our S&P500 emini trading system you will know that we are currently in a drawdown period. Drawdowns can feel like failure. The feelings they create are difficult to describe, but if you trade you should be able to immediately relate to these undesirable feelings. Nonetheless, Ms. Kanter’s law states that it is helpful to look at the situation as if you are in the middle of a process when things are not going well.

As a systematic trader, I find this perspective useful. By considering drawdowns as if I am in the middle of them, gives me perspective, and allows me to have confidence going forward. Being in the middle of a drawdown period is rough, but having the right emotional and financial tools gives one the confidence to manage it. Faith, confidence, and perspective are your emotional tools as a systematic trader. Disciplined money management is your financial tool to get through drawdown periods.

Drawdowns are similar to being in the middle of a process. As systematic traders, we must always be ready to face drawdowns and the feelings they create. Solid trading models, confidence, faith, and the Kanter Law can all help pull us through the middle of this process called drawdown.

Tuesday, September 28, 2010

Are there limits to logic? Emini trading system - Emini

Are there limits to logic? If markets behaved logically the underlying logic would eventually be discovered, traders would make excess profits, and the markets would breakdown and cease to exist. In general, new traders believe that rational and logical ideas should make profits when applied to markets. But more experienced traders rely less on logic and the rational. Experienced traders accept chance and probability as the primary determinants of trading models. Armed with this knowledge they understand the odds of the game and use a disciplined money management system to minimize risk and maximize profits.

Probability and chance not only drive our trading models, they also occur spontaneously whenever we set out to find or discover something. Louis Pasteur once stated that, “chance only favours invention for minds which are prepared for discoveries by patient study and persevering efforts.” In regards to trading this means that traders need to study the markets as much as possible, be persevering, and eventually a useful trading idea may occur. It takes a long time and it is not easy.

Creativity involves a mix of conscious and unconscious thoughts and processes. Conscious reasoning is logical and rational. The unconscious is not logical. The unconscious puts limits on logic. In order to succeed we must immerse ourselves in the ideas, thoughts, and research and then step back and allow the unconscious to process all the information. Sometimes the more we seek something the more it eludes us. Seek not, and you shall find, may be more useful in the creative process. This is one way to build successful trading systems and models.

Wednesday, September 22, 2010

Does God Play Dice in the Markets?

Mr. Albert Einstein once said that he could not believe God plays dice with the world. He felt that there was a hidden order to things. He did not want to accept the statistical probability ideas being developed in quantum mechanics. I wonder what he might have thought of markets and trading.

As a physicist he might disregard trading as behavioral and better understood through psychology. As traders we trade the markets and make and lose money with the ideas that we apply to the markets. The chance and probability of success rests on our trading models. Is there a hidden order in the markets? Is it all chance and probability? What do you think?

Tuesday, September 21, 2010


Here's a sample from

A woman could never get her husband to do anything around the house. He would come home from work, sit in front of the tv, eat dinner, and sit some more -- would never do those little household repairs that most husbands take care of. This frustrated the woman quite a bit.

One day the toilet stopped up. When her husband got home, she said sweetly, "Honey, the toilet is clogged. Would you look at it?" Her husband snarled, "What do I look like? The tidy-bowl man?" and sat down on the sofa.

The next day, the garbage disposal wouldn't work. When her husband got home, she said, very nicely, "Honey, the disposal won't work. Would you try to fix it for me?" Once again, he growled, "What do I look like? Mr. Plumber?"

The next day, the washing machine was on the blink. When her husband got home, she steeled her courage and said, "Honey, the washer isn't running. Would you check on it?" And again was met with a snarl, "What do I look like? The Maytag repairman?"

Finally, she had had enough. The next morning, the woman called three repairmen to fix the toilet, the garbage disposal, and the washer. When her husband got home, she said, "Honey, I had the repairmen out today."

He frowned, "Well, how much is that going to cost?" "Well, honey, they all said I could pay them by baking them a cake or having sex with them." "Well, what kind of cakes did you bake them?" he asked.

She smiled. "What do I look like? Betty Crocker?"

Monday, September 20, 2010

Trading Systems and Aesthetics

In Mr. Koestler’s book, The Act of Creation, he discusses perceptions…

“when two independent matrices of perception or reasoning interact with each other the result is either a collision ending in laughter, or their fusion in a new intellectual synthesis, or their confrontation in an aesthetic experience.”

What I find interesting in the above quote is that he uses the word confrontation in regards to having an aesthetic experience. In most art forms, the build up of tension and confrontation, and the subsequent resolving of these, help create the aesthetic experience. There generally is a thesis, antithesis, and a synthesis in art. The same is true in building trading models. This is why trading is sometimes described as an art.

There is inherent tension in building trading models. The concepts and our perceptions of the market that underlie the model may seem illogical. Nonetheless, by bringing what may seem as illogical and discordant ideas into trading models increases the chances of creating a better trading model. Successful trading models really are a combination of both art and skill.

Monday, September 13, 2010

Winning Trading Systems and Bisociation

In Mr. Arthur Koestler’s book, The Act of Creation, he discusses the logic of laughter. I have recently written about Mr. John Cleese and his thoughts regarding humor and what is needed in order to be creative. Both men share similar ideas which can be applied to trading models and trading systems.

Mr. Koestler states that humor occurs when there is, “the perceiving of an idea…in two self-consistent but habitually incompatible frames of reference.” The “idea” here is similar to the main idea of our trading model and the frames of reference underlying the trading system. Successful and robust trading systems usually operate within various frames of reference, for example, two or more time frames, markets, or events.

When we “get” a joke, we are usually relating the idea of the joke to two or more frames of reference. When we trade, we use various frames of reference for the trade to setup. But when we trade we always seem to use time as one of those frames of reference. It may be the time frame we choose to trade in, or the use of two or more time frames to setup the trade. I wonder if there is any way we can avoid the concept of time when we trade? And if time is usually one frame of reference, what is the other, non-time frame of reference we use? Maybe this is what Mr. Koestler discusses as “incompatible” frames of reference. As a systematic trader I tend to think about things like this.

Mr. Koestler uses the term bisociation to refer to things that operate on two planes or frames of reference. He further states that simple, routine thinking operates on a single plane, whereas the creative act always operates on one or more planes. Successful trading systems are usually bisociative, like any art form.

Thursday, September 9, 2010

What's so funny about emini trading models and trading systems?

Here are a few more ideas regarding creativity from Mr. John Cleese. Mr. Cleese spoke about putting in extra time and being persistent when coming up with creative solutions. Constant and conscious thinking about creative solutions also allows our unconscious to process the information in the background. I believe many of us have thought about problems only to find the solutions and answers later on and in some unexpected way.

Mr. Cleese also tells us that creativity is similar to humor. When we understand a joke and laugh we are usually connecting two different frameworks of reference in some new way. Connecting frameworks or ideas is also useful in building winning trading models and systems. By researching and finding patterns and relationships, we create the foundation for a trading system. This can be very similar to finding humor in a joke.

When I first started trading I read everything I could about it. This was helpful, but only to a point. By reading I was able to absorb many ideas, but by being creative and persistent, I was able to find relationships to test. Mr. Cleese states that new connections are only significant if they generate new meaning. So as you think creatively and play with ideas, try putting together random concepts and look at them with your intuition to determine if there is anything significant about them--then test the relationships.

Lastly, it is important to know when to relax and to take a step back. Sometimes we just push and push and make no progress. At this point it is important for us to recognize that we need to take a break. By taking a break we let our brains and unconscious process the information and ideas we have been churning. This, in itself, can sometimes lead to a creative solution.

Wednesday, September 8, 2010

How to be creative in building successful trading models and trading systems

Being creative is essential to building successful and winning trading models. Learning how to be creative can also help us succeed in anything we desire in our lives. If you are familiar with Monty Python’s Flying Circus you may remember Mr. John Cleese. Mr. Cleese played an instrumental part in the success of the show due to his energy and ability to be creative. Mr. Cleese also went on to become a very successful business entrepreneur after Monty Python. I recently read an article in which he discussed creativity and how to be more creative.

Mr. Cleese states that creativity is a way of operating--a mode of behaving. It is being “child-like” and having the ability to play. People who have this ability tend to think freely, explore ideas for fun, and find enjoyment in the process.

Mr. Cleese states that people operate in two modes, open and closed. The closed mode is productive, serious, and pressured. It is the mode that we are in when we are at work. It is purposeful, but not creative. In contrast, the open mode is relaxed, expansive, and less purposeful. It is a mode where we can be curious, participate in thought experiments, and think about “what-if” situations. Both modes are important, and the ability to switch between them is essential in order to be efficient.

There are five aspects to the open mode: space, time, time, confidence, and humor. The first is space. In order to begin the creative process you must make some space for yourself and seal yourself in from outside demands. Find a place where you cannot be disturbed.

Second, create a specific amount of time in order to be creative. He suggests an hour and a half. He also suggests smaller, frequent increments of time for creative thinking are better than longer, less frequent sessions.

Next is time again. Mr. Cleese stressed that he felt more creative when he “stuck to the problem” longer than others would. He would give it even more time. The most creative professionals are the ones who are prepared to play with the problem longer before resolving it. I believe this is the key point of succeeding at anything you do in life. In my case, building successful trading models took a long time and required discipline and a lot of perseverance.

The fourth aspect of being creative in the open mode is having confidence. Creativity feeds on itself. The more creative you are, the more confidence you will have, this leads to being even more creative. Mr. Cleese also stressed that when you are in the open mode you need to let the ideas flow. Play is experiment. Refrain from judging yourself or the ideas. Do not be afraid or fearful of making a mistake. Nothing paralyzes the creative, open mode more than fear.

Lastly, Mr. Cleese stressed the importance of bringing humor to the process. Humor creates spontaneity, it is essential to being playful, and can be very useful in solving problems. I hope this article helps you understand how to be creative. Now go and use these ideas to make money trading or to pursue anything else you desire in your life.

Tuesday, September 7, 2010

One more Vince Lombardi

With football season just around the corner, and in honor of a great motivator and coach, here is one more Vince Lombardi link worth watching...

Sunday, September 5, 2010

Wednesday, September 1, 2010

Vince Lombardi Speech on Winning

So I'm back from the mountains and found this inspiring speech to share...

Winning is not a sometime thing; it’s an all the time thing. You don’t win once in a while; you don’t do things right once in a while; you do them right all the time. Winning is a habit. Unfortunately, so is losing.

There is no room for second place. There is only one place in my game, and that’s first place. I have finished second twice in my time at Green Bay, and I don’t want to finish second again. There is a second place bowl game, but it is a game for losers played by losers. It is and always has been an American zeal to be first in anything we do, and to win, and to win, and to win.

Every time a football player goes to ply his trade, he’s got to play from the ground up—from the soles of his feet right up to his head. Every inch of him has to play. Some guys play with their heads. That’s O.K. You’ve got to be smart to be number one in any business. But more importantly, you’ve got to play with your heart, with every fiber of your body. If you’re lucky enough to find a guy with a lot of head and a lot of heart, he’s never going to come off the field second.

Running a football team is no different than running any other kind of organization—an army, political party or a business. The principles are the same. The object is to win—to beat the other guy. Maybe that sounds hard or cruel. I don’t think it is.

It is a reality of life that men are competitive and the most competitive games draw the most competitive men. That’s why they are there—to compete. To know the rules and objectives when they get in the game. The object is to win fairly, squarely, by the rules—but to win.

And in truth, I’ve never known a man worth his salt who in the long run, deep down in his heart, didn’t appreciate the grind, the discipline. There is something in good men that really yearns for discipline and the harsh reality of head to head combat.

I don’t say these things because I believe in the “brute” nature of man or that men must be brutalized to be combative. I believe in God, and I believe in human decency. But I firmly believe that any man’s finest hour—his greatest fulfillment to all he holds dear—is that moment when he has to work his heart out in a good cause and he’s exhausted on the field of battle—victorious.

Vince Lombardi