Friday, October 29, 2010

Greek Debt and Mr. El-Erian

Mr. Mohamed A. El-Erian was recently discussing the Greek debt problem as reported by Bloomberg.com.

He stated that Greece is likely to default on their debt by 2013. Mr. El-Erian felt that, it’s in Greece’s interest to default “as long as you can contain the contagion to other countries and it is done through orderly restructuring and repricing to retain competitiveness.” I definitely agree that it is only a matter of time before the Greeks default, but I have a feeling that it will not be an orderly process. These kinds of things spread like wildfire and can be very difficult to control and keep orderly once they begin to happen.

Mr. El-Erian always seems to be in the news recently. He and Mr. Nouriel Roubini are now officially the twins of doom. I like both of these men, and I am kidding when I say this, but there is some truth to the statement. Mr. El-Erian calls it like he sees it. It is only a matter of time before the overleveraged countries pay for their mistakes. It happens to individuals and it will happen to countries. Greece may be first, but remember, there is line at the door to bankruptcy and default…and it “ain’t going to be purty at all.”

Wednesday, October 27, 2010

The dilemma of market prices and Information Theory

Can information theory help us better understand market price behavior? Information theory states that an unexpected event or signal that occurs contains more informational content than an event that is expected. I can follow the logic of this. But here is the dilemma; if a signal or an event contains more information, it theoretically should reduce uncertainty.

When the market receives unexpected news, prices immediately react, but the sudden reaction in prices does not generally reduce uncertainty, it increases it. In my opinion, given everything else, if the news has been expected, one should expect market prices to be range bound with negative feedback dominating price moves. But if the news is unexpected, then a price breakout in some direction usually occurs. Price breakouts are positive feedback events that generally create herdlike trading. Although the unexpected news event may contain more information, it does not necessarily lessen uncertainty, it increases it. This can lead to trading opportunities for discretionary style traders.

I have difficulty understanding how discretionary traders can make money on a consistent basis. Discretionary traders not only have to figure out what direction prices are going to move, but they also have to determine if the news is expected or unexpected. This is why we see the market move so much when economic figures or earnings are released that differ from the consensus opinion. Consensus is synonymous with expected. Relating the actual figure to the consensus number is another aspect that a discretionary trader has to take into account. Then, if that is not hard enough, the discretionary trader has to figure how far and in what timeframe prices will move. Is it not better to trade the market systematically? I think so.

Tuesday, October 26, 2010

Mr. Paul Krugman and British Economic Policy

Mr. Paul Krugman, in his column in The New York Times, criticized the recently adopted policies of the British government. Mr. Krugman argues that cutting deficits during difficult economic times is not good policy. This is an argument that many economists make.

I can understand their line of reasoning. The problem though, as I see it, is that politicians and governments rarely, if ever, follow through with deficit reduction policies when economic times are better. Cutting spending, increasing taxes, reducing fat, and taking the more harsh measures that are required to reduce deficits is difficult to do when times are good. What politician wants to take away the punch bowl and spoil the party when times are good?

Economists may be right in their opinions about deficit reduction during economic distress; but human nature, self-interest, and greed works against them. You cannot have it both ways; either you cut deficits when times are good, or you cut them when times are bad. Humans sometimes need to actually experience pain before they do something about it. Recessions and economic slowdowns are the pain that wakes people up.

Monday, October 25, 2010

Britain pays the piper while the U.S. tells him to "F" off..

It is only a matter of time before the United States adopts similar policies that the British have recently announced. Unfortunately, our politicians do not have the “balls,” pardon my French, to do so. In Britain, it is time to pay the piper. In America, we do not want to believe that the piper has to get paid.

The Conservative led government in Britain has announced drastic cuts in public spending and initiated a variety of policies to control their public deficit. The public deficit as a percent of economic output in Britain is 11.5%, in America it is 10.7%. The British have announced 83 billion pound spending cuts, or 130 billion USD. The announced policies seem draconian; 19% cuts across all government departments, 490,000 public sector employees to be laid off, payment cuts to the long term unemployed, limits announced on jobless benefits and to welfare recipients, an increase in the retirement age, cuts in the arts and police, and higher value added taxes.

In my opinion, this kind of thing will eventually occur in the U.S. We just do not want to admit it…yet. The British have decided that they must face the music if they want to dance. In America, we do not want to hear the music, never mind dancing to it.

Friday, October 22, 2010

Something for the end of the week

From my friend at ZZJoke.com...

HOW TO KEEP A HEALTHY LEVEL OF INSANITY:

1. AT LUNCH TIME, SIT IN YOUR PARKED CAR W/ SUNGLASSES ON AND POINT A HAIRDRYER AT PASSING CARS. SEE IF THEY SLOW DOWN.

2. PAGE YOURSELF OVER THE INTERCOM. DON'T DISGUISE YOUR VOICE.

3. EVERY TIME SOMEONE ASKS YOU TO DO SOMETHING, ASK IF THEY WANT FRIES WITH THAT.

4. PUT YOUR GARBAGE CAN ON YOUR DESK AND LABEL IT "IN"

5. PUT DECAF IN THE COFFEE MAKER FOR 3 WEEKS. ONCE EVERYONE HAS GOTTEN OVER THEIR CAFFEINE ADDICTIONS, SWITCH TO ESPRESSO.

6. WRITE "FOR SEXUAL FAVORS" IN THE MEMO LINE OF ALL YOUR CHECKS.

7. FINISH ALL YOUR SENTENCES WITH "IN ACCORDANCE WITH THE PROPHECY."

8. DONT USE ANY PUNCTUATION

9. AS OFTEN AS POSSIBLE, SKIP RATHER THAN WALK.

10. ASK PEOPLE WHAT SEX THEY ARE. LAUGH HYSTERICALLY AFTER THEY ANSWER.

11. SPECIFY THAT YOUR DRIVE-THROUGH ORDER IS "TO GO".

12. SING ALONG AT THE OPERA.

13. GO TO A POETRY RECITAL AND ASK WHY THE POEMS DON'T RHYME.

14. PUT MOSQUITO NETTING AROUND YOUR WORK AREA. PLAY A TAPE OF JUNGLE SOUNDS ALL DAY.

15. FIVE DAYS IN ADVANCE, TELL YOUR FRIENDS YOU CAN'T ATTEND THEIR PARTY BECAUSE YOU'RE NOT IN THE MOOD.

16. HAVE YOUR COWORKERS ADDRESS YOU BY YOUR WRESTLING NAME, ROCK HARD ________.

17. WHEN THE MONEY COMES OUT THE ATM, SCREAM "I WON!","I WON!" "3RD TIME THIS WEEK!!!!!

18. WHEN LEAVING THE ZOO, START RUNNING TOWARDS THE PARKING LOT, YELLING "RUN FOR YOUR LIVES, THEY'RE LOOSE!!"

19. TELL YOUR CHILDREN OVER DINNER, "DUE TO THE ECONOMY, WE ARE GOING TO HAVE TO LET ONE OF YOU GO." AND THE FINAL WAY TO KEEP A HEALTHY LEVEL OF INSANITY.......

20. SEND THIS E-MAIL TO EVERYONE IN YOUR ADDRESS BOOK, EVEN IF THEY SENT IT TO YOU OR ASKED YOU NOT TO SEND THEM STUFF LIKE THIS.

Thursday, October 21, 2010

The Right Attitude for Trading

“Winning is not everything, but wanting to win is.”

-Vince Lombardi

As traders we must have this attitude in order to succeed. The hard part is maintaining this attitude when we are getting tossed around with losses and or experiencing drawdowns in our trading systems and trading models. Faith, confidence, and perseverance are the only way through the tough times…

Friday, October 15, 2010

Some good advice for quantitative traders from Mr. Paul Wilmott

Here is some good advice for trading model builders and quants…

In my view the main reason why quantitative finance is in a mess is because of complexity and obscurity. Quants are making their models increasingly complicated, in the belief that they are making improvements. This is not the case. More often than not each ‘improvement’ is a step backwards. If this were a proper hard science then there would be a reason for trying to perfect models. But finance is not a hard science, one in which you can conduct experiments for which the results are repeatable. Finance, thanks to it being underpinned by human beings and their wonderfully irrational behaviour, is forever changing. It is therefore much better to focus your attention on making the models robust and transparent rather than ever more intricate.

Source :Paul Wilmott’s blog

The idea is to keep it simple…

Tuesday, October 12, 2010

FROM ZZJOKE.COM - Jokes

for a change of pace...

A man and his wife are awakened at 3 o'clock in the morning by a loud pounding on the door.

The man gets up and goes to the door where a drunken stranger standing in the pouring rain is asking for a push. "Not a chance" says the husband "It's three o'clock in the morning!"

He slams the door and returns to bed. "Who was it?" asks his wife.

"Just a drunken stranger asking for a push" he answers.

"Did you help him?" she asks.

"NO, I didn't, it's 3 o'clock in the morning and it's pouring rain!!"

"Well, you've got a short memory" says his wife. "Can't you remember about three months ago when we broke down on vacation and those two guys helped us out? I think you should help him."

The man does as he is told and gets dressed and goes out in the pouring rain and calls out into the dark, "Hello, are you still there?"

"Yes," comes the answer.

"Do you still want a push?" calls out the husband.

"Yes, please!" comes the reply from the dark.

"Where are you?" asks the husband

"Over here, on the swing" the drunk replies...

Friday, October 8, 2010

Mr. Jim Simons, High Frequency Trading, and the Flash Crash

The Wall Street Journal reported that Mr. Jim Simons gave an interview on CNBC in regards to high frequency trading (HFT) and the flash crash.

During the interview Mr. Simons stated that HFT helped the market recover quickly compared to how long it took the market to recover from the 1987 crash. I find this interesting. I respect Mr. Simons and admire his success, but I feel his opinion is biased and flawed. Renaissance Technologies, his firm, is known to use HFT, so how can he be objective? How can you respond to what happened after the crash and not address what or why it happened before it occurred? How can you feel HFT helped the situation, when in fact, HFT was one of the major reasons of why the crash occurred in the first place?

For example, if you cannot swim and I push you into the water, then I jump in and save you, should you consider me a hero? In my opinion, Mr. Simons would have been better off not making any public comments in regards to this matter. HFT is here to stay, but the public’s confidence in the market and the system has been shaken by it.

Friday, October 1, 2010

Managing Drawdown Periods in Trading Systems - emini trading - emini trading system

All successful traders have trading plans for both good trading times and the negative periods. Negative trading periods are known as drawdowns. I wonder how the term came about, but one can guess that these periods are called drawdowns because they not only reduce our accounts, but that they also draw us down emotionally.

So how can we handle “draw us down” periods? In my humble opinion, the best way to handle drawdown periods is through confidence, faith, and disciplined money management. Confidence and faith are interrelated. Confidence increases over time. The longer we successfully trade our models, the more confident we become. Prior drawdown periods and negative emotional experiences also can help us better manage and understand current drawdown periods. “What doesn’t kill us makes us stronger” and “diamonds are made under pressure,” are two sayings I like to think about when I am in drawdown periods.

Ms. Rosabeth Moss Kanter, a Harvard Business School professor, was asked about what confidence is in an interview. Her response was, “confidence is a situational expectation—an expectation of a positive outcome.” This is relevant to traders who use trading systems and models. Every time we trade we have a situation where we should have an expectation of a positive outcome. Our trading models should have positive expectation. Positive expectation can be calculated from our trading research. But positive expectation cannot, however, be calculated in our emotional states. This comes from faith; faith in our selves, faith in our trading models, and faith from above.