Emini Trading Signals and Alerts

Just a quick thought for those interested in trading...we do not sell our methodology, we sell our trading signals...Those who sell their methodology are probably selling air...trading is one of the most difficult things to do successfully...why do you think 95% fail?

now its time for the mountains and some rest after a very difficult seven months...

Vacation

I will be on vacation and will resume blogging September 1.

SP500 VOLATILITY - FUTURES

We calculate a proprietary volatility statistic. This indicator has been backtested to 1950 and captures the market's volatility and its relative volatility to other years very well. I use it to adjust my price stops on trades. Other traders may also want to adjust position sizes. Our March 23, 2010 post contains some historical charts. Generally, .95% is our threshold. See our volatility page above.

Emini Trading Performance

There were three trades this week for a total of 7.25 points.

Why European Bank Stress Test Results are to be Ignored

One word defines the stress test results that are to be released today...silly. Here's why. The European Bank Stress test results will not include the possibility of European sovereign debt defaults. What?!! This is exactly what they are supposed to be measuring; the amount of risk that the banks are undertaking due to their holdings of sovereign debt.

These tests are supposed to give investors and the financial community some idea if the banks can survive defaults in any of their government bond holdings. The results of these tests are to be ignored. This is certainly a coordinated effort at trying to cover up big systemic problems. I believe that everyone in the back of their minds understands that if Greece or other countries were to default, there would be a cascading problem. The value of all the bonds would decline as investors repriced them during a crisis. The banks holding these bonds would face severe losses and the European governments would have to bail them out. It's as simple as that. Ignore these test results.

What if the Chinese have to bailout their banks ?

Over the weekend I was reading about how the Chinese banks are playing games with their loans and moving them off-balance sheet. How much of this is going on and why? Here is the possible problem with this. If the world economy stagnates or even declines again, what will happen if Chinese workers, borrowers, and real estate companies have problems servicing their debts?

Here is one possible scenario I hope never plays out. The world economy stagnates or declines more than expected, Chinese factories begin to experience a slowdown in production, Chinese workers begin to be laid off, leading to more non-performing loans. If this occurs, one wonders how many loans are at risk. Can you imagine if the Chinese government has to step in and bailout its banks like we did ours? This would mean that one of the biggest buyers of U.S. debt would probably reduce their purchases, or even worse, stop buying our debt.

This would lead to severe complications in the U.S. We have not structurally reformed our government and economy. We cannot stop gourging ourselves with debt. Our states are in a fiscal mess and I wonder who will bail us out next time. If the Chinese stop lending to us we will face even bigger problems than we already have.

Emini Trading Performance - June 2010 YTD

Although our returns at various risk levels have outperformed the SP 500 Cash Index, we are underperforming in comparison to other indices we track. A review of our comparative performance can be seen here.

Paul Tudor Jones Interview

This interview with Mr. Jones was insightful from a variety of perpectives. My favorite part is his definition of what can be considered good performance. Mr. Jones feels that a money manager or trader should return two to three times more than their worst drawdown, on average. This concept is similar to the Calmar ratio, which compares returns to drawdowns.

On our website, in the money management section, we allow users to run historical returns and drawdowns for a given risk level. A comparison of our returns to drawdowns, from Mr. Jones' perspective, can help one understand our performance.

Paul Tudor Jones - F word Speech

This speech given by Mr. Jones has some great advice...


My favorite part is, "Some things happen to you that at the time will make you feel like the world is coming to an end, but in actuality, there is a very good reason for it. You just can't see it and don't know it. When one door closes another will open, but standing in that hallway can be hell. You just have to persevere."

Things do happen for a reason...

Paul Tudor Jones - Video

Paul Tudor Jones and a video about him...

Systematic Trading vs. Discretionary Trading - Some Statistics

Traders always argue over which is better; systematic trading or discretionary trading? I believe this question will always be debated, but by looking at some statistics we can try to get a better understanding. I am a systematic trader, so I am biased, nonetheless, I began to research answers to this question and came up with some interesting statistics that I would like to share with you.

The systematic and discretionary data is from www.Barclayhedge.com. I calculated the S&P500 data and the compounded returns from 1999 to 2009.

Systematic traders 7.08%, Discretionary Traders 8.79%, and S&P 500 Cash -.93%.

The 1999 to 2009 statistics support the case that discretionary traders have outperformed system traders by statistical return measures. Interestingly, both groups have easily outperformed the market return over this particular time period.

According to Barclayhedge, if one looks at the time period from 1987 to 2009, systematic traders returned 9.33%, with a Sharpe ratio of .37, and drawdown of 22.07%. Discretionary traders returned 9.20%, with a Sharpe ratio of .61 and 10.67% drawdown. The SP500 returned 9.41% from 1987 to 2009. Interestingly, both groups underperformed relative to the market, but the numbers seem to support discretionary trading as a better alternative to systematic trading.

So which I is better? The answer is that the statistics seem to support discretionary trading. But in specific terms, the answer will depend on each individual firm or trader’s performance. Certain firms will have excellent discretionary traders, others will have excellent systematic trading systems. My suspicion is that those who do call themselves discretionary, still follow some kind of systematic approach, and leave the final decision of entering a trade as discretionary.

Please Note

Virus Alert!

There is this dangerous virus being passed electronically, orally, and by hand.
This virus is called Worm-Overload-Recreational-Killer (WORK).

If you receive WORK from any of your colleagues your boss or anyone else via any means DO NOT TOUCH IT.

This virus will wipe out your private life completely.

If you should come into contact with WORK put your jacket on and take two good friends to the nearest bar.

Purchase the antidote known as Work-Isolator-Neutralizer-Extractor (WINE) or Bothersome-Employer-Eliminator-Rebooter (BEER).

Take the antidote repeatedly until WORK has been completely eliminated from your system...

Emini Trading This Week

One X trade this week for -7 points.

We are currently in a 7 month drawdown and 19 point decline. In comparison, some of our other historical drawdowns have lasted from 5 to 9 months, with the worst drawdown of 21 points, and others of 16 to 18.50 points. We are still within historical parameters, but nonetheless, these declines always are difficult to handle.

MR. NIEDERHOFFER AND MR. TALEB - TWO OPPOSITE STYLES OF TRADING

Mr. Victor Niederhoffer and Mr. Nassim Nicholas Taleb are two traders whom I admire for a variety of reasons. This article is a great story and synopsis of how different and opposite they both are in their respective trading strategies.

I have read that traders who write options generally tend to make more consistent money than those who buy options; but when an unexpected event comes along they blow it all away. Mr. Niederhoffer writes them, and Mr. Taleb buys them. Mr. Niederhoffer makes money up until the unexpected event. Mr. Taleb loses money until the rare, unexpected, black swan event occurs.

Mr. George Soros Speech - Germany is the Key

Here is the text of a recent speech given by Mr. Soros...no one knows what will happen in the future, and although I usually am optimistic, I do worry that this overleveraged world of our has to structurally reform itself. I think I hear the sound of a piper in the distance...

High Frequency Trading Creates an Uneven Playing Field

Here is a link to a video about high frequency trading. High frequency trading (HFT) has become an issue lately. According to the Tabb Group, HFT accounts for 61% of the volume in U.S. equity markets. I am not against it or for it. But I believe the SEC has the obligation to step in and make the playing field level for all traders. Having the opportunity to see bid and ask orders split seconds ahead of others, which is called flash trading, is similar to having inside information. Under exchange rules, stock orders are supposed to be routed to the exchange that offers the best price. This means that exchanges can lose the fee that they charge if the order is executed on a different exchange. By flashing that order for a few milliseconds, they can try to keep the order and gain the fees. This is not a level playing field for investors and traders.

Firms that use high frequency trading claim they are providing liquidity to the market. This is simply not true. High frequency trading may be providing liquidity, but not when the markets need it. Markets need liquidity when an event or crises occurs. High frequency programs are stopped if data feeds and prices are becoming abnormal. This is what happened on May 6, 2010. It reminds me of the stories of the specialists on the Street who simply stopped picking up their phones during the crash of 1987.

The firms who are using HFT are probably doing well with it and will continue to fight anyone who threatens to change the rules. In my opinion, however, HFT needs to be better regulated and the rules need to be changed to make the playing field more level for all traders.

EMINI TRADING PERFORMANCE

No trades last week. The trading models are still in a drawdown phase.

SOROS VIDEO - ACT TWO

Bloomberg posted a video of a speech given by George Soros. It is worth watching. Soros believes that we are now in Act Two of the financial crisis. The sovereign debt problem has not gone away, has not been dealt with, and will come back to haunt us. It makes me shiver thinking about the amount of leverage in this world. America is swimming in debt and has pushed its problems under the rug by borrowing even more in order to solve its problems. The European sovereign debt problem has also not been adequately addressed. Although I have not been involved with credit markets in my life, I still wonder why anyone would buy the debt of countries that will not be able to pay back their debts.

That being said, here's the link to the video...

SP500 EMINI TRADING PERFORMANCE

There were two trades this week...

Y sell = 3.25

X buy = -7.0

Creativity and Uncertainty, Synchronicities and Trading

We should pay attention to synchronicities that occur in our lives. They may be happening for reasons that we may not currently understand. A synchronicity is what we sometimes call a coincidence, or when two chance events occur at the same time.

Last week I was flipping through the TV channels and caught a few moments of an interview with Mr. Deepak Chopra. All I briefly heard was that creativity tends to occur within uncertainty. I wish I had seen the whole broadcast. Nonetheless, this fragment of information was something I thought about all through the week. As traders, we deal with uncertainty in a variety of ways, so naturally, uncertainty linked with creativity peaked my interest.

Last night, I was looking for a book to read, and began to look at some old books on our shelves. I came across the book, “The Act of Creation,” by Mr. Arthur Koestler. I do not know if you believe that the universe sends messages to us, but I sometimes think it does. This book is about creation and creativity, and how all creative activities have the same basic pattern. I have just begun to read it and I will post my thoughts as I go along over the next period of time.