1/ Unknown Market Wizards (Jack Schwager)
"There are solo traders, operating in complete obscurity, who achieve performance far surpassing the vast majority of professional managers’.
"Some of them may have the best records I have ever encountered."
amazon.com/Market-Wizards…
"There are solo traders, operating in complete obscurity, who achieve performance far surpassing the vast majority of professional managers’.
"Some of them may have the best records I have ever encountered."
amazon.com/Market-Wizards…
2/ Peter Brandt
"My brother bought silver coins at a premium of 20% over face value. It was an asymmetric risk trade: you could lose a maximum of 20%, but the upside was unlimited.
"By 1974, silver had more than tripled. My brother was driving around in a Mercedes-Benz." (p. 7)
"My brother bought silver coins at a premium of 20% over face value. It was an asymmetric risk trade: you could lose a maximum of 20%, but the upside was unlimited.
"By 1974, silver had more than tripled. My brother was driving around in a Mercedes-Benz." (p. 7)
3/ "Charts have become much less reliable. In the 1970s-80s, patterns were neat. There were fewer whipsaws. There weren’t a lot of people looking at charts.
"I think high-frequency trading creates volatility around breakout points. Markets are more mature, with bigger players.
"I think high-frequency trading creates volatility around breakout points. Markets are more mature, with bigger players.
4/ "I used to trade 1-4 week patterns. Now I trade 8-26 week patterns.
"It’s only when I override my instincts through a disciplined process that charts work.
"Copper has been in a 40-cent range for nearly a year. Today, I bought near a new recent high. That’s hard to do.
"It’s only when I override my instincts through a disciplined process that charts work.
"Copper has been in a 40-cent range for nearly a year. Today, I bought near a new recent high. That’s hard to do.
5/ "There may be an inverse correlation between how I feel [and conventional wisdom] about a trade and how it turns out.
"I take pride in the fact that I can be wrong 10 times in a row. My edge comes from the fact that I have become so good at taking losses." (p. 20)
"I take pride in the fact that I can be wrong 10 times in a row. My edge comes from the fact that I have become so good at taking losses." (p. 20)
6/ "If you have a 100-contract position and the market goes against you a full point, that’s $100,000. I started thinking in terms of dollars. I stopped trading the market and started trading my equity. It had a definite impact: my performance drastically deteriorated." (p. 22)
7/ "When I was trading my own account, it was like monopoly money. My trading capital was just something I kept score with. I detached myself emotionally from it.
"Once I found myself trading money for friends, all of a sudden, it was real money. It messed with my head." (p. 26)
"Once I found myself trading money for friends, all of a sudden, it was real money. It messed with my head." (p. 26)
8/ "I hate indecision. I hate regret. I hate second-guessing. So I wanted a [stop-loss] rule that was automatic and would protect against my giving back most of my open profits.
"I don’t trade intraday. If I sit and watch the screen all day, I will sabotage myself." (p. 30)
"I don’t trade intraday. If I sit and watch the screen all day, I will sabotage myself." (p. 30)
9/ "In the Twitter world, there is a tendency to respond negatively if you were bullish and now switch to bearish or vice versa. Whereas, I think that the flexibility to change your mind is actually a strong attribute for a trader." (p. 36)
10/ "Trendlines no longer work. Channels no longer work. Symmetrical triangles no longer work.
"The only thing I have found that still works are patterns that tend to be shorter-term—less than a year and preferably less than 26 weeks—that have a horizontal boundary.
"The only thing I have found that still works are patterns that tend to be shorter-term—less than a year and preferably less than 26 weeks—that have a horizontal boundary.
11/ Schwager: "Is it that they are not so much patterns that work, but instead allow you to select entries with well-defined, reasonably close, meaningful stop-risk points?"
Brandt: "Yes.... charts are wonderful for finding specific spots with asymmetric risk/reward." (p. 37)
Brandt: "Yes.... charts are wonderful for finding specific spots with asymmetric risk/reward." (p. 37)
12/ "Someone else trying to copy my methodology wouldn’t have my conviction. If, as is inevitable, the approach goes through a difficult period, they wouldn’t be able to last through it. That’s why traders need to know exactly why they are taking a trade." (p. 40)
13/ Jason Shapiro
"The traders in Market Wizards worked on their own time. They were super-contrarians. It didn’t matter what other people thought. Politics didn’t matter. I said to myself, “That is what I want to do.”
"The traders in Market Wizards worked on their own time. They were super-contrarians. It didn’t matter what other people thought. Politics didn’t matter. I said to myself, “That is what I want to do.”
14/ "Nick Leeson was massively short options. The Singapore government announced it was going to liquidate the entire position. Nikkei futures traded at a 15-20% discount to cash all day. I went long futures/short cash. The next day, they came back in line, and I made almost 20%.
15/ "The U.S. stock market had been going straight up. I was going to be the hero: I kept shorting and getting stopped out all the way up.
"We had a saying in Hong Kong" “Should’ve been up, but it’s down, so short it; should’ve been down, but it’s up, so long it.” " (p. 59)
"We had a saying in Hong Kong" “Should’ve been up, but it’s down, so short it; should’ve been down, but it’s up, so long it.” " (p. 59)
16/ "With only $3 million under management, it is tough to raise any more money. You need infrastructure, and I couldn’t afford infrastructure. It’s the whole catch-22 thing. Also, I’m not exactly a marketing guy." (p. 66)
17/ "The February 2020 top in the stock market was unusual. In this case, the speculator position wasn’t meaningfully long at the top. But then the market came down 5%, and everyone got long. And I saw the same thing on TV: everyone was saying you have to buy the dip." (p. 75)
18/ "If NASDAQ, a higher-beta index, is lagging the Dow, a lower beta index, when the market is up—not the price action you would expect—and I’m long equity-correlated positions, then I will short NASDAQ as a hedge." (p. 76)
This is alpha momentum:
This is alpha momentum:
https://twitter.com/ReformedTrader/status/1217567206784954368
19/ "Being a contrarian works in the markets, but it doesn’t work in social situations. People want to be liked; they want to be part of a group. Being a contrarian doesn’t win you any friends.
"People get into such one-sided views that their logic disappears.
"People get into such one-sided views that their logic disappears.
20/ "If you ask me whether I personally think Trump is an a**hole, yes, I think he is. But does that mean every single thing he says has to be lambasted, every single time?
"Sometimes I argue because I think it is important for people to hear the other side." (p. 77)
"Sometimes I argue because I think it is important for people to hear the other side." (p. 77)
21/ Richard Bargh
"Staring at screens is like being at the casino. You have to guard against the temptation to take impulsive trades.
"If a bad or missed trade destabilizes me, I have rules for bouncing back: Take some time off, exercise, go out in nature, have fun." (p. 115)
"Staring at screens is like being at the casino. You have to guard against the temptation to take impulsive trades.
"If a bad or missed trade destabilizes me, I have rules for bouncing back: Take some time off, exercise, go out in nature, have fun." (p. 115)
22/ Amrit Sall
"I tried trading breakouts from trendlines and intraday consolidations. Over the longer term, it was a net negative strategy that feeds into your impulsive nature. You’re trying to make easy money, but that is not how it’s going to work." (p. 123)
"I tried trading breakouts from trendlines and intraday consolidations. Over the longer term, it was a net negative strategy that feeds into your impulsive nature. You’re trying to make easy money, but that is not how it’s going to work." (p. 123)
23/ Schwager: "The perception that trendline breakouts work is a consequence of drawing the line with the benefit of hindsight. In real time, there are multiple other trendlines that experience what prove to be false breakouts, which effectively redefine the trendline." (p. 125)
24/ "I have to be aware of what is priced in.
"If a central banker said something contrary to what was priced in, I would place an aggressive trade without hesitation, then hold minutes to hours.
"I only get 10 of those trades a year and can’t afford to pass up on one." (p.126)
"If a central banker said something contrary to what was priced in, I would place an aggressive trade without hesitation, then hold minutes to hours.
"I only get 10 of those trades a year and can’t afford to pass up on one." (p.126)
25/ "After a big hit, I minimize the emotional impact by returning to a calm state as soon as I can. I do a postmortem, learn the lessons, and move on. I avoid the trap of replaying the same negative story, reliving the pain multiple times, and taxing my mental capital." (p. 136)
26/ "If you worry about missing out, you will take trades you shouldn’t. If you're agitated, you may snatch profits instead of letting them run (or hold onto your losers).
"You are continually up against your emotional limitations. That is why so few people succeed." (p. 137)
"You are continually up against your emotional limitations. That is why so few people succeed." (p. 137)
27/ "Over time, increased market automation and HFT algorithms have made execution harder and eroded my edge on very short time frame strategies. As a result, I focus primarily on higher conviction trades and trade less frequently during the month but take on more risk per trade.
28/ "You may go through long periods when you don’t make anything, or even have a drawdown, and then have a substantial gain. Entrepreneurs understand that. They will invest in a company for a long time, and the payoff comes in one hit after many years of hard work.
29/ "A lot of losing traders have a paycheck mentality. But outsize profits don't come from consistency. At best, I am right 50% of the time, and sometimes I am right only 30% of the time. However, I earn eight times as much on my winners as I lose on my losers." (p. 142)
30/ Daljit Dhaliwal
"I liked not knowing what would happen the next day. I didn’t want a mundane job.
"An official could say, “We’re not going to help Greece,” and the euro would move 20 ticks. Later, Chancellor Merkel would say the same thing, and it would move another 40.
"I liked not knowing what would happen the next day. I didn’t want a mundane job.
"An official could say, “We’re not going to help Greece,” and the euro would move 20 ticks. Later, Chancellor Merkel would say the same thing, and it would move another 40.
31/ "I didn’t care whether I fully understood the reasons; all I cared about was the immediate impact.
"What I do now is quite the opposite. I fade the initial reactions to headlines. It is no longer possible to trade for the initial move because the algos move before I can.
"What I do now is quite the opposite. I fade the initial reactions to headlines. It is no longer possible to trade for the initial move because the algos move before I can.
32/ "Around 2016, there was a fundamental shift: the short-term moves continued into the longer term.
"It’s mentally tiring trying to trade headlines. And when I analyzed my trading results, I noted that almost all my profits were coming from very few trades." (p. 158)
"It’s mentally tiring trying to trade headlines. And when I analyzed my trading results, I noted that almost all my profits were coming from very few trades." (p. 158)
33/ The Financial Times: "The article was one of two pre-written stories—covering different possible decisions—prepared in advance of the announcement. Due to an editing error, it was published when it should not have been. The FT deeply regrets this serious mistake." (p. 162)
34/ "After reading Ray Dalio's Principles, I started questioning everything. Your perception of reality is not necessarily the way things are.
"After reviewing my trading notes, I realized that although I thought I was good at technical analysis, I really wasn’t.
"After reviewing my trading notes, I realized that although I thought I was good at technical analysis, I really wasn’t.
35/ "Dalio is a master of history. People get blindsided by something that has happened before because they overweight recent history and don’t go back far enough to backtest their views. To get conviction, you have to look at history well beyond your own (recent) experience.
36/ "I analyze markets back about 100 years—but, ideally, I would like to go back even further. One book that I read recently is Devil Take the Hindmost: A History of Financial Speculation. That book talks about market bubbles all the way back to tulipmania." (p. 165)
37/ "Long-term prolonged consolidations are important. You can’t tell when they will break, but when they do, it can often lead to major price moves.
"I generally advise against seeking a trading career because most people are not willing to put in the effort needed to succeed.
"I generally advise against seeking a trading career because most people are not willing to put in the effort needed to succeed.
38/ "Short-term luck fools people into thinking their profits are due to skill. It takes a medical student six-plus years to become a doctor. Why would proficiency in trading to be any different?
"Don’t be eager to start trading. Do research and find your approach first.
"Don’t be eager to start trading. Do research and find your approach first.
39/ "To succeed, you really need to love trading. To me, playing the markets is like a never-ending chess game. It’s the most exciting game you can play. If trading doesn’t excite you, I don’t know whether the good times will be good enough to offset the bad times." (p. 172)
40/ John Netto
"Going through my first loss made me aware of the potential for outlier events. I appreciated that Lehman Brothers could happen. I understood that seemingly inconceivable macro events could take place. I knew it was imperative to manage risk." (p. 180)
"Going through my first loss made me aware of the potential for outlier events. I appreciated that Lehman Brothers could happen. I understood that seemingly inconceivable macro events could take place. I knew it was imperative to manage risk." (p. 180)
41/ "We are currently in a regime where there is a massive chase for yield.
"With $17 trillion of negative-yield instruments out there, gold is a zero-yielding currency. The fact that gold yields zero makes it better to hold than assets you have to pay to own." (p. 186)
"With $17 trillion of negative-yield instruments out there, gold is a zero-yielding currency. The fact that gold yields zero makes it better to hold than assets you have to pay to own." (p. 186)
42/ "Without knowing the market narrative, you will buy near the high and sell near the low.
"If no one expects OPEC to cut production, and they cut, you can have a significant price response. If it's widely anticipated, the market might even reverse once news is out." (p. 190)
"If no one expects OPEC to cut production, and they cut, you can have a significant price response. If it's widely anticipated, the market might even reverse once news is out." (p. 190)
43/ "It’s hard for good traders to consistently make money, but it’s not hard at all for bad traders to lose. They have no process. They make decisions emotionally and are incredibly impulsive, which is why they are swayed by panic and buy near highs / sell near lows.
44/ "Winning traders can lose even when they do everything right. They have a process and a commitment to improvement. Incremental improvements can have a profound effect.
"Losing traders want a silver bullet; if it doesn’t work immediately, they switch strategies." (p. 194)
"Losing traders want a silver bullet; if it doesn’t work immediately, they switch strategies." (p. 194)
45/ Jeffrey Neumann
"I started trading not long after the change from eighths and sixteenths to penny decimals. My broker went out two decimals beyond the penny decimal. However, most brokers only went out to a penny, which is why my first stock was stuck between 7 and 8 cents.
"I started trading not long after the change from eighths and sixteenths to penny decimals. My broker went out two decimals beyond the penny decimal. However, most brokers only went out to a penny, which is why my first stock was stuck between 7 and 8 cents.
46/ "They let me put in an order at 7.01¢. After I got filled, I'd put up my stock for sale at 7.99. I was almost a market maker. Even though my stock never moved, I made 13% after commission on every trade.
"I used charts to find stocks that stayed in a range for a long time.
"I used charts to find stocks that stayed in a range for a long time.
47/ "People began to catch on, so I had to raise my buy and lower my sell points to get filled. The game ended about a year after it started. The bid-asked spread got so compressed that I was selling a stock only a few hundredths of a penny above where I bought it." (p. 207)
48/ "A one-month trendline breakout means that the potential move is six to eight hours long. I didn’t learn until later to look for breakouts from longer-term trendlines because they led to much bigger moves.
"Now, look for breakouts from one- to five-year trendlines." (p. 209)
"Now, look for breakouts from one- to five-year trendlines." (p. 209)
49/ "Once everyone is talking about something, I no longer have an advantage. I want to be looking for a place to get out.
"When the sector leaders broke their uptrend lines, even though some of the smaller stocks held on, I started getting out of everything." (p. 212)
"When the sector leaders broke their uptrend lines, even though some of the smaller stocks held on, I started getting out of everything." (p. 212)
50/ "Insiders owned 750 million shares. Two months earlier, they couldn’t even have sold 100 million at 1¢. However, if they generated tons of publicity, they could sell at 10¢ easily. When they started selling, prices collapsed. They kept going until they couldn’t sell any more.
51/ Schwager: "The SEC charged Spongetech with “a massive pump-and-dump scheme that deceived investors into believing they were buying stock in a highly successful company.” Spongetech had also defrauded Madison Square Garden and a host of professional sports teams." (p. 215)
52/ Golf course indicator: "I usually never talk markets with my golf buddies. I showed up for the first tee, and this 60-year-old who has never speculated in stocks asked me about Litecoin. To me, that was a clear sign that the masses knew about this trade." (p. 221)
53/ "I immediately pivot and correct mistakes. I learn from each one.
"The second I realize I am wrong and get out of the stock, it’s over. I don’t even remember the trade a minute later. It happened. It’s gone. I’ve accepted it." (p. 223)
"The second I realize I am wrong and get out of the stock, it’s over. I don’t even remember the trade a minute later. It happened. It’s gone. I’ve accepted it." (p. 223)
54/ Chris Camillo
"Before the iPhone, people would say, “I would never buy a phone without a keyboard.” I saw so much disconnect between what people said and what they did that I completely lost faith in market research as an industry." (p. 236)
"Before the iPhone, people would say, “I would never buy a phone without a keyboard.” I saw so much disconnect between what people said and what they did that I completely lost faith in market research as an industry." (p. 236)
55/ "I monitor a large number of proprietary word groups. If the conversational volume is abnormally high, that is the first signal for me that something is up. When I find something like the Under Armour trade, I spend 14-15 hours a day for days or even weeks on due diligence.
56/ "I interviewed store managers and consumers. I went online and scoured every piece of information related to my assumption.
"Every time there is a new show on Netflix, I monitor the depth of interest in the show by measuring the conversational volume.
"Every time there is a new show on Netflix, I monitor the depth of interest in the show by measuring the conversational volume.
57/ "The way Wall Street approaches the stock is to focus on viewership. There is a firm that provides Nielsen-type ratings for Netflix. The problem is that every top Netflix show has roughly the same amount of people watching it, so that statistic doesn’t tell you anything.
58/ "Netflix has hit shows with some regularity. The real question was whether Stranger Things was an anomaly. I measured the volume of people speaking the words Stranger Things, and then I compared it with the top five shows they had produced in the prior five years.
59/ "For other hit shows, conversational volume peaked in the first week, then went back to the prior level. Stranger Things hit that peak, then plateaued there.
"What was particularly interesting was that almost every analyst was predicting a bad earnings quarter for Netflix.
"What was particularly interesting was that almost every analyst was predicting a bad earnings quarter for Netflix.
60/ "For every trade that I found, I was missing dozens.
"I needed to capture more data. I had to figure out how to broaden the funnel.
"The opportunities I was catching were very random and based on my physicality—where I was and what I saw at that moment in time.
"I needed to capture more data. I had to figure out how to broaden the funnel.
"The opportunities I was catching were very random and based on my physicality—where I was and what I saw at that moment in time.
61/ "Going on Twitter and Facebook to manually look for things that I thought were happening was very inefficient.
"What if I could structure all the theoretical words and word combinations that would represent anything that would be meaningful to any publicly traded company?
"What if I could structure all the theoretical words and word combinations that would represent anything that would be meaningful to any publicly traded company?
62/ "Those terms would include the name of every company, every CEO, every product, every brand, every technology, every cultural movement, and every government regulation that could affect a company. I called these word combinations “ticker tags.”
63/ "Students were instructed to research earnings reports and find news articles with an end goal of identifying the price drivers for each company. They would tag words associated with anything that could move the needle. “Pretzel bacon cheeseburger” would be a tag for Wendy’s.
64/ "We could detect conversational anomalies and understand whether there was more interest in a granular topic than a particular benchmark, whether that benchmark was internal to the company—a comparison to a previous year—or whether the benchmark was a competing product.
65/ "Years before Wall Street, even earlier than transactional data, we were able to spot the acceleration in people talking about La Croix, (and bottled water in general). National Beverage Corporation was almost a pure play on La Croix, which accounts for a majority of revenue.
66/ "I’m not trying to predict what people will do, but rather identify what they are interested in and buying right now. People talk about something when it is happening or immediately before it happens.
"I love cultural shifts because Wall Street is always late catching on.
"I love cultural shifts because Wall Street is always late catching on.
67/ "I was able to gauge real-time foot traffic by monitoring word combinations, such as “Chipotle” plus “lunch,” and “Chipotle” plus “line,” in online conversations. Almost overnight, the mentions of these word combinations dropped by about 50%.
68/ "We see negative things happen to brands all the time, and they can usually recover relatively quickly. A few weeks or months later, everybody forgets about it. SeaWorld was a rare situation where the level of negative conversation spiked, then just kept building.
69/ "Twitter's data rates were going to increase. We decided to sell the company instead of raising more money.
"Our methodology is so foreign to hedge funds that their lack of confidence would lead them to move much more slowly than I would (if they made the trade at all).
"Our methodology is so foreign to hedge funds that their lack of confidence would lead them to move much more slowly than I would (if they made the trade at all).
70/ "Managers want something systematic. They wanted to know how often this approach would generate tradable information with high conviction. I couldn’t give them a hard answer.
"It took me over a decade to get to the point where I had high conviction in my own methodology.
"It took me over a decade to get to the point where I had high conviction in my own methodology.
71/ "I will never trade on data alone. Every trade I do has a thesis with a narrative associated with it.
"I noticed a conversational spike in e.l.f. That alone didn’t tell me anything. Was there a spike because people liked a product or because they were complaining?
"I noticed a conversational spike in e.l.f. That alone didn’t tell me anything. Was there a spike because people liked a product or because they were complaining?
72/ "The spike could be traced to makeup tutorial artist Jeffree Star, who has 15 million YouTube followers. On half his face, he used an e.l.f. product that costs $8; on the other half, he used a top-selling $60 product. He said the $8 product was as good as the $60 product.
73/ "That instantaneously changed the consumer perception of the e.l.f. brand. The stock moved up more than 50% in two months. The odd thing is that I bet that most analysts who cover e.l.f. have no idea who Jeffree Star is." (p. 253)
74/ "The insurance industry puts out a report on estimated roofing damage claims, but that report is released many months after the fact.
"I look at the word combination “roof,” “hail,” and “damage.” Every March–May period, there is a seasonal spike in this word combination.
"I look at the word combination “roof,” “hail,” and “damage.” Every March–May period, there is a seasonal spike in this word combination.
75/ "I noticed a seasonal spike that was triple the size of any previous one. There were three such abnormally high spikes in a row. I realized it was a severe hail season and took a long position in Beacon Roofing. It subsequently came out with a very bullish eanings report.
76/ " “Obsessed” plus “new” plus “game” will alert me when there is a new game sparks an upsurge in online conversation. So that umbrella tag would clue me in as to what specific game tag I need to start following at that moment, even if I had never heard of the game before.
77/ "The word “toy” and an emotional word, such as “obsessed,” connected to it identifies anything happening in the toy sector that is an anomaly that day.
"The phrase “I can’t find” followed by anything is an example of a very general umbrella tag." (p. 255)
"The phrase “I can’t find” followed by anything is an example of a very general umbrella tag." (p. 255)
78/ "Sometimes the company is so big, and the information is so limited in scope, that it doesn’t make any difference. If I believe the information could potentially be significant, I then have to determine to what degree it has already been disseminated to the investment public.
79/ "I trade completely blind to other fundamentals in the company and price action.
"The second the information on hits the street, whether it’s analysis by a sell-side firm, a media story, or the company's reports, I call that “information parity.” My trade is over." (p. 257)
"The second the information on hits the street, whether it’s analysis by a sell-side firm, a media story, or the company's reports, I call that “information parity.” My trade is over." (p. 257)
80/ "I spent $250,000 setting up a hedge fund.
"Other funds loved the concept, but they could not take the risk I might front-run the data for my own fund before they saw it. I was naïve to think I could do both. My fund was open for only 60 days before I had to shut it down.
"Other funds loved the concept, but they could not take the risk I might front-run the data for my own fund before they saw it. I was naïve to think I could do both. My fund was open for only 60 days before I had to shut it down.
81/ "Losing on the first trade in the hedge fund bothered me tremendously. I learned that I didn’t have what it takes to run other people’s money.
"I could have lost ten times that amount in my account, and it wouldn’t have bothered me as much.
"I could have lost ten times that amount in my account, and it wouldn’t have bothered me as much.
82/ "My ability to focus on something interesting to me is my number one strength. The type of analysis that I do requires an immense amount of work for something that doesn’t have any immediate payoff. I could go for months without finding a high-conviction trade." (p. 263)
83/ Marsten Parker
"Parker was the only purely systematic trader I found whose performance was sufficiently superior to merit consideration for inclusion in this book.
"Ever since Market Wizards in 1989, I had found that standout individual traders tended to be discretionary.
"Parker was the only purely systematic trader I found whose performance was sufficiently superior to merit consideration for inclusion in this book.
"Ever since Market Wizards in 1989, I had found that standout individual traders tended to be discretionary.
84/ "This bias seems to have become even more pronounced over the years. There may be many systematic traders who are profitable but few that outperform benchmarks by wide margins over long periods." (p. 268)
85/ "A financial planner gave me the usual spiel about how the stock market goes up 11%/year and will do that forever. I could pay him 2%/year to put my money in mutual funds that also charged 2%/year. That didn’t make sense to me." (p. 271)
More on this:
https://twitter.com/ReformedTrader/status/1122643718631092224
86/ "I wanted to test things. I didn’t feel comfortable assuming some pattern worked just because somebody said so.
"I didn’t have a clue about the dangers of curve fitting and data mining.
"I became obsessed. At heart, I am more of a software developer than a trader.
"I didn’t have a clue about the dangers of curve fitting and data mining.
"I became obsessed. At heart, I am more of a software developer than a trader.
87/ "By mid-1999, I had become skeptical that there was any connection between how nice a chart pattern looked and the probability of a successful trade.
"I found that the further a stock dropped on the first breakdown day, the more likely it was to continue falling.
"I found that the further a stock dropped on the first breakdown day, the more likely it was to continue falling.
88/ "I didn’t want to believe it because, instinctively, I thought the larger the initial drop, the more the stock was oversold. At first, I didn’t even test for unusually large declines on the first breakdown day. Then I thought, “Why not go all the way?”
89/ "I found that if there was a 20% drop on the first day, there was a very high probability of a continued price decline.
"From 2000 to 2012, I made more than half my profits from the short side using that strategy. But then in 2013, it stopped working." (p. 275)
"From 2000 to 2012, I made more than half my profits from the short side using that strategy. But then in 2013, it stopped working." (p. 275)
90/ "For the long mean-reversion system, the stock had to be in an uptrend. Then the stock had to be down a certain percentage from its recent high within a given time frame. I would enter a buy order a specified amount lower based on the stock’s average daily volatility.
91/ "The system is profitable for a broad range of parameters.
"For mean-reversion systems trades initially show open losses as of the close; they need to be held overnight to be profitable. You are not waiting for a big rebound: you just want to capture a bunch of small wins.
"For mean-reversion systems trades initially show open losses as of the close; they need to be held overnight to be profitable. You are not waiting for a big rebound: you just want to capture a bunch of small wins.
92/ "If you use any stop—even a very wide one like 20%—it kills the results.
"If a higher close doesn’t occur within five days, I will liquidate the position. I also keep the size of each position small." (p. 280)
"If a higher close doesn’t occur within five days, I will liquidate the position. I also keep the size of each position small." (p. 280)
93/ "I exclude biotechs from the universe of shorts because they may multiply in price in response to drug trial results or FDA decisions.
"A system that shorts a stock on a rebound in a downtrend doesn’t work. My short mean-reversion system only sells stocks in an uptrend.
"A system that shorts a stock on a rebound in a downtrend doesn’t work. My short mean-reversion system only sells stocks in an uptrend.
94/ "These mean-reversion signals occur as part of a blow-off top in a major uptrend without any intervening correction. You are looking for a particularly prominent short-term up-move — namely, a large percentage price rise in a short period." (p. 280)
95/ Tail risk inherent in mean-reversion systems: "There was a hit on the short side when I was shorting Chinese ADRs, and they just kept going up. I took another hit after Hillary Clinton came out with a tweet about regulating drug prices, and biotechs fell apart.
96/ "In contrast to my classic L/S momentum strategies, long and short mean-reversion systems don’t naturally hedge each other. For mean reversion, when the market is tanking, you don’t get sell signals.
"Hedge a long mean-reversion system with a short momentum system." (p. 281)
"Hedge a long mean-reversion system with a short momentum system." (p. 281)
97/ "Multiple systems that are well-differentiated can be superior to the best individual system." (p. 283)
More on this:
Strategic Allocation to Commodity Factor Premiums
Dual Momentum – A Craftsman’s Perspective
Strategic Allocation to Commodity Factor Premiums
https://twitter.com/ReformedTrader/status/1204964215120809985
Dual Momentum – A Craftsman’s Perspective
https://twitter.com/GestaltU/status/1110908075333038081
98/ "A very simple trend-following system based on buying new highs worked very well on recent IPOs, even though it didn’t work at all on the general universe of stocks.
"I now will turn off a system if its equity curve goes below its 200-day moving average." (p. 284)
"I now will turn off a system if its equity curve goes below its 200-day moving average." (p. 284)
99/ "Make a strategy simple as possible, using as few rules as possible, testing only parameter values in a reasonable range. It is robust when the results don’t differ much between parameter values. It's even better when I can remove a parameterized rule altogether." (p. 285)
100/ "Include an on/off switch (e.g., an equity curve moving below its moving average) in each strategy, even if it reduces profits in a backtest. This can limit losses if a system stops working. The more strategies you run, the easier it is emotionally to turn one off.
101/ "The tail risk in a mean-reversion strategy is more likely to come from a cluster of medium-sized losing trades rather than from the potential for a huge loss in an individual trade. The serial correlation of losses is may be understated in any backtest.
102/ "It is possible to do well for 15 years, then have a near-career-ending drawdown. Therefore, it is advisable to maintain another income source.
"Good things come from sharing your story and knowledge with others—something I was afraid to do for many years.
"Good things come from sharing your story and knowledge with others—something I was afraid to do for many years.
103/ "Don’t quit your day job. Try to develop an appreciation for how much randomness there is in the market. Test everything. Don’t assume something works or doesn’t work just because someone says so. Maintain an ever-present spirit of experimentation." (p. 286)
104/ Michael Kean
Daljit Dhaliwal: “Michael is unique because he combines two very different approaches: long equities and a unique short strategy. His ability to do both shows how adaptable he is as a person. Adaptability is critical in the game of speculation.” (p. 294)
Daljit Dhaliwal: “Michael is unique because he combines two very different approaches: long equities and a unique short strategy. His ability to do both shows how adaptable he is as a person. Adaptability is critical in the game of speculation.” (p. 294)
105/ "Your Black Monday was our Black Tuesday.
"The 1987 crash in the US was the event that popped the New Zealand stock market bubble. Within six months, the stock market was down 50%. It didn’t recover to the old highs for over 20 years." (p. 296)
"The 1987 crash in the US was the event that popped the New Zealand stock market bubble. Within six months, the stock market was down 50%. It didn’t recover to the old highs for over 20 years." (p. 296)
106/ "I was fortunate to have a job with a very flexible work-at-home policy. I would get up very early every day to do my salaried work, then trade the US markets in the afternoon. It was a unique situation that allowed me to almost be a full-time trader and still pay the rent.
107/ "Pump-and-dump OTC stocks would go from 50 cents to $5 or $10 on virtually nothing and then collapse in a day. I found research services and blogs that covered penny stocks. Most focused on on the pump, but I was interested in the services covered shorting these stocks.
108/ "Pump-and-dump stocks are unique in their price action. The typical pattern would be for the stock to start at a price like 50¢ and then go up every day by 20-30¢. If the stock couldn’t close up for the day; that would signal the pump was struggling, and the move was over.
109/ "After the first down day, they could be down 60%–70% the next day. These stocks moved up in a gradual, controlled fashion without the wild parabolic up-moves you can sometimes get in real stocks.
"But you would only get one of these opportunities once a quarter or so.
"But you would only get one of these opportunities once a quarter or so.
110/ "Getting the short availability was very hard, and the strategy was not scalable. Also, the frauds were so brazen that the SEC eventually became more active in halting trading in these stocks.
"There are patterns that can be traded profitably without being an expert.
"There are patterns that can be traded profitably without being an expert.
111/ "In a healthy market, you can buy small-cap biotechs 2-3 months before a critical catalyst, such as the release of the results from a phase 3 trial. I would buy these stocks before the hype, before brokers started issuing upgrades, and before retail clients started buying.
112/ "I sold before trial results were announced. Some stocks doubled just on the expectation of the release of trial results.
"Most $100–$400 million bio stocks have low-quality assets. If they are in a phase 3 trial and still that small, it is unlikely they are onto something.
"Most $100–$400 million bio stocks have low-quality assets. If they are in a phase 3 trial and still that small, it is unlikely they are onto something.
113/ "Big pharma companies pick over companies in phase 1 and 2. The fact that they have chosen not to be involved with in phase 3 has negative implications.
"There are circumstances where the odds for failure are very high, even if you don’t know anything about the drug itself.
"There are circumstances where the odds for failure are very high, even if you don’t know anything about the drug itself.
114/ "There has never been a biotech company with a market cap under $300 million that has had a cancer drug pass in a phase 3 trial.
"Biotech is a funny industry; it can attract horribly promotional management." (p. 300)
"Biotech is a funny industry; it can attract horribly promotional management." (p. 300)
115/ "Monsanto was hit by a lawsuit due to claims that their weed killer caused cancer. It's at a 40%–50% discount to historical valuations. The market is pricing in €30–€40 billion of legal liabilities. Other than for tobacco, there has never been any settlement >€10 billion.
116/ "I am looking for small caps that are growing very fast—at least 20-30% revenue growth per year—but haven’t reached scale yet. If they hit their targets and start earning money, there is a catalyst to move the stock price higher." (p. 304)
117/ Pavel Krejčí
"80% of my trades and 90% of my profits are in stocks in uptrends with bullish reports.
"Some stocks that are in downtrends and have a large short interest can be so oversold that they will have a positive reaction, even if the earnings report is bearish.
"80% of my trades and 90% of my profits are in stocks in uptrends with bullish reports.
"Some stocks that are in downtrends and have a large short interest can be so oversold that they will have a positive reaction, even if the earnings report is bearish.
118/ "The best trades are when the general market is sideways/down, the stock is in an uptrend, there is a pullback before the earnings report, and the report is bullish.
"If the last report was bearish, longs will cover before the upcoming report. They can then become buyers.
"If the last report was bearish, longs will cover before the upcoming report. They can then become buyers.
119/ "There is a saying that the analysts are always wrong. Yes, that may be generally true, but the day after an earnings report, some of their upgrades and downgrades can be critical to the market price action." (p. 316)
120/ "Trading fits me well. I prefer to be on my own. I don’t feel comfortable in large groups. I am happy fishing, taking walks in the forest, and working on my garden.
"I wanted to find something where the success or failure would depend only on me, not my colleagues or boss.
"I wanted to find something where the success or failure would depend only on me, not my colleagues or boss.
121/ "You can’t find many other activities where success or failure depends only on you.
"Any success I have had is because I hate losing: I can’t focus on anything besides figuring out how to improve. My losing periods are actually beneficial to my future trading." (p. 320)
"Any success I have had is because I hate losing: I can’t focus on anything besides figuring out how to improve. My losing periods are actually beneficial to my future trading." (p. 320)
122/ CONCLUSION (p. 323)
"There is no single formula for succeeding in the markets.
"Even an excellent methodology will yield poor results if it is not consistent with your beliefs and comfort zone.
"If you don’t know what your edge is, you don’t have one.
"There is no single formula for succeeding in the markets.
"Even an excellent methodology will yield poor results if it is not consistent with your beliefs and comfort zone.
"If you don’t know what your edge is, you don’t have one.
123/ "Learning from mistakes is how traders improve. Perhaps the most valuable benefit of a trading journal is that it facilitates identifying trading errors.
"It is striking how many of the interviewed traders experienced their worst loss due to the lack of a protective stop.
"It is striking how many of the interviewed traders experienced their worst loss due to the lack of a protective stop.
124/ "If positions are correlated, portfolio risk may be unacceptably high. Shapiro handles this by reducing position sizes and adding trades that are inversely correlated to the existing portfolio.
"Any long-only equity portfolio has positions that are highly correlated.
"Any long-only equity portfolio has positions that are highly correlated.
125/ "Good trading is the antithesis of shooting from the hip. Your methodology should exploit your edge and manage risk.
"Trades based on someone else’s recommendation tend to end badly, even when the advice is correct. (For example, your holding period may be different.)
"Trades based on someone else’s recommendation tend to end badly, even when the advice is correct. (For example, your holding period may be different.)
126/ "Human emotions and impulses often lead traders to do the wrong thing.
"Greed will cause traders to take marginal trades or place positions that are too large.
"Parabolic price moves in either direction tend to end abruptly and sharply.
"Greed will cause traders to take marginal trades or place positions that are too large.
"Parabolic price moves in either direction tend to end abruptly and sharply.
127/ "Traders often experience their worst performance after periods when they have done exceptionally well. Winning streaks lead to complacency and sloppy trading. If everything is going great, watch out!
"The flexibility to change your opinion is an attribute, not a flaw.
"The flexibility to change your opinion is an attribute, not a flaw.
128/ "A counter-to-expected market response to news can be a very valuable trade signal.
"Ego is detrimental to effective trading. Many traders are more invested in their market theories and prognostications being right than they are in being profitable.
"Ego is detrimental to effective trading. Many traders are more invested in their market theories and prognostications being right than they are in being profitable.
129/ "Aiming for consistent profitability in low-opportunity periods can lead to taking marginal trades.
"Systems can work for a time but then entirely lose their edge. The ability to terminate or radically change systems is essential to long-term success as a systematic trader.
"Systems can work for a time but then entirely lose their edge. The ability to terminate or radically change systems is essential to long-term success as a systematic trader.
130/ "Trading profitability is inherently sporadic, while living expenses are continual. Those seeking to trade for a living want want to keep their day jobs as long as feasible.
"Although people think trading is easy money, traders who excel have a very strong work commitment.
"Although people think trading is easy money, traders who excel have a very strong work commitment.
131/ "Markets reward traits that are difficult to maintain. Patience [to wait for a good trade and to let profits run] requires overcoming natural desires. It is a trait I have repeatedly found in great traders.
"You need to love trading so you can get through the tough times."
"You need to love trading so you can get through the tough times."
132/ More from Jack Schwager:
Hedge Fund Market Wizards
Hedge Fund Market Wizards
https://twitter.com/ReformedTrader/status/1202766501956087808
133/ Jack Schwager:
* what timeframe makes the most successful trader
* uncorrelated returns
* elite traders can often have terrible starts to their careers
* risk management
* investor psychology
* mean-reversion versus momentum trading
player.fm/series/top-tra…
* what timeframe makes the most successful trader
* uncorrelated returns
* elite traders can often have terrible starts to their careers
* risk management
* investor psychology
* mean-reversion versus momentum trading
player.fm/series/top-tra…
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