Frist off I would really like to know if that is Taleb that writes the letter to Niedehoffer in the introduction to Education of A Speculator??? While I feel that Niederhoffer is a very bright man and an extremely talented trader he seems to really not understand the concept of risk management at all... To blow up once and then expose himself to the same thing again is simply rediculous... "Nobody could have forseen two planes crashing into WTC, it was totaly unexpected" Well Victor if it was expected than it would not have blown you up... Victor has now become the dreaded captain of the Essex...
Commisso that was exactly what struck me in the article. Assuming that you can sell premium because you can be sure that future events will be the same, in volatility terms, as the past shows a complete lack of understanding of probabilities IMHO. It's like accepting $2 to stick your head out of the window of a speeding train for 1 second. Sure you will make a nice income if you do it often enough and the probability of losing is small, but who wants to lose their head if a series of events go against your statistical record. I'm sure their must have been more to his strategy than that but maybe not. Nick Leeson was buying futures and when the market went against him sold puts and used the premium to offset the loss. Even today, It just tickles me that anyone would do that. That's like playing Russian Roulette and using 3 bullets instead of one.
I think the probem with Niederhoffer is that he is under the illusion that trading is similar to a game of chess in which the rules and possible outcomes are clearly established and absolute... He neglects to realize that the market is just as much a living breathing creature as he and that at any given moment in time there is virtually an infinite # of ways it can express itself... Pipes burst at the CME, planes crash into buildings, Russians default on debts, people put out fake emlx releases, and Greenspan comes out in morning with surprise rate cuts popping the futures 100 pts in matter of minutes... He needs to be as wise as the boy in the movie Magnolia sitting at the table watching the frogs fall from the sky and saying with grin on face "this really happens" "I base my calculation of risk with the expectation that LUCK will be against me" -- Napoleon "...I will therefore state the following argument. If the science of statistics can benefit me in anything, I will use it. If it poses a threat, then I will not. I want to take the best of what the past can give me without its dangers. Accordingly, I will use statistics and inductive methods to make aggressive bets, but I will not use them to manage my risk and exposure..." ~Nassim Nicholas Taleb~ PEACE and good trading, Commisso
i highly doubt that dr. niederhoffer labors under any illusions about risk, regardless of the style of trading he employs.
Well I'd have to say he does, being that the man blew up two nice size accounts in 10 years... He only see one side of the coin, the probabilistic side, he neglects to take into the account the magnitude side... Pascal saw the folly in this 500 years ago when he made his wager on God, why this man can't see it after blowing up once and then vowing not to make the same mistake again is beyond me... He hasnow become the dreaded captain of the Essex, lightning hit him twice, I hope for his sake he can pick himself up and not become a janitor... PEACE and good trading, Commisso
ill wager you right now. if you last half as long as he has, and you ever get to be known as 'the best,' then you'll blow up at least half as many times. he is not the only person to have experienced a significant drawdown. Actually, it's inevitable (see vince, 'protfilio management formulas'). recall the 'risk/reward' premise.
Sorry Chasin but that statement makes absolutely no sense to me what so ever... He promised himself that he would not blow out twice and then he goes and employs a strategy that exposed himself once again to blowing up... Sure pipes burst once and planes crashed into WTC... That sucks BUT these things happen and is precisely the point that Keynes made 100 years ago and Taleb is making with his recent treatise... The point of the "black swan" is that you cannot be certain that these things will not occur just because they have not yet... Therefore why expose yourself to it????
Niederhoffer lost ALL his equity not once BUT twice, that is not a drawdown... What is being labled the best worth if you are not abe to keep playing??? This is not a game like any other because there is no end in sight unless of course you blow out and have no more EQUITY and cant borrow anymore... I would trade being labled "the best" to insure I can stay in the game and it will be over when I SAY it will... AND it is not inevitable if you do not expose yourself to it! This man has put all his equity at the will of the market many times... He is trying to box with the trading gods only he has not yet realized his arms are tooooooo short... Read "The old trader and the yen" he is trying over power something with an indominatble will... This is not DRAGON/SLAYER competition, the man simply needs to start looking with softer eyes...