What Works in Trading & Why: Part I

What Works in Trading & Why: Part I

Part 1: The Big Ideas

I use a trading model that's unbelievably effective and robust. Anyone who disbelieves this can simply follow my trades in real-time using out-of-sample data (which is the only data that really counts) -- and verify for themselves (info provided below).

It's built around some very simple, but very big ideas. Ideas you can probably use to your own benefit as a framework for developing a trading plan. Now, simple does not mean easy to execute. On the contrary, high-probability trades, ideal trade location, in any market is often counter-intuitive and psychologically a difficult place to do business.

Big Idea #1: Clifford Asness is a quant. A 39-year old who, last I checked, was pushing $13.5 billion around in market in '05. His wildly successful hedge fund AQR Capital is built on two insights that seem contradictory : "Cheap assets outperform expensive assets more than they should" and "Momentum portfolios work better than they should."

Now Asness, like most with an edge, tends to be pretty secretive, but I've got a few quant friends in that world and I understand, in general, what he does. He sorts stocks (or whatever assets he's trading) into deciles from cheap to expensive, and he buys when stocks in the cheap decile group trigger a momentum buy; he then shorts roughly an equal amount of stocks in the expensive decile group as they trigger a momentum sells and rides this market neutral portfolio. His personal cut for doing this runs $25-50 million a year.

Big Idea #2: Joseph Hart is an obscure technical trader who wrote a course on technical trading called Trend Dynamics (http://trend-dynamics.com/TD_Products_Self_Guided.htm) which I had the privilege to edit. Someone in Elite forum called it "one of the best courses that nobody knows about". Hart's one of those old school technicians who hand-charted markets before PCs were ubiquitous and whose market insights are credited with helping more than a few turn their trading avocations into trading careers.

One of his insights (and he has many) that I've embraced is what he calls the 7th Law: "That dramatic price movements tend to unfold from price structures that minimize profitable participation." In brief, he focuses on trade location around swing extremes and identifies where longs (or shorts) are likely to get stopped out (their participation minimized) and fades that.

Big Idea #3: Pete Steidlmayer, a legendary independent floor trader since 1963, started teaching his unconventional ideas about reorganizing and reading price data (market profile) in the 80's to standing room only crowds at the CBOT. These weren't the typical crouwd of retires managing IRAs and wannabe daytraders flocking to some trading symposium, but pros already trading on the floor. Personally, I think Steidlmayer may be the premier market thinker of our time, and little understood or appreciated.

Something he said that I certainly appreciate is that: "Under most circumstances markets are either readable or reliable." Here's another seemingly contradictory idea. He is saying that high probability entries (i.e. reliable) are difficult to identify; or to turn it around, entry levels that are easy to identify using conventional tools are probably not reliable and low probability entries.

I've been at this market analysis and trading business for a long time, some 28 years now, and ideas like this coming from guys who really walk the walk, frankly tend to be a little off-the-wall & are often contradictory because -- markets ARE perverse and to really thrive in markets you have to view things in a strange way, there is no edge otherwise.

In Part II, I'll provide a couple examples of how I translate these ideas into trading....

PS: If you want my detailed list of the exact actions taken in stocks (and commodities) and my daily trading plan you can always drop me an email at my blog or send me a PM: Use the "Send me your BUY LIST" button, right-hand column at: http://www.street-noise.net/articles/

 

Nice articles.. keep it up..

 

You're not related to Jerry Olson by any chance? He's all over T2W like a rash.
I think your stuff is worthy of respect, look forward to seeing you "walk the walk!"

 

Thanks Ripley -- appreciate the feedback and I'll post Part II tomorrow.

There is always (in forums like this) an element of skepticism fueled largely by envy, jealousy and disbelief that someone has found success in something as hard as trading. So be it.

I've earned my stripes and have the scars to prove it. I post my trades live daily for anyone to see -- anybody else here making that offer?

It's easy to verify whether or not what I say works. If somebody offers something that works and one dimisses it out of hand, without investigating whether it works, then that's a pretty stupid thing to do. But, then again markets are full of stupid people doing stupid thing -- I've done my share of that as well.

I have a private following of real pros, many who manage millions of dollars money for a living. They run ideas by me and read my analysis every day for only one reason (and its not cause I'm so handsome, I'm not) -- its cause it puts money in their pockets and helps them trade better.

PS: And they love noisy markets and skeptics because they are the one often taking the opposite side of their profitable trades. Like Fischer Black said: "Noise makes profits possible"

Ultimately, its very simple markets tell you what is true or not, what works and who is real and who is not real... my trades do all my talking for me -- although you wouldn't know it by this post <<grins>> What else matters.

 

No never heard of the guy. I don't know what T2W is and I've never been involved in public forums much at all.

I've been a tape reader since I was 22 years old and have done nothing, but read the tape (now charts) all day, every day for 28 years running. LIke Marty Schwarz (the famous S&P trader) once said: "Its a very monkish life"

 

Hmmm.....I wouldn't pat myself on the back too hard, if I were you. Others have done so and fallen onto the floor, and broken teeth. Some even fell so hard that they bit their tounge off. I realize you are a paying sponsor, but a little humility goes a long way with most folks around here.

Having said that, hey, if you're a great trader, congratulations.

 

Exactly. The ET floors are littered with big talking gurus that couldn't produce worth a whit, despite their incessant grandiose claims.

Every month or so a new one comes along. They've been reading charts (and "the tape" lol) for 28 years, talk like they can foresee every single market move and act like they're the master of all trading. Oh, but they need subscribers to their website. Give me a break.

--opm8

 

why dont we give him a chance before we go into attack mode?

 

Noise trader, I'm looking forward to your live calls. Please be sure to inform everyone of your great trading techniques as I'll be looking forward to your progress in your trades and teachings from an amazingly experienced trader as yourself.

Please be sure to post the results of your trades in the forum as well, as I'm interested in seeing how you do.


I'm not pleased with the censorship though, not one bit.

EDIT: Noisetrader, may I ask, what is the price on your services so we may let all ET members know the price to see your great calls?