FUTURES TRUTH MAGAZINE INTERVIEW - Apri-May, 2002 and June-July, 2002
Thanks to Futures Truth Magazine for allowing us to reprint this article...visit them at www.futurestruth.com.
Part 1 - For our interview this month, we present part 1 of a wide-ranging interview we had with Alan Pryor, a principal of longtermtrading.com. longtermtrading.com offers a suite of long term trading systems that are completely mechanical and non-optimized. The systems are unique in that they all use either weekly bar data (as compared to daily or intraday bars) to generate their trade entry and exit signals. In this first half of our interview, we'll talk about the psychological pitfalls of trading, matching trader personality to a trading system, and some of the personal lessons learned by Alan from his years of trading experience. One of the candid points revealed by Mr. Pryor is his belief, despite developing mechanical systems for sale to traders, that system selection is the least important part of developing a comprehensive, successful commodity trading plan. In our next issue, we talk with Mr. Pryor about systems trading and the particular development and design process that go into making a robust trading system
Name: Alan Pryor
Education: BA - Chemistry and BS - Biology (1975), MS -Industrial Hygiene Engineering (1978), University of California
Background: Agricultural/Environmental Engineer/Researcher by Day, System Developer by Night, and Weekend Rancher and Trader.
Favorite Books on Trading: Without a 2nd thought, New Concepts in Technical Trading Systems, by Welles Wilder. Even 24 years after it's publication, I think this book remains the most creative and insightful publication on new technical trading concepts ever published. I still enjoy occasionally browsing through it for ideas. It was (is) an absolutely brilliant, breakthrough piece of work and a joy to read as it was presented so well. And all of the concepts presented have stood the test of time. We unabashedly admit to using a number of his indicators in our own development work ____________________________________________________________________________________
Let’s start off with an easy one. Is there anything that you would tell to those new to trading commodities or stocks that you wish someone had told you when you were getting started?
Well, actually that's an easy question but it needs a long answer. I would tell new traders exactly what was told to me over 25 years ago…only I ignored it then. I was told that there is no Holy Grail to making money in commodities. The only true path to success as a trader is through hard work, mental discipline, and steadfast perseverance. And even if you have these in your favor and you manage to stay in the markets more than 6 months to a year, you still need a little luck to fall your way if you want to grab one of the brass ring megamoves.
I would also tell new traders to throw out every piece of unsolicited advertising they receive touting a wonder trading system unless it comes with a very complete, non-optimized, long term track record. The biggest mistakes most new traders make is to think they can get in the markets right away and duplicate the fairy tale rags-to-riches stories that are touted so often by the industry advertising juggernaut. Most new traders getting into the markets these days start out day trading the equity indexes. This is probably because they received one of those innumerable glossy, full color ads in the mail that showed them they could have turned $10,000 into $2,000,000 in the past 6 months if only they have followed 10-12 trades that were recommended by the promoter/developer during that period.
The advertisements give a few examples showing the little buy arrows right the exact bottom of every trough and the little sell arrows right at every peak and touting supposed investment returns of 200% - 300% in a week or less. They may even have a testimonial from a user who claims to have made a million bucks using these methods The ads show guys sitting on golf carts with their wireless quote pagers, or a woman on a reclining lounge on a tropical beach with a laptop and the image is just too much for the average person to resist. The prospective new trader fires off their money and starts thinking all about what they are going to do with their profits even before the information even shows up on their doorstep.
New investors have to realize, however, that these ads are designed solely to separate a trader from his money without any regard as to whether that trader will ever make a dime using the wonder method. Just this morning a new mailer arrived that sets new low standards. The flyer headlines screamed in bold type, "How to Pick Up $3,000 to $12, 836 Every Morning Before Breakfast….Starting with just $500!" Well once I stopped laughing I took a closer look and, as expected, there was absolutely no indication of how one could earn exactly $12, 836 before breakfast. But I'm sure that didn't stop many in the investing public from buying it hook line and sinker. I'm convinced that a trader isn't really ready to trade until they can recognize this advertising for what it is and chuckle at it right before tossing it in the recycling bin.
So you're simply saying most new trader's trading expectations are unreasonable?
Exactly! Most new investors sincerely want to believe that there is a Holy Grail system that could change their life for the better. They buy a touted day trading system (if what they purchased could even be rightfully called a "system") and plunge into the markets with sugar plum fairies dancing in their head. In my opinion, they are like lambs being led to the slaughter. In most cases they are woefully ill equipped to handle the brutal psychological rigors of day trading and have given absolutely no thought to the concept of money management. They only see the upside without any thought to risk control. Before they know it they are blown out in 3-4 months. Or if they do get lucky and hit a string of winners right away, they write a letter to the vendor touting that they have doubled their money (which of course goes into the next advertisement), immediately double up on their position sizes, and they are toast inside of 6 months.
Despite the hoopla and wild scenarios of success and fabulous riches painted by some in the industry, most new day traders and swing traders get blown out of the market inside of 6 months. Very few survive and fewer still make any money the first year. Maybe one trader in every 1,000 actually parlays a small stake into a small fortune but even that is eventually given back if the trader did not recognize his success was due to an incredible amount of luck and di not implement a rigorous risk control strategy. New traders must realize, initially at least, that they actually have a better chance of winning a million dollar payout from a progressive slot machine in Las Vegas than of turning $5,000 into a million dollars in the markets in a short period of time. Both are highly dependent on luck but the house take in Las Vegas is a much smaller percentage than the combined commission and slippage take in stocks or futures trading
Well what about the testimonials that are frequently shown in these ads? Couldn't at least some new investors expect to reproduce those trading results in the future?
Well in some cases the reported track records are out and out fraud and nothing but the most extensive due diligence will prevent even a knowledgeable trader from buying into that. But it is also statistically possible, even probable, that one or two new investors will show profitable results over a period of time even when using a system that is not expected to be profitable over the long term. And it is due to pure luck!. As an example, I took a poorly performing system off our dusty shelf of discarded ideas and generated the following portfolio statistics and equity curves. (We used Portfolio MCS software by Inside Edge Systems for this analysis. This software evolved from the old Portana portfolio analysis software. It is a sweet, inexpensive utility program that I highly recommend for portfolio analysis):
Total Net Profit = -$108,884.00, Max Drawdown = -$367,624.00,
Total No. of Trades = 2,097, Percent Profitable = 35.50%
Now needless to say, this is not a system that any trader would want to trade over the long term. Yet there is a certain definable probability that at least a few traders using this system to trade the universe of commodities or securities would make money over the short and possibly even the long term. We can quantitatively determine this probability by performing a true Monte Carlo simulation of the individual trades taken by the system and then plotting the resultant P&L distribution as a histogram. As you can see from this distribution in the graph below, even though the majority of traders would have lost money trading this system over the long term (and some catastrophically so), about 1% of the time a trader would have made in excess of $500,000 - these are the lucky few you see touted in the trade advertising. Yet it would obviously be foolhardy for an investor to risk his money trading such a system with the odds so poorly in his favor. Now I realize that some will argue that true Monte Carlo simulation really doesn't represent the real world and I would tend to agree.
But the point is made simply to show that you can rarely believe what you read unless it's backed up by a slew of cold, hard, objective backtesting data. And my original mentor was right…there is no Holy Grail. (Editors Note: Monte Carlo simulation is a game playing technique used to predict a range of future expected returns given the outcome of a certain number of trades or events that have occurred in the past. In a nutshell, the simulation involves randomly selecting one trade from all of the trades and noting its result. The first trade is then put back into the hopper, so to speak, and another trade is randomly selected and that result is added to that of the first trade selected. This process continues over and over until the predetermined number of trades is selected and the final results tabulated. The the procedure is repeated over and over until the predermined number of trials is performed.
So are you saying that proper system due diligence and analysis of backtesting results is the most important thing a new investor can do?
Actually I'm saying it is just one of the important things they have to do right in order to stack the odds in their favor. At the risk of erroneously implying to potential customers that our trading products (or other very good trading products that are available) are not important, new investors really have to deal with two other issues that are at least as important as the track record of the particular trading strategy they use. It is actually quite easy and requires little effort to pick a trading system that produces a reasonable return over time without any optimization. There are even pretty good tools available to use for defining and implementing a good money management strategy which many believe (including myself) is every bit as important as system selection in ensuring your trading survival. The absolutely toughest part of becoming a good trader, though, is developing the internal discipline and intestinal fortitude to be able to ride a winning system through it's losing periods.
It's easy to trade a system when it's making money. You come home at the end of the day and look at your portfolio P&L and see that you've made money and you're jazzed up and dive right into your nightly analysis with fervor. It's a whole different ballgame, though, when you are in an extended drawdown (which you invariably will see for some period of time when trading). It takes a special breed of person to approach the markets with the same vigor when you're on the tail end of a 6 month drawdown and you're account is down more than 25 - 50% from it's peak. At this point, most investors are wondering when, or if, the bloodletting is ever going to end. Very, very few people have the stomach to continue after that. They gradually loose their interest and start becoming fearful. Soon they are thinking of more and more reasons why they shouldn't put on this trade or that trade and before they know it their account is dormant And, of course, then the markets pick up and go and they are out on the sidelines with only a big loss to show for all their effort and stress.
Successful traders learn from this experience, though. They learn that they have to have reasonable expectations from the market that can only be gleaned from a thorough examination of past system performance. For instance, consider the situation where the trader was sitting on a 25% drawdown and worried sick about loosing more. If that trader knew that their system had a 33% drawdown every few years using a particular money management scheme, that trader would have been in a far better frame of mind to stick it out a little longer knowing that the current drawdown was not out of the ordinary.
What a trader really needs to do to be successful over time is to understand his or her unique personality and their tolerance for stress. Only then can they gauge whether they will be able to psychologically handle the stresses introduced by any trading style or system and the attendant equity swings inherent in that system. In my case, I learned that I could handle stress a whole lot better if I don't have to sit down and make trading decisions every day under the press of time. It was understanding that I do better when I am a bit removed from the hustle and bustle of daily trading that led me in my search for longer term systems and to start using weekly bar data. Once I successfully developed these approaches, I became much more relaxed about trading. Indeed, because I only have to sit down once a week to make trading decisions when I'm using weekly data, it sometimes seems like I'm watching the market in slow motion compared to my ways of the past. In summary, an investor has to look at himself or herself very closely and honestly and only then attempt to pick a system that will match their personality based on it's trading style and its historical performance.
You've also mentioned the importance of money management. Is this the 3rd leg of the stool?
Exactly…but it is inextricably tied in with the psychological and system selection aspects of trading. I like to say that successful trading is 50% psychology, 30% money management, and only 20% of success is attributable to the particular system you are using to trade. It's the person's true aversion to risk that should determine their money management strategy because a more aggressive strategy requires greater risk. If an investor is not aware of how far drawdowns are likely to occur in the future they will not be psychologically prepared to accept them and will abort their trading plan at exactly the worst possible time - that being during a equity trough. In general, if a trader is shooting for an average 50 - 100% return with a pretty good long term system (say 40% of trades are profitable with a 2:1 win:loss ratio), I advise them that they are probably going to have to risk 3-4% of their equity on any given trade. That same trader then needs to understand that at some point they will probably be hit with a 35-50% drawdown and they better be psychologically prepared to hold the course during that drawdown - even if it means 10 losing trades in a row! Very few people can do that if they have not pre-conditioned themselves by understanding and knowing the likelihood of such a drawdown occurring given their system and money management scheme.
Investors must also be aware of the dangers of trading with anything less than $50,000. This is because you have to limit the number of commodities you can trade and each loss thus becomes a much bigger hit to your equity on a percentage basis. As such, your equity swings generally become even more pronounced than the reported track record results for the particular system traded and the risks of a drawdown exceeding a trader's psychological threshold are even greater. Unless an investor knows this ahead of time, they are almost certainly doomed to failure.
Do you have any advice for those who trade any of your systems?
We get very few customers that are new to trading. I'm pretty sure it's just because we don't play the advertising game and promote unrealistic expectations. Having been burned by my own gullibility in the past, we just aren't given to the type of advertising chicanery that constantly sweeps in a new net of suckers. Almost of our customers have already been through their own trading wars and horror stories and they have come to understand and accept the limitations of what they can really expect from the market over time. They have already firmly convinced themselves that they need to be system traders and they are to the point were they are seriously looking for mechanical trading systems that will suit their individual trading styles and personality. And they demand backtesting to a sufficient degree that they have some quantitative expectation of future performance. They generally want to trade the systems themselves but don't like to do it on a day-to-day basis because they get burned out - just like I did. Most of my customers are very smart people who have been around the block so I can't really presume to know a lot more than them.
The one piece of advice I do generally offer them is to just take that last step in their trading evolution, give up their discretionary trading responsibilities, and simply hand the system over to a system assist broker to trade for you. I have finally admitted to myself that I am the weakest link in my own trading machine and have just taken that step with a few of my accounts. And I'm already happier. I get to see what's being done by accessing all of the account information on line so I can check the positions against my own TradeStation output. I seems like I still get to have all the fun of being in the market but don't have to deal with the stress and worry and messy details of doing my own analysis and double-checking everything before I put in orders. And all of this only costs $5 per contract more than when I was do all the computer analysis and entering all my orders myself. Most importantly, using a system assist type broker prevents traders from second-guessing their system and they're certainly ahead of the game for that reason alone.
What do you think the hot markets and stocks are this year?
Actually I make it a point to try to not consider which markets will be hot because I have found that it interferes with my trading decisions. One of the tenets of system trading is that you follow the system no matter what. This is tough enough for the average Joe like me just because of the psychological problems that we've already discussed. Add in a good mix of third party fundamental input and fear and greed on the part of the investor and you find out that slowly over time you have become a discretionary trader. So to me, even thinking about the markets becomes a distraction that will likely have a negative impact on my trading. So for this reason, I avoid reading anything that has to do with analysis or predicting where the markets will go next. I love reading the Wall St. Journal because they have such great, accomplished, and entertaining writers. In suppose if I just stuck to the front pages it would be OK but I found I inevitably migrated to the commodities section and ended up introducing stress into my life. So I don't even look at that anymore. I fervently believe if they just listed commodities by code names and you only got the open, high, low, and closing prices and didn't even know what they were when you did your analysis, that most traders would do better. Then it's reduced to a simple statistical numbers game.
Next issue we'll continue our conversation with Mr. Pryor and talk
about his views on system development and the importance of honest
PART II - In this issue, we'll pick up again on our interview with Alan Pryor, a principal of longtermtrading.com. Last issue we talked about the psychological and money management aspects of trading and how that may impact your choice of trading systems. This issue, we'll discuss the trading and system development philosophy he uses in their long-term trading systems.
Your systems have done well. To what do you attribute their performance?
At the heart of everything we do are 2 concepts - simplicity and extensive backtesting with non-optimized parameters. We are pretty well convinced after many years of system testing that the most successful performing systems in the future are those that are very straightforward in design and have been developed and backtested with non optimized parameters.
By simplicity I mean all the concepts are clearly understandable and make sense to a person of average intelligence (like myself) and the mathematics can be done with a simple calculator (although I very strongly recommend letting a computer do the work to avoid mistakes). I fervently believe that systems have to be fairly simple so that investors intimately understand its nuances and that gives them the confidence to stay the course during tough trading period. In each of our systems, there is a single entry, a single price based exit stop and/or a profit retention stop, and a money management stop.
Our systems also adhere to most of the time honored tenets of trading success such as follow the trend, don't try to pick tops and bottoms, and limit your losses and let your profits run. All of our trading systems are all designed to enter in the direction of the major trend and require a price or volatility-based breakout as confirmation. Every system also has a strict money management stop that is placed with every entry order to limit initial losses in the event the breakout is false. All of our systems as essentially reactive rather than predictive. The market has to tell us it's moving through appropriate price action before our systems signal entries and once the move on its way we let profits run as long as possible with a trailing stop.
Don't a lot of systems attempt to follow these guidelines? What makes your systems different?
Well, you're correct in that these principles are widely known and in use by many other traders. One of the things we do differently that improves our relative overall system performance is that virtually every parameter in every one of our systems is market adaptive. For instance, one of our systems (WaveRider) is a price channel breakout system. The size of the channel in WaveRider constantly and automatically changes based on recent price activity. Similarly in other systems our trailing stops automatically accelerate or decelerate relative to the current price based the same market adaptive methodology. We just let the market decide if it's moving in a trending manner or not and then our system parameters are all automatically adjusted.
However, although we use a lot of common principles that have been handed down over the years, we have also found out that a lot of the conventional wisdom is flat out wrong. For example, we have found it is almost always better to tighten stops when trends are strong rather than having loose stops as is often preached. Similarly, we use stochastics as a breakout confirmation tool rather than as an indicator of overbought or oversold conditions which is the use for which they were initially developed and promoted. Another thing different about our systems is that they only use weekly price bars rather than daily or intraday bars. This not only suits our personal trading styles (because we only have to do our analysis once per week instead of 5 times per week) but we also think price patterns are much more reliable on longer time frames because you eliminate a lot of the noise in the market.
You also mentioned extensive backtesting and non-optimization as keys to long-term system performance. How do you look at those as part of a system development process?
Any system we design and evaluate has to withstand our very rigorous backtesting and scrutiny…and this is where being honest with ourselves comes into play. Anyone who has spent any time with TradeStation has found that it's pretty easy to put a system together that can show really good performance numbers across many different commodities if one is willing to adjust the parameters for each commodity and/or exclude certain commodities from your testing data base. However, we absolutely believe down to the core of our bones that such optimization, in almost any form, is detrimental to the system development process and has probably caused the premature demise of more technical traders than any other single factor (although lack of money management is probably a close second). As a result, we have been fairly accused of taking the concept of non-optimization to an extreme in our development work. As an example, in addition to holding every single parameter constant for every commodity within a single system test, we hold many of the parameters constant across all 6 of our systems. These include the fixed money management stop, the market adaptive methodology, and the profit retention stop. Additionally, every one of our systems is backtested against the same stringently selected 21-commodity portfolio so we don't introduce commodity cherry picking into the evaluation equation. Finally, just to keep us from running thousands of tests to find the absolute best set of parameters for any one system, we require all of our parameters to be a Fibonacci number or a 10x multiple of a Fibonacci number. Now, none of our systems use Fibonacci numbers or ratios in any way but we decided early on that restricting our choice of parameter values this way just seemed to be a reasonable, conservative way to keep us from curve fitting and we have been doing it ever since.
You clearly seem to have a preference for trading longer term. Any particular reason why?
All of our systems look at the market from a long-term perspective (meaning an average trade length measured in weeks to months) because we look at the markets that way and every system we have ever developed was with our own eventual use in mind. In essence, our systems are long term because they fit our personal psychology and our preference for trading less in the market. I think successful short-term traders have a completely different personality than long-term traders. They are very disciplined and can use their extended, focused attention spans to stay glued to a screen all day. They are highly reactive and have steely nerves to handle the inevitable real time market setbacks. These are very, very difficult attributes to develop in an average trader and, I realized early on, ones that I could never hope to muster in myself.
Successful long-term traders, on the other hand, tend to be much more methodical and calculating and have a more patient temperament. I’m definitely in this later camp and I think that 95% of prospective traders are also. Also, although I really get a kick out of being “in” the markets and sneaking peeks at quotes now and then, I really don’t have a passion for trading and don't particularly enjoy the mechanics of trading. I find the whole process of downloading quotes and trade selection to be tedious and boring and yet stressful at the same time. I think that every trade introduces another incremental level of stress in a trader that, if a trader's individual stress threshold is exceeded, leads to mistakes and bad judgment. The hardest part about being a trader is consistency and handling stress when things are not going your way. For me, it's simply a lot easier to be a consistent when I'm not stressed and trading less frequently makes me less stressed. So by trading long term and reducing the number of trades, I end up spending less time doing something I really don't enjoy doing and eliminating a lot of stress in my trading life. By matching my trading style to my trading systems, it has made me far more relaxed as a trader and in far better psychological shape to weather the inevitable drawdowns that I'm sure our systems will see in the future.
Do you feel that the longer-term approach is superior to other types of trading like day trading and short term?
That's a little like asking whether you think apples or oranges are better. And, of course, the answer depends on whether the particular person who was asked happens to likes apples or oranges. The point being that I think a trader should not ask whether or not long term trading is superior to short term trading (I think it is), but whether or not long term trading suits their individual personality. I think most people imagine that swing trading or day trading seems exciting and somewhat daring and they think that this would be a fun thing to do in their lives. They rarely consider whether they are emotionally suited for the psychological rigors and discipline required for successful day trading or short term swing trading. I'm pretty sure most people's personality and lifestyle are far better suited for a longer term trading approach.
But I also think there are some inherent technical advantages to trading in a longer time frame. I have always believed that markets are chaotic in the short term but more predictable and cyclical over the longer term. One can take almost any long-term price chart and see a number of seemingly very tradable long-term price trends that have far less "bounce" than price action viewed in shorter time frames. But the bottom line to us is simply that our work shows that it is generally more profitable to apply the trading principles we use to long term time frames rather than in short term trading. Plus we like the fact that our long-term approach reduces the overall number of trades compared to trading systems with a shorter time frame and thus minimizes the negative effects of commissions and slippage. The one possible disadvantage of longer term trading strategies, however, is that they generally require both a larger initial stop and a looser trailing stop to allow room for a big move to develop. This is psychologically very difficult for a thinly capitalized trader to accept. However, I have learned over and over again that large stops leads to large profits - as incongruous as it sounds. I've spent countless hours in the past trying to develop systems with the tightest possible initial stops and I invariably found out that it almost always works out better if larger stops are used - even on small contracts like corn or eurodollars.
Your use of weekly time frames is somewhat unique in the industry. How did you end up using these time frames when so much of the industry seems to be going to shorter and shorter time frames?
Well my original research into the use of weekly bars was entirely motivated by the fact that I was sick and tired of having to do my commodity updates and analysis every evening. As I said earlier, I don't particularly enjoy the mechanics of trading - especially if I have to do it at the end of a long hard day in the field. I found I would often walk into my home at the end of a long day in the fields and find my kids bouncing off of the walls and my poor wife ready to bolt town. Having to find the time and quiet space to sit down each evening and methodically do my updates and trade analysis in the midst of this chaos just became impossible without starting to shut my family out of my life. It simply wasn't an environment conducive to making thoughtful trading decisions. It also felt at the time that I was just getting too close to the markets. I realized something had to give and started earnestly looking at longer term trading to reduce my trading activity. I also stated working with weekly bars at the same time because only doing your analysis and placing trades once a week instead of once a day sure sounded good. And as they say, I have never looked back since.
You obviously have a strong bias for technical analysis, what led you to focus of this type of analysis compared to fundamental analysis?
I first became interested in the markets as a college student when I was walking through the bookstore at the University of California. It was absolutely huge and probably ten times larger than the entire public library in the small central California valley town in which I grew up. I was wandering through trying to find my way and happened to glance up in the Business/Investment section of the store. I saw William Granville's new book on On Balance Volume on the shelf and, to this day I don't know why because I had no interest in investments at the time, just happened to grab it and curiously browse through it. I was instantly hooked and read through 100 pages right there in the store.
I didn't have enough money to buy it at the time but I went back to the store every day until I had read the entire book. I still vividly remember crouching down in the store aisles scribbling notes from the book into my binder and being absolutely dumb struck at what appeared at the time to be the clarity of his vision. Now I have never been able to subsequently develop a system that is consistently profitable using On-Balance Volume or any volume indicators, but I became instantly and totally hooked on his premise that the market itself will always tell us everything we need to know about the market. From that point on the markets became an exciting, mysterious, wonderfully changing puzzle for me to solve and my love affair with technical analysis began.
How do you go about developing a system?
I have fun doing system development work even though only about one out of every 20 ideas I try ever pans out into a working system. I think its relaxing to sit in front of my computer, bring up a few weekly charts, start applying indicators and see if I can spot any loose relationships between the price of the commodity and the indicator with which I am playing. It's a little like playing Solitaire. If anything looks interesting, I'll start coding different entries and exits to see if I can take advantage of this observation. If I can get things to work well with a half dozen different commodities using weekly bar data, then I'm finally ready to run the system on our standard 21 commodity portfolio. I wish I were the type where I'm occasionally hit with the proverbial lightning bolt and a system mysteriously jumps out of my head. But the process is longer and more evolutionary for me and I generally have to work through a slew of my half-baked testing ideas before I hit on a good one.
If you have a preference, would you prefer to trade commodities or stocks on a mechanical trading system? Why?
Well, that's an easy one. Assuming that you are leveraged to the same extent in each marketplace and you have the same relative risk: reward ratios, I would always favor a basket of different unrelated commodities over a basket of different, seemingly unrelated stocks. A cornerstone of any successful trading plan is diversification and I am convinced that it's easier to diversify with commodities than with equities. This is because the movement of seemingly unrelated stocks are, in fact, very highly correlated as they tend to move up or down together as a group with the overall market. Even if you try to get stocks from 7 or 8 different stock sectors, the degree of correlation between the movements of the individual stocks is very high. It just seems intuitively obvious to me that eurodollars, cattle, cocoa, soybeans, copper, and Swiss franc are more likely to show more independent price movement relative to each other than say GE, IBM, Wal-Mart, and United Airlines.
Are you working on any new projects that you can tell us about?
I would not exactly consider it to be a life failure if I never succeed, but I have never, ever been able to develop a short term, swing system that can trade with non-optimized parameters across our full standard portfolio of commodities. It seems that every time I sit down and start trying to come up with a shorter-term swing system I find my initial results are not consistently profitable. I then end up basically going through a series of changes in the system methodology to get it profitable and invariably end up with a longer-term system. Our most recent system that we just introduced ("Anomaly") is a good case in point. This system started out as an attempt on my part to consistently identify and buy oversold commodities and sell over bought commodities. It seems I get a wild hair up me and go through this seemingly futile attempt every few years. This time I tried a few dozen different combinations using RSI, Stochastics, and %R and nothing was really working. Then I accidentally reversed my buy and sell signals in the system code and, lo-and-behold, profits unfolded. Eventually our continued research shows that Stochastics are a much better tool at predicting continued price movement in a trend than they are at predicting overbought or oversold reversal conditions. Once that became apparent and I stepped outside the box, all the development pieces came together quickly and Anomaly was the resulting system for which we have just posted the description and historical performance results on our website.
That notwithstanding, I still haven't given up trying to find that elusive short-term system. I still have a gut feeling that there is a profitable way to trade short term swings with weekly bar data so I'll continue to play with the computer trying to discover that little hidden kernel of swing trading wisdom. I have to admit, though, that my attempts to come up with a viable short term system may be more about my meeting a personal challenge than a realistic appraisal of my chances of success and I would not be surprised if we had this same conversation 10 years from now. A wise, grizzled, old market veteran may still be right long from now when he recently said, "The consistent short term swing system has yet to be developed". Thanks for the opportunity to share my thoughts.The End