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Research
Right click and choose "save as.." to download any of the following documents.
Winning And Losing Streaks Probability Calculator.xls - Trading can be a streaky affair. Long winning and losing streaks can and do occur. Long winning streaks can give you the feeling of pride, even hubris, and long losing streaks can make you question yourself and abandon sound trading principles, methods, and systems, often just before the losing streak comes to an end. Knowledge of the likelihood of longest winning and in particular longest losing streaks in trading can help traders know what to expect and reinforce needed confidence when long losing streaks inevitably occur. This knowledge can also help traders to decide whether they are willing to withstand the long losing streaks that inevitable accompany low win-percentage methods (such as long-term trend-following).
This Excel file is a tool for calculating the probability of longest winning and losing streaks. The upcoming issue of Futures Truth will have my complete article on the subject. Note: the Excel file has a macro. I keep my antivirus software up-to-date so there is nothing to worry about security-wise.
Know Your Market - How an understanding of some basic fundamentals can be used to improve trading system results for agricultural markets.
Is Long-Term Trend-Following Dead? - Long-term trend-following systems have suffered large draw downs and poor absolute returns during the last few years. This note discusses one way to improve results and proposes a buy-and-hold benchmark for measuring performance of commodity trading systems.
Problems with Long-Term Trend-Following Exits - Anecdotal and empirical evidence suggests that one of the problems with recent trend-following system performance is the exists.
Does Trend Following Work on Stocks? - A white paper by a couple of
fund managers that provides compelling evidence that long-term trend-
following does indeed work on stocks, provided you only consider the
long-only case and use very wide trailing stops.
Book Reviews
Fortune's Formula: The Untold Story of the Scientific Betting System That Beat The Casinos and Wall Street, by William Poundstone
Fortune's Formula is a recently published (2005) wide-ranging book about gangsters, horse-racing, information theory, card-counting, statistical arbitrage, and hedge funds. It's ostensibly about fixed-fractional betting and the Kelly criterion (the "formula" in the title), which serves as the common theme that weaves together the disparate topics covered. A fixed-fractional money management scheme risks a fixed percentage of account equity on each trade. This allows risk to increase or decrease along with equity. The Kelly criterion relates a trader's "edge" (all positive expectancy trading systems have a positive "edge") to the amount that should be risked on each trade in order to maximize growth of your account. A simple way to approximate this percentage is Kelly % = W – (1 – W) / R, where W = win % and
R = win/loss ratio. For example, if a trading system has a 60% winning percentage and an average win/loss ratio = 1, then the Kelly % = .6 - (1-.6)/1 = 20%. That is, to maximize the growth rate of equity, a trader must risk 20% of equity on each trade. This is a huge amount of risk, but as the book explains, betting some percentage of Kelly reduce the wild swings in equity associated with full Kelly betting. Unfortunately, Fortune's Formula doesn't spend much time addressing this, or delving into the technical details of Kelly betting. One of the interesting tidbits in the book is that Warren Buffet's equity curve resembles that of a full Kelly bettor. Fortune's Formula is a fun read, but the person looking for details about the Kelly criterion will have to look elsewhere.