“There is a clear difference between understanding how to construct a successful strategy and having the ability, drive, and willpower to make it happen in reality. That is the tough part that can never be properly taught.” – Clenow

Clenow begins his third chapter by discussing the returns of some trend following funds. He asks the reader to note the differences in annual returns and how those differences correlate with the differences in maximum drawdown. It is important for us to understand that most trend following systems will react the same way in certain situations, but the amount of risk will determine the magnitude of those reactions.

“Contrary to popular beliefs and widespread myths, trend following is not a terribly complex subject. It is all about waiting for a price to make a move up or down, taking a bet that it will continue in the same direction for a while and sitting on that bet until the price moves enough against you that you conclude that the trend is over.” – Clenow

From here, Clenow touches on some investment strategy topics including: diversification, position sizing, time horizon, risk level, and multiple strategies. It is interesting that he, like many of the Market Wizards, makes a point to state that an investor is far better served to focus on these areas than entry and exit signals.

He also suggests using a position sizing algorithm that accounts for a market’s average true range (ATR). This will allow each position in our portfolio to have a similar impact on the entire portfolio regardless of volatility.

Clenow also spends a significant portion of this chapter explaining the importance of diversification. We need to remember that we are building a robust system that can be traded across many different markets. This is one of the key flaws of my 10/100 Trend Following System.

It looks like the next chapter will get into some detail about specific trend following strategies.

Jack Schwager’s third interview in Stock Market Wizards is with short selling specialist Dana Galante. While I have always been interested in short selling as a portion of a strategy, I thought it was very interesting that Galante only plays the short side.

This didn’t make sense to me at first, but then a light bulb went off when Schwager explained that many investors use Galante’s short-only approach as a risk control portion of a larger portfolio. By trading exclusively on the short side, Galante has build her own niche in the trading community. She is able to offer her clients something that most investors would never think about.

Top Five Quotes From Market Wizard Dana Galante

“I was never really obsessed with the market, like a lot of the people that you have written about. I like the market, and I think it’s exciting and challenging, but I don’t go home and think about it.” – Dana Galante

Along with her overall strategy, this runs opposite of what we generally see from Market Wizards. Most of the traders interviewed have spent years obsessing over the markets and many have lost friends and family because of their obsessions. Galante is not going to be one of them. She says that she makes it a point to leave work at a reasonable time everyday and never trade or do research from home.

As someone who has struggled quite a bit with work/life balance, I appreciate that she is able to do this. I tend to get lost in whatever project I am working on and then miss out on everything else that happens while I am focused. I would love to become more like Galante and be able to leave work at work.

“I don’t want to grow. I don’t want to manage people; I want to manage the portfolio.” – Dana Galante

This reminds me of an independent music group or filmmaker. Galante doesn’t want to build the biggest hedge fun on the planet. She is actually quite content with the amount of success she currently has and would rather focus on doing what she does best than managing a conglomerate.

I find that most of my complaints about my day job have to do with managing people. While I find the actual work that I do to be quite enjoyable, the stress of managing employees is extremely frustrating, so I can completely understand where Galante is coming from.

“The key is anticipating what is going to affect future earnings relative to market expectations.” – Dana Galante

I have never been very good at anticipating anything, but I appreciate that Galante looks at her positions with respect to earnings. It is important to base your trades on a system or strategy that is grounded in real numbers as opposed to what you think might happen, or even worse, what you hope will happen.

“I won’t short a stock that is moving straight up. The stock has to show signs of weakening or at least stalling.” – Dana Galante

Despite the fact that Galante trades only the short side and regularly finds herself swimming against the current of the overall market, she is not foolish about it. She only shorts stocks that show signs of weakness. Therefore, she isn’t likely to be calling tops in stocks that are rocketing higher and increasing earnings.

“When a company blames the price decline in its stock on short sellers, it’s a red flag.” – Dana Galante

Galante went on later in the article to explain that the short sellers are the ones who are doing the buying when a stock finally bottoms. She makes the argument that short sellers covering their positions on the way down are actually slowing the decline.

I found Jack Schwager’s interview with Steve Watson from Stock Market Wizards to be interesting in that it stretched my mind a bit. Watson bases his trading on fundamental research combined with information he gains from actually calling company executives. While this couldn’t be further from my approach, once again, we see that there are some rules that apply to all types of trading.

Top Five Quotes From Market Wizard Steve Watson:

“I didn’t expect to get a job managing money on day one. I just wanted to break into the business. Once I decide I am going to do something, I become determined to succeed, regardless of the obstacles. If I didn’t have that attitude, I never would have made it.” – Steve Watson

One of my favorite parts of these interviews is when the people being interviewed discuss how they got involved with trading. I like reading about the mindset they had before they became successful. I have been able to draw quite a bit of motivation from that.

It’s great to read about how determined Watson was to be successful. I also appreciate that he was willing to put in the work and didn’t expect to be managing money right from the start.

“But it really comes down to my philosophy: It’s much more valuable to do your own research so that you can make your own decisions about when to get in and out.” – Steve Watson

Watson is referring to using research from analysts in making buy or sell decisions. We can take this a step further and apply it to systems trading. It is much more valuable, and some would say essential, to do your own research when building and backtesting your trading system. Doing all of the work yourself enables you to understand the system inside and out. This comprehensive knowledge of what you are doing will make trading the system seamless.

“If it looks like dead money and what I originally thought would happen is not happening, then it’s probably better to just move on.” – Steve Watson

Once again, despite having a completely different approach to trading that I do, we see a Market Wizard advocating cutting losses. The number one theme from all of the interviews I have read seems to be that keeping losses under control is the number one rule across all forms of trading, investing, and gambling. On the flip side, letting losses run seems to be the fastest way to blow up an account.

“You have a locomotive while prices are going up, but the problem is, what happens when the locomotive stops and reverses direction, as it invariably will. Are we near a top or will the top form three years from now? I can’t answer that question. All I can do is control the factors over which I have an influence.” – Steve Watson

Watson trades based on fundamental research and actually talking to company executives. This couldn’t be further from my style. I don’t even like talking on the phone. However, we both agree that there is no point attempting to predict price movements. In this respect, Watson has an element of trend following in his approach, despite how different it is from a more traditional trend following strategy.

“We’ve had a lot of short positions that we closed out because they went against us and that later on collapsed. But we are much more concerned about avoiding a large loss than missing a profit opportunity.” – Steve Watson

Watson again stresses the importance of cutting losses short. He actually goes as far as to say that missing a big profit is OK with him if it means that he keeps his loses under control. This is easier said than done. I have a very hard time watching a stock continue higher after I get out

This interview marks the start of Jack Schwager’s third interview book, Stock Market Wizards. The first interview is with Stuart Walton, who trades a hedge fun in San Francisco. His only employee is a part-time secretary. His office sounds like the kind of quiet, relaxed place that I imagine myself trading from one day. He spent a lot of time focusing on how he can be influenced by other people’s opinions even after years of experience. I believe Walton and I are cut from the same cloth in the respect.

Top Five Quotes From Market Wizard Stuart Walton:

“I believe anyone can do this job; I don’t think you have to be born to do it.” – Stuart Walton

I love when successful traders make it a point to say that trading skills can be learned. If trading was a talent that you are born with, we would not have any hope of improving over time and would be better off to just give up now. The fact that many successful traders have discussed that anyone can learn these skills is very inspiring.

While you can learn to trade pretty much any style out there, I do believe that the best way to be successful is to find a trading style that matches well with your personality. Seeing as I prefer to work with firm numbers and systems, discretionary trading did not work well with my personality.

“Sometimes the opportunities are so obvious that you almost can’t lose when they come around; the only problem is that they don’t come around that often. The key is not to lose money in the times in between.” – Stuart Walton

I am still waiting for one of these opportunities. This blends well with looking for those few trends each year that are really strong and staying away from the markets when they aren’t moving.

“Someone who has never made a mistake is dangerous, because mistakes will happen. If you’ve made mistakes, you realize they can recur, and it makes you more careful.” – Stuart Walton

This is an excellent point. To build on it, you also have to be able to admit your mistakes. I have seen many traders blow up because they simply couldn’t imagine the possibility that their research was wrong. The number one most commonly repeated rule for success is to cut your losses. If you can’t admit your mistakes, you won’t be able to cut your losses. You may not even be able to admit that you have losses.

“I think a lot of successful traders are unemotional, hardworking, and disciplined. Ironically, I find myself lacking on each of those counts. I get very emotional; I really don’t work that hard; and I’m not as disciplined as I should be. I would attribute my own success to having both conviction about my gut feelings and the ability to act on them quickly. That is so critical.” – Stuart Walton

I thought it was interesting that Walton points out that he doesn’t have what it takes to be a successful trader. I also struggle with those three things, however I stubble with he things Walton is good at too.

“Either go at it full force or don’t go at it at all. Don’t dabble.” – Stuart Walton

This is a lesson I think could be applied to most of the people I would see at monthly Meetup groups. They would show up once a month, doing no homework between meetings, and wonder why they weren’t successful. This business takes quite a bit of hard work and dedication, it’s not a part time side project or hobby.

At first, I was confused as to why Jack Schwager would interview a hypnotist in The New Market Wizards. As the interview with Robert Krausz progressed though, I realized that he was discussing the same kind of trading psychology that Dr. Van Tharp and Charles Faulkner had discussed.

This exploration of the subconscious mind and how it can help us, or hold us back, ended up being incredibly interesting in terms of both trading and life in general. Once again we see a Market Wizards interview that spends almost no time discussing actual trading strategy, once again stressing the importance of the mental aspect of trading.

Top Five Quotes From Market Wizard Robert Krausz:

“I found out a long time ago that one of the most damaging things a person can do is to harp on past mistakes. If you’re constantly repeating to yourself, ‘I shouldn’t have done that,’ it’s like a cartwheel going over the same tracks. Eventually, the negative message gets so embedded in your psyche that it becomes very difficult to change your course of action.” – Robert Krausz

This is something I struggle with in all aspects of life. l obsess over things I did wrong years ago and how my life could be different if I had made better decisions. I agree with Krause that this is a very destructive force, however I don’t know how to change my way of thinking. The more I try not to think about certain things, like mistakes, the more I tend to focus on them.

This has had a severely negative impact on my trading. The only potential solution I have found, short of one-on-one counseling with Dr. Van Tharp, Charles Faulkner, or Krausz, has been reading through Trading In The Zone by Mark Douglas. This book takes a head on approach in dealing with these mental issues.

“The more closely the conscious mind is aligned with the subconscious, the easier it is to generate winnings. To keep those winnings, however, your subconscious mind must believe only one thing: that you deserve your winnings.” – Robert Krauss

This is an interesting concept that we have seen come up with a few other Market Wizards. While everyone will say that they believe they deserve to win, it is interesting how many traders later realize that there is more too it. It is very interesting to hear first hand accounts of traders who dig deeper into their subconscious and find out that they don’t really believe that they deserve to win.

I fit into the category of most traders in that, on the surface, I believe that I believe I deserve to win. However, when you start breaking down my insecurities and self-confidence issues, it is entirely possible that there is something down there holding me back. Perhaps it all stems from my mother patronizing me every time I got excited about building a business. But then again, that could all be bullshit, too.

“Some people lose because they feel they don’t deserve to win, but more people lose because they never perform the basic tasks necessary to become a winning trader.” – Robert Krauss

I like what Krausz does here, basically calling out people who don’t put in the work and then blame it on their subconscious issues. This is why I would like to reserve judgement on my own mental capacity. It is also entirely possible that I just haven’t done enough homework to be successful. It is also possible that I just haven’t yet found a strategy that meshes well with my personality.

According to Krausz, these basic tasks are more likely the reason for my lack of success than the mental aspect. I find this to be encouraging because I can take steps to improve on these basic tasks. The mental aspect is a bit more complicated to deal with.

“I learned that people’s perceptions of reality and true reality are not the same thing. It’s a person’s belief system, not reality, that really counts. The more I worked with hypnosis, the more I realized how often our lives are warped and misdirected by invalid beliefs that have their origins in childhood. These beliefs frequently cause people to live their lives with a distorted view of reality.” – Robert Krausz

Krausz uses a good example to illustrate this point. He describes a young child, who gets yelled at for picking up his dad’s tools. After the child grows a bit, he tries to help dad with a tool, but there is a bad memory associated with it, so he is hesitant. Dad sees this and tells the child that he just isn’t good with tools. The child gives up on using any tools because he was told he isn’t any good with them.

This is a very simplistic example, but you can see the idea. Now picture that example the way real life happens. There were probably 30 or 40 small memories regarding tools that all played into the childs feelings. When associated with trading, you could see the example being applied to everyone who ever told you that you can’t make money in the stock market, or that you aren’t smart enough. This could lead you to believe that you will never be successful, even though you can’t recognize that believe consciously.

“What causes lack of confidence? What causes fear of loss? What causes poor execution? NO TRADING PLAN! This is the basic feature that separates losing traders from winning traders. Lack of confidence disappears in direct relation to the validity of a back-tested trading plan.” – Robert Krausz.

This was my favorite quote of the interview, because Krausz provides us with a solution. His solution is to achieve confidence and eliminate fear through back-testing. That is such a simple, yet totally brilliant concept, and is a big part of the reason I am focusing on system tradying.

The discretionary element of the system I had been trading could never be back-tested, therefore there was always room for that doubt to creep in. Moving into a more systematic approach is giving me the ability to remove those doubts because I can prove the long term success of a given system. That is extremely powerful and motivating for me.

As I continue to get more and more interested in building and backtesting trading systems, I am beginning to look into purchasing trading software. This is an overwhelming experience, to say the least. There is a seemingly endless selection of different software packages, and there doesn’t seem to be any clear guide to selecting which one would best fit my needs. To be honest, I don’t even know what my needs are at this point.

Products I Have Seen Recommended

• In Following The Trend, Andreas Clenow recommends Wealth Lab and RightEdge. 
• My friend @Systemstrader95 suggested I check out Wealth Lab or Trading Blox.
• I have another acquaintance who programs systems using MetaTrader4 and NinjaTrader. 
• I have seen and heard about Tradestation. 
• In a personal email, Clenow also recommended OpenQuant, but noted that it has a high price point.
• I received a few emails recommending Amibroker, which I know Woodshedder uses and recommends.

With this as my universe of possibilities, I began to explore the details of each of these systems.

Products I Quickly Disqualified

Wealth Lab

Since Wealth Lab was the highest recommended product and is supposed to be the easiest to learn, I decided to start there. The pictures on the website look like the software is really cool, and I can even register and download a free trial. However, when I dug a little deeper, I discovered that US residents are required to have a Fidelity account to access Wealth Lab. The fine print specifies that this account must have a minimum balance of $25,000 and place at least 120 trades per year. That means I’m not going to be using Wealth Lab.

TradeStation

I like the idea of software that is already linked to a broker, so I decided to try Tradestation next. Here again, I ran into very high minimum account requirements, although they do offer a software only version for $250 / month that is limited to simulated trading. I think we can probably do better than that. I would prefer a one time fee to a monthly subscription.

TradingBlox

I next looked at TradingBlox, which Clenow mentioned was started by former turtle Curtis Faith, who wrote a good book on system trading. At this point, I realized that my first question for each software package should be about the price. For TradingBlox, I found out that there were three different versions. The $1000 model came with a few systems already programmed. The $3000 system, which was “on sale” for $2490, came with 11 systems and the ability to adjust them. Then there was the big daddy $4000 system that came with all 11 systems and the ability to program your own.

I just couldn’t see the point of buying anything that I would eventually grow out of, and certainly not at those price points. I have read enough to know that in order to be successful, I will need to build my own systems from the ground up. I would never be successful trading someone else’s system.

OpenQuant

At $400 / month, OpenQuant was out of my price range, and it didn’t help that their website looked like it was designed by a third grader.

MetaTrader4

This software appears to be limited to Forex, Gold, Silver, and Oil.

Products That Warrant Further Consideration

NinjaTrader

NinjaTrader is available for a one time fee of $1000, or you can lease it for $50 / month. I felt that both of these price points were more than reasonable, so I decided to download the free version that limits to simulation only and give it a spin. The problem was that it told me the license key they emailed me was not valid and I wasn’t able to get the software open to begin with. This makes me think that there might be bigger problems with the software.

Amibroker

Amibroker is highly recommended and sells an entire package of software for $409. This is the software that Woodshedder used to backtest my SPY 10/100 Trend Following System. The software came with data for the 30 Dow stocks preloaded, which let me play around a bit. Since I’m new at this I obviously had no clue how to use anything, but the software appears to have a decent help file and loads of videos under the support tab of its website. I could see this software working just find for what I would like to do.

RightEdge

RightEdge is available for a one time fee of $500 or a monthly subscription of $50. Both price points seem incredibly reasonable for software that was so highly recommended. There is also a 45 day free trial available. The software seems slightly more polished than Amibroker, and it appears to have an extensive help file as well as a PDF manual. I was able to load some charts and pull free data from Yahoo. Based on the strong recommendation from Andreas Clenow, I am probably going to move forward with this software, but will experiment further with Amibroker as well.

Jack Schwager’s interview with Charles Faulkner in The New Market Wizards was one of the interviews that was more about the psychology of trading than actually trading. This is one of my favorite subjects to read about, so I found the interview extremely interesting. Faulkner is a staunch advocate of NLP, and spent most of the interview discussing various applications it has to trading.

Top Five Quotes From Market Wizard Charles Faulkner:

“By modeling successful people, we can learn from the experience of those who have already succeeded. If we can learn to use our brains in the same way as the exceptionally talented person, we can possess the essence of that talent.” – Faulkner

This is a concept that makes perfect sense when it is written in front of you, however it is also one that can easily get lost in the shuffle of a busy life. You have to make time to study successful people in order to learn from and model them.

This is exactly what I have been doing with the Market Wizards series for almost a year now. Every week I read about a wildly successful trader and discuss things I can learn from what they find important. I have recently taken this a step further into having ongoing discussions with some very accomplished traders.

“The different forms of market analysis can be seen as different maps of the same territory. Outstanding traders seek to have maps that most closely match the market territory in a way that is useful for them.” – Faulkner

I really like how Faulkner illustrates that there are many forms of market analysis, and any of them can be correct when applied the right way. This is something we have seen from a number of Market Wizards who have endorsed a number of different styles. It appears that any form of analysis can be correct as long as it fits with your personality.

This is something I have been dealing with as I am evolving into more of a system trader. I have found that making discretionary decisions does not fit well with my trading mentality as it forces me to second guess my analysis. Removing the need for the analysis and using backtesting to prove a system profitable will make a huge difference in the application of my trading map.

“One thing that really struck me was that not one of these people said they truly regretted anything they had actually done – what they regretted was what they hadn’t done.” – Faulkner

Once again, this is one of those concepts that is so obvious, yet so easy to forget about. Faulkner discusses this in the context of deciding what you really want out of life and then going after it. Many of us spend most of our time chasing things that we don’t really want after all. Faulkner is urging us to seriously contemplate the roads we are choosing to take.

“Trading actually tends to attract people who are ill suited to the task – those who are enamored with making lots of money; people who are willing to take high risks; individuals who seek excitement or who react to the world with emotional intensity.” – Faulkner

Know anyone like this?

What is scary is that I fall into every single one of those categories. Each one is something I have spent an enormous amount of time working on. I believe that moving to a systematic approach is going to remove a lot of the excitement from trading for me, however I am also the kind of person who is excited by large data sets, so if I can focus my excitement on backtesting and deelopment, then perhaps I will put less emphasis on the success of a given position. We will see….

“With NLP, you can direct your conscious mind to notice when you’re not where you want to be. What’s more important, you can use NLP techniques to effectively introduce new patterns into your unconscious mind to bring about the changes you desire, instead of complaining or making up any one of a thousand reasons why you aren’t where you want to be in your life.” – Faulkner

I had previously read about NLP from a bunch of books on how to get girls. Faulker’s application is a bit more sophisticated.

I believe that I could benefit a great deal from applying some of these NLP techniques to my life as well as my trading. I will put an NLP book on the upcoming reading list.

As I began reading up on the events of the past week in order to prepare for this weekend’s Weekend Update post yesterday it suddenly occurred to me that I might be wasting my time. All I was doing was regurgitating the same information that could be found by reading Investor’s Business Daily or any of the very intelligent people who were already doing a much better job describing their approach to that style of investing (Mike & Joe).

In order to get some confirmation on my new opinion, I reached out to a new friend. The conversation went something like this:

I guess that answers that. Upon deeper reflection, I realized that I have really just been going through the motions with my Weekend Update lately and there are two good reasons for that.

First, I am ridiculously busy. I work full time running a restaurant and banquet hall and then work part time as a freelance writer which I hope to eventually make my income stream that funds my trading account. Because of my hectic schedule, I have been sitting down at around 10 PM every Saturday night and trying to bang out a Weekend Update before falling asleep. The results have been less than stellar.

Second, I’m just not that interested in CANSLIM investing anymore. It’s not that I think there is anything wrong with the strategy though. I just feel like my general lack of self-confidence puts me a tremendous disadvantage when it comes to making discretionary trading decisions. On the other hand, I am finally getting some traction in learning how to build a trend following system like the ones I read about in Covel’s book almost ten years ago.

The way that Woodshedder was able to backtest my SPY 10/100 Trend Following System and give me legit numbers on how I could expect it to perform moving forward has had my head spinning for a week now. I can’t not move forward learning more about these automated trading systems.

So with all of that said, what should I do now? Well, since @SystemsTrader95 is kind enough to tweet his long and short positions at the end of each week, I could probably learn something from looking at those charts. For now I’ll just look at his Core Trend Following Program.

Long Positions:

S&P 500 SPDRs – (SPY)

Since the 50 day line dipped below the 100 day line at the beginning of the year, this chart has been cruising higher. It has also held the 50 day line despite recent market action.

iShares Barclays 20+ Year Treasury Bond Fund – (TLT)

Despite the 50 and 100 day lines crashing through the 200 day line earlier this year, this chart looks to be coming back. Price is currently trading above all three lines and if I were to add the 10 day line to this chart you would see that it shot right up through the other averages.

Financials Select Sector SPDR – (XLF)

Here we have another chart holding up at the 50 day line.

Japan iShares – (EWJ)

This chart has looked very strong ever since the 50 and 100 day lines crossed the 200 day line at the beginning of the year.

Guggenheim China Real Estate ETF – (TAO)

This is the chart I understand the least. I’m not sure if it is on the long list because it has logged significant gains or because of the recent jump through the 50 day line back to the 100 day line. Regardless, it is still trading well above the 200 day line, as are both the 50 day and 100 day lines.

Currency Shares Euro Trust (FXE)

This is another one that looks kind of choppy, trading at the 50 day line and under the 100 day line. Again, it is still well about the 200 day line.

Short Positions:

Russell 2000 iShares – (IWM)

I’m guessing that this is on the short list because of breaking the 50 day line.

iShares Silver Trust – (SLV)

Pretty clear why this trend is down.

SPDR Gold Trust Shares – (GLD)

Again, this one is obviously a down trend.

iShares MSCI Emerging Markets – (EEM)

Trading below the 200 day line. 50 day recently crossed below the 100 day.

EMU Index iShares – (EZU)

Trading below the 50 and 100 day lines. 50 day line looks to be crossing the 100 day line right now.

Powershares DB Multi-Sector Commodity Trust Agriculture Fund – (DBA)

Trading below all three lines in order. Clear down trend.

United States Oil Fund – (USO)

Look like this chart was pretty choppy up until about two weeks ago. Clearly trading well below all three averages now.

The market took a turn for the worse this week, logging big distribution on Monday, Wednesday, and Thursday. This negative action has begun to turn the 10 day moving average down as the index actually broke through the 50 day line. If the market continues in this direction, it shouldn’t be long before we get a negative signal and go short.

If the market does continue along this path and give me a short side entry signal, I would have to give up a good portion of the paper profits I would have made if I took the last up side entry signal. This is all part of the plan though, and it appears as though I would still be exiting a profitable position.

Backtesting The SPY 10/100 System

Since I do not yet have the software capabilities to backtest this system, Woodshedder from iBankCoin volunteered to help me out. The results he came up with were very interesting. I highly recommend reading his breakdown of the strong and weak aspects of this system. His results show that the system would underperform simply buying and holding SPY over the long term, but would do so with smaller drawdowns.

While this does not appear to be a good system from a performance standpoint, it does appear to be a good system from a risk of ruin standpoint. This got me wondering what I could do to tweak different aspects of the system in order to increase performance without losing the safety. Since I don’t have the ability to backtest for myself, I will have to keep monitoring the system as-is for now. I hope to begin learning a software package soon.

“With futures strategies you can cover everything from equities to bonds, metals, grains and even meats, with standardized instruments following the same basic characteristics. If you are looking to build portfolio strategies that make full use of diversification effects, this is a dream.” – Clenow

To start off the second chapter of Following The Trend, Clenow once again points out the diversification benefits of futures strategies. This represents a level of diversification that traders can’t easily find anywhere else. A trader can trade everything from stocks and bonds to gold and pork bellies to bonds and currency. I particularly like Clenows argument that a diversified equities portfolio will still be highly correlated during extreme circumstances.

Clenow also points out that trading a futures strategy provides the benefit of leverage. When trading futures, you only have to have enough money to cover the margin, which is usually a fraction of the total value. This allows a trader to have more control over his risk levels. While margin requirements vary based on the market, they are generally in the 10% range.

“When dealing with quantitative strategies, the most crucial building block is always the data itself. Everything else you do will be based on the data and if you have even a small problem with your data, your calculations and algorithms may all be for nothing and your actual trading results may differ substantially from what your simulations had you predict.” – Clenow

Clenow spends a good portion of this chapter discussing how traders can construct long term price data for futures despite the fact that each futures contract has a limited life span. He explains that the most liquid contract is really the only one that matters. The most liquid contract is generally the one about to expire, however the liquidity switches to the following month’s contract slightly before the actual expiration.

The conversation then moves into term structure, where Clenow explains that the price of future contracts generally increases with time due to the theoretical cost of holding a given commodity over that time period. This concept also applies to financial futures due to interest. The basic concept is that if you are buying a future commodity to hedge price, then the person you are buying it from theoretically has to hold the item for the time frame established before delivering the commodity to you. There is a cost associated with this storage.

“What is required to do proper back-testing simulations is a continuous time series that reflects the actual market behaviour, which does not necessarily mean that it reflects the actual prices at the time.” – Clenow

Clenow continues by pointing out that if you were to chart the actual prices of futures over a long term period, even if you were to use the most liquid contract at each point, there would still appear to be gaps with no data between contracts. He discusses different ways to adjust the charts for these gaps. No matter which way you adjust, it is important to keep in mind that with these adjustments, the specific price at any past point will become inaccurate, however the long term trends will be accurate.

“It is therefore imperative that you don’t skip any asset classes and make sure that your strategy covers a wide range of markets across all available markets, or you simply miss the plot of diversified futures trading and most likely blow up sooner or later.” – Clenow

Clenow divides all futures markets into four categories: Agricultural Commodities, Non-Agricultural Commodities, Equities, and Rates. He admits that this is a very crude way to classify these markets, but I understand his reasoning that we need a practical way to look at these groups.

I thought it was interesting that he points out that there is very little correlation between markets in the Agricultural Commodities category. He also points out that many managed futures strategies will struggle a great deal with equities, however when the equities markets have very bad years, managed futures will be cashing in on the short side.

“Before you can start trading you need to model and test your strategies. For that you will require lots of data, applications for testing strategies and possibly your own database solution. If you are new to programming, I strongly advise that you pick a relevant computer language and start studying.” – Clenow

This is where I need some help!

I’m sold. I am completely on board. I want to learn how to build, program, backtest, and trade these systems. What should I do next?

Clenow strongly recommends Wealth Lab, but when I looked into it, I found that I would have to have an account with Fidelity with a minimum of $25,000 and 120 trades per year in order to qualify to use Wealth Lab.

Clenow’s other recommendation, RightEdge, seems to have a $50/month license, which would be interesting if it wasn’t his second option.

I also had someone recommend Tradingblox which has three levels, but the level where you can build your own system is $4,000.

I know other people who use MetaTrader 4 and Ninja Trader, but don’t know much more about them except that they won’t run on my MacBook.

I also know TradeStation exists, but haven’t seen anyone recommend it.

So here is my question:

I have a strong desire to learn how to program trading systems.

I am willing to study any programming language needed.

I have very little trading capital, which makes any large minimum deposits impossible.

I am willing to spend a couple thousand dollars up front, and then up to a couple hundred per month for licensing or data.

What system/software should I focus on?

Please send any and all feedback to me on twitter @DontTalkStocks or email me: andy@donttalkaboutyourstocks.com

Jack Schwager’s interview with Jeff Yass in The New Market Wizards was one of the more difficult interviews to pull quotes from. Yass specializes in market markets in options and runs a very large operation. Therefore, most of what he discusses has very little application to how I trade my personal account. There were a few key points that I felt could benefit my trading. Once again, we see comparisons between trading and poker, as well as the theory that anyone with average intelligence can learn to trade.

Top Five Quotes From Market Wizard Jeff Yass:

“The basic concept that applies to both poker and option trading is that the primary object is not winning the most hands, but rather maximizing your gains.” – Jeff Yass

I’m not sure whether I learned this concept about trading and then applied it to poker or if it happened the other way around. Either way, this is something that has always been at the forefront of my mind with respect to both. My goal in poker is never to win the most hands, but to make sure that the pot is as large as possible when I do win.

I really liked that Yass described situations in poker where you have nothing to gain from betting and the check/raise is the best play. This is a concept that I have always had a strong grasp on. There are many situations in both trading and poker where pushing all of your chips in is not the optimal move in terms of long term survival. I need to keep that in mind.

“I learned more about option trading strategy by playing poker than I did in all my college economics courses combined.” – Jeff Yass

I often joke about all the things I didn’t learn in college. This is an interesting take on that. It makes me question whether there is some aspect of my life that I could apply to trading and improve my performance. I think that it can be broken down to the fact that I simply think different than normal people. This is why things like location independent work, the paleo diet, and trend following are so interesting to me.

“The moral is that in trading it’s important to examine the situation from as many angles as possible, because your initial impulses are probably going to be wrong. There is never any money to be made in the obvious conclusions.” – Jeff Yass

Perhaps this is where that different way of thinking can be a benefit to me. I am very curious about this concept of examining a situation from different angles. I have noted many times in the past when my initial impulses was very strong and eventually turned out to be wrong.

I can also remember saying “This is a sure thing!” before buying stocks this past summer that turned out to be losers. I was looking for the sure thing that just had to go higher and it didn’t work.

“Given the nature of market, the chance of a crash is always greater than the chance of an overnight runaway euphoria.” – Jeff Yass

Yass says this in respect to the fact that there is a downside bias priced into options. While he was taking about options trading, it reminded me of the importance of playing good defense with your positions. At any time there could be a sudden announcement, terrorist attack, or natural disaster that sends the market into a tailspin. I need to keep this in mind when calculating my risk.

“We believe we can train any intelligent, quick thinking person to be a trader. We feel traders are made, not born.” – Jeff Yass

If you’re reading my blog, then the odds are pretty good that you already believe this. I just think it’s nice to remind myself during the rough patches that being a good trader isn’t a superhuman quality. It’s just a lot of hard work, time, and effort.

The Nasdaq Recap

The Nasdaq jumped 2.8% this week, but volume came in just slightly lighter than average. The index was up on Monday and Tuesday, and then shot much higher on Wednesday to log a follow through day. It wasn’t all good news though, because the index stalled on increased volume Thursday and then lost ground Friday. Despite Friday’s loss, it was able to close at the high of the day.

While the markets are at all time highs, many investors are questioning the current lack of strong leadership. This market appears to be driven more by the printing of money than actual economic growth, but the trend following crowd would argue that the price action is the only thing that matters. I believe the truly intelligent investor will see both sides here and follow the price while remaining cautious of this rally’s flaws. There were reasons to be concerned in 1999 as well, but that doesn’t mean you should have been on the sidelines.

There is a long list of companies scheduled to report earnings this week. How those earnings come in and how the market reacts to them should give us some idea of the direction things will move in the next few weeks.

Leading Stocks

Celgene (CELG)

This was the eighth straight positive week for CELG, although the past six have been in light volume. The stock has been on a very impressive run since breaking out of a first stage flat base at the beginning of the year. This stock is one of the key reasons that the Biotech sector continues to perform well.

CELG has been consistently reporting solid, but not mind blowing earnings and sales numbers. That trend will likely continue as the company projects annual earnings growth of 16% this year and 20% next year. Return on equity, fund ownership, and industry group numbers are all fantastic as well.

Green Mountain Coffee Roasters (GMCR)

I have been debating putting GMCR among the leaders for weeks, but have held off because of the lingering overhead supply. While we can’t ignore how far the stock has fallen, we also can’t ignore the relative strength it has shown in recent months. The stock has been incredibly strong ever since the company named a new CEO at the end of November.

In its most recent quarter, the company reported earnings growth of 27% and sales growth of 16%. Annual earnings are expected to grow 18% this year. Return on equity, fund ownership, and industry group numbers all look good as well. The company is scheduled to report earnings again on May 8.

Linkedin (LNKD)

LNKD had a nice bounce off of its 10 week line this week, but volume was lighter than average. The stock has continued to show strength after its monster weeks in early February following its last earnings report.

Earnings growth has been off the charts in recent months, jumping triple digits in four of the past five quarters. Sales growth has been impressive as well. Annual earnings are projected to be over 50% this year and again next year. Fund ownership has almost doubled this year, but return on equity is lighter than we would like to see and the industry group is underperforming.

Top Performing Sectors

Despite the market moving back into a confirmed uptrend, the leading sectors appear to be relatively unchanged. As you can see, there are still quite a few defensive sectors making these lists. A truly strong uptrend will need to feature strong performances from sectors that contain strong growth stocks.

Top Five Sectors:

1. Office, 2. Media, 3. Transport, 4. Finance, 5. Real Estate

Top Five Fidelity Sector Funds:

1. Biotech, 2. Health Care, 3. Multimedia, 4. Transport, 5. Utility

Top Five SPDR Sector Funds:

1. International Utilities, 2. Health Care, 3. Utilities, 4. Consumer Staples, 5. Retail

Stock Setups To Watch This Week

Proto Labs (PRLB)

PRLB failed on its attempt to break out of its second stage consolidation this week, but that doesn’t mean it can explode on volume next week. The stock broke out on Thursday in volume that was over 200% faster than average, but it stalled out and closed below its pivot point. Friday saw the stock pull back even further into its consolidation.

Despite the failed breakout attempt, PRLB still has all of the numbers we like to see. Current earnings and sales growth are 121% and 31%. Annual earnings are projected to be up 24% this year and 23% next year. Return on equity is extremely strong at 38% and fund ownership is increasing, but the industry group could be performing better. PRLB is scheduled to report first quarter earnings on April 25.

Ocwen Financial (OCN)

OCN tried to break out of a third stage consolidation at the beginning of February. Since that failed attempt, the stock’s momentum has fizzled and it has spent the past month living below its 10 week line.

While there isn’t currently a base formation, OCN has all of the numbers to back up a breakout if one should form. Current quarter earnings and sales growth are 488% and 51%. Annual earnings are expected to increase 254% this year. The company is expected to release first quarter earnings on April 29, so it is possible that the stock could form a flat base and then break out on positive earnings. That all has to actually happen before we would consider taking a position. That is a long shot, but it might be worth keeping an eye on.

This was yet another week that made me wish I started following this system in time to get in on this trend. The SPY is up about 11.5% since the 10 day moving average crossed above the 100 day moving average. After this past week, it is trading well above the 10 day line and we can’t possibly get a sell signal until it breaks below that line.

Sooner or later this rally will falter and when that happens, I will get a signal to get in on the short side. Until then, all I can do it wait.