August 2, 2011

Someone made the comment recently: Guy, “I agree with you "everyone has a trading method" - at least in their own minds.”

I didn't know how to take it. The more I thought about it, the more it had a negative tone. True, everyone wishing to play this market game, not just has, but must have a trading method based on whatever concepts best suited to him/her in temperament, style, and execution.

It requires having a belief system, some knowledge of the game, a conviction in one's self and confidence in the trading methods used whatever they may be.

This is also why whatever method being used needs to be thoroughly tested for proof of concept and why we simulate so much on past market data. We can do hundreds if not thousands of backtests just to find an edge which might or might not prevail in the future. But whatever we do, no matter how many tests are done, there will be only one future and we will be able to deal with it only once.

My trading methods are governed by mathematical formulas. They describe in general terms a mathematical environment in which they are made to operate. My papers and articles provide an overview of this trading environment. All of which took some years to develop.

To me, the only way to disagree and “express an opinion” on a mathematical formula seems to be to provide the necessary argumentation to disprove the said formula; to say that the equal sign is in fact not valid. An opinion, an impression or a feeling that an equation does not work is not enough; it is required to break the equal sign.

It should be easy to disprove my findings as all rest on a single equation which is the foundation of all my trading philosophy. To do so, it is required to render my added parameters equal to zero and voilà; the whole equation will collapse to a simple Buy & Hold formulation and case closed: no enhanced trading method, no enhance results, no alpha points generated, no accelerating Sharpe ratio; another burst bubble. Until then, I will continue to consider that the equations used in my papers stand on themselves.

I can understand that my trading methods may not be one's cup of tea; that they are not the orthodox way of playing the game either. But then, no one has ever said that you could not develop algorithms and trading methods that were outside the traditional methods. Trading based on preset mathematical functions instead of technical indicators of all kinds is different; I will admit. I would even hope for the word innovative.

The main conclusion to my papers is the claim that the outcome of my trading equation is an accelerating Sharpe ratio over a significant portion of a portfolio's life. And I have to say that I am quite proud of having been able to integrate my findings within modern stochastic portfolio theory. The implication of such a statement is that one can jump over the capital market line (CML), and escape from the limits of the efficient frontier.

We are all trying the best we can to design and develop the best trading strategies that fit “in our minds” with our mindset, knowledge, convictions and belief system. In this regard, I do not do anything that is different from anybody else. At least, my trading methods are now out there, in the open, for all to see.

No one is being forced to adhere to my point of view, share my vision of the game, or adhere to my methodology. All you will find on my website is: look at what this thing can do. It is just something else to consider, providing another avenue of research. And I only hope it may help some to develop their own and better trading methods.


Created on ... August 2, 2011,    © Guy R. Fleury. All rights reserved.