Trading the Financial Markets
updated Aug 24, 2008
I've taken an interest in applying mathematics and psychology to the financial
markets. I've put together this page and links partly to help me solidify my
own thinking and mostly to provide an easy reference for me to see how my models
are doing. They may also be of interest to others (but don't expect me to spill
any numerical details of the trading strategies!). Some thoughts on the nature
of trading and my philosophy are here.
A page with some studies on commissions and trading costs for my style of trading
is here.
Models
Program
Trading Models: These models use purely objective technical
indicators to make trading decisions in an automated way. My first such model
I called Aggressive Hedge I. Encouraged, I learned
from its behavior and in 2004 developed Aggressive Hedge II and
Model A. I also studied the behavior of individual stock prices
and developed a short term trading model I called Long-Short
Stock. After some months of good performance after initiation,
the Aggressive Hedge performances became volatile
with poor performance. Model A continues to do well,
and Model C is quite impressive. Will it continue?
I'm thinking about better risk/reward refinements to my general strategy but
so far it's all ideas in my head. Daily, I focus most of my attention on...
Discretionary
Models: The term "discretionary model" may be a
bit of an oxymoron. Still, there are objective technical signals that are a
significant influence on my decision making.
My currently followed models (both discretionary and mechanical), all plotted
since the inception date Mar 25, 2008 of the most recent model, Model
C.
A hedge fund or mutual fund using any of these models would distribute all
of its profits as short term capital gains, or pass-through dividends. While
this is not "tax efficient", nor can the ~2% annual expense ratio
for the typical Profunds fund be considered cheap, these are minor effects compared
to the ~100-200% annualized returns, and when compared to more traditional tax
efficient buy-and-hold approaches. In mid October '04, a check of Barron's showed
the best performing hedge funds over the past year and 3 years are nearly all
in the global investment category, not the long-short category as mine would
be. The top hedge fund at that time was the Prospect Fund, with an average annualized
return of +72% / yr for the past 3 years. Can the very strong performances of
the discretionary models be duplicated at a multi-billion dollar hedge fund?
Almost certainly not. The Profunds prices are determined at the close of the
corresponding futures, which is after the official 4pm close of the exchanges.
Profunds trading decisions close 25 or 5 minutes before the 4pm deadline. That's
plenty of time for trades made by a hypthetical hedge fund making big trades
using these decisions to tilt the market, and to be sniffed out and front-run
by enterprising competitors as well. For now, I'm satisfied being a lone wolf
operating outside the Wall Street community.
All performance charts and annualized return figures are conservative in that
they neglect any dividends and interest earned on money while in cash.
A workspace for my own reference is here.
Richard Nolthenius
return to home.
