Slow Down - Then They Break
How Systems Break: First They Slow Down
you for sending me the link.
For more on the inevitability of system failure, see my book, Govopoly in the 39th Day,
at resources, above.
See below, for another example of the curiously counter-intuitive and
elegant dance of
prices under the influence of goofy-nomics.
Japanese bankers, following standard practice, try to stimulate the
economy by lowering the central bank interest rate.
Normally, you might expect this to weaken the yen, stimulate exports
and discourage imports.
In this case, however, now that Japan has negative interest rates,
depositors withdraw cash from their demand deposit accounts to
store it elsewhere.
This winds up creating a shortage of spot Yen, arguably helping to
drive its price higher.
Speaking of goofy-nomics, retail bankers, traditionally long currrency,
with lots of leverage, might like to consider running a pro-forma
balance sheet and P&L statement assuming the possibility of
negative interest rates and a 10X increase in asset prices.
You might ask your bank how it plans to pay higher wages, rents
and utilities while still having to collect low interest on
Yen / U.S. Dollar
you for sharing with me your wisdom last week. I asked you about
instrument specific optimization.
I did some
research and experiments
such as out of sample testing, and decided that robustness, which gives
you confidence, is more important than optimization.
You would rather
trade a moderately performing system with faith, than second guess a
system that has superb backtest results.
I would also like
to share with you a new system that I developed. It is kind of a hybrid
of the exponential lag system and the double support resistance system.
Instead of using the highest high / lowest low in a look back window as
the resistance / support, I used the exponential lag of the past highs
as the resistance, and the exponential lag of the past lows as the
It only takes long signals when the price is above the slow
lag resistance, and only takes short signals if the price is below the
slow lag support. You should be able to understand the rules by looking
at the attached picture, which shows an example of trading the Gold
market using 200/20 as the lag parameters. (Figure 1)
The next picture
is a parameter screening using the portfolio [GC SI ZS ZC CL NG GE JPY
ZN ZB], where Bliss=ICAGR/DD. The settings are: Heat=0.2 portfolio
risk, 0.02 per instrument, Skid fraction=0.1, Commission=$2.5 per
contract. The skid is small because my account size is less than 100k,
and I trade only 1 or 2 contracts per instrument. (Figure 2)
optimal parameters 180/15, I produced the equity curve as attached,
where the benchmark is an equal weight index of the instruments in the
portfolio. The result is: ICAGR=0.248, DD=0.254, Bliss=0.976. (Figure 3)
I did an out of sample test using the portfolio [HG ZW SB CT HE CHF GBP
ZT GBS NQ]. The result is: ICAGR=0.148, DD=0.368, Bliss=0.401. It is
clearly not as good as the optimized result. (Figure 4)
The system is
kinda robust, but I think the real merit of it is that you can easily
create hundreds of versions using different parameters, and reduce the
overall skid of the account.
Let me explain: a 10 day Donchian Channel
and a 11 day Donchian Channel very often have the same value, but a 10
day exponential lag and a 11 day exponential lag are almost always
different. If you have 100 channel breakout systems with different
parameters, many of them actually place their stops at exactly the same
price. Similarly for the crossover system, several systems might
produce a crossover on the same day, and execute their orders on market
open on the next day. As for my system, the 100 stop orders placed by
the 100 systems might form a continuous price range. Trading each of
them with 1% equity should greatly reduce the skid.
interesting feature is that the entry risk does not vary too much. If
you examine the first GC chart, the distance between a pair of lags
varies within a factor of 2. I tested the system using 2% margin per
trade, instead of 2% risk per trade, and the result is not
May I have some of your opinions on the system? Thank you very much!
1 - Signal Generation
2 - Performance Map
3 - Optimization
4 - Out-Of-Sample test
you for sharing your process and research.
Skid does not have much effect in quiet markets. In wild
markets, where skid does show up, sub systems with slightly differing
parameters might all take the same hit.
I wonder how your double-band system performs relative to a single-band
system with similar time constants, after you optimize the supporting
In general, the long-term system defines the secular trend while the
short-term system trades in and out.
Many moving average systems also feature some sort of dither filter -
to prevent strings of whipsaws around the crossovers.
Some systems use average true range (ATR) to keep the original
protective stop out of range. Your system seems to use a band
between average highs and average lows.
Again, you might run some robustness tests to find out your system
sensitivity to skid assumptions.
April 12 we have a Web Tribe meeting. I have difficulty
the video conference. I feel that I am being
wish that I was present for all the Tribe interaction and
had all the information.
My romantic relationship has recently ended. I share this
share that I behave badly in he relationship. I choose to ignore my
commitments and agreements. I am dishonest. I feel
unwilling to discuss my behavior with my girlfriend. I am
that the relationship is over. The dishonesty feels
I find myself moving away from an intimacy-centric relationship towards
a series of mostly physical encounters.
The tribe hears me. They do not recoil in horror, It is good
to be able to bring my failings to Tribe.
find myself tired during the Tribe meeting. I struggle to pay
attention and be present. I intend to get more rest prior to
next Tribe meeting.
Another Tribe member takes the hot seat.
He works on issues of judgment and fairness. I am pleased
how well we work together even over the video.
We are learning. We are growing.
you for sharing your process and insights.
our last virtual tribe meeting I bring to my Tribe's attention feelings
I do not like when doing something while someone watches.
may do a project as simple as hanging a picture alone and have issues
with the anchors and the level or just the process itself and be okay
with it until i successfully complete the project.
However, when someone watches, like my wife, I feel the obligation to
get angry and show my anger at every little issue.
as a part of my project I begin sharing my
process as a
trader trading a discretionary account with my Tribe. I am okay sharing
the winning days, however I become emotional when faced with reporting
the losing days. I do not work on the issue in the Virtual Tribe and
tackle it in the regular Tribe meeting a few days later.
the meeting I get into my feelings and recollect an incident where an
older kid jumps the lunch line in front of me. I tell him that
is not right, to which he proceeds to punch me in the stomach.
I hold back tears and do nothing. A couple of minutes later, my father,
who is vice-principal at the school sees me upset. He finds
the other kid punched me. My father slaps him and I leave with him. I
remember leaving the school with him teary eyed.
play the incident in Tribe and I am watching another Tribe member that
is playing me use my resource of shutting down and do nothing. I begin
crying, and realize I do not want to be that person anymore.
see that I often shutdown in the face of a large challenge or adversity
looking to be bailed out and looking for pity. I do not want
do this anymore. I want to be powerful and in charge.
takes the Tribe awhile before we find the right resources as we all
share similar resources in edgy situations, like shutting down.
i go through the process of using the new resource and feeling
empowered, I am experiencing one of the best feelings ever.
fear, full presence, and joy of challenge. I breath heavy
receiving the new heart rock as my body is going a little numb from
oxygen overload. I feel so present that those few minutes
like an eternity. I feel endless joy and gratefulness to Tribe for
being there and helping me. It feels like "one of those moments".
the Tribe meeting I feel different, I notice people reacting
differently to me. I feel certain, strong, powerful. I intend to get
used to my new resource heart-rock and use it forever.
you Ed for introducing these methods into my life and thank you to my
Virtual Tribe, as well as my physical tribe, assisting me in my growth.
you for sharing your process and insights.
with the Music Within
I’m just wondering how you are doing?
I am back on violin practice for a while. I feel glad I still have the
feel and the sound quality on my right arm.
the sound feels even more solid, confident, patient and mature than
what it was before I stop many years ago. The Fred seems to grow it. I
wonder where I get it without practice for this many years?
must come from some other special training …
I am spending time to revitalize my technique on my left hand fingers.
This time if I encounter any technique barrier, I want to bring it to
I intend to stick to it.
Thank you for inspiring me to have my force awaken,
Have a good evening,
you for sharing your process.
You must be fine and making others wise and healed.
My ex calls regularly. I get irritated
by just her voice. I
suppress that feeling.
I remember your words, all feelings have positive intentions.
Ex always behaves selfishly. Whenever her calls come it's for something
she wants or needs. She is least bothered about me.
Though I have given her full alimony and legally not liable to do
anything, most of the time I end up doing what she wants. Though I feel
like helping her since she is my children's mom, I develop the resentment.
She feels like a winner after she has extracted something from me.
Some people do not change because they do not want to!
In this way they get what they want.
I = R! AHA!
Thanks a lot
you for sharing your process.
You might consider taking your feelings about
<irritation> and <resentment> to Tribe.
During the virtual Tribe meeting I worked on winning and fairness.
I heated up when I felt <anger> around my intention
to constantly monitor for fairness.
The monitoring feels like swimming through molasses as I judge my
impact on others.
I wonder to the group if it is possible to win without someone else
losing and if it even matters. I back away from the feeling and do not
complete a process.
you for sharing your process and insights.
- Seeking Pity
Thought I'd quickly check in. I am doing fine with my commitment to
lower my weight and be more mindful of my health. I continue to log
everything, notice how the inputs and outputs relate, and make changes
that support my goals when I "get it wrong".
No rebellion so far, but that usually happens when I near my goal, so
I'll stay attuned for that message. So far the scale ticks downward a
bit at a time, and I am happy with the system I have in place. I'll
give a quantitative report at the end of 30 days from starting to track
Here is a link to a video of a guy that weighs a lot more than I do and
seems to do just fine at writing and performing heartfelt music.
Amazing artist. I realize it can work both ways, and I am trying the
you for checking in.
Per the hook in the song:
"I beg steal and borrow
I'm so darn
good at sorrow
and you don't care enough to cry."
You can re-write in SVO-p:
I have low motivation and ethics.
I specialize in self pity.
You don't choose to enable me.
While she doesn't seem to buy in, I notice he has little trouble moving
Dear Mr. Seykota,
I would like to thank you for the wonderful work you have done in
promoting the trend following system in particular, and the ideas of
courage and reason underlying them in general.
I just finished reading Michael Covel's book "Trend Following", and am
starting on Andreas Clenow's book "Following the Trend", they all seem
to have you in common, so I shall be acquiring your books as well.
I am a electrical, and computer engineer with a deep physics background
and normally my eyes glaze over when any subject regarding finances
But Trend Trading is like physics, and suddenly it made sense and
became intensely interesting to me. I am now writing my own own trend
trading platform software - I feel it's the best way for me to truly
understand how it works at an intuitive level.
Besides, you you play a banjo! I
play a heavy metal guitar. It's obvious!
Thanks again for sharing your wonderful insights, I shall be reading
your site and books with great interest.
you for sharing your process.
Some Heavy Metals,
in order of
in order of quirky thrash power units
(QTPU / album):
It's amazing how you find the time to answer all the questions that
come to you over the years!
Here are some of mine:
- With the advances in deep learning (eg. recent tournament results by
Google's AlphaGo), what kind of performance, in your opinion, might be
achieved with such programs when used in trading?
- On a somewhat related note, wouldn't it be more profitable for many
tech firms to apply their AI technology directly to trading the
markets, and potentially even win market share in the asset management
business from traditional financial service firms? But while there's
been great advances in the effectiveness of machine learning in solving
complex problems, there hasn't been much carryover effect to trading,
at least in terms of a big change in the returns (or top quartile
dispersion) seen in current investment firms / hedge funds?
- Perhaps along these lines, there's a recent Bloomberg
article that reported on the returns of a Japanese day trader who grew
his account to over US$150 million in about a decade, trading from his
home. It seems his trading is done manually -- might such returns be
equivalently generated through a sufficiently advanced trading program,
with no human intervention? Or are there specific qualities of human
cognition that are valuable in trading, but cannot be
replicated in programs?
you for raising these issues.
Markets act to discount situations that arise in this ever-evolving
moment of now.
Theoretically you could have perfect trading machines competing
against each other for the grand prize of $0 per year.
More realistically, you have people trading with their emotions and
people printing up money and spending it and you have weather and you
even have politics. For more on this, see my book, Govopoly in the 39th Day.
I have a hunch that simple trend-following systems may continue
working, within limits, whether or not you code them up on smart
- Tech firms can easily design a trading system. They can not so easily
follow it or market it or get it through compliance,
or explain the inevitable drawdowns to investors or fend off
- To make those returns, you have to risk a fairly large percent of
your equity - and you have to keep your ego out of it.
This guy now trades in front of a large Twitter audience, indicating
high risk of contracting King Kong's disease. Pride, the great
equalizing banana peel, may appear to work its magic. Keep eye on
Thank you for your clarification. It was very helpful.
I did exactly what you suggested. I did a parameter screening for a
portfolio that consists of 8 instruments: [GC, SI, ZS, ZC, CL, NG, ZT,
JPY], each with 0.5% risk budget, making a total entry risk of 4%.
is the result:
My optimal parameters lie in the shorter regions because I only trade 1
or 2 contracts per instrument, and the skid is very small. I selected
the optimal parameters (159, 16) and ran a backtest. The benchmark is
an equally weighted index of the 8 instruments in the portfolio. The
result is attached below:
ICAGR = 0.0519, DD = 5.93%, Bliss = 0.876. That is very promising
I have another question though - I used the same parameters across all
The result would certainly be much better if the
parameters are optimized for individual instruments.
What are the
reasons not to do so? Do we run the risk of curve fitting? Or are there
any other concerns?
Currently I use unique parameters for each
instrument in actual trading, and I feel a bit worried whether this
approach is justified.
Thank you very much!
you for extending this thread.
You might consider testing your system against various values for skid,
say, 0 for the best possible fill (no skid) and 100 for the worst
possible fill (high or low of the day).
You might also test your system to see if your Bliss holds up for more
Heat, say total risk of 5% to 50% in 5% increments.
You might not find much of a market for a futures trading system that
returns 5.19% per year.
Per your question about instrument-specific parameters, you might
generate a spreadsheet showing the instruments on the vertical scale
and, across the top, the calendar years for your test.
fill in the boxes with the optimal parameter set for that year.
Per your worry,
you might consider taking your feelings about <justifying your
approach> to Tribe as an entry point.
- Portfolio Selection
I am an undergraduate student from [University] studying Physics and
I would like to thank you for the wonderful resources
that are available on your website. I have been studying trend
following techniques and doing system design and back testing in the
The attached picture is an example of a parameter screening
for the natural gas contract.
I recently started to manage a small amount of money from my friends,
using a combination of several trend following systems.
I just realized
there’s a missing piece in the puzzle regarding portfolio selection.
Sometimes you receive signals from multiple markets/systems and run out
of capital - which signal do you take?
I do not feel good about making
discretionary decisions like this, taking some signal and ignoring
others, which essentially gives you the freedom to not follow the
I’m also not very comfortable with equal Heat(risk) allocation
across all portfolio components. As an example, I prefer the Japanese
Yen to Silver because it gives consistently better Bliss across a large
range of parameters in backtests, and it also produced a nice profit
Could you please give me some hint regarding portfolio
selection and portfolio weighting?
Thank you very much!
you for raising this issue.
You show a parameter screen for Natural Gas; you might consider
running your screen for an entire portfolio over several decades.
In your simulation, you might consider using what I call the
you have eight instruments in your portfolio. You then create
instrument risk budget - as one eighth of your total portfolio entry
Position size = risk budget / position risk.
Then, for eight instruments and a risk budget of 1/2% of
equity, you can have up to 4% total entry risk
Note: your portfolio naturally self-selects as you stop into the
trending markets and ignore the rest.
Some traders like to perform some or another type of pre-ranking of say
40 futures in order to select the best for the portfolio.
While this might work, it also invites listing whipsaws as instruments
appear and disappear from the portfolio.
Ultimately, you have to come up with something that fits yourself - and
that you can implement with emotional alignment.
Defiant / Defiantly Definite
I acknowledge that it is my intention to include (at least
one) the typo in my FAQ update.
Thank you for adding emphasis to my typo. I wrote "defiantly"
where I think I meant to write "definitely".
The idea of defiance fits in well with feelings of judgment, being
watched, fairness and other topics that we work with last
I'm sending you a big hug. Thank you for finding and sharing a signal
in the noise
you for sharing your process.
night we have our first "TTP oriented" on line Tribe meeting. At the
meeting we focus on the feelings that come related to our Lab projects
and things that are happening in our lives.
All four Tribe members are present. We experience a lot of technical difficulties
that interrupt the flow of the meeting. Even with the glitches, the
meeting turns out well
and continues to feel like Tribe.
the initial check in, no one actively expresses willingness to be on
the Hotseat. One of the members express concerns about being able to
get into it with the on line format and another member shares his
concerns about being overheard by his family and being too
No one has a specific issue they want to work on.
We decide to go with the flow and see what comes up by repeating a
take turns checking in again, in a series of check-in rounds. Each
member shares feelings and checks in on what's happening for them and
we take turns adding to the check-in with our own feelings and feedback
for each other.
The connection feels good.
ongoing check in continues. A member starts reporting an
feeling as he gets into telling us about <telling the truth
<getting what he wants > and < keeping commitments
He scratches his arms.
member that initially expressed concerns abut being able to get into it
immediately picks up on what's happening and assumes a PM role of
encouraging more scratching, the Tribe joins in and encourages Hotseat
to do more.
Hotseat starts to really ramp it up more,
feeling itchy and scratching and suddenly his connection drops. W The
disruption feels jarring. PM is concerned for Hotseat's wellbeing.
seat is unable to rejoin effectively for a while. We wait for
to come back. He continues to experience issues, intermittently
connecting and dropping off. Two versions of "him" appear in
chat. I notice it mirrors his check-in about < telling the
and having two versions of himself: One version where commitments are
kept and the other, "off balance sheet" version. It's not
if we can effectively continue the process.
We eventually go back to taking turns checking in, sharing and
responding to each other.
We keep going with the flow.
each round, we seem to arrive at consensus that there are some common
issues and feelings coming up and resonating all of us:
< winning >
< get what you want>
< fair/fairness >
< being watched/observed >
< judging self/others>
< telling the truth>
< keeping commitments >
< being honest >
The feelings and issues feel related.
continue sharing feelings and feedback. While it is my turn,
notice I feel irritated with myself and my talking as I reflect on
feedback about how I judge my trading. I say it aloud "I feel
like telling myself to shut up". I hear PM say "Do more of
I find it very easy to close my eyes and scrunch up my face. I get into
it. I hear encouragement. I grumble "shut up
I hear more encouragement. I feel that I am in the field of
acknowledgment. The Tribe is with me, providing a medium for the
experience. It intensifies. I'm really into it. I think I'm moving. I'm
grumbling. I sort of hiss and grumble more. I keep scrunching up my
face. The Tribe encourages me until I get to a freezing point. It
happens very quickly.
I recall laying on my bedroom floor.
I'm 12 or 13 years old and I'm drunk with a friend. My friend is saying
nasty things to me and telling me to shut up whenever I reply. I
realize in an instant that I learn all about being critical and
judgmental from him. I judge myself very harshly whenever I feel unsure
about my value or worth to others. I judge others too. I judge my
friend. I say "He's a dick. He's a f--king dick. He's just a critical,
judgmental dick!" I use the harsh judgment to medicate
and want a friend. I feel a wave of relief and clarity as I
understand and recognize this for the first time.
I come out
of the hot seat state feeling very clear. I forgive my childhood friend
out loud to the Tribe. I do it again a few times as I explain what I
see and remember. We don't actually practice role-play. I still feel
clear, I choose heart rock instead, I forgive the judgment
and no longer feel it with me. I no longer feel any judgment about my
friend. I see he uses the judgment rock exactly the way he taught me
to use it. I'm glad I forgive him and the rock. I'm glad I am reminded
that I deliberately choose heart rock.
We pause for a
minute. I reflect on the lack of formal process and propose to the
Tribe that maybe once we see the pattern we know what to do and it is a
matter of choosing... I forgive him again out loud and re-affirm my
choice of heart rock, I know what to do instead. I feel a sense of
connection with this lost friend and with my Tribe. It feels like the
conclusion of Rocks Process.
PM checks to see if there is
anything more I would like to do with the process and I say "no, I feel
clear." PM calls for a checkout on process. We all feel glad
about the process and note that it's possible to do work in our on line
format, even with the technical difficulties that come up.
Everyone thanks the PM for really pushing the process forward and
providing the steady encouragement that allows the process to unfold.
I feel willing to do this again and to support other people in their
I would like to acknowledge and thank Ed for Rocks Process and Tribe.
They are most defiantly
the foundation that support our meeting last night. I think that our
Tribe's familiarity and comfort with real world TTP process make this
kind of exploration and experimentation much more fruitful.
you for sharing your process.
Momentum - Catch
just spent some time reading your Radial Momentum article and I really
enjoyed it. Just for you know, above the "business card levitator
experiment" there is a paragraph which I believe contains a small typo,
"He says that when I see the the card sticking to the slit". I'm just
trying to do my part to help prevent Bernoulli Abuse.
I hope you have a great week,
you for the catch.
You may see the page, with correction, at:
On the Path
I am eternally grateful for your mentorship this past
Saturday. It was truly an honor.
The journey continues with your recommended reading and learning from
the ground up via back testing in Excel.
I will keep you posted of future progress.
you for sharing your process.
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