The link to the podcast:
The Untold Side of the Turtle Trading Legacy ft. Bill Eckhardt & Rob Sorrentino | Top Traders Unplugged
The structure of the market is that the money flows from the many to the few. So, you have to be among the few, not among the many.
If you do normal human reflexes, normal human reactions, then you’ll almost always find yourself among the many and you’ll be a loser. Trading doesn’t feel good. If you’re enjoying it too much, you’re probably doing something wrong.
I tell people that to be a money maker is sort of negative sum, emotionally. You’re going to have to suffer a certain amount to make money. You can’t simply succeed by following your inclinations.
Some Quotes from the discussion
– I mean, there’s certainly aptitude. Some people are better at things than others, but almost everyone can be taught. Some people learn on their own, and other people have mentors, but I can’t think of another subject that can’t be taught. So, I never said trading couldn’t be taught. That’s a distortion
– There’s more to trading than simply having rules. You have risk management. You have certain attitudes toward profit, loss.
– Now, I should mention, as far as I know, all other traders that I know of have this approach. First, they try to develop something, whether systematic or intuitive or fundamental. But first, they try to develop something that makes money, that shows a profit. Inevitably that will be too risky. So, they graft risk control almost as an afterthought on their system, on their profitability system.
– Some people even went so far as to say that because of the turtle systems, trend following was dead. In fact, I’ve heard about the death of trend following pretty much every few years throughout my career. And I’ll have to say again, like Mark Twain said, the death of trend following has been highly exaggerated. I still believe although there are other ways than trend following to deal with the market, and we do a certain small amount of that, not counter trend, but just systems that aren’t trend following. The majority of our work is still devoted to following the trend.
– And because there’s bigger competition, better competition, because more people are learning more about technical analysis, one has to keep researching to stay ahead of it. I used to compare it to the Red Queen in Alice of Wonderland, where in her country, you had to run as fast as you could just to stay where you are.
– We try to keep our original trading size in a given position. We try to keep that fairly constant. There are some times where we make small adjustments, so it’s not a pure case. But I would say that roughly speaking, we liquidate a trade with the same position as we initiate it. That’s true enough. Now, there are situations where you have to make small adjustments for technical reasons. Now, we’ve tested adjusting to current volatility and other things, but since volatility often increases with a trend, we have found that, and if we were readjusting to volatility, we would be decreasing our position with the trend. And we’ve found that to be counterproductive.
– 80% of our systematic work is still trend following.
– what you have to do is you have to eliminate a lot of the structure, but you have to keep enough of it. You have to keep what’s important. And of course, that’s one of your… What is important is, of course, one of your major research problems.
– Price is absolutely not a moving average process. It’s not stationary. It has none of the qualities of a moving average.
– No time series analyst, no professional time series analyst in economics or another time series would say that crossing a moving average is significant. But that’s what futures traders have clung to, this idea.
– we trade about 70 markets so potentially… I mean, we don’t always have positions in all of them. Sometimes systems can be long, they can be short, they can be out of the market. So, we do really believe in diversification.
– If there’s not enough liquidity to do the sort of volume that we need to do, then we avoid that market.
– The stock market is dominated by people who have long positions. It’s dominated by the longs, whereas in the futures market, there is exactly one long for every short and vice versa. It’s completely balanced. So, they are different processes.
– Stock markets are simply a different phenomenon and require entirely different rules. We would trade stocks. If I felt that I had some kind of relative advantage in stock trading. I don’t feel I have. I’d be competing with people who’ve been studying stocks all their life. I’ve been studying futures all my life, and I feel that that’s where my relative advantage lies. So, we don’t trade stocks.
– Here’s a fundamental thing, and that is that the distribution, the probability distribution of price change, and also of trades in a futures trading system, are not normally distributed. In fact, they’re radically non-normal. This means that normal distribution theory (which is mathematically, by far, the most tractable), and normal distribution theory (which is the theory that you can get the most information out of your data if you can assume the data is distributed normally), simply does nothing apply to futures trading. The futures are so non-normal, and they’re so far from normality in their behavior. There are a lot of theoreticians, I would mention the inventor of fractals, Benoit Mandelbrot, who say that the futures markets don’t even have a variance. There’s no variance. So, they don’t even have a standard deviation.
– I would mention many decades ago that famous company, Long-Term Capital Management, that had some of the greatest academics, including Myron Scholes, on their board from the Black Scholes model. This company busted out spectacularly, and it really was because they were using normal distribution theory and its correlatives.
– Yes, I agree with that wholeheartedly. And I’ve seen evidence of non-normality in every futures market, not only in cotton. The market distributions have heavy tails. So, in particular, the left hand tail, the one that represents losses, is very heavy. The technical name for this in statistics is leptokurtosis. Now, all markets suffer from this leptokurtosis, and to some extent, all trading systems do too. So, the trading rules have to intervene to keep those left tails under control. And that’s, of course, one of the major uses of risk management. I should mention that there are systems, and a lot of people use them, that have very high success rates. They make money 70%, 80%, 90% of the time, but then they’re subject to large freakish losses.