Barjon's Money Machine

[barjon]

@BJon. I can't see this working with random entries and overnights. If you are making this work, i would imagine that there is a lot of screen time involved?

They are not exactly random entries, kimo - although I made a near one this morning since I knew I was starting this thread (about 20 underwater atm). I wait for weakness or strength to hit the "extreme" level I have in mind and then enter as soon as that weakness or strength appears to have halted.

Otherwise I will seek to enter a directional trade on ftse first - and usually await 8:30, 9:00 or 10:00 reversal times for that - moving to a pair if that goes offside.

And yes there is a lot of screen time involved because you can't set stops or limits.

 

[timsk]

Hi all.
Interesting thread.
Some learned old hands on T2W have, in the past, accused me from time to time of 'not getting it'. In the context of this thread, I admit I don't 'get' what the issue here is about risk?

My perception (which may be quite wrong) is that an element of risk is always present - not just in trading - but in life. My laptop could blow up as I type this and kill me. It's not possible to eradicate risk altogether as, almost by definition, a key characteristic of a black swan catastrophic event is that one doesn't see it coming and can't predict it - other than one will happen eventually. The difference between barjon's proposition in this thread and HoCo's and S89 is that the methodologies employed by the latter two (ex)members was fundamentally flawed and lots of people predicted disaster would strike sooner or later. If I've understood barjon's position correctly, he's not saying his approach is guaranteed 100% risk free, merely that there aren't any known risks that are thrown up by analysing historical data. Just as none of us worry that our computer's might blow up and kill us (but accept that it's possible), can we not say legitimately that the risk with barjon's methodology is well within bounds and pretty minimal compared with most other strategies?

As I say, if this isn't a reasonable and accurate assessment of the situation - please can someone point out where I'm going wrong.

Tim.

 

[DionysusToast]

when I read Barjob's original post I read into it differently to the above Toasty.

'your assertation is this. DOW & FTSE are correlated. This correlation will remain in all circumstances. '

Barjon is clearly relying on the DOW & FTSE being correlated sure. I don't think he ever asserted that the correlation would remain in all circumstances. He actually mentions stops so clearly he has a plan to get out if the trade goes too far against him.

Actually, he states quite clearly that the correlation will not break down when he is away from the screen and thus he leaves trades open at these times.

'The similarity between your strategy, Howards strategy and Spanish89 strategy is that they all promise security and absolve you from thinking out any particular trade.'

there is no similarity of promised security, nowhere has Barjon promised security

The security I refer to is the security that there is no risk of ruin. That this is a sure thing. This is what Howard thought. It wasn't safe, just the risks were hidden behind a lot of things he misunderstood. Thus he felt secure using the strategy for an extended period.

'You are absolved from all stress or worry about your trades. You are making money stress free. But is that because you have no risk of ruin or because you don't understand the risk of ruin?'

mate this is naughty. He hasn't stated this or asserted it at all. naughty because that question on risk or ruin is patronising to Barjon, that's how I read it. I dont know Barjon but I am sure he has some grasp of money management issues.

Well it is naughty but he is also stating that something can't happen because it needed to happen before.

'Now - I am not saying the DOW & FTSE are not part of institutional stat arb trades. In fact, such things more than likely exist (hence the correlation) but there is almost certainly a forex component of the arb trade.'

this is not an arb trade, best just to call it a spread trade. There is no ARB trade between the Dow and FTSE. Of course forex will play a part in the price action of this spread.

Nope - this is exactly what stat arb is - but there are 2 slightly different meanings for the word stat arb. In Academia, stat arb is described as taking advantage of mispricing between instruments. In the fund world, stat arb refers to technical multi-instrement mean reversion strategies.

'In your strategy there is no mitigation for unknown risks and you haven't really looked very hard into known risks. '

Barjon talks about stops in his OP so he must have some risk management in place so he must be managing risk, how do you know he hasn't looked very hard into known risks? is that an assumption?

Yes - because he has only looked @ what the pairs have done in the past to assess what they will do in the future. Perhaps Jon can tell us what research he has done outside of this.

I am sure Barjon has just phrased this incorrectly he must know the risk isn't mitigated but the risk is clearly lower on a well correlated / cointegrated spread than trading a single instrument.

I raise these points as I read Barjon's OP in a totally different way. Certainly many biases come out during reading, trading whatever activity you care to pick.

Indeed... it may be a misunderstanding.

 

[ChocolateDigestive]

@ Choccy - Yes that's fine and the the spread related volatility is what Blojob wants

the volatility on a ratio basis is different to the volatility on a residual basis. In simple terms if you double the DJ and FTSE then the residual (difference) will be doubled but the ratio will stay the same. capiche.

but what I'm assessing and trying to get a handle on is the blowout risk which I think is quite low. Lower probably than a single stock /index spread as thats micro and company specific whereas here you're working macro and aggregated over lots of constituents which diversifies you as well as leaving you with a counter position where you're hedged against economic shock.

you cant assess the blow out risk without knowing the entries and stops, not sure what you are trying to prove? You could find out the correlation and co-integration but not blow out risk without knowing the position strategy

 

[DionysusToast]

Hi all.
Interesting thread.
Some learned old hands on T2W have, in the past, accused me from time to time of 'not getting it'. In the context of this thread, I admit I don't 'get' what the issue here is about risk?

My perception (which may be quite wrong) is that an element of risk is always present - not just in trading - but in life. My laptop could blow up as I type this and kill me. It's not possible to eradicate risk altogether as, almost by definition, a key characteristic of a black swan catastrophic event is that one doesn't see it coming and can't predict it - other than one will happen eventually. The difference between barjon's proposition in this thread and HoCo's and S89 is that the methodologies employed by the latter two (ex)members was fundamentally flawed and lots of people predicted disaster would strike sooner or later. If I've understood barjon's position correctly, he's not saying his approach is guaranteed 100% risk free, merely that there aren't any known risks that are thrown up by analysing historical data. Just as none of us worry that our computer's might blow up and kill us (but accept that it's possible), can we not say legitimately that the risk with barjon's methodology is well within bounds and pretty minimal compared with most other strategies?

As I say, if this isn't a reasonable and accurate assessment of the situation - please can someone point out where I'm going wrong.

Tim.

Where you are going wrong is 2 places:

1 - The data analyzed is not sufficient. You can't consider the pairs of 2 instruments priced in different currencies without considering the currency. If you do not consider the currency, you'd better consider the SB contract.

2 - The presumption that something bad cannot happen because it didn't yet happen is flawed (see Titanic)

3 - Something bad already did happen but Jon managed to evade getting sunk by the skin of his teeth. Despite this occurrence 3 years ago, Jon maintains that such a thing can only happen again when he is in a position to exit the trade.

The only real problem I have with the strategy is the holding of positions with zero 'stop loss' when away from the screen.

 

[barjon]

Based on the fact that it hasn't happened in your analysis period, right? So if it didn't happen before when you were away from the screen, it cannot happen again?

This is not rational. You presume that everything that can happen already has happened.



So you worry about it but leave trades open and go to bed? You close trades that go against when you are awake but sleep soundly that it won't happen when you are asleep?



Correct - but you have 2 things to consider.

- You have not factored currency into any of your analysis. In a currency event, is your SB going to maintain your bets in sterling when their actual dollar value is changing dramatically? Is your SB company going to take a huge currency loss to honour the S&P side of your trade? What does the contract say?

- The UK stock market and the US stock can do something that they haven't done before. In fact, whilst you say nothing bad happened in 40 years, it is clear that something bad happened almost 3 years ago that cause you a lot of grief. You maintain that this can only happen when you are at the screen.

I still maintain that you may well be looking at an unclosed loophole in the way SBs take bets. You are not trading underlying values but betting on number of points moved on each instrument. Hence my interest in seeing numbers crunched where the currency difference is taken out of the equation.

Blimey, toastie, you're a hard taskmaster

Based on the fact that it hasn't happened in your analysis period, right?. Well it hasn't happened for 40 years and that's good enough for me.

it is clear that something bad happened almost 3 years ago that cause you a lot of grief.. It something I'd prefer not to talk about I had misjudged the starting extreme and added at the next extreme level and the next like a rank beginner and suffered the inevitable consequences - a near 30% dent in my account. Now you know why I was keeping it dark

unclosed loophole in the way SBs take bets.. I don't thinks it's a loophole. Certainly SB make their own prices and after closing their ftse moves with the futures and dow. There is often a sharp (untradeable unless you'e already positioned) move on ftse open as their ftse moves to reflect real ftse. It'd be interesting if you see the same sort of differences arising in the futures.

 

[Mata Nui]

Interesting thread. Accepting that they go out of whack then revert how do you determine if they are out enough to give a realistic chance of sufficient profits? Have you calculated some standard deviations or do you just eyeball it?

 

[ChocolateDigestive]

Actually, he states quite clearly that the correlation will not break down when he is away from the screen and thus he leaves trades open at these times.

the correlation is just a number, that's all a physiclal number. A trade can go against him and he can decide to take a loss if he wants. Personally I could not leave a trade overnight in place without stops in place. He needs an API and set it up to for controlled losses 24/7/265. I am sure both you and me agree on that!

The security I refer to is the security that there is no risk of ruin. That this is a sure thing. This is what Howard thought. It wasn't safe, just the risks were hidden behind a lot of things he misunderstood. Thus he felt secure using the strategy for an extended period.

i just dont get where Barjon said there was no risk of ruin, anyone would be insane to think there was no risk of ruin if you refuse to take losers mean revert spread trading

Well it is naughty but he is also stating that something can't happen because it needed to happen before.

If he said that he is wrong but I cant see that he said that. Clearly if something hasnt happened in the past doesn't mean it cant happen

Nope - this is exactly what stat arb is - but there are 2 slightly different meanings for the word stat arb. In Academia, stat arb is described as taking advantage of mispricing between instruments. In the fund world, stat arb refers to technical multi-instrement mean reversion strategies.

my bad I should have said 'true arb', things like dual listed stocks etc.

Yes - because he has only looked @ what the pairs have done in the past to assess what they will do in the future. Perhaps Jon can tell us what research he has done outside of this.

the old 'do old patterns repeat' thing has reared it's head again. In case you haven't noticed the only price data we have is based in the past. surely you cannot deny that it is possible to create a profitable trading strategy from knowing that the spread of x against y crosses the mean z times in period p with band deviation omega, and all this from just PAST data.

 

[barjon]

The only real problem I have with the strategy is the holding of positions with zero 'stop loss' when away from the screen.

toastie

Believe me, I'd set a stoploss if I could. Trouble is that it is not a "directional" trade but a "relationship" one. The market might be going up or down but that has nothing to do with the relationship so you can't set stops (or limits).

 

[barjon]

Interesting thread. Accepting that they go out of whack then revert how do you determine if they are out enough to give a realistic chance of sufficient profits? Have you calculated some standard deviations or do you just eyeball it?

I make a judgement on what I regard as an "extreme" where recent history suggest it won't get past (by much). This is the difficult bit which people need to decide upon for themselves. The numbers are in the spreadsheet to give you something to work on

 

[ChocolateDigestive]

unclosed loophole in the way SBs take bets.. I don't thinks it's a loophole. Certainly SB make their own prices and after closing their ftse moves with the futures and dow. There is often a sharp (untradeable unless you'e already positioned) move on ftse open as their ftse moves to reflect real ftse. It'd be interesting if you see the same sort of differences arising in the futures.

barjonny, are you talking about 9pm to 1am when the FTSE futures are shut?

 

[ChocolateDigestive]

toastie

Believe me, I'd set a stoploss if I could. Trouble is that it is not a "directional" trade but a "relationship" one. The market might be going up or down but that has nothing to do with the relationship so you can't set stops (or limits).

and you do realise that it would be fairly straight forward to set up an API to set up an automated stop, of course you would have to trade the futures. I suppose what you could do is only leave enough in your SB account so they close you out automatically if it comes to that. No doubt they might chase you for any shortfall but you can always tell them to swivel.

actually thinking about this if you love the bucketshop so much a decent programmer should easily be able to set up a price feed going into a spreadsheet with a texted alert to you if your custom stop is hit. You can just get a cheap pay as you go phone set the text alert up, set volume to max and sleep soundly knowing that if you get a text all hell will break loose!

 

[kimo'sabby]

They are not exactly random entries, kimo - although I made a near one this morning since I knew I was starting this thread (about 20 underwater atm). I wait for weakness or strength to hit the "extreme" level I have in mind and then enter as soon as that weakness or strength appears to have halted.

Otherwise I will seek to enter a directional trade on ftse first - and usually await 8:30, 9:00 or 10:00 reversal times for that - moving to a pair if that goes offside.

And yes there is a lot of screen time involved because you can't set stops or limits.

Why don't you trade the two markets outright? To me, it seems like you are making life difficult for yourself,...all in the name of not having to take outright losses.

EOD, it's what you feel comfortable with, and i respect that.

 

[ChocolateDigestive]

toastie

Believe me, I'd set a stoploss if I could. Trouble is that it is not a "directional" trade but a "relationship" one. The market might be going up or down but that has nothing to do with the relationship so you can't set stops (or limits).

I think you could do this in a ninjatrade demo account if you get the correct license and use ninjascript to program a custom stop, would give you an alert based on the futures going out whack. Would not close you out automatically but give you a heads up in the middle of the night if you were getting a caning.

This would allow you to still trade at the bucketshop but get an alert from a futures demo platform.

I am sure Toasty knows people who can do this in ninjascript!

 

[scose-no-doubt]

you cant assess the blow out risk without knowing the entries and stops, not sure what you are trying to prove? You could find out the correlation and co-integration but not blow out risk without knowing the position strategy[/QUOTE]

Not the risk for each position, I'm looking to get a handle on the correlation sigmas and likelihood of a correlation breakdown. I'm positing that the spread relationship will almost always mean revert unless and remain range-bound unless a fundamental shift in the relationship of the two economies takes place. To me the main blow out risk is failure of the relationship. Something which hasn't happened in 40 years over the course of several 10+ sigma events in credit and equity markets.

 

[scose-no-doubt]

.

 

[timsk]

Hi DT,
Thanks for the reply.

Where you are going wrong is 2 places:

1 - The data analyzed is not sufficient. You can't consider the pairs of 2 instruments priced in different currencies without considering the currency. If you do not consider the currency, you'd better consider the SB contract..

Yes, I understand your point - in principle. But wouldn't barjon (or anyone trading this methodology) need to be leveraged to the same degree that forex traders are to be exposed to the risk? Although not impossible, surely the probability of the two currencies getting so out of wack that the resulting loss seriously impacts the trader's account is on a par with my laptop blowing up as I type and killing me?

2 - The presumption that something bad cannot happen because it didn't yet happen is flawed (see Titanic).

Again, I accept and completely agree with you. But that's not what barjon's saying and besides - trying to think up something that hasn't ever happened before is a bit of a catch-22.

3 - Something bad already did happen but Jon managed to evade getting sunk by the skin of his teeth. Despite this occurrence 3 years ago, Jon maintains that such a thing can only happen again when he is in a position to exit the trade.

Well, his solution may not be acceptable to you - but I would be happy with it as it's about the best situation most of us are able to engineer. You can never eradicate risk - it's always there.

The only real problem I have with the strategy is the holding of positions with zero 'stop loss' when away from the screen.

A stop loss would be good - I agree - but barjon maintains that it's not feasible to have one. I've never traded this way myself, but I can see that the placing of stops could easily increase one's exposure to risk - rather than decrease it - by one stop being hit and leaving an open long position in 9/11 or 'flash crash' type of market.
Tim.

 

[D70]

The stat arb of dow vs ftse can be taken to whole new levels. You can stat arb anything. There is software out there that runs any correlation you can to load. And computers can trade the "arb" for you.

You could have snp, naz, dow, ftse, dax and cax in one big "arb". Long some, short tuther, net flat. The premise holds for all of them (or should do).

It's all been done and is being done.

And dont just go on "2 times dow = 1 ftse". Get some standard deviation models out.

 

[D70]

I'm sure you've all used your charting software to create ftse*2 vs dow.
Looks just like any other chart doesnt it!...........

 

[ChocolateDigestive]

The stat arb of dow vs ftse can be taken to whole new levels. You can stat arb anything. There is software out there that runs any correlation you can to load. And computers can trade the "arb".

You could have snp, naz, dow, ftse, dax and cax in one big "arb". Long some, short tuther, net flat. The premise holds for all of them (or should do).

It's all been done and is being done.

And dont just go on "2 times dow = 1 ftse". Get some standard deviation models out.

oh yes D70 if it is correlation you want it is correlation you shall get. There is a free tool at

http://www.market-topology.com

dial that baby up for the top pairs.

BBL BHP dual listed pops out at only 97.42% correlation last 3 months.

if you include ETF's that's when it starts getting silly.

VIX VXX 99.94% correlation last 3 months.

I am sure there are plenty of places you can compare futures contracts.

Here's the thing though, finding the correlation or co-integration is not hard that's the easy part. Next you need to make sure you are not competing against HFT algo's as you either need to be faster or first (or both) and trading something like VIX VXX it just aint gunna happen unless you can trade sub 5 micro seconds

So you need to make sure you choose instruments that you can execute properly, make sure that your total cost of execution is not prohibitive and liquidity is there. Make sure you can execute with proper risk management.

Then it gets interesting.......