传奇人物理查德•丹尼斯和威廉•埃克哈特组建了海龟，他还建立了这个系统，全世界商品交易市场恐怕没有人像他那么有学问。当丹尼斯意识到任何和他一起工作的人都可以把交易原则浓缩并定义出来时，他发明了这个令人吃惊的成功的机械交易系统。现在，他刻意回避投资界，把自己关起来，潜心研究自己用的机械交易思想。过去25年来，他和一些程序员的合作稳定有序。
为了解除他的神秘性，《股票和商品》的撰稿人阿特•柯林斯2004年10月在芝加哥的耀西餐厅和理查德•丹尼斯有过交谈。
问：现在的交易环境和你过去赚钱的时代比，有什么不同？
丹尼斯：现在比过去难10倍。应该如此。市场工作就是让系统交易者出轨。有些人可以赚钱，但不会长久。
问：为什么？
丹尼斯：因为和15年或20年前比，现在市场变化太剧烈了。我想可能是因为现在的趋势跟踪者比过去多。在这个游戏中，总是有人追着你。
在机械交易的世界，期望不起什么作用，是吗？人们说是系统在反应不是预测在反应，在一定程度上交易者根本不用做事。
关于“我在观察数字”这个说法，有必要解释一下。多年以前，我就知道如何脱离系统。你付了钱，你就要抓住自己的机会。如果你认为市场和两年前一样，这些思想会帮助你的。
我还是举个例子吧。似乎波动的行情就是好机会，波动小的最好做趋势跟踪。也许你想把包络线移开远点，这样你可以抓住波动的25%，它至少波动50%。这要根据数据来说，但是如果你认为波动小是好事，那么其它的就是坏事。
未来可能有所不同。然而，不会每个人都赚钱的。
问：这些变化有什么原因吗？
丹尼斯：对冲基金和商品交易顾问的再现应该让人们感到吃惊。过去对冲基金有很多钱，表现就好，这也是为什么现在不行的原因。钱太多不好操作。我想是因为对冲基金在拼命研究趋势跟踪。很多对冲基金只根据内部消息交易。他们不是交易。他们是在桶里钓鱼。
想想20或25年前我们有什么。那就是未知的信息渗透进市场并慢慢地推动价格。
你到外汇市场，基本面是一样的，但是也有很多内部消息。它不是未知的内部消息，它是官僚主义。德国银行的官僚主义者告诉对冲基金他们要怎么做。现在趋势开始了，它突然爆发，这样趋势跟踪者无法及时跟进，然后又结束了。它不是慢，它不是间接。它是突然的。
系统跟踪者在市场中看见了信号，他们以为这和大豆的信号一样，但不一样。趋势的结构在变。让我们面对它，如果你在管理某种基金，90%是利率和外汇。10——15年的数据都没用，因为它不同了。
问：所以你之前的趋势跟踪系统没用了？
丹尼斯：20年前有用的东西，现在十分之九都没用了。去年和过去相比，只有一小部分的突破是有用的。我总是看N天的轨线——10天、20天、40天，一直到280天。20天的轨线有时候有用，但是从15年前开始就走下坡路了。如果你用更长的，比如一年的，它们一开始比20天的差，然后直到下一年都很好。这就是它的强项。
问：既然你不认为任何系统都会永远有用，那么在你换系统前，你会准备用几年呢？
丹尼斯：事实上很难知道。我现在做的事有点主观。我想知道在去年市场不好时有用的东西，5年前市场很平淡时也有用，对15或20年前也有用。这并不是说为每个阶段找到最好的参数，只是找到对于过去，前不久，和很久以前很糟糕的时候都通用的东西。
问：你是不是说你现在不是趋势跟踪了？
丹尼斯：我想做点逆势的——也许是现在有用，但10年前不好的东西——和趋势跟踪系统一起配对用。我想让交易互相依靠，如果你用了一种，你同时也用了另外一种。这事不好办。部分解决方案就是平衡。
问：你的方法还是长线吗？
丹尼斯：目前，我在使用一个系统，他有6个不同的因素，最长的是30天。它没起作用。我也许要使用一个大的逆势系统，也许是60天，它仅仅在去年赚钱。当趋势跟踪系统不能赚钱时，他就可以赚钱。
问：有句古老的说法，系统的核心最好是简单的，你是否同意？
丹尼斯：我不同意。如果你谈的是调整参数的回报，那例外情况是重要的。最好的使用系统的方法是放弃。如果这笔交易是趋势跟踪的，而市场却是振荡的，放弃。如果你的交易时间太长，放弃。
问：我听说你不会编程。你能明白不同参数导致的结果吗，比如标准背离，夏普比？
丹尼斯：我能明白。我做了24年了。那些懂数学的人会帮助我明白的。我不会打字，更不会编程，但我知道结果是什么。
我大部分时间就是和程序员谈话，然后等结果。我和他们一起工作了20年了，所以我不急着想什么就要什么。我告诉他们我的思想，他们编程。这是一段冒险，因为即使是最好的程序员，一开始也会犯错。
问：他们的对优化做出的决定，你相信他们吗？
丹尼斯：我想说所有参数都是我选择的。“我们有7个参数，这是范围。如果某个参数有用，我们会测试10次，并尽量找到最好的参数”。这都是我的决定。他们永远不会说：“哦，让我们再试试其它的数字。”我的兴趣就是找到最好的参数。
问：我听别人说，你说你可以把你的方法印在报纸上，还没人能学会。
丹尼斯：趋势跟踪者不希望别人嘲笑他，诋毁他。像看持仓量报告这样的事，任何人都会。市场和持仓量之间并没有直接的关系。但是了解持仓量报告可以让人们在关键的改变趋势的时刻抓住机会。
不管现在原油的价格是多少——也不管5或10年后它怎么走——这都和投机无关。使用过去模式的人都会在市场中碰到人为操纵，发现他们的系统过去有用，但现在没用了。
所以，短期而言，心理对人有影响。
现在更飘渺不定。在大行情之后有些合约要被平掉。如果你的基本面认为会有所不同，你就占了很大的优势。如果原油突破了关键水平，每个人都要在那里卖出。如果基本面能让下跌实现，那么逆势的基金也可以。
我说的话有些人不爱听，我称之为“特殊情况”。我在研究时把逆势放在心里。这里有个例子。我们过去根据N天突破交易。如果我现在发明了新的系统，我会使用一个过滤器，以判断N天的突破是赚钱的或亏钱的。如果是亏钱的，我就会交易。比如你想在100天最高点买入，我就测试系统，看看如果在20天最高点买入，在20天最低点卖出会如何。如果20天的测试失败了，我就会使用100的最高点。
问：为什么这么做？
丹尼斯：因为，首先，测试时失败的交易保证了很多人在亏损时要平仓。更说明了当你进场时，市场是在整固，不是有趋势的。如果上次20天的突破有利润，那么市场就不是在整固。所以，如果市场在振荡，20天突破亏损了，你就用100天突破，你知道市场在整固，很多人正在被洗来洗去。你知道，如果人们被洗的太多了，他们就不会跟踪这个趋势。这个行为会让交易成功。
问：有趣啊。你是不是现在正在干？
丹尼斯：事实上我把它当作过滤器。另外一个过滤器是振荡——和最近1，2年比，现在的振荡范围有多大。如果范围大，那么交易的方向是逆势。如果你有逆势的方法，那么就去寻找和过去相比有很大振荡的市场。如果是趋势跟踪，就去寻找振荡不厉害的。
问：你真的在做吗？人们说你早就退休了。
丹尼斯：我可以6个月不交易，但我不会6天不做研究。有些人早上起来就在研究谁是美国总统。我早上起来就想搞清楚到底哪个系统对过去有用，对现在有用，对未来也有用。
问：以前你和威廉•埃克哈特争吵才诞生了海龟——是不是受电影《交易所》启发的？
丹尼斯：哦，上帝啊，不是！我想电影是后出来的。至少我希望如此！我做海龟的事是因为每个人都相信直觉，包括比尔，比尔很理性。我想直觉和交易不搭配。我想应该是原则。
问：传说中说整件事只是好玩的一时兴起。你事实上是不是真的想办海龟班？你的尝试让你赚钱了吗？
丹尼斯：赚了很多的钱。他们的毛利润是1.5亿美元，我们赚了1.1亿美元。我们一开始给了他们10%。为什么不给更多？这是我们的钱，我们在承受风险。
问：你们的团队当时在做什么交易？
丹尼斯：我们用系统交易了5，6年。我知道有用的是原则。没用的是判断。
如果你不用原则，你就会陷入日本神秘主义，你会受灵感的启发而行动——你本能地做事。你不能在早上醒来说：“我有一个市场直觉”。你必须做很多判断。
问：人们说你用机械交易是因为你只期望赚一定比率的钱。看起来非系统的因素也起了很大的作用。
丹尼斯：一开始，我的系统叫“无论如何都不能有想法”。我赚了4年的钱。每天，我都告诉自己我没有想法。如果有人给我一个消息，叫我去买燕麦合约，我也不相信他什么都知道。我仅仅知道我有个消息，只是小优势，那天结束时，我的优势也许等于我的利润。我就像是一个赌场。
这是中美商品交易所，很难搞，因为没有任何对冲。你应该买小麦，卖活牛。这并不能减少风险：这是给了你优势。如果你的交易很多，你也会丧失优势的。系统也是如此。
问：你的直觉是什么？
丹尼斯：我没那么天真——交易所的人总是在交易。但是中美商品交易所是一个创新，因为没人知道你可以依靠很大的成交量平衡风险。交易者不原因交易奇怪的东西。我就是这样开始的。似乎那里的钱不多。第一年我赚了35000美元，在当时不算坏了。这些年来，我有回到了那个方法，但是对我来说，最安全的还是原则。
问：你不能仅仅依靠机械系统赚钱，是吗？
丹尼斯：没错。每年赚30%，长期来说是很难的。事实是，一旦我去了交易所，优势就不存在了，所以我要形成自己的判断。
这是我做的最好的事，但也是我的负担，因为我要相信自己的直觉。在场内的人10次会有9次搞错关键的反转点，这更确信了你要相信自己的。你在场外机械交易不会那么差，但时不时也会有类似的冲动。我认为我在场内的经验伤害了我的机械交易。在场内交易的人通常都是很差的系统交易者。他们学的东西不同。他们关注于价格的微小跳动。如果在屏幕上，这些微小跳动没有任何含义。
问：你说海龟的成功和他们个人有关——因为他们是你严格挑选出来的。理论上，是不是任何人都能掌握机械交易方法？
丹尼斯：可以这么说，这和我们选什么样的人区别不大。人们在学习海龟课程以后是否能做到，这和他们的个性有关系。如果有我们来控制，不管他们多么聪明，结果差别不大。
问：真的没有差别？会不会有些人害怕使用系统原则？
丹尼斯：越是有创造性思维的人，越容易毁掉自己的表现。优秀的交易是无聊的交易。成功的交易要求有能力实施限制。成功的系统交易者花了很多精力开发系统，但是在遵守系统方面就很差。你一定是精神分裂了。拼命开发了系统，然后又不用它。如果布什总统有一个系统，他会成为一个优秀的交易者。
最后，你要去享受你的系统，否则没有任何含义。
所以，你要有纪律，不能高估自己的判断。一旦你把系统开发好了，你就不要再想办法去优化它。你可以在开发的时候优化，但是在交易的时候优化它会毁了很多东西。
问：一旦你确信不用海龟了，会不会有些人会抱怨这个系统？
丹尼斯：有1，2个人不出名，大部分都很出名。事实是，如果我告诉他们，他们会比我还难过。
问：你知道吗？你的系统在互联网是免费的？
丹尼斯：我知道，但那不是我的系统。事实上，让我困扰的是，人们以为我把自己不用的系统公布出去了。一次我在密歇根大街上走，听到别人这么议论。很明显，他们以为是我的。我希望人们明白，我很早就不用这个系统了。
我改变了很多东西。很多人就不知道去优化点什么。比尔•埃克哈特还在用，但他疯狂地优化了很多东西。我则相反，我改变了观念，如果你知道我3年前在做什么，我可能不知道我现在在做什么。我必须承认这是一个主观愿望。我想努力找到一个系统，它能和市场协调起来。我的思想不太现实。
问：如此说来，你不是靠管理基金发达的，而是靠个人交易发达的，是吗？
丹尼斯：客户没有和我交流思想。问题是基金经理很少会和有钱的人坐在一起。总是有这个代理，那个代理。人们有个误区，都想找到通用的方法，但没人想找到特别的方法。很难向最终客户解释。唯一的办法是把客户留在这个游戏中，这意味着不赚不亏也是不错的。
我的一些交易很糟糕。我不想解释，但是人们有兴趣知道，所以我一般不想管理基金。
问：为什么做系统工作？他们需要研究什么系统特点？
丹尼斯：系统对过去有用是因为一些关联。也就是价格会想相同的方法移动。如果价格上涨了一天，你可能会预测它第二天还会涨。如果它涨了一周，你可能预测它下周还会涨。这就是趋势的潜在原则。一个聪明的趋势跟踪系统就要尽力组合这些片段，这样信号之间能互相确认，这样你就预测到了更多的力量。它有用是因为它适用于不同的时间框架。
基本派渗透到价格中。政府行为或官方透露的信息都能改变趋势。这样模式就变得模糊了。如果你事后看，趋势很纯粹。这就是少数交易者知道的信息改变了价格的波动。这就是价格波动的不同。它扭曲了自然的趋势。
问：你不是基本派，是不是？
丹尼斯：今年可能是基本派的天下。每次我打开电视，只要原油涨了5美元，我就能看见T•布恩•皮肯斯龇牙咧嘴地笑。当原油涨到30美元时，他就在电视上说：“可能是40多美元，不会是20美元。可能是60多美元，不会是40美元。”如此不断循环，当然了，人们一直在听他的，他是对的。你也许希望这是技术派的倒霉日子。不管原油是10周的最高点，还是最低点，基本派都是看涨的。趋势跟踪者想在10周最低点买入，如果基本派多了，趋势跟踪者就倒霉了。
我更应该成为基本派的传教士，而不是基本派。对很多人来说，根本得不到基本面的信息。有时候，市场确实如预测的那样，但长期是站不住脚的——看了电视以后才知道会发生什么。如果宇宙是这样的，我就麻烦了。
问：假如说有人想以机械交易为生。比如他一开始有50000美元，想每年赚50000美元。
丹尼斯：我希望他能把50000全部投入，因为这是唯一的办法。大部分系统会接受20%的亏损，希望你不会那么倒霉。50000美元亏20%是一回事，但是你要忍受这个可能，20%的缩水，一直到0。一般系统的缩水是最大缩水的1——1.5倍。如果你投入50000美元，你可能会靠一般的系统赚50000——75000美元。但我想这是上限。
请注意：一个系统在不同市场的表现应该是一致的。针对不同市场定制不同系统也是可能的，甚至是必要的。
除了标准普尔，它们都是一样。你必须当它们是一样的，不要找理由改变参数。你可以针对不同的市场优化不同的系统，或者一起优化。最好一起优化。
问：为何标准普尔不同？
丹尼斯：它们是股票的平均值，如果你想研究它们，很难找到样本。有人用棉花的系统去做标准普尔，一做就失败了。3到5年前，有很多跟踪股指期货的系统。市场在研究如何从这些期望中套利。
问：你如何做的？
丹尼斯：这是你的思想。人们拿着系统找我。系统都很简单，我不知道他们如何像做模拟交易时那样做交易。当人们开始实战时，他们就泄气了。
这不奇怪。我也用短期系统，但那是我用心选择的，且不会经常交易。和其它思想相比，我认为它们不行。我认为那样交易都是给别人贡献佣金的。
另外一个问题是这些短期的东西好找。参数少。没有大量的数据。没有大量细致的工作。
你需要不同的方法。
你应该尝试不同的东西。我是一个真正的逆向投资者，比如人们说最简单的就是避免持仓过夜。实际上，我想去做更难的事才合理——持仓过夜。3年前，似乎可靠的统计都在说要从开盘到收盘盯盘。如果你了解收盘——比如说当天涨了——下次开盘时你有55%的机会是对的。
这个方法对我的早期生涯有很大帮助，尤其是在场内交易时。有时我很冲动，但我愿意在收盘前建仓。
在过去没有半夜的电子市场时，谷物在1：15分收盘，在第二天9：30分开盘。你没有求助对象。
人们开始打赌。我知道一个人，过去每晚交易上百分债券，一年赚了100万。但是我做的时候就发现很难做。我知道幻觉就是风险。没错，半夜交易是有风险，但也能赚钱。
我强烈支持“做难事。”很难把它塞进机械系统，因为你永远不用做判断了。现在的人都会做趋势了，他们也不害怕。现在很难知道什么是很难的事。如果你想想——你能想到一些。
———————————————————————————————————
Perhaps no one in the world of commodity trading has more lore attached to him than the legendary Richard Dennis, the founder, along with William Eckhardt, of the original Turtles and the system they established. Dennis’s stunningly successful involvement with mechanical systems came about when he realized that whatever worked for him in his trading could be reduced to and defined as a trading rule. Today, he pretty much eschews the public investment arena, confining himself to an exploration of mechanical trading ideas for personal use. A self-described “computer-illiterate,” he nonetheless has worked steadily with a handful of programmers for the last quarter century.
To separate the myth from the man, STOCKS & COMMODITIES contributor Art Collins spoke with Richard Dennis in October 2004 at Yoshi’s, a restaurant in Chicago.
How’s the current trading environment compared with your high-profile days?
It’s 10 times harder than it used to be. It should be. The market’s job is to derail the systems traders. Some of them are going to make money, but that can’t go on forever.
Why not?
Because the market is changing more dramatically than it would have 15 or 20 years ago. I think that’s because there are a lot more trend-followers involved in the market than before. It’s a game where you’re forever chasing your tail.
Anticipation doesn’t have a lot of place in the mechanical trading world, does it? The adage is that systems react rather than predict, and traders should have no input at all once they’re beyond a certain stage.
There’s something to be said for the dumb bunny approach of “I’m just looking at numbers.” I’ve done my share of talking myself out of systems that would have worked for years. You pays your money and you takes your chances. But ideas help if you’re thinking about what the market is likely to be like two years from now.
Let me give you an example. It seems to be increasingly true that volatility screens are a good idea; the trades with the lowest volatility for trend-following are best. You might decide to push that envelope even further by taking only a quarter of the trades that are the least volatile instead of half. That part wouldn’t be based on data, but on your idea that low volatility is good and the rest will be worse.
There’s got to be something different about the future. Otherwise, everyone will make money, and we know that can’t happen.
Any other reasons behind the change?
People should marvel at the difference between the returns of hedge funds and Commodity Trading Advisors (CTAs). The hedge funds have been much better over the years, with more money, which is a reason they should be worse. It’s harder to perform with huge amounts under management. I think it’s because hedge funds exploit trend-following systems to a large extent. A lot of the hedge funds are just trading on inside information. They’re not trading. They’re shooting fish in a barrel.
Think about what we had 20 or 25 years ago. The paradigm was that unknown information seeped into the market and gradually moved price.
You go to a currency market, and there’s the same fundamental forces but you also have this tremendous flow of inside information. It isn’t unknown inside information, but it’s bureaucratic. It’s bureaucrats at the Bundesbank telling the hedge fund guys what they’re going to do. Now as a trend starts, it explodes immediately so that the trend-followers can’t get in until it’s over. It isn’t slow. It isn’t indirect. It’s all at once.
System followers see a signal in financials that they think is the same as a soybean signal, but it’s not. The structure of the trend changes. Let’s face it, if you’re running any kind of a fund, 90% of your trades are in interest rates and currencies. It throws all the data of more than 10 to 15 years ago into question because it was generated a different way.
So your old bellwether trend-following systems don’t work anymore?
Nine out of 10 things that worked 20 years ago don’t work now. In the last year, only a subset of those breakouts worked relative to the 20 to 40 ranges that worked previously. I’m always looking at n-day trajectories – 10, 20, 40, up to maybe 280 days. Twenty-day trajectories worked for a while, but that started going downhill 15 years ago. If you go out to the longer-term ones, like a few years’ worth, they started out worse than the 20-days and maintained themselves nicely until last year. That’s what makes it tough.
Since you don’t regard any systems as likely eternal performers, do you anticipate only x number of probable profitable years before you have to switch?
That would be hard to know before the fact. What I try to do now may be a little subjective. I like to find something that worked in the last year when markets were bad, but also worked in the previous five when markets were mediocre, and also worked 15 or 20 years ago. That doesn’t mean you’re trading the optimal variable for any of those periods, but rather, something that has been passable in the good old days, the recent past, and in the very recent bad period.
Would you say a big part of what you’re doing now is not trend-following?
I like to take something counter-trending – maybe something that worked well this year but not so well 10 years ago – and pair it with a trend-following system. I like to make the trades depend on each other so that if you get one of one kind, you also get one of the other kind. It’s not the easiest thing to do. Part of the solution is to have a balance.
Are you still long term in your approach?
Currently, I’m running an online system that incorporates six different elements, the longest about 30 days. It isn’t behaving. I might have one mega-counter-trending system that might be for 60 days, which only makes money in periods like the last year. It’s balanced to make money when the trend-following stuff doesn’t work.
Do you agree with the old saying that simple is best at a system’s core?
I don’t. If you’re talking about risk-adjusted return, exclusion’s important. The way to make a system optimal is to throw things out. If it’s a trend-following trade and the market’s too volatile, throw it out. If you’ve had the trade too long, throw it out.
I’ve heard you don’t do your own programming. Do you understand the full significance of the results, and various components like standard deviation. and Sharpe ratio.?
Yeah. I’ve been doing it for 24 years. The math guys set it up and helped me understand it. I can’t type, much less program, but I understand the output.
I spend most of my time talking to programmers and waiting for results. I’ve been working with these people for 20 years, so I can get into that intermediate zone between computerese and real English. I tell them my idea of how it would go in the program, but they’re the guys who are going to program it. It’s quite an adventure, because even a good programmer will get the first it-eration wrong half the time.
Can you trust them to not make poor optimization decisions?
I pick all the parameters. I’ll say, “We have seven [variables], here’s the range. If anything shows any promise, go through it 10 times and try to narrow down the optimization.” It’s all my decision. They never just say, “Oh, let’s try some numbers.” My real interest is trying to figure the damned thing out.
You’ve been quoted as saying you could print your methodologies in the newspaper and no one would be able to follow them.
An individual trend-follower isn’t going to have people trying to mimic or corrupt him. But take the Commitment of Traders’ report, in which everyone can see how many contracts are committed, for example. It’s not just a straightforward accounting of the relationship of the number of contracts and how the market is behaving perversely. But knowledge of the report does give people an opportunity to change the trend at crucial moments.
Whatever crude oil’s price is now – and whatever it’s going to be one, five, or 10 years from now – won’t have much to do with speculation. Those using patterns of the past will encounter enough manipulation in the market to the point where their systems that worked before won’t work now.
So psychology affects the short run.
It’s less ethereal than that. There are contracts that have to be liquidated after a big trend. If you have some idea of what fundamentals will make a difference, you’ve got a big edge. If crude breaks the important levels, everyone’s got to sell it from there. If something fundamental can make that decline happen, countertrend funds will make it happen.
I’m an advocate of something most people don’t like, which I call “special situations.” I research keeping the countertrend element in mind. Here’s an example. We used to trade n-day breakouts. If I were creating the system now, one of the filters I would use is whether the n-day breakouts were winning or losing. I would only take the trades if they were losing. Suppose you want to buy at the 100-day high. I’d run a system in the background that showed me how a system is doing that buys at the 20-day high and sells at the 20-day low. I would only take those trades at the 100-day high if the 20-day trade in the background was losing.
Why does that work?
Because, first of all, the losing trade in the background guarantees a certain number of people with losses who have to liquidate. It also defines the market to be more in a consolidation than in a trend when you enter. If the last 20-day breakout has a profit, the market is not in a consolidation. So if the market is choppy and the 20-day breakout is losing, when you get to the 100-day breakout you know you were in a consolidation and people have been whip-sawed. You know that people are less likely to go with this trend than they would have many whipsaws ago. That behavior tends to make a trade work.
Interesting. Is that a lot of what you’re doing now?
I actually use it as a filter. Another filter I use is raw volatility – how big the ranges are relative to how big they’ve been in the last year or two. If the ranges are big, trades ought to be oriented to the countertrend. If you have something that works as a countertrend, go more for the markets where the ranges are big relative to what they were. If it’s trend-following, go for the small ranges.
Have you been doing this straight through? There were stories that you retired for a time.
I went six months without making a trade, but I never went six days without doing research. Some people like to wake up in the morning and figure out how they can get to be President of the United States. I wake up wanting to figure out a system that really worked well in the past, really works well now, and will continue to work in the future.
Regarding that initial argument you had with William Eckhardt that led to the formation of the Turtles – was it inspired by the movie Trading Places?
Oh God, no! I think the movie came after. At least I hope so! We did the turtle thing because everyone believed in intuition, including Bill, who is a very logical guy. I thought about intuition and trading and it didn’t seem right. It seemed like it should be rules.
Legend depicts the whole thing as kind of a playful whim. Did you in fact have a percentage of the Turtles? Did you make money off the endeavor?
Tons. I think they grossed $150 million and we made $110 million. We started out paying them 10%. Why give them a lot? It was our money, we took all the risk.
What kind of trading were you person-ally doing?
We’d traded systems for five or six years. I realized that the things I’d been doing that worked best were rules. The majority of the other things that didn’t work were judgment calls.
At the risk of drifting off into Japanese mysticism, when you’re not using rules, action still has to come out of some inspiration – something you’re doing with the spontaneous part of your mind. You can’t wake up in the morning and say, “I want to have an intuition about the market.” You’re going to have way too many judgments.
The adage is you need money to trade mechanically because you can only expect to earn a certain percentage of your capital. It would seem that the nonsystematic elements of what you were doing played a key part in your success.
When I started out, I had a system called “Having no idea whatsoever.” For four years, I was just taking edges. Every day, I focused on the fact that I knew nothing. If someone gave me a quarter-cent edge to buy an oat contract, I didn’t think he knew anything either. I just knew I was getting a quarter-cent edge, and at the end of the day, the edges would approximately equal my profit. I tried to be like the house in the casino.
This was the MidAm [Mid-America Commodity Exchange] and it was tough sledding because nothing offset anything. You’d buy wheat and sell cattle. This didn’t reduce risk: It just gave you the edge on each. When you make a lot of trades, you can drown the risk of those edges and come out with the residue of whatever the edges were to start with. [Initially] that was pretty much the system.
Which you pretty much intuited, right?
It wasn’t that novel – people at the Board of Trade had been doing it forever. But for the MidAm, it was revolutionary because no one would understand that you could balance your risk with a lot of volume. Other MidAm traders weren’t willing to bother with odd-lots or things like that. That’s how I started. It wasn’t like there was a lot of money in it. My first year I made something like $35,000, which wasn’t so bad back then. Over the years, I’ve drifted back to that approach, but the safe harbor for me has been coming back to the rules.
But you couldn’t have amassed the money you did just being mechanical, could you?
Sure. Even making 30% a year over a long-enough period. The truth is, once I went to the Board of Trade, the edges weren’t there in the same respect, so I had to develop some judgments and subjectivities.
That might have been the best thing that I’ve done, but in terms of going forward, it was an albatross because I’d learned to trust my intuitions. On the floor, you see people and know that they’re wrong nine times out of 10 at crucial turning points, which then confirms with near certainty any ideas about what you have to do. Nothing like that exists when you’re trading mechanically off the floor, but you’ll still feel similar impulses every now and then. I think my pit experience hurt my mechanical trading. People trading in the pit are generally very bad systems traders. They learn different things. They react to the tick in front of them. That’s nothing like looking at numbers on a screen.
You’ve suggested that the success of the Turtles was somewhat related to their personal makeup – that you selected them through an explicit screening process. In theory, couldn’t anybody follow a mechanical approach?
You could make the case it didn’t make much difference who we picked. The people who could sustain trading after the Turtle program did so according to their abilities. While they were under our control, it didn’t make much difference how intrinsically smart they were.
But shouldn’t it make no difference at all? Or is there something beyond people being too scared to follow system rules?
The more somebody is creative, the more chance they have of sabotaging their performance. Good trading is boring trading. Successful trading requires a kind of intelligence that can realize and enforce its own limitations. Successful system traders apply every ounce of intelligence they have into the creation of their systems, but they’re dumb-bells about following them. You’ve got to have a schizoid approach. Work like hell to make it good, and then ignore it. President Bush would be a great trader if he had a system.
Ultimately, you have to be on board to enjoy the bounty of your system. Otherwise, none of it means anything.
That’s why you need to have the discipline not to overrate your own judgment. You have to think of your systems as being beyond improvement once you’ve done the best you can with them. You improve them every minute you’re researching them, but the idea of improvising during trading has been the ruin of many.
After your confidentiality period with the Turtles expired, didn’t some of them start breaking the news on the system?
There were one or two who will remain nameless. The majority was exemplary. The truth is, if you talked to those people, you would find they’re way more upset with certain people than I am.
You know your system is available for free on the Internet now, right?
Yes, but it’s not my system now. Actually, one thing that’s a little bothersome is that a lot of people probably think I had something to do with posting my discarded system. Once I was walking down Michigan Avenue and I heard somebody talking about it. It was clear that they thought it somehow had my blessing. I hope people realize that it hasn’t been a system that I would have advocated trading for a long time now.
I’ve changed things a lot. A lot of people don’t even like to optimize anything. Bill Eckhardt stays in a very tight range, although he does re-optimize like a maniac. I, on the other hand, change the concept to the point that if you knew what I was doing three years ago, you probably wouldn’t have any clue what I’m doing now. I have to admit it’s subjective. It has to do with trying to anticipate what systems the markets are going to accommodate. I try to come up with novel ideas, ideas that others haven’t run to ground.
From what I’ve heard, you didn’t thrive in fund management anywhere near as well as in individual trading. Is that right?
Customers and I didn’t have a meeting of the minds. The problem was that a money manager rarely sits down with the person with the money. There’s always a representative of a firm of a firm of a firm. There are these levels of misdirection where everyone wants something that’s passable, but no one wants something that could be spectacular. It’s difficult to explain to the end user. The only objective is to keep the customer in the game, which means that breaking even is seen as doing okay.
I’ve had some bad performances that had nothing to do with that. I don’t want to make that be an explanation, but this variance of interests has been a problem, so I tend to not want to do it.
Why do systems work? What market characteristics do they exploit?
Historically, systems have worked because of serial correlation. There was an implication that the price would continue to move in the same direction. If a price moved up for a day, you could predict it would move up for another day. If it moved up a week, you could predict another week. That’s an underlying principle of why there are trends. A clever trend-following system just tries to overlap these momentum segments so each of these signals reinforce the others, so that you get a prediction with more force. It works better because it incorporates more than one time frame.
Fundamentals seep into price series. There’s a corrupting element to trends when markets get overwhelmed by government action, or officials leaking information. That’s when the patterns get muddied. If you look backward in time, the patterns tend to suggest more of a pure trend-following. This other kind of price movement is based more on short-term information known to a few trader groups. It makes a big difference in the price series. It distorts the natural formation of trends.
You haven’t generally been big on fundamentals, though, have you?
This is probably the year of the fundamentals. I turn on the TV and see T. Boone Pickens grinning every time crude’s up five bucks. He’s been on TV since crude was at the $30 level, saying: “$40’s more likely than $20. $60’s more likely than $40.” That ebbs and flows, of course, and people get their head handed to them along the way, but overall, he’s been right. You would expect it to be a bad period for technicians. Fundamentalists would say crude is bullish whether it’s at a 10-week high or low. They’re more likely than the trend guys to want to buy at a 10-week low, which means if they’re right, the trend guys are out of luck.
I’d have a better chance of being a fundamentalist preacher than a fundamentalist trader. Fundamental information just isn’t accessible to a lot of people. Sometimes, the market actually does what’s predicted, but still, it’s an untenable long-term paradigm – to watch TV and then know what’s going to happen. If the universe is structured like that, I’m in trouble.
Suppose someone wants to trade mechanically for a living. Say he has $50,000 for startup and will need to earn an average of $50,000 per year to survive。
I hope he’s willing to risk the whole $50,000, because that’s about the only way you can make that. Most decent systems build in about a 20% loss, which hopefully you don’t hit right off the bat. A 20% drawdown off $50,000 is one thing, but you also have to withstand the possibility of a 20% drawdown from zero. A decent system only makes one to one and a half times a maximum drawdown. If you have $50,000 to lose, you can probably make $50,000 to $75,000 with a decent system. But I would think that’s about the upper limit.
Please weigh in on the following: a single system should perform the same across an array of markets. Or a certain amount of custom tailoring per system per market is possible and maybe even inevitable.
With the exception of the S&Ps, they’re all the same. You have to treat them the same, for no reason other than sample size. You can optimize each system in each market individually or you can optimize them all together. It’s better to optimize them together.
What makes the S&Ps different?
They’re averages of stocks and if you’re going to do any research on them other than day systems, it’s hard to get enough of a sample. There’s a cottage industry of short-term S&P systems that just died the minute they were implemented. There were an immense amount of what I assume to be trend-following index systems available three to five years ago. The market figured out how to arbitrage out that expectation.
How do you stay above all that?
That’s where you need ideology. People would come to me with systems. They were pretty simple and it was hard for me to see how they could keep working the way they had on paper. The minute people actually started trading them, they just fell flat.
It’s not surprising. I use short-term systems too, but they’re very selective and don’t trade very often. Compared to other methodologies, I’ve got to say they don’t work as well. My impression is that that kind of trading is driven by margin considerations.
Another problem is that these short-term things are easier to find. There are fewer parameters. There’s a ton of data. It’s not a place where you find much subtlety.
You want the difficult approach.
You should be trying to do something different. I really am a contrarian at heart; for example, the easiest task is avoiding overnight risk. In fact, I thought it would make more sense to do what’s harder – take the overnight risk. Up until three years ago, it seemed to me that the most reliable statistics were follow through from the close to the open. If you knew something about the close – it was higher for the day, for example – you had about a 55% chance of being in the right position for the next open.
That approach helped me a lot in my early days, especially when I was in the pit. I would be brutalized sometimes, but I would make myself go back and take a position at the end of the day.
Back in the days when there were no overnight electronic markets, what you got was the 1:15 close and the 9:30 open price the next day in the grain pits. You had no recourse.
People started making those bets. I know a guy who used to trade a hundred bonds every night and make $1 million a year, so the market adjusted. When I was doing it, it was the hard thing to do. I thought the risk of it was illusory because I knew what risk you had during the day. Sure, the overnight trade seemed to have more intrinsic risk, but it also had more reliability.
I’m a big proponent of “Do the hard thing.” It’s hard to squeeze that into a mechanical paradigm, because you never make judgments. People are so trend oriented now that they don’t mind biting off anything. It’s harder now to know what the harder thing to do is. But if you can figure it out – you probably have something.