Current thoughts on trading & Penetration live

The statistical testing I'm currently doing is progressing well. I am of course building on huge amounts of relevant data that I have still from 2000 to 2006. I have used this data to produce many families of applicable models and have selected a number of "representative" models to "blind test" on current data. The results from this are very encouraging. Broadly speaking, the models current performance is pretty much identical to that of its previous testing period. This gives good support for my current trading plans.

I have also been reading lots of relevant market related books published over the last few years (when I have not been paying attention to the markets at all). One of the newest books published in my field has been Scott Patterson's The Quants. This was the book I bought and read during the recent New York trip. While not having much detail, there were one or two clues that have supported me in my testing. For instance, Renaissance Technologies, no doubt the finest "Quant" fund, was described as aiming for profitability not just monthly, but weekly, daily, even hourly. Descriptions of other funds also suggested this same type of focus. But to achieve this requires that the trading systems being used be extremely short-term and probably linked to profit target exits rather than system reversals - in other words, you look for a particular "set up" on intra-day data, jump when it occurs, and exit on a fixed gain.

When visiting mum the other day, I brought back some boxes of trading books and magazines and have been skimming through these the past few days. One long interview that I have studied in detail was with Doyne Farmer from 2000, just after he had left the Prediction Company, documented so well in one of my favourite trading books, Thomas Bass's The Predictors (which I have also re-read recently). This interview also gave a number of similar clues to how their systems worked in the manner outlined above. Years ago I visited a hedge fund manager as UBS and he showed me the Prediction Company's "black box" chugging away in a corner, which he claimed had a Sharpe ratio of 16. Again this is only possible with very short term, "in-and-out" systems.

So I have worked through my entire collection of magazines such as Futures, Technical Analysis of Stocks and Commodities, Active Trader, Absolute Return, Eurohedge, etc. In the latter, it is really amazing how many names I came across that I had sort of put out of my mind - funds like Mulvaney, Vega, Rubicon, IKOS, Weavering, etc. It is also strange reading them in one go to find just how many dropped out over the period. I have little regret about starting my hedge fund though it didn't succeed. So few do, and those that don't have some pretty clever people involved - there really is no shame in failure in this most-competitive field.

Other fascinating reading has been interviews with Nassim Taleb (before Fooled by Randomness) and Victor Neiderhoffer (post first blow up, pre-second). I am also studying Andrew Lo's Hedge Funds: An Analytical Perspective in great detail.

But overall, things are going well. The green light is set for late April / early May when I will combine trading with revision for my exams

And finally, I have acquired another recent recording of Penetration from their recent tour as well as two shows from 1977 and 1978. Superb stuff! I also found an old video featuring live performances by punk bands in the late 70s, one being Penetration at the Electric Circus in 1977 doing "Don't dictate". I feel quite nostalgic - and also very clear that modern bands have little of the intensity of punk.