Rembrandt selfies or selfie sticks?

Wandering through the city of Amsterdam over the past few days, it was difficult not to appreciate the grandeur of the past, and to make comparisons between the past and the present. It can sometimes be tempting to think that the old times were truly better. Where once a "selfie" was an evocative painting by Rembrandt or Van Gogh which now hangs in the Rijksmuseum, today, it is the product of a selfie stick, which is now banned in most museums. What starker contrast can there be between the past and the present?

In Amsterdam, the bridges, the canals, the cobbled streets: it all comes together to create a very picturesque view of the past. It is of course only a partial snapshot and a somewhat skewed one at that, which has been preserved over the ages. The difference is that everything around these preserved streets has changed. The canals are no longer arteries of commerce, but of tourist boats. The pathways surrounding them are clogged with cars as opposed to horses and their carts. What has been less than picturesque about the past, has been erased, the physical toil, the lack of healthcare and a society which was significantly more violent.

We need not purely look back over the ages to have a rose tinted view of the past. Even within the space of our own lifetimes, we might lament the passing of time. Indeed, in the industry of finance, this is no different. My career has been comparatively short, around a decade, yet, it is just about long enough, for me to make comparisons about how the industry has changed.

My main reason for being in Amsterdam, was to attend the Global Derivatives conference. One of the panels discussed this very point, about whether the past was indeed better in finance, in particular for quants. The panel consisted of a number of very well known and experienced quants.

It was noted that the job of a quant has changed over the years and the finance industry itself was reducing in size. Where once quants purely used mathematics to price options, in recent years, maths skills have become more important in other areas such as systematic trading. The panel seemed largely in agreement that the past was a more fun time to be a quant. Alex Lipton, of BAML, in a light hearted comment, suggested that the reason being a quant was more fun 20 years ago, was because everyone was 20 years younger, which elicited audience applause.

I have to agree with Alex's point. Very often, the more emotional reasons for wanting the past, can somewhat overshadow the more practical reasons in favour of the present and indeed the future. Indeed, I feel that it is a very exciting point in time to be a quant. It's purely that, the "new" areas for quants before, like pricing options have become more mature and established fields. The area of systematic trading, whilst it is hardly new, has become a bigger focus for quants and creating new questions to solve. Indeed, not every problem has been solved in quantitative finance. The recent financial crisis, suggests there is a huge amount of work left to be done.

For the past, our memories do a wonderful job of scrubbing away the less desirable, whilst in the present, problems cannot simply be "unmemorised" and have to be confronted. Let's celebrate glories the past, but remember, that just like today, it was not perfect.

(I shall be publishing a full takeaway of my quant thoughts from Global Derivatives 2015 over the next few days. It has been kindly been sponsored by the team at Global Derviatives and hence the full version will be available. Let me know if you'd like a copy! Also a summary of my tweets from the conference can be seen here)

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York and Budapest - join our Meetup.com group for more details here (Thalesians calendar below)

27 May - London - Gaining the alpha advantage in vol trading - Artur Sepp
29 May - Prague - Trading Thalesians book talk / Interactive FX intraday demo - Saeed Amen / The Thalesians (tickets here)
03 Jun - Frankfurt - Trading Thalesians book talk / Python FX intraday demo - Saeed Amen / The Thalesians (tickets here)
17 Jun - London - Using Python to build trading strategies - Man-AHL & Saeed Amen
18 Jun - New York - Dr. Tim Leung - Exchange-Traded Funds and Related Trading Strategies - IAQF-Thalesians

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Seeing something in nothing

My brain has been constantly whirring over the past day or so, desperate to find an idea for a blog article. The problem is that my brain is invariably focused on topics for a blog, which have nothing to do with finance like burgers. Yes, I could write about burgers and somehow skew the end of the article to finance. But I've probably done that more than enough times by now (and want to leave that opportunity for a week when I really do not have any ideas). Alternatively, I could just take a break from writing something financial, and focus on more important subjects (despite being in currency markets for a decade, even I recognise, that where EUR/USD is trading, is perhaps not the biggest concern of most people). Possibly, although, I do quite enough of that already on my Twitter feed (@thalesians if you're interested in following!)

The whole exercise has however, got me thinking. Maybe sometimes doing nothing, tinkering with your thoughts and engaging only in that thing called idleness can sometimes be the best course of action. Always wanting a positive result from what you do, is not always possible.

I'm not for a moment suggesting that doing nothing all the time is a solution for success, merely that it has its time and place. Working hard has an element of usefulness, if it's on a project where the outcome could yield a tangible benefit.

I recently went to a conference organised by the London Quant Group, which featured a myriad of exciting talks, one of which was on the subject of data mining by Mark Salmon, which I enjoyed very much (I also gave a talk, although I must confess I probably should have avoided telling any jokes - my subject of the Impact of Scheduled Events on FX Implied Vol was perhaps not the best avenue for my brand of humour!)

However, returning to the narrative about Mark's talk, the crux of data mining can be simplified into the problem of spending too much time finding "value" in a dataset where there is nothing to be found. He outlined a number of different methods to try to avoid data mining.

In the context of a systematic trading strategy, excessive data mining can result in a strategy which might work fantastically on historical data, but potentially awfully when you run it live with real cash. Doing nothing, rather than endlessly searching for something which isn't there would have perversely been more productive.

In a different context, even with discretionary trading, sometimes doing nothing can be the answer. Trading for the sake of it, when you have no conviction in any market view at that time, is worse than doing nothing. Overtrading your book, is one thing to avoid, and is the bane of many traders. Only your broker will make money from overtrading!

So perhaps sometimes, doing nothing might well be better than doing something. In the next blog, I promise to discuss a bit more than simply, well... nothing.

(as an aside, I'll be in Amsterdam next week speaking at Global Derivatives on Big Data based trading and impact of scheduled events on FX implied vol. Let me know if you'll be around!)

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York and Budapest - join our Meetup.com group for more details here (Thalesians calendar below)

27 May - London - Gaining the alpha advantage in vol trading - Artur Sepp
29 May - Prague - Trading Thalesians book talk / Interactive FX intraday demo - Saeed Amen / The Thalesians (tickets here)
03 Jun - Frankfurt - Trading Thalesians book talk / Python FX intraday demo - Saeed Amen / The Thalesians (tickets here)
17 Jun - London - Using Python to build trading strategies - Man-AHL & Saeed Amen
18 Jun - New York - Dr. Tim Leung - Exchange-Traded Funds and Related Trading Strategies - IAQF-Thalesians

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Expecting a holiday from general elections?

The notion of forming expectations seems ingrained into our psyche. It is crucial, because without having expectations decisions become purely random exercises. Expectations give us a guideline, however imperfect, to judge both the state of the present and future.

Take for example, when you go on holiday. One way to pick a holiday destination is to spin a globe, close your eyes and place you finger somewhere on the map's surface. Alternatively, we can draw up a short list of destinations. From those, we pick a place to visit, for which we have the most positive expectations.

Our expectations can be a product of many things. In this holiday case, something we might have read could impact our expectations. Friends might have traveled a certain place. We could have visited a destination a long time ago and have vague memories of it. The expectations we form might well end up being markedly different from other people too (the "consensus").

The problem with expectations around holidays, is that we nearly always go on them with very high expectations. After all, if you expected a holiday destination to be utterly awful, it would be unlikely you'd visit there in the first place!

Are all holidays fun? Not if they fall short of your very high expectations. If you're a keen swimmer, expecting spotless sandy beaches with tropical temperatures, and instead face water which feels like ice, your expectations are dashed! If on the other hand, you hate swimming and instead yearn to visit museums, the state of the beaches would be of little concern.

In the short term, markets are like holidays (however implausible this might seem) and we had a prime example this week! After the exit polls came out at 10pm LDN for the UK General Election showing a potential Tory win, GBP/USD immediately jumped. Polls had been pretty wishy-washy going into the election, some showing a Labour victory and other others indicating a Tory win, with relatively small margins of victory compared to the exit poll. Had anything actually changed materially, about the economy in that moment at 10pm? No, of course not. GDP did not suddenly change because of an exit poll! It was merely that real events surprised compared to real events.

In the longer term fundamental factors are a driver for markets. However, we shouldn't lose sight of how in the shorter term, the difference between expectations and news, can be a much more potent driver. Be careful what you expect, before you make a decision, because that will impact how you feel about the result, just like markets!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York and Budapest - join our Meetup.com group for more details here (Thalesians calendar below)

27 May - London - Gaining the alpha advantage in vol trading - Artur Sepp
29 May - Prague - Trading Thalesians book talk / Interactive FX intraday demo - Saeed Amen / The Thalesians (tickets here)
03 Jun - Frankfurt - Trading Thalesians book talk / Python FX intraday demo - Saeed Amen / The Thalesians (tickets here)
17 Jun - London - Using Python to build trading strategies - Man-AHL & Saeed Amen
18 Jun - New York - IAQF-Thalesians Seminar - Dr. Tim Leung / Exchange-Traded Funds and Related Trading Strategies

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Discomfort zone

The phrase "leaving your comfort zone" is the most cliched of cliches (I tried to use clichiest - but my word processor refuses to acknowledge the existence of that word). Perhaps a more apt description, would be what follows from this, namely reaching a discomfort zone. Essentially any sort of change will result in leaving an area, where you know what you're doing to one, where you need to learn.

It's like the first time you try to ice skate. Your initial steps seem to be disconcerting, rather than enjoyable. The overwhelming urge is to be very cautious, hands grasping the handrail, seeing the other skaters zoom past. If anything an excess of caution and a reticence to take part, makes skating more difficult. The only way to master ice skating is to leave your comfort zone and allow yourself to move more freely. For me, the only way I really learnt how to ice skate, was on an ice skating rink, which had no hand rail, thus forcing me to learn!

In trading, you might learn something when you're in your "comfort zone" and your strategy is performing well. However, from experience, it's when everything that can go wrong, has gone wrong, that you really do learn. Of course, this doesn't mean you should aim to lose money! It's simply, that everyone will have a drawdown sooner or later in their career. It's how you react and learn from a bad patch that can make it such a valuable experience. Another time you learn in markets, is when you try a totally new strategy. For me, this happened, when I started researching the use of news data to trade markets. Continual research, even when you appear to be making money, is the best hedge against any sort of complacency.

Of course, whether or not you trade, the idea of leaving your comfort zone can come up very often during your professional career, in particular, when deciding whether to move on from your job. Hence, it's rarely something you can avoid. Rather than fearing it, it can be seen as an opportunity, albeit one where initially, you might feel that you're not quite going forward in the manner you intended it.

We've encountered it, in trying to expand our Thalesians finance talks, out of our base in London? Would the idea work elsewhere? Should we just stick to London, where we already had an audience for our talks? Luckily, we took the plunge (another cliche I usually prefer to avoid) and expanded to other cities. It was never easy at first, but slowly, we found our way.

We now have a successful series of talks running in New York and Budapest, albeit a lot of the credit for that needs to go to the local organisers (Harvey Stein/Matthew Dixon in NYC and Attila Agod in Budapest). The next step (to leave our comfort zone) is to start a series of talks in Prague and Frankfurt. We have our first talks in those cities in late May and early June respectively, where I'll be speaking about my new book Trading Thalesians, as well as giving a fun demo on intraday FX markets using Python (and I hope if you live in those cities you'll join us - register for those talks here). Hopefully, with your support they will be the first of many!

There are risks involved in leaving your comfort zone and sometimes it can be the wrong decision. But then again no risk, means no reward! It's not simply a matter of trading, but can apply to major decisions you make.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York and Budapest - join our Meetup.com group for more details here (Thalesians calendar below)

27 May - London - TBA
29 May - Prague - Trading Thalesians book talk / Interactive FX intraday demo - Saeed Amen / The Thalesians (tickets here)
03 Jun - Frankfurt - Trading Thalesians book talk / Python FX intraday demo - Saeed Amen / The Thalesians (tickets here)
22 Jun - London - TBA

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Why go to a restaurant, if you can cook?

It's a simple question, if you can cook why go to a restaurant? First, being able to cook something to ward off hunger is not the same as being able to cook a Michelin star meal. The latter takes years of training and is somewhat of an art. How deep is your repertoire of dishes and would it compare to a restaurant? For example I like to bake and often make cookies. I have made them so many times, that I know the various tips and tricks, to make them relatively well. This of course doesn't mean that I can miraculously move on to making cheesecakes to the same standard. I also can't somehow easily transfer my cookie making skills to burgers, which I would truly love to do.

The food is also not the only part of the restaurant experience. It is also about the environment of the restaurant and most of all, the company of your fellow diners. Also when we say a "restaurant", what do we mean. The standards of restaurants can vary significantly, as does the cost of them. Hence, treating restaurants as one homogeneous group seems wrong.

We ask parallel questions when it comes to investing. If we can invest in simple strategies such as long only index trackers, why go to a hedge fund, which charges higher management fees? As an example, my expertise is largely in the realm of systematic trading, primarily in liquid markets such as currencies. This does not mean that all of sudden, I can start trading some other unrelated asset class from a discretionary perspective, without a lot of training or effort. Baking cookies doesn't automatically mean we can bake cheesecake. Hedge funds give you this ability to make the leap.

Just as with restaurants, hedge funds are not all the same. The question suggests we are trying to group them together. This ends up missing the point. For one, the strategies that hedge funds employ vary significantly. Some might be long/short equity funds, others will be trend followers and so on. There can also be a large amount of dispersion in the returns of various hedge funds in a certain sector. Furthermore, even if we might be possible to replicate a modicum of a hedge fund's strategies, the details will always be more difficult to implement and time consuming to do yourself. A hedge fun is being paid to do this in a more efficient fashion. The flipside is that you need to do your homework when it comes to selecting a hedge fund.

There's a lot more to restaurants than just the cooking. There's also a lot more to investing in hedge funds, than an initial glance might suggest.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York and Budapest - join our Meetup.com group for more details here (Thalesians calendar below)

29 Apr - London  - Global macro & UK election panel - Eric Burroughs / Reuters, Mark Cudmore / Bloomberg, Jordan Rochester / Nomura, Jeremy Wilkinson-Smith / Independent & Saeed Amen / Thalesians

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IRL - In real life

IRL is the internet abbreviation for "in real life". Think about how much of your communication is outside this sphere of "real life". How many e-mails you send and receive a day? How often do you text your friends? Do you tweet or use Facebook? The list is of course endless. I've mainly gone through these questions to illustrate how so much of our communication consists of reading and writing messages electronically. The speed and ease with which we can do this, means our brains are saturated with information throughout everyday. There are few places in the world where we can be truly cut off from the beep-beep sound of a phone receiving a text message. Perhaps, with this information overload, "real life" communication is no longer as important?

To ask this question, seems to ignore the fact that real life communication is so much richer than electronic messages. The spontaneity of a real life chat, is difficult to replicate, by reading and writing. We of course have telephones and Skype, which help bridge the gap, but both somehow still fails to capture meeting all the nuances of real life conversation.

After all, despite all the advances of communication, business people travel the world more than ever before to strike deals and meet counterparts. Conferences are just as much as an opportunity to meet your counterparts in your industry as they are a time to hear presentations. Finance is of course no different. I would say that finance is probably a place where real life communication is even more important. Trading is the business of acting on news and judging how the market reacts to events. If you don't know anyone else in the market, how can you tell how they will react to events? I have got many ideas from chatting to traders. The exchange of ideas just happens so much quicker when you're there in the same place!

It's one of the main reasons we started running Thalesians' finance seminars all those years ago, to try to bring together members of the finance community "in real life" and hopefully shed some light on markets at the same time, starting in London, but also now in New York and Budapest (where we just had a bitcoin panel, yesteday). We're very excited about our next panel event in London on Wed 29th Apr, which brings together experts, which include Eric Burroughs (Editor of FX Buzz, Reuters) and Mark Cudmore (EM strategist, Bloomberg), to discuss global macro markets and the UK election. The panel will also be taking questions from the audience, given everyone a chance to take part in the discussion.

So if you want to learn about markets in a snapshot more than 140 characters at a time, in that most "old school" of ways "in real life".. register here to attend our next LDN panel event on Wed 29th Apr. Tickets are selling out quick and I hope to see many of my blog readers there!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York and Budapest - join our Meetup.com group for more details here (Thalesians calendar below)

22 Apr - New York - How Smart Money Invests and Market Prices Are Determined - Lasse Pedersen
29 Apr - London  - Global macro & UK election panel - Eric Burroughs / Reuters, Mark Cudmore / Bloomberg, Jordan Rochester / Nomura, Jeremy Wilkinson-Smith / Independent & Saeed Amen / Thalesians

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The mystery of patterns

I love patterns. As a mathematician, it seems natural that I seek to find patterns. Does this make me unique? Not really, it's a human trait to want to find a modicum of order in anything. In the book The (Mis)Behaviour of Markets: A Fractal View of Risk, Ruin and Reward by the late mathematician Benoit Mandelbrot, he illustrates this point through the use of a simple example. He plots a number of graphs. Some are of real market prices and some are random paths. I've repeated the exercise below. Which of the following examples are random and which are real?

It's somewhat difficult to guess, although I'm sure some of you might recognise some of these. At the bottom of the article, I've given the identify of the random plots, but I'll let the real ones remain a mystery (e-mail me if you really want to know their identities!). 

So is it futile to try to find patterns in markets? Well, no (I'm hardly going to say yes, when I've spent the past decade doing exactly that!). The question is not necessarily whether we can find patterns in price action, but understanding whether there is a logical rationale for patterns you find. There are numerous examples of patterns I can cite. Whilst some might be sceptical of technical analysis, there is an obvious reason why it works, the element of self-fulfilment. If enough market participants think a certain type of price action could result in a trend, and they jump on that trade, it becomes like a virtuous circle.

More broadly, there can be relatively intuitive reasons why we see certain patterns in price action, related to more behaviour aspects of trading. One interesting example can be seen in intraday volatility in FX markets. We could of course also make the case that volatility as a quantity is easier to forecast than market prices, because it has many "nice" properties. Volatility for example tends to be mean-reverting and also (relatively) bounded. In the plot below, we calculate the intraday volatility by time of day in EUR/USD over the past decade. There are several obvious patterns. Volatility tends to be lower during Asian hours, when there are generally fewer market participants. During London hours, volatility picks up and starts to tail off when London traders go home. We also notice spikes such as 1.30pm and 3pm LDN time, which tend to be the time of US data releases. Of course, attempting to monetise this pattern is tricky! However, it does illustrate that the idea that markets can have fairly distinct patterns.

So just because patterns might be difficult to separate from randomness, we can't simply say they don't exist in markets! There is of course the crucial caveat, that on many occasions there really is no pattern to be found. It is experience, which helps separate the data mining from the pattern finding in markets. Best of luck finding patterns in markets!

If you'd like to know more about vol patterns in FX, I wrote an article in the Financial Times explaining the volatility chart in a bit more detail (FT: Unpicking higher currency volatility: a guest chart - 10 Apr 2015) and also a comprehensive Thalesians quant paper discussing various patterns in both intraday currency volatility and also liquidity, which is very topical at this time (Thalesians: Once upon an intraday - 09 Apr 2015). If you'd like a copy of that research paper, let me know!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York and Budapest - join our Meetup.com group for more details here (Thalesians calendar below)

17 Apr - Budapest - Impact of bitcoin - Tamas Blummer & Panel featuring Izabella Kaminska / FT)
22 Apr - New York - How Smart Money Invests and Market Prices Are Determined - Lasse Pedersen
29 Apr - London  - Global macro & UK election panel - Eric Burroughs / Reuters, Mark Cudmore / Bloomberg, Jordan Rochester / Nomura, Jeremy Wilkinson-Smith / Independent & Saeed Amen / Thalesians

The random plot is graph 4. All the others are of real markets.

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