If it wasn't for me, I'd do brilliantly

Christmas has come. Christmas has gone. The tree remains. The wrapping has gone. The decorations still sparkle. Christmas markets are still around (as above), but quieter. The days between Christmas and New Year are here, that odd period of limbo, where the last year, 2015, lingers, hanging on to time as an outstretched hand seeks that embrace of the familiar, whilst, the new year, 2016, awaits the chimes of Big Ben, an unknown artist ready to grab its 15 minutes of fame. It's a time to recollect what we have done, and indeed, what we have failed to do, which we had planned for in the past year. One of my favourite quotations about explaining success and failure, is from Chamfort, the eighteen century French writer (which is incidentally the opening quotation in my book, Trading Thalesians and the title of this post):

'If it wasn't for me, I'd do brilliantly.'

When it comes to plans, we know the saying that the best laid plans of mice and men, often go awry! What is a plan, but an ill suited straitjacket for the future? It is somewhat disconcerting to accept that randomness plays such a deep role in our lives, given that the more randomness an event seems to exhibit, the less power we have to influence it. It feels so much more satisfying to believe that we have a casting vote over our lives. My earlier comment on planning might have been somewhat facetious, given a modicum of planning does have its place. Having no plan whatsoever, surrenders all your control to randomness. At the same time, a plan which assumes little or no space for randomness is doomed from the start.

So much of modern life is random. Who we meet for example is so often a product of randomness. In particular if we think of the modern day, both cheap travel and the advent of social networks have suddenly increased the number of connections we can make exponentially. If we seek to eliminate all randomness from our life, yes, we might eliminate the potential downsides, yet, we simultaneously remove any opportunities for upside from randomness.

A good trader recognises that randomness is an intrinsic part of what he/she does, trading is the monetisation of managing risk. Yet, a good trader also understands, that it is sufficient to skew the odds in their favour to be successful, rather than to be right all the time. This want to coax value from randomness, need not be confined to trading. The same approach can transcend so many other parts of our life too: making the most of randomness, rather than attempting to master it (which is impossible).

So maybe this time of limbo in the calendar, isn't so much a time for planning, maybe it's simply a time to accept, that randomness will happen. Rather than being fooled by randomness, embrace it. Best of luck for 2016!

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 interested 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, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

20 Jan - London - Nick Firoozye - Managing Uncertainty, Mitigating Risk
29 Jan - Budapest - Robin Hanson - The Age of Em: Robots
08 Feb - London - Saeed Amen/Delaney Granizo-Mackenzie - CTA/Pairs trading (joint Thalesians/Quantopian event)
29 Feb - London - Jessica James - FX option performance (TBC)
21 Mar - London - Robin Hanson - The Age of Em: Robots

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Margin is too small

Saturday mornings are perhaps not the times at which we associate that the brain is most awake. It is more time for slumber, than the gathering of thoughts. Unable to come up with anything remotely useful to say on an early Saturday morning, I tweeted the following:

trying to think of something truly inspirational to say on a Saturday morning, I think I have it, but it's too long to fit in 140 chars

It is perhaps somewhat facetious to compare myself to the great French mathematician (in retrospect, that sentence sounds more accurate without the word "somewhat"). However, the tweet alluded to something Fermat wrote in the 17th century and well done, to @ewankirk for recognising the Fermat reference in my tweet too. To quote that fountain of all knowledge, Wikipedia, with some help from Google, Fermat claimed that he discovered a proof to the following, Fermat's Last Theorem, which states that:

no three positive integers a, b, and c satisfy the equation aⁿ + bⁿ = cⁿ for any integer value of n greater than two. The cases n = 1 and n = 2 were known to have infinitely many solutions.

However, Fermat wrote that the proof was too small to fit in the margin of the notebook he was working on. Alas, he never thought to buy another notepad to write it down... either that, or he didn't really have a proof. The theorem remained unsolved till the mid-1990s, when Andrew Wiles solved it. He was subsequently knighted recognising this great achievement. His proof amounted to around 150 pages. So Fermat was right in some respects, the proof was indeed far too big to fit into his notepad's margin.

Mathematics is often about the proof, not so much purely the statement of fact. There are many ideas which are very easy to understand in mathematics (and might seem intuitively true), but their proof is so much more difficult to articulate. Indeed, if we consider Fermat's Last Theorem, it isn't that difficult to understand what it says.

Unlike in mathematics, in markets, there is very little that we can actually "prove". We can have theories about how markets behave, we can use historical data to illustrate them. I can use statistics to show a trading strategy would have made money. We can use our intuition to judge that the conditions necessary for the strategy to make money, are likely to be there in the future (or indeed that they won't be there). But can I "prove" that you will definitely make money in the future. No.

In a sense, trading and in particular, quantitative trading (or least successful variants of it) requires a modicum of skills from many different areas. The first one is common sense. Sorry, no amount of mathematics can erase the necessity for common sense when it comes to trading.

Instead mathematics and statistics, needs common sense to guide its correct usage when trading. You may have found the best ever strategy in the world (ever, ever, really!), but a bit of common sense, might tell you that it's impossible to execute in practice or that transaction costs you've assumed are totally unreasonable. As well as common sense and a good knowledge of statistics, an ability to code is important for systmatic trading, after all, the more data you have to play with, the less likely it is that Excel will be sufficient to crunch it. Oh, and a bit of luck can help too! We might live by our median result (which we hope is above zero), but a good start is always a bit of a luck.

I can't prove any of this obviously. But if we could prove everything easily, wouldn't everything suddenly become very boring? With that, I wish you a very merry Christmas!

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 interested 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, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

20 Jan - London - Nick Firoozye - Managing Uncertainty, Mitigating Risk
29 Jan - Budapest - Robin Hanson - The Age of Em
08 Feb - London - Saeed Amen/Delaney Granizo-Mackenzie - CTA/Pairs trading (joint Thalesians/Quantopian event)

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Fed up of hikes?

In recent years, Christmas in London has been accompanied by the sparkling lights and loud sounds of Winter Wonderland in Hyde Park. I've never been to real German Christmas market, so for me this "faux" version is still a bit of a novelty and never fails to cheer me, even if it is somewhat hectic and busy. For markets, in the run up to Christmas, it hardly seems like a time of cheer and no amount of visiting Winter Wonderland is likely to change that. With the FOMC, likely to hike rates at their meeting this week, markets have already begun to feel jitters (although it could be argued that this is not all related to the potential Fed hike).

The question is, of course, should these jitters derail what seems like a done deal (at least if we consider markets pricing of the likelihood of hike)? I have no clue whatsoever, and do not for a moment claim any better reading of this than anyone else in the market! What I do know however, is that whenever the Fed would choose to hike, it will signal a sea change in monetary policy. For years the market has become accustomed to rates being on a downward trajectory, so whilst 25bps is hardly a massive move, it is more the signalling effect that the first hike will herald. To that end, the Fed have telegraphed the likelihood of a hike for an extended period, clearly attempting to prepare the ground. No one in the market should be "shocked" if the Fed does indeed end up hiking in December! This is in sharp contrast, to the taper tantrum of May 2013, when Bernanke mused about the likelihood of tapering QE: it caught the market totally unaware. The risk is of course, if the Fed fail to hike this time, after preparing the market so long, will the market really take it on board beforehand? Beware of the boy who cried Fed hike.. one too many times.

For systematic traders, the focus on the Fed hiking might well prove interesting, but by definition, they do not make discretionary decisions. They stick to what their model is telling them, and don't simply override it unless they have an extremely good reason for doing so. If you keep on making alterations to your model, you end up running a discretionary strategy! For systematic traders, perhaps a better question is asking, do events like FOMC on average favour their strategy or end up disadvantaging them, and is it dependant on whether the Fed hike or cut rates? Obviously, every FOMC meeting is different and to some extent you could argue this event is fairly unique, hiking from ZIRP, but if you have enough data, it should cover multiple hiking cycles. For instance, if you're strategy is skewed towards being long equities, you can show on average, that long equities positions perhaps well on FOMC days. However, this might not follow for all other types of models.

Good luck for the week, whichever way you choose to trade markets, whether it is from more of a discretionary perspective or using a systematic model. Most importantly have a very merry Christmas and a happy new year!

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 interested 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, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

14 Dec - New York - Yakov Amihud - The Pricing of the Illiquidity Factor's Systematic Risk (Thalesians/IAQF)

14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)
20 Jan - London - Nick Firoozye - Managing Uncertainty, Mitigating Risk

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Writing about nothing

There's a certain deliciousness in writing reams of prose which in effect say nothing, using words merely to enhance the reader's vision of the scene. This sentiment might seem ridiculous but bear with me for a moment. Just as the richness of light envelopes the human eye to enable it to see, it is through the sheer adaptability of words that a writer can render a scene in a reader's mind. To what end you might ask, is the writer's intention to labour so patiently to fashion an image from words? Surely what is important is for the writer to describe what happens, rather than to write about what is there?

My point is best illustrated by describing the difference between a photograph and a film. A photograph captures that single moment, a slither of time never to be repeated, available to us to replay again and again in a photograph whenever we want. A film does something similar, but with moments of time strung together before eyes. Suddenly, those single moments lose their significance in a film, washed up in a sea of time, sweeping away time in its path.

To truly treasure a moment, we need to recall it. If we fail to recall it, it loses its significance. To enable us to understand what could happen in the future, we need to be able to describe what we observe in the present.

The same is true of markets. A market view is not manifested from a void. It comes about through a careful observation of the present and what it could mean for the future. An inability to describe the present situation in markets in detail and indeed to be aware of the past, makes predicting the future so much more difficult. You could argue that the market did this before the last ECB meeting, somehow misreading the current situation, and thus adjusting expectations to such very stretched levels it would be difficult for Draghi to placate the market, when the ECB meeting actually arrived.

Of course, that ruthless punisher of errors, hindsight can never be beaten: we can but do our best beforehand with the information we have at that point, not after the fact. Yet to do our best, we need to sit back and take a snapshot of situation. We only have ourselves to blame if we misread the situation because we have missed something.

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 interested 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, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

14 Dec - New York - Yakov Amihud - The Pricing of the Illiquidity Factor's Systematic Risk (Thalesians/IAQF)

14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)

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Dovish hike? Our panelists' thoughts on FX

I have always been a firm believer that having discussions with other market participants is a powerful way to test your own views, both for discretionary and quant traders. Furthermore it can be an important way to understand how the market is positioned and to see how your views fit into that. As a result, over the past few years, we have organised several very lively macro panels at the Thalesians. They have been a great way to hear the views of many market experts. Furthermore, they've always been great fun.

Last Thursday, we had our latest macro panel at the Thalesians in London. I moderated an expert panel, which featured Eric Burroughs (Editor of FX Buzz - Reuters), Mark Cudmore (EM strategist - Bloomberg), Mick Grady (Multi-asset strategist & economist - Aviva), Ashraf Laidi (Strategist - Intermarket Strategy) and Jeremy Wilkinson-Smith (Independent). We touched on a number of different areas within macro markets, including the Fed, views on USD, as well as EM. We rounded off the discussion by hearing about the panellists' favourite views for the coming months in macro space.

I began the discussion by asking the panel's view on USD and the prospects of a Fed hike in December. The panel's view on the USD was perhaps more cautious than previous panels, where the view had been much more bullish. Among the panelists, there seemed to be near unanimous agreement that the Fed would hike in December. Cudmore suggested that the long USD trade is not over, however, he also believed the easy part of the USD trade is now over, and will be characterised by higher volatility. Wilkinson-Smith echoed this sentiment to some extent, noting that the risk reward is not there good for being long USD, with potential for squeezes on day of the Fed hike, especially given the possibility that the Fed would be conducting a "dovish hike".

Grady was more constructive on the dollar. Further ahead, he believed that the Fed is likely to hike more rapidly than what has been priced into the market, on the back of his more bullish view on the US economy. He also noted that his bullish USD view was helped by the Fed's policy divergence with both ECB and BoJ, which both remain in easing mode. In the short term, Burroughs suggested there was room for a short term covering rally in EUR/USD. He noted that one supporting reason was that the market was long gamma. However, following that, he could see a move back towards parity for EUR/USD. He agreed with Grady's view that the Fed could hike more than the market expected. Burroughs noted that the market is not prepared for further downside in EUR/USD, citing the median 12m forecast on Reuters is 1.05, and very few forecasting below parity, aside from Reuters' team forecast at 0.94 and a few other forecasters.

Laidi thought there was not much further downside in EUR/USD and over time spot could go higher. He suggested that the Fed would not hike in December, disagreeing with the rest of the panel. He was bearish on the US economy expecting the spectre of recession to return to the USA next year. Laidi also believed that USD strength would make it difficult for the Fed to hike. The panel broadly agreed that there wasn't much credence in the notion that the Fed would hike, purely to cut later. Wilkinson-Smith argued that if they really wanted to stimulate the economy, a more obvious path would be QE. There was also the question of the impact of the USD move as "tightening". Grady suggested that tightening due to USD strength, was equivalent to 2 to 3 rate hikes. The panel also discussed the potential reaction of equities on a Fed hike. Grady, thought that a hike would be welcomed by equities, given that it could be viewed as a vote of confidence.

On USD/JPY, there was consensus that we have already seen the high. Laidi suggested there could some downside in spot from here. Burroughs noted that the JPY is very weak on long term valuation metrics. He noted that the BoJ has been getting to limits of what more it can do. On Japanese equities, Grady was bullish, noting there was room for reallocation from retail, which was underweight.

Taking the discussion towards EM, Cudmore noted that the best performing currencies were INR, RUB and CHN (excluding ARS, which is much less liquid). Cudmore was bullish on INR, citing that it was growing strongly. He noted other opportunities in Asia, which remain comparatively cheap, such as PHP, also driven by strong growth. However, his view on EM, was not universally bullish. Notably he was bearish on ZAR and also BRL. Grady suggested that on EM, you need to pick your spots carefully. He agreed with Cudmore on the bearish BRL view citing massive current deficit and very high inflation, among other factors.

I ended the panel by asking what the panelists favourite views. Cudmore was bullish INR vs CAD. Grady saw upside in AUD/CAD, based on the differences in the non-commodity sectors, citing the green shoots in the Australian economy. Wilkinson-Smith suggested receiving AUD rates. He didn't see RBA hiking rates, with the state of their terms of trade. In FX space, he saw AUD/NOK downside, citing his constructive view on crude versus his bearishness on Australia's biggest commodities, such as iron and copper. Burroughs suggested being overweight PLN. Among Laidi's favourite views, was downside in GBP/AUD.

I hope to organise further Thalesians macro panels in the future, mostly likely in the spring. We hope to see you at the next panel!

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 interested 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, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

14 Dec - New York - Yakov Amihud - The Pricing of the Illiquidity Factor's Systematic Risk (Thalesians/IAQF)

14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)

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Another year over

So, this is Christmas
And what have you done?
Another year over
And a new one just begun - John Lennon

Time is jumping and skipping its way to that point of the year, when the current year fades into the past and the new year beckons us to the future. The lights of Christmas have begun to shine, sweeping up memories of the rest of the year in their wake. It is natural to ask, so, this is Christmas and what have you done this year?

A year might seem like a long time, before it starts. Yet, when the year is close to extinguishing, there is a realisation that it has passed quicker than you expected. The past is littered with the shadow of failure, or engraved with the glossy shine of success. The future is a place of promise unfulfilled or full of grand plans and ambition.

Whilst we should allow the conditions which allowed the past's successes to bloom into the future, it is unfortunately, all too easy to allow also the failures of the past to corrode the future, a vicious circle without an end.

A modicum of failure can however, be a necessity for success. If all you experience is success, it can lead to recklessness, a somewhat irrational view that whatever you do will be successful. A trader who has successful run, might feel somewhat infallible in the face of the market, and simply take too much risk, which magnifies his or her downside should the market turn against him or her, in an unexpected Black Swan event.

So when thinking about the coming year, treat it as canvas not yet sullied by the shadow of the past. The future is your time to shine, not to muse over what could have been, this year. Make use of the failures that have happened, and refashion them into lessons for success. And if you have indeed been successful, be cautious ahead. Just because there have been Black Swans in your past, there might well be a Golden Swan ahead!

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 interested 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, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

25 Nov - London - Panel - Macro Markets Discussion

26 Nov - Zurich - Thomas Schmelzer - Portfolio Optimization, Regression and Conic Programming

14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)

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A sunny life trading?

Let me take a guess! You're sitting in America reading this? If you are, I hope you're not too far from a burger joint I'd like to visit one of these days! Well, it's probably a fairly good guess, given the Internet traffic that comes to this website, is mostly from US IP addresses. However, wherever you are sat in the world, you'll see the same article, the same text, the same photos in front of your eyes. True there might be a marginal delay in how quickly, the webpage reaches you because of where it is hosted, but that's about it.

First, there was world of mouth, then the printed word, then the telegraph, then the telephone and now all manner of electronic ways of communicating. News now travels quicker to their destination.
For markets, it opens up the question of where should I trade? Before you had to physically be near to an exchange. That is now irrelevant, you can collocate a server physically at an exchange and login from a different continent.

So from a technology point of view it seems irrelevant where you create a trading operation. You can choose a place that is more in keeping with how you want to live. No longer does it always have to be in London or New York, the traditional financial centres. It can be in warmer climes and indeed cheaper places to run a business, like in the photo above.

However, this ignores the point that trading is still very much a human operation, whether you trade in a more discretionary or systematic way. A quantitative trader is still a person at the end of the way, a person tapping away code into a computer to make it trade. They need to be recruited somehow. Where you are based will impact the pool of talent available to you. Some colleagues can of course work remotely. But even then, do you want every one of your traders to be working remotely? The flow of ideas can be aided by technology, be it through Skype and Twitter, as examples. Yet, this approach cannot fully dispense with human contact. I've worked remotely on client projects and it has been successful, but being able to sit down and have a chat about how a project is to be put together makes the process so much quicker and easier, even when compared to using Skype (and certainly when compared to using a phone or email).

When I've presented my work to a real audience, I get far more interaction than I do sending out work via email. It's obvious why: it's just easier to respond, when the person is sitting next to you. Furthermore, being able to gauge people's expressions as you are presenting, can be invaluable in allowing you to adjust your message (if they seem puzzled, it's your job as a presenter to fix that!)

In a bigger city, the number of random interactions you have can be exponentially more, than in a small city. One thing I consider is that whilst luck is an important in trading, the luck of meeting the "right" people is potentially the most important form. I've been lucky enough to work with very smart folks in banks, and after I started working full time at the Thalesians, I've tried to make an effort to keep going to industry events, whether it is conferences or more informal Meetup groups (including the Thalesians!) to keep in contact with the market. It's been an invaluable way to compliment the more "new" ways I try to stay in the "market's loop" like Twitter or LinkedIn. Ironically as useful as Twitter or LinkedIn have been, it's been as a way to meet people in real life (yes, the traditional way!), who are in markets. Finance Twitter has been a great resource, filled with many smart people!

So yes, technology might make it easier to trade wherever you want in the world. Indeed, a place which might work for one fund, might be totally inappropriate for another. But it hasn't totally dispensed with the need to keep on meeting people in real life. Life would be very boring indeed if our interactions were confined to only 140 characters on a computer screen. Now, I just need to find a place to trade, in the sun and next to a great burger joint... any ideas for where?

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 interested 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, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

25 Nov - London - Panel - Macro Markets Discussion

26 Nov - Zurich - Thomas Schmelzer - Portfolio Optimization, Regression and Conic Programming

14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)

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