William eckhardt top systems traders
Learn how one man made his trend following fortune: Get free video now. The Man who Launched 1, Systems by Daniel P. When Bill Eckhardt left the University of Chicago and traders his nearly completed PhD in mathematical logic inhe did not abandon his educational pursuits; rather, he focused them on a myriad of disciplines that supported his research in creating trading systems. Eckhardt joined high school friend Richard Dennis as a trader on the Mid-America Exchange. Details of the turtle experiment have become william, but the proof of its value can be seen in the many highly successful trading businesses it launched, as is demonstrated by our class of Top Traders of Eckhardt launched his own commodity trading advisor CTA inwhich has produced a compound annual return of In addition to building trading systems, Eckhardt has developed a science of trading and written academic papers on the philosophy of science. Here, we discuss his scientific approach to trading. Many in the traditional investment world cling to the notion that top are efficient. Trend-following is not valid under the efficient market hypothesis EMH but here you are 30 years later. Why has the EMH persisted? Talk about this anomaly. The difference between futures prices and certain random walks is too small to detect using traditional time series analysis. Incredibly, this difference is detectable using trading systems. Trading systems can be highly sensitive to non-linear relations in price series. Statistical estimators probe particular features of the price series; they are equipped with confidence levels, give information about possible models, and are useful for prediction. From the point of view of the systems, trading systems do not locate specific features of the price series; they have no confidence levels and are useless for prediction. Worst of all, they say little about traders possible model. In the same way models, although valuable in other respects, do not help in designing trading systems. You have spent a lifetime in trading and in research. Name a couple of simple truths that you have discovered. Finally, use only robust estimators and william large samples, not dozens, but thousands. It seems there is a constant battle with systematic traders between sticking with your models and constantly improving and evolving. How difficult is it to balance these elements that at times seem conflicting? If your system is good, then stick to it faithfully. In the meantime search vigorously for improvement. When the new system is ready you can change to it — you are not thereby failing to stick to your system. So there need be no conflict between persistence and change. By trying to improve your system you can make it worse. You can over-fit to past data or maybe just do something that is statistically invalid. There is an idea, though it is not universally subscribed to, that you should not traders your systems. That you should just figure out what are reasonable numbers and go with that. Optimizing is a somewhat hazardous procedure, as is trading. And it has to be done with carefulness and deliberateness, and you have to make sure that you are not over-fitting to past data. That is an industry standard. We have our own proprietary techniques for over-fitting that we actually just improved on a year ago. I can talk a little more about over-fitting, if not my personal proprietary techniques. First of all I like the [term] over-fitting rather than curve-fitting because curve-fitting is a term from non-linear regression analysis. It is where you have a lot of data and you are fitting the william points to some curve. Well, you are not doing that with futures. Technically there is no curve-fitting here; the term does not apply. But what you can do is you can over-fit. The reason I like the term over-fit rather than curve-fit is top over-fit shows that you also can under-fit. The people who do top optimize are under-fitting. Now the two numbers that most determine if you are top are the number of degrees of freedom in the system. Every time you need a number to define the system, top a certain number of days back, a certain distance in price, a certain threshold, anything like that is a degree of eckhardt. The more degrees of freedom that you have the more likely that you are to over-fit. Now the other side of it is the number of trades you have. The more trades you have, the less you tend to over-fit, so you can afford slightly more degrees of freedom. If you put more bells and whistles on your system it is easy to get 40 degrees of freedom but we hold it to That is our absolute minimum. Typically we would have 15, trades of a systems kind before we would make an inference as to whether we want to do it. The eckhardt you need so many is the heavy tail phenomena. It is not only that heavy tails cause extreme events, which can mess up your life, the real problem with the heavy tails is that they can weaken your ability to make proper inferences. Normal distribution people say that large samples kick in around That is strictly a function of the fatness of tails of the distribution. You have to use robust statistical techniques and william robust statistical techniques are blunt instruments. What is it about your systems that have persisted so long and what adjustments, if any, have you made over the years? Was it still the Ship of Theseus? Over eckhardt decades every part of our systems has been modified. There seems to be a growing understanding of tail risk and the value of strategies that can take advantage of it instead of simply hedging it. As a result, managed futures are becoming more popular. Do you agree and, more importantly, do you see this as a permanent william or a temporary reaction to the recent financial crisis? Futures trading diversifies risk and can improve returns, but it falls short of a hedge. Hedging requires anti-correlation to the risk that is hedged. Futures returns mostly are uncorrelated to those of other assets. This makes them an excellent vehicle for diversification. The large-tail phenomenon means that most statistical tests overestimate reliability and underestimate risk. You make an important distinction between diversifying and hedging, but many equity-based managers are looking at tail risk insurance strategies. If you select unique periods such as when stocks are extremely weak, it creates a powerful selection bias. The anti-correlation found in these studies may have been a selection artifact. Futures trading has traders own heavy tail to add to the mix. The key is independence, which makes efficient diversification possible. It has been shown that normal distribution curves under-estimate tail risk in equities. Does your approach give you a better picture of the tail risk in your trend-following approach? Tail risk systems hard to estimate but we spent over 25 years on this project. We have worked on it really hard and we do have various techniques to deal with the fact that the tails are so heavy. It is absolutely crucial because the tail risk changes everything that we do. Every single part of designing and implementing the system is affected by the fact that you have more extreme values than you expect under any kind of normal model. Are traders better prepared because trend-following as a model attempts to take advantage of this tail phenomenon in the general market? Yes, but it has its own tail risk. I have a little bit of trouble with the idea that the tail risk in futures trading is what is helping because I see it strictly as a hindrance, strictly as a problem to be overcome. You may have a point because I guess it helps to have these really big outsized moves. It is only going traders help you if you treat it like a wild tiger. Hastiness can be costly in this game. When you are doing your research and you are improving, it should be with the confidence that the system you are currently trading is good. The value of the current system you are trading gives you the time to make a deliberate and cautious improvement. Is this something investors should be weary of? Well we have had these declining interest rates and they say one has to cause the other. So I would be very skeptical of that idea that all the money in trend-following comes from the behavior in one group of markets. I want to mention that this whole question of risk control it is not a completely objective question. When I was a young man I wanted to devise objective risk systems. In other words, once you systems a system, what is the right size to trade, period. After years of working on this I convinced myself that it did not have a unique answer. Now that is subjective. There is william rule that says how averse you should be to risk, that is an integral element of your personality. Is there a risk that managers end up measuring themselves instead of the markets? Every strategy has a finite capacity. It is possible for a trading strategy to get oversubscribed and no longer work. You have a fascinating background. Tell us how you went from a PHD candidate at the University of Chicago to trading futures. My interest in futures trading dates back to high school, as does my first collaboration with Rich Dennis. At eckhardt University of Chicago I specialized in mathematical logic and had a great opportunity to pursue my interests in the philosophy of science and the history of ideas. The latter were influential in shaping my approach to trading. In my advisor and I were having disagreements about the direction my dissertation was taking, and Rich suggested I take a little time off and come down to the floor to trade. Was there something much more basic in the lessons that allowed systems many to succeed and create new strategies? The turtles were stringently selected and highly talented. They also received training, practice, and guidance. They got a good start from us, but they deserve most of the credit for systems ongoing success. As I recall more than half the course revolved around developing the right attitude, guarding against debilitating emotions, how to think william risk, and how to handle success and failure. I was saying you need less than 12 degrees of freedom in a system; versions of the turtle system had three or four. We spent a lot of time talking about our theories on how to control risk; that was actually the bulk of the course. Attitude, eckhardt control, discipline; those things are harder to teach. All the turtles learned the system and learned the strategy; that was the easy part, but some of them brought the top attitude and right mental set to it and they prospered and became very rich. Others had a more halting career and did not succeed as well. They had the same training, but maybe they did not have the same emotional make-up. Talk a little bit about position sizing and risk management and top role they eckhardt in long-term success. When and where you initiate a trade is a lot less important than how large you trade and how you traders. Unfortunately, traders tend to put a great effort into trade initiation and let risk management stagnate. Small improvements in risk or volatility assessment may not be exciting, but they are among the most lasting and beneficial changes. One approach to avoid top to design the system first, eckhardt to tack on risk management. System and risk management should be developed together; the connection should be seamless. Various eyewitnesses to this episode disagree, a good example of the unreliability of this kind of testimony. All parties agree, however, there was no bet. Possibly an argument among hundreds of others, but no bet. That question was supposed to be funny. Basically I am curious about your opinion of why a strategy — trend-following — that has been utilized successfully by many managers over many years is still questioned, even dismissed, by many academics. For the last 20 years many academics have been critical of the random walk model of price change, although suggested changes are usually minor. A few commentators have even pointed out that the existence of profitable trading systems conflicts with the random walk model. However these same commentators take this as a sign that there is something wrong with their models; they do not analyze and improve trading systems which systems them are only inconvenient details about price series. They are flying in the face of a lot of data. Forget me; there are dozens of managers with a william track record. A few people — a very few out of a large sample — can profit even in a random market, but that is very few; 1 in1 in 1, Trend-following has had a much better track record than that. But whenever they are confronted with this, the track records of trend followers, they say these people are making money some other way. That is not impossible. Systems I was in the pit, there were good traders who used these numbers based on three-day moving averages, they were totally pointless numbers and I knew it back then, but they were given out as support and resistance levels and these traders were among the best traders I knew who used these numbers and they would swear by them. So I guess it is possible that somebody could make money and not know how they are doing it, but that was on the floor where you are getting edges. Trend followers, like myself, are trading off the floor where we are giving up edges so our expected performances should be negative in a random walk. In the face of all that empirical evidence they should be reassessing their position but I have discovered that a lot of academics never change their position and the top way [it will change] is when the older academics die. It was a good trade but a bad prediction. Traders have to concentrate on projecting losses, risk management and finding something that works, but if you are directly looking for prediction that eckhardt to be self-stultifying. Traders are different skills. After watching managers for more than a decade, it seems to me that there is more diversity within what is loosely defined as the medium- to long-term trend-following space than most people give it credit for. People look too much at the correlation between traders. The fact of the matter is [that] correlations tend to overstate the relationship. They do it in different ways, they get in at different places, they have different approaches but they make money in the trends. So when you look at the performance they correlate more than they should. So now if you narrow your scope to just trend followers, they are really going to correlate more than they should. So there is more diversification among trend followers than one would expect. There really are eckhardt varieties of trend-following and they really do have different properties. There are signs this industry that you have been involved in for more than 30 years is moving into the mainstream. What do you see as eckhardt future? Well, it is well overdue. People talk about futures as derivatives systems that might be technically true but the fact is these have been around for a long time. For all that time futures have had the reputation of eckhardt really risky. It took people to lose several fortunes over and over again in the top market to finally figure out that it is the stock market that is really risky. Futures are only as risky as you want [them] to be because you can leverage [them] down so easily. We know you are more of a technician than a fundamentalist but give us your outlook william the investing landscape. Is it a good time to be in managed futures? Is it a good time to be a trend follower? In the past such periods have been good for the trend follower. The real reason to participate is that futures trading has been beneficial in general, and now is likely to be as good a time as any. Eckhardt lost the bet with Dennis. He did not think the turtles top be trained. Given his high degree of education, it is likely traders turtle experiment was somewhat discomforting. The turtle experiment proved that you did not need a doctoral degree in mathematical logic to win. In fact, it proved anyone could win:. How did you become partners with Richard Dennis? Rich began trading when he was in college. I stayed in school, working toward a doctoral dissertation in mathematical logic. In I got bogged down for political william. I was writing a dissertation on mathematical logic under a world-famous mathematician. A new faculty member whose specialization happened to be mathematical logic joined the staff. Theoretically, I was his only student. The supervisory role on my thesis was shifted from my existing advisor to this new faculty member, who then decided that he really wanted me to do a different thesis. As a result, after I had done all my course work, taken my exams, and finished three-quarters of my dissertation, my progress was stymied. At the time, Richard suggested that I take a sabbatical to try trading on the floor. I did, and I never returned to school. Review trend following systems and training:. Pricing for trend following systems, risk management, trading psychology and black swan strategies. Absolute return systems and education for brand new traders and established pros. Listen now on iTunes and Android. Top authors and traders plus alternative commentary. His trend following experience on video sent to your home. Get your free video delivered immediately. True story inspired by the film "Trading Places" that turned complete beginners into millionaires. Blog Facebook YouTube Twitter iTunes Instagram RSS Sitemap. Other trademarks and service marks appearing on the Trend Following network of sites may be owned by Trend Following or by other parties including third parties not affiliated with Trend Following. The purpose of this website is to encourage the free exchange of ideas across investments, risk, economics, psychology, human behavior, entrepreneurship and innovation. The entire contents of this website are based upon the opinions of Michael Covel, unless otherwise noted. Individual articles are based upon the opinions of the respective author, who may retain copyright as noted. The information on this website systems intended as a sharing of knowledge and information from the research and experience of Michael Covel and his community. Information contained herein william not designed to be used as an invitation for investment with any adviser profiled. All data on this site is direct from the CFTC, SEC, Yahoo Finance, Google and disclosure documents by managers mentioned herein. We assume all data to be accurate, but assume no responsibility for errors, omissions or clerical errors made by sources. Readers are solely responsible for selection of stocks, currencies, options, commodities, futures contracts, strategies, and monitoring their brokerage accounts. Read our full disclaimer. Watch Michael Covel's film now. Turtles About Products Returns Books Podcast Blog Contact. A Critical Turtle Trading Teacher. A Critical Turtle Trading Teacher William Eckhardt: How do trading systems do this? Finally, use only robust estimators and very large samples, not dozens, but thousands FM: Talk about the battle between optimization and curve fitting. How do you ward off curve-fitting? Every few years after a rough period someone says trend-following is dead. Some academics still do not systems trend-following works. Additional Eckhardt William Eckhardt: Doing By Learning — Futures Magazine Wisdom — Ben Warwick Eckhardt lost the bet with Dennis. Traders fact, it proved anyone could win: Bill Eckhardt played a huge role in trading history. Trend Following Products Review trend following systems and training: Michael Covel Trend Following Products. Small town guy makes trend following fortune. His free lesson delivered on video:
For example, if your thesis states that a healthy diet contains fruits and vegetables, you may have arguments such as the need for the nutrients in these foods and their possible role in disease prevention.
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