Could You Be on a Desert Island and Make Money Trading?

There are people (read: intellectual twits) who don’t understand the value in this article because the date is “2005”. They think, “It’s 2010, no good now!” The people who think like that are the same people who trust their money to the buy and hold insanity of Fidelity. Everyone gets what they want, right? Off my soapbox and onto a a great excerpt from that article:

“I [Harding] went to Sabre [first firm] because I didn’t want to sit in an investment bank and make money. I wanted to know if you could do it from outside the markets looking in. “Could you be on a desert island and make money trading?” was the question I was asking myself.” Partly this was Harding the scientist exerting an influence, as the efficient market hypothesis was a hot topic amongst academics that studied markets…”With the EMH under consideration I was very interested to know whether the very antithesis of that, technical analysis, had any truth in it. So I went to Sabre very much in the spirit of intellectual curiosity.” According to Harding the prevailing thinking at places like Wood Mackenzie was that there was no intellectual respect for technical analysis. There were a hundred analysts there, consisting of various types of serious people, and the technical analyst was isolated at the end of a row in an out-of-the-way part of the office. His craft was considered intellectually light-weight by his peers and the press. ” I remember being visited by the FT’s Barry Riley in 1988. Within a week there was a side-swipe in print along the lines of “that’s more than the whizzkids with computers can manage,” ” recalls a somewhat wearisome Harding. “But the thing is he and all the other serious investment professionals nodding sagely in agreement were wrong. No amount of looking knowledgeable and smug will make you right if you are wrong in the first place.” This attitude was something that Harding was to get used to over his career. “For eighteen of my 25 years in markets I have received intellectual scorn and derision from everyone – business school professors, senior investment professionals to experienced journalists. But thankfully now it’s different: the battle is won. The enemy is routed. All we are doing now is mopping up the stragglers.” David Harding spent two years at Sabre Fund Management, each day drawing hundreds of charts by hand, like a true craftsman. Every chart was bound into big leather folders, and in turn each chart pattern was copied into other folders. He likens it to an old-fashioned publishing house. Harding noted without irony that the company was run by accountants, and that “there certainly was method in what was done there.” He continues “I certainly regard my time there as the foundation stone of my credentials as an empiricist. There is nothing like drawing thousands of charts by hand to fix them in your mind. In fact I regard this phase of exhausting taxonomy of technical analysis as being like the relationship used to be between biology and taxonomy in the life sciences. Until something like 1830 you had gentlemen scientists collecting leaves and putting them into folders, and it wasn’t until Darwin that he and others started putting some order on it. Only by arranging data and putting it in order can you get any pattern out of it. What AHL and others have done is go beyond the taxonomy and turn trading into a real science.”


“Our sort of approach to markets is a science. It is an unpublished science, but it is a real one. You could get the thick leather bound volumes of papers on it if there was a willingness to “open the kimono”, as the horrible modern expression has it.” “The process of trading our system is like repeatedly drawing different coloured balls from the statisticians apocryphal bag. As we draw out a ball it becomes part of the track record, and we put it back in the bag, but there is no guarantee that the balls will come out in the same order in future.”

4 thoughts on “Could You Be on a Desert Island and Make Money Trading?

  1. Great information is great information, it doesn’t matter when it was written.

    Some of the best information on money management for trading was written by John Kelly in the 1950’s and extrapolated upon by Edward Thorp in the 1960’s. It wasn’t even written for the purpose of trading (originally written at Bell Labs to correct the problem of data loss over phone lines and then adapted for gambling by Thorp later on). Most fund managers (and good retail traders) still use these as the basis of their position sizing rules. In fact Thorp moved on from playing blackjack to running a successful hedge fund using the same money management algorithm.

    If you’re going to pass it by because you think it’s “old information” or “wasn’t written by a trader for trading” then you’re going to miss out on the “gold standard” of managing your risk.

  2. In SOuth Africa,after the World Cup soccer cup ended, “fundamental experts” predicted a huge drop in the local currency (the Rand) due to “currency leaving the country”.Guess what?
    The Rand has since strenghtened to its strongest level in years.This is now due to “foreigners pouring money into bond funds”.
    Of course the trend was up so logically one should have been long Rand instead of looking into the crystal ball of imaginary fundamentals!

  3. I am very happy that the large majority of traders and firms think technicians don’t know what they are talking about. The well-educated fundamentalists are what allow us to earn profits. I don’t want too many of them to acknowledge the track record and wisdom in trend following/technical trading. We need somebody on the other side of the trade so we can relax on the desert island.

  4. Michael

    I always have thought that trend following was more about simple math – but the more I look into the websites of the best trend followers it seems that the level of math is beyond any individual investors. i.e. Davivd Harding website hires scientist to develop the trend following programs.

    Do you see high level math being used in all trend followers? With high level math – I mean the basics, add, sum, multiplication, etc.

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