Opening the Kimono

A definition:

open the kimono: v. phr. to expose or reveal secrets or proprietary information.

Opening the kimono? My job (inspired by a comment in an earlier post).

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57 thoughts on “Opening the Kimono

  1. Well I hope you do. The last week has convinced me that I don’t have any idea what I’m doing, and neither do the three other advisory services that I pay too much for. I’m not losing big because I’m quick to get out when I realize I’m wrong, but I seem incapable of trading the “trend”, as I currently understand trends. Today’s gap just should not not have happened. Yes, I know the market does not do the things it’s supposed to do, but when 90% of the moves are made at 3 am, you approach the NY opening from a purely reactive mode.

    At any rate, I’m willing to keep an open mind, because my current way of thinking it making no one any money other then Schwab.

  2. John: If you are trend trading the equity markets only, good luck. As a trend trader, I have come to understand the importance of trading various equity international equity markets, US bonds, emerging market bonds, commodities, real estate, gold and currencies all with ETF’s. The result has been a much smoother equity curve with a smaller drawdown than I was used too. I use leverage but I sleep well at night given the range of markets I trade.

  3. I know the market does not do the things it’s supposed to do

    Wrong. The market does exactly what it’s supposed to do unless it’s being artifcially interferred with. If there’s more buyers than sellers the market moves up, if there are more sellers than buyers it moves down. The market gapped up the other day because there were far more buyers than sellers, this is how its supposed to work. How can you say that should have “not not happened”? You are implying that there were more sellers than buyers at the open, how do you know that?
    Where did you get that data from?

  4. Thanks. btw, by artificial interference I mean things like cicuit breakers, uptick rules, etc. Things that physically prevent people from taking positions that they want to take.

  5. Trader Ken says: “Wrong. The market does exactly what it’s supposed to do unless it’s being artifcially interferred with.”

    Correct… like the Japanese government interfering in the currency market last night, revaluing the Yen by selling large amounts of it and buying U.S. Dollars to try and stop their currency from getting stronger and slowing down their export based economy. This has ripple effects across all global markets.

  6. Actually Jim, no, that’s not the type of interference I meant. Im specifically talking about things that affect the mechanisms of the market. Not talking about policy influences, etc. If the Japanese govt wants to sell Yen then that creates lots of selling pressure. If the selling pressure is greater than the buying pressure then the price will drop, that is what the market is supposed to do.

  7. Trader Ken. Relax. My comment “I know the market does not do the things it’s supposed to do” was an expression of frustration. I never claimed it was a statement of fact based on empirical evidence. OK?

  8. Yes John I know, and that’s exactly my point. I think if people focused more on the empirical evidence of the market, buying and selling pressure as measured by the price, then they would do a lot better.

  9. I thought Ken’s point was that intervention or not, from a trend following perspective its irrelevant? Meaning, and I give David Harding props for this, if we were all on a desert island, and all we had was price data — everything is already baked in — so actually it is the way markets work.

    Philosophically, of course Jim — I agree.

    Folks talking past each other here 🙂

  10. Actually I’d say it was just the opposite… something like the market “uptick rule” that Ken mentions is part of a level playing field… everyone has to deal with it and they know about it before it happens. An intervention by a government is a “surprise” outright manipulation, pure and simple. It’s not “irrelevant” for trend followers or anyone else, except the government that is manipulating the price.

  11. Oh, and it’s actually very relevant for trend followers because the intervention is ALWAYS in the opposite direction of a long term established trend.

  12. Jim, it is relevant in the political sense that I agree with you. It is irrelevant from a trend following trading perspective since intervention is nothing to new … and to say it’s relevant says to me that I would need to build in ‘something’ to account for it in a trend following system … which is not doable.

    Does it suck? Yes. Is it new? No.

  13. Further, I personally maintain that since the dot com bubble there has been more government monkey business than ever before … and if we can ever get past a government dedicated to propping up the Dow (read: saving Fidelity and Buffett’s behinds) — trend following will enter a golden age of returns.

  14. Here’s the original statement: “Wrong. The market does exactly what it’s supposed to do unless it’s being artificially interferred (sic) with.”

    Explain to me how what I discussed is not artificial interference with the market. I’ll say it again… it’s the ultimate in artificial interference.

    As far as relevance is concerned, watching a 75% profit in open equity reduced to 35% in a matter of minutes is relevant no matter what your style of trading is. At least I only lost “paper”… many lost large amounts of real cash.

    Again, not saying you or I can do anything about it, but the subject was interfering with markets, not how to put a rule into a trading system to avoid it.

  15. There’s a HUGE difference between government regulation (again, known about ahead of time and everyone has to play by the same rules) and a government minting a large amount of currency for the sole purpose of manipulating prices; the price of not only their own currency but the currency they choose to buy with it (in this case the U.S. Dollar). This is not announced ahead of time and is done with the intention of causing interference with the marketplace and the balance of trade.

    If you think these are the same things you need to think a little harder.

  16. Yeah, as Michael is saying, I am speaking purely from a trading perspective. Markets are buying pressure and selling pressure, period. I was making an exception for interference of the type where people are blocked from making trades. In that case the market really isn’t reflecting the true buying/selling pressure of all those who want to participate. But, yes, from a pure trend following perspective even that doesn’t matter.

  17. Ken, this isn’t just pressure from “selling some Yen”. You (and Michael) obviously have your own opinions and are welcome to them, but if you don’t understand how this is the ultimate in market manipulation and interference, way ahead of any kind of “uptick rule” or government regulation, then you are fooling yourself.

  18. “This is not announced ahead of time and is done with the intention of causing interference with the marketplace and the balance of trade.”

    I know Jim, and I agree, but what does that have to do with a trend following system? Trend followers for decades have been plowing on and making money through assorted manipulations, etc.

  19. Jim, I understand that it is the “ultimate in market manipulation and interference” and agree, but how does it matter if you are trend following trader using price data to trade? If it matters, then you or someone has to build something into a trend following system to account for it. Bottom line, there will ALWAYS be some manipulation as long as governments with people exist, and it sucks.

    There are two lines of discussion going on here:

    1. The philosophical role of too much government. Bad in my view.

    2. The reality of trading a price-based trend following system — where government manipulation is irrelevant. It only becomes relevant if it completely wipes out all trend following performance permanently. So far, that has not happened.

  20. Did you really just ask me how manipulating the price of a currency affects you if you’re using price data to trade the currency market?

  21. Michael, my understanding of trend following is as good as yours. In fact I’ve been using trend following as a trading method since the time you were only an internet marketer just beginning to learn what trend following was. While I’m not (and never will be) in the camp of people who discount your contribution to trend following and trading in general because of this fact, I’m not going to allow you to keep attempting to change the original subject to something else because you’re now an “authority” on it.

  22. Trader Jim says: “This [devaluation of the Yen] is not announced ahead of time and is done with the intention of causing interference with the marketplace and the balance of trade.”

    TJ…Actually the Japanese government DID suggest it would devalue the Yen after Japanese manufacturers approached them a while back — I think August 29. As the country has a long history of devaluing their currency, this was a shot across the bow that caused me to close out my trade and look for something else. The USD/JPY spiked that night and I believe it wasn’t an accident…Just as the fat finger of May 6 in the equity markets was no accident. These spikes are warnings to me, and so far they’ve been accurate bellringers of trend changes.

    Cheers.

  23. Jim, I am not attempting to change any subject or back any view, nor am I even worried about what was debated or talked about earlier in the thread. I get all too well what government intervention does to trend following performance, but that is not new.

    Do I like it? No. Does it happen? Of course. Is it really bad now? Of course.

    So now what? If you, or anyone, sits down to trade a price-based trend following system what can you do about it in the trading system process? Day to day? How does it affect when you buy, sell, how much? I know it affects you big picture, but how does it affect the act of when you place buy signals, sell signals, ATR adjustments, etc.?

    I am not saying it doesn’t affect trend following, I am saying everyone already knows that as they put money to work with trend following.

    Not sure what you are arguing with me about honestly! Not putting a controversial view out there by any measure. It’s a view that everyone who I have ever met or talked with in the space agrees with.

    I get the feeling you are reading my words and taking a different message.

  24. But DG even as you heard the news … unless it was a variable in your system … there was not really a way to use the information?

  25. DG…

    If I believed everything that was “suggested” in the news then I’d be a fundamental trader, not a trend follower.

    I’m also well aware of the Japanese history of revaluing currency, having traded through these since the early 90s. Just because they have a history of it doesn’t mean it isn’t market manipulation. Again, “market interference” that’s the comment being discussed here.

    Besides, saying you “may” do something isn’t the same as actually doing it. The fact is it WAS done without being announced ahead of time. And there will most likely be more in the coming days and weeks. The only reason it was alluded to in the Japanese media at all was political. The political party that won the election actually intervened after running on a platform of saying they probably wouldn’t intervene if elected. So I guess politicians are the same no matter where you live 🙂

  26. Michael says: “I get the feeling you are reading my words and taking a different message.”

    No Michael, I’m not. I’m reading what you are writing “loud and clear” and telling you that you are interjecting things into my comment that don’t belong. My response was to Ken’s quote about the market being the market unless it is interfered with, or manipulated. No trading methodology, including trend following, was discussed during my comment.

    I know you are passionate about the subject of trend following (as I am… I make a nice living by trading my trend following system), but believe it or not sometimes people comment about subjects that are not necessarily directly related to trend following, even on a site dedicated to it. Market manipulation affects everyone who trades, trend follower or not.

  27. Ken, I like you a lot but you’re arguing in an empty room. If you would take 2 seconds to stop and read what I’ve actually wrote you’d come to the same conclusion that Michael did.

  28. Ken, it is irrelevant to figuring volatility to size a trade, but too much of it definitely drops performance down. If we did not see the Fed intervention since 01 … the performance would have been insane.

  29. “The difference is that in one case traders are being blocked from placing trades, in the other they aren’t.”

    In one case the regulations are already in place and known before a trade is ever opened… in the other a trader is blindsided and his capital can disappear in a matter of minutes. Explain to me again how “uptick rules” are the worse of the two?

    There’s also a difference in trading reality and trading fantasy. Unless you’re a scalper you’re not trying to enter a trade during an intervention… and oh yeah, with the widening of spreads and volatility good luck getting an order through to your broker.

    Interference is interference… no matter what the

  30. I really don’t want to debate which is a worse type of interference because its irrelevant to the main point I was trying to make. But I will say that if you block too many people from the market then you really have no market. A govt manipulated market is still a market and people can decide whether they want to participate or not.
    But to tell people they cant place a trade in this direction or that direction, I think thats just criminal.

  31. “A govt manipulated market is still a market and people can decide whether they want to participate or not.”

    Yes, in regards to regulation. Not in regards to completely changing the value of something in a matter of seconds with no prior warning.

    Ken, I’m not arguing which is worse… that’s just my opinion. What I’m arguing is that you think an intervention is not market interference… and in that case you are dead wrong.

  32. “If the Japanese govt wants to sell Yen then that creates lots of selling pressure. If the selling pressure is greater than the buying pressure then the price will drop, that is what the market is supposed to do.”

  33. Either you don’t know what an intervention is or you don’t think an intervention is market manipulation… which is it?

  34. It’s neither Jim, I honestly don’t know what you are talking about. As I said before, from a trend following perspective, govt intervention is irrelevant. It’s not in the equation.

  35. “I’m specifically talking about things that affect the mechanisms of the market.”

    So I guess I’m not understanding what you said here either?

    Again… interference is interference.

  36. And just to be clear, I do think intervention is market interference. I do think the govt selling Yen is intervention, and I do think intervention is market manipulation. So I dont really know what you are debating because I agree with most of what you are saying.

  37. Well you weren’t before… and neither was Michael.

    We all have our differing opinions, but you can’t make facts into opinions or vice versa.

  38. Yes I was before. I can only assume you are misinterpreting my statements. An interpretation is not a fact. You still have not shown me exactly where I said “intervention is not market interference” or “intervention is not market manipulation”. Show me where I said that.

  39. Ken, you can continue to spin this anyway you like, but the quotes I’ve provided above show that you were writing it off as the government “selling Yen”. If you agreed with me in the beginning there wouldn’t be 51 comments on this thread right now. I’m not “misinterpreting” anything, and if I was you could have cleared that up originally by stating so instead of continuing to debate the issue (which didn’t include how it affects trend following either).

  40. What Im saying is that govt intervention does not interfere with the mechanical functioning of the market, the market is still responding to buying/selling pressure and that’s what a market is supposed to do. Uptick rules, circuit breakers, lock limits, etc. do interfere with the mechanical functioning of the market. In those cases the market is not doing what it’s supposed to do because buying/selling pressure is being artificially interferred with.

    My main point is that most people would do better if they realized that as long as a market is responding to buying and selling pressure (and not worry about where that pressure is coming from) then the market is doing what it is supposed to do from a mechanical perspective.

  41. @TJ

    You have a lot of great insights!

    I should clarify…I did NOT respond to the Japanese announcement that they were going to interfere in the Yen (I agree, that would be fundamental analysis based on advertising…the worst kind!)…I responded to the spike in the dollar that occurred on the chart on Aug 29. I’ve just found it dangerous in the past to ignore these spikes…which a lot of traders do. It’s just one more piece of price information coming off the page.

    And as for the Japanese having a history of interference…well, if you’re going swimming, it’s good to know there’s gators in the water. To ignore the dangers of a a potential Japanese response to a lengthy downward USD/JPY is dangerous…see any description of currency trades by Soros, a “trendfollower” who often anticipates the beginning and end of his trades by assuming some form of government interference at some point.

    Cheers

  42. Wow!
    As a novice, following intense debate between experienced guys deepens my learning – interesting as hell.
    Question (respectfully): Is Trader Jim overtrading?
    I’m learning to limit bet size, place sane stops, & use breakouts of a certain length to enter.
    I may get limit-days where I get screwed, but I think (hope?) I’d avoid a 75% loss.
    My challenge is to follow rules I’ve learned.
    Once, to deal with fear of heights, I took up sport parachuting; learned an instructor got killed, broke a simple rule (fling away the ripcord – he kept his $10. item, & it tangled his chutes).
    Nobody else ever died there.
    Trying to stay alive…

  43. Was it the Japanese girl? Do I need more pictures of good looking women? That gets the blood boiling? 🙂

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