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Ep. 417: Robert Carver Interview with Michael Covel on Trend Following Radio

Robert Carver
Robert Carver

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Today on Trend Following Radio Michael Covel interviews Robert Carver. Robert is author of “Systematic Trading: A unique new method for designing trading and investing systems.” He got his start in finance working at AHL. Robert started with AHL in 2001 during his final year of college. It was at this time that he was introduced to quantitative trading and began thinking of finance in a systematic way. He later went back to AHL, working there from 2006-2013.

Robert doesn’t tout systematic trading as the only way to trade. He says there are some great traders out there that aren’t systematic traders. However, the majority of people need a system to be successful. So how does Robert define a system? He says a system must be objective, repeatable, and transferable. If you can’t get the same results using a different person then it is not a true system. The rules must be transferable from one person to another and the results must be objective and repeatable. Most do not have a good understanding of statistics, and they get confused in thinking that the more complicated a system is, the better it must be.

Robert and Michael move on to discuss behavioral finance, prospect theory and the difference between trend following and high frequency trading. A high frequency trading system is harder for traders to meddle with than trend following systems. The trading time frames are much shorter in high frequency trading which lessens the opportunity for human intervention. Most traders fail because of their own meddling. If you can avoid the temptation to change your system then you will be more profitable in the long run.

Working for a company like AHL would have been interesting to see from the inside during 2008. Michael asks, “What were you seeing from the ground in 2008? How did that change you and how you viewed systems?” Robert says it showed him that people truly don’t know what is happening or going to happen. Systematic traders, including himself, were able to make money because their systems saved them. When their systems saw markets going down, stops helped them exit trades and even go short in some cases. This is where all the money was made. Robert does say there are rare times you should intervene with your trading system. For example, he was forced to modify one of his systems when he found out there was going to be a coup in Thailand and the currency was going to be suspended. It’s not that he thought he could forecast what the price was going to do better than the system, but he did know trading that market was going to be impossible. Robert says there has been maybe three other times when he has had to intervene with his system. They are rare and extreme circumstances.

In this episode of Trend Following Radio:

  • Unpredictable risk vs. Predictable risk
  • Systematic trading
  • High frequency trading vs. Trend following trading
  • Black swans
  • When to intervene with your system
  • 2008 crash

“People rarely evaluate themselves critically and properly work out how well they have done in their discretionary trading activity, and look at statistics properly to examine whether they are genuinely doing much better than a system. I think a lot of people out there are fooling themselves.” – Robert Carver

“The more complicated the notion of what your predicable risk is, the less and less you think about the un-predictable risk.” – Robert Carver

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How I Made $2,000,000 in the Stock Market by Nicolas Darvas

Excerpt:

“Hungarian by birth, Nicolas Darvas trained as an economist at the University of Budapest. Reluctant to remain in Hungary until either the Nazis or the Soviets took over, he fled at the age of 23 with a forged exit visa and fifty pounds sterling to stave off hunger in Istanbul, Turkey. During his off hours as a dancer, he read some 200 books on the market and the great speculators, spending as much as eight hours a day studying. Darvas invested his money into a couple of stocks that had been hitting their 52-week high. He was utterly surprised that the stocks continued to rise and subsequently sold them to make a large profit. His main source of stock selection was Barron’s Magazine. At the age of 39, after accumulating his fortune, Darvas documented his techniques in the book, How I Made 2,000,000 in the Stock Market. The book describes his unique “Box System”, which he used to buy and sell stocks. Darvas’ book remains a classic stock market text to this day.”

How I Made $2,000,000 in the Stock Market by Nicolas Darvas
How I Made $2,000,000 in the Stock Market by Nicolas Darvas
How I Made $2,000,000 in the Stock Market by Nicolas Darvas
How I Made $2,000,000 in the Stock Market by Nicolas Darvas

On Amazon.

Yes, the Darvis Method is a form of trend following.

Use a computer rather than your brain…

CNBC: One of the U.K.’s most successful hedge fund managers [David Harding in pic] has spoken of the benefits of using the “emotionless systematic approach”.

Covel: That’s another way of saying trend following.

David Harding
David Harding

Source: www.insidermonkey.com

Trend Following and Controlled Baseball

Feedback in:

This post [below in italics] brings up some thoughts on selling trend following. Selling the logic of how and why it works doesn’t seem to pump people up enough to get them to try it. Its a story people don’t want to listen to even if it’s true. When it comes to investing, I feel people want to buy something that caters to their laziness, them wanting to feel cool or safe. I find it funny when trend traders scratch their heads wondering why more people aren’t investing this way. But the psychology that keeps them from investing in it is the same psychology that provides trend following profits. To me, it’s an interesting paradox.

Kanri Yaku (by S. Godin): Literally, “controlled baseball.” If you’re playing this way, it’s by the numbers. The manager tells you precisely what to do, and you do it. There are algorithms for when to bunt, for when to throw a ball. And there is no room for surprise. It is ground out (not a pun), controlled and predictable. Kanri yakyu will often get you into the playoffs. It rarely means you’re going to win the big games, though. The secret is being able to play this way when you need to, but being brave enough to leap when it’s least expected. Just like your career.

Nice.

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