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Some Stats

by MoleAugust 31, 2011

Lots of noise out there. Lets keep it simple. I dont mean to post over Scott, but need this to go out today due to the FDOM (first day of month) stats. Please read Scotts post.

I (volar) just got caught up with vacation, and I always re-read my favorite books on vacation. Many traders look for trading answers, I look for understanding. What do I mean by that? Well I dont read books that tell you “how to make money.”  I suggest New Market Wizards- the piece by William Eckhardt is the best written material I know of to this day (next to some of Taleb’s stuff).

I know some of you dont like stats, but if you dont understand true market distribution, well then how can you trade? If you are betting on mean reversion you need a platykurtotic market. Go google it, I am not your mother or hired teacher. If you are a trend trader, you need a leptokutotic market.  Now, dont get me wrong, trend traders need edges; they have to be crafty to keep drawdowns low to catch the trend. This is hard, but it is necessary to traders who want to win. For those betting on mean reversion, you may win often (in little bits/pieces), but you will be bankrupt if you dont know how to get out and STAY out. I am sure there is an edge shorting mutual funds that have very consistent returns for that exact reason.

Graph:


Now lets look at the seasonal distribution of weekly returns (rolling 2 week average) for this time of year.

Go figure- not bullish, or bearish. Just utterly fat tailed.

This means that you should be careful fighting trends- IMO bollinger bands may need to be used inversely this time of year. Or if you are betting on convergence, you need to be very careful with a very tight stop.

Now on to a timely piece of data.

Notice the first day of SEP is highly positive, but has a terrible sharpe. Which means, I dont take my usual FDOM trade.

Bottom Line: the market is deceiving. You need to know why you win and why you do not. As for the FDOM, I dont see that edge in September (even tho there is a high chance we do close higher).

Best of luck trading,

-Volar


About The Author
Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • Anonymous

    First. So you are saying that September is a k-lepto-maniac and a liar?

  • Anonymous

    Thanks Volar. So tomorrow the trade is riskier than any other FDOM.

    Looks like zero will be especially useful to avoid traps tomorrow.

  • http://practicalt.blogspot.com/ Gold_Gerb

    just for the record, I looked up Platykurtic over at Investopedia.

    also Cokurtosis, Kurtosis, Leptokurtic, and more.
    I’ve lost my appetite for dinner.
    😉

  • Anonymous

    Volar, dont worry about posting over my simplified observations with your beautiful analysis. :-)

  • Hinkognito

    Brilliant analysis. Thanks for your contribution.

  • Anonymous

    Eco calendar is heavy tomorrow. We may get some nice swings.

  • http://evilspeculator.com molecool

    Damn – can’t get a word in edgewise here 😉

  • Anonymous

    GG, do you have an updated T chart for Wednesday’s action?

  • Anonymous

    “platykurtotic” Used to hear that word all the time in the prison yard. Gonna get all platykurtotic on that motherfucker!

  • jacksoo

    and……… hell GG we all sit back and let you do the hard work and then you don’t pass on the other info, what the hell is the world coming to!!!!!!  

  • Anonymous

    So what you are saying that for playing overbought/sold strategies, you need a platykurtotic market, or one with THIN TAILS? As opposed to the Taleb/Mandelbrot FAT TAIL observations?

    Also, the chapter by Eckhardt in NMW is my favorite bit of market writing off all time :-) I’ve reread it 50 times and there is hidden gems in there waiting to be rediscovered.

  • Zero % forever

    Volar
    Great Analysis.Thanks for your observation.
    We shall keep your macro view and Scotts time tested Candle chart Analysis to navigate this minefield of a market orchestrated by inbred mafosi !We are rats hanging on the tail of these elephants.

    Last week you did a VIX seasonlity analysis .If time permits chime in your thoughts on that topic.

  • Anonymous

    I can give you the nutshell seasonality… September/October are good months for markets shitting the bed

  • http://practicalt.blogspot.com/ Gold_Gerb

    TED spread, anything we should keep an eye on?

    http://stockcharts.com/h-sc/ui?s=$TED&p=D&yr=2&mn=0&dy=0&id=p77401473202

  • http://practicalt.blogspot.com/ Gold_Gerb

    well don’t blame me!
    i’m down to a paltry…(one, two, three)…comments.

  • http://practicalt.blogspot.com/ Gold_Gerb

    only for tonight.  

    Emini.
    http://tinypic.com/view.php?pic=2lbcolv&s=7

    it’s a broken inverse T.  
    failed to rollover, so you just extend the line upward.

  • Anonymous

    LMAO!

  • Anonymous

    Thanks. So you have it finishing on Sept 1st if my reading is correct?

  • http://practicalt.blogspot.com/ Gold_Gerb

    Warning: Bearish Gartley fantasies

    does anyone have a calculator, I’m no good at Geometry. I think the X is not even close.

    /ES
    http://tinypic.com/r/zmmeli/7

  • http://practicalt.blogspot.com/ Gold_Gerb

    correct.
    but let me add my tree rings DOW futures is pointing to a Sept 2nd max lift.

    so sit on your hands till the Holiday weekend passes.

  • Anonymous

    I don’t remember what Eckhardt says on this, but I think Volar is saying that in reality you have Fat tails, i.e., probability of periods of extreme returns over the mean is higher than what most people assume. People assume a somewhat faster reversion to mean as reflected in lower probability of extreme returns as reflected in thin tails which in fact is a wrong assumption in the first place.

  • Anonymous

    ROTFL. scary. :)

  • http://thefxspeculator.blogspot.com Onorio

    I got a USDCAD daily long signal

  • http://thefxspeculator.blogspot.com Onorio

    Best entry at 0.9760 with SL 1 pip bellow the pinbar

  • http://evilspeculator.com molecool

    ¤ø„¸¸„ø¤º°¨¤ø„¸¸„ø¤º°¨ 
    ¨°º¤ø„¸  N E W  „ø¤º°¨ 
    ¸„ø¤º°¨ P O S T “°º¤ø„¸
    ¸„ø¤º°¨¤ø„¸¸„ø¤º°º¤ø„¸

  • http://evilspeculator.com molecool

    Sorry Volar :-}

    I linked to both Scott’s and your post.

  • http://evilspeculator.com molecool

    Those Aussie convicts have a lot more class than I thought! 

  • Anonymous

    Volar your posts are like cheep whisky…. when I am done I have a headache! But at least with your posts I have some profit for my pain.

    You introduce math terms that are beyond me (though I will look ’em up) and I don’t fully grasp everything you say. You are dead on right that revert to mean traders really need to know when to give it up, since the more out of mean something becomes the more likely it ought (so one would think) to revert… aww c’mon revert, revert now… you know you wanna… oh crap!

    When you say BBs “may need to be used inversely” I take it you mean beware (or embrace) the embed which you conclude may be more likely at this time of year for the reasons you stated that I am not up to fully grasping.

    Mole: Stayed up late for your post — I feel compelled to go short — help! Have you been kidnapped by strippers and afflicted with the stockholm syndrome, such a tease. I will run out a get a fist full of singles! 😉

  • volar

    hehe

  • volar

    basically yes. But lets just say with a market of 8 kurtosis (ultra lepto) markets have huge tendency to have small moves that revert to the mean and gigantic moves that embed (up or down).

    or Eckhardt bot every breakout for that exact reason IMO

  • volar

    mid october is when the seasonal rally starts (Vix collapse). But we fell off early this year which makes things a bit harder to do

  • volar

    well the math just refers to  distribution. so the real market is lepto, which means fat tailed (large moves). But lets just say with a market of 8 kurtosis (ultra lepto) markets have **huge tendency** to have small moves that revert to the mean and gigantic moves that embed (up or down).

    this plays with traders mental problems. they see something with an 80% probability, but still lose. Or as scott says, the market will still F**** the most people. or consistency is the enemy of a great idea that may work

  • Anonymous

    jesus i was about to ask about you volar. i mentioned your post and was about to ask where the hell were you, i was starting to miss your insight.