What I like about Ray Dalio

I like The New Yorker piece on Ray Dalio. He is the founder of Bridgewater Assoiates, one of the largest hedge funds today, known for its success in exploiting economic inefficiencies. Here's what really caught my attention:

"
... Dalio doesn’t rely solely on software. Unless he and Jensen and Prince agree that a certain trade makes sense, the firm doesn’t make it. 

...“When I’m thinking, ‘What is going on today?,’ I also need to make the connection to ‘How does what is happening today fit into our framework for making this decision?’  

...“I hear a lot of people describing what’s happening today without the proper historical context and without the framework of how the machine works,” he says. 
"

A number of people popped up in my mind as soon as I came across that passage. The reason that most people do not have an edge in trading the markets successfully, lies in their unwillingness to think on a deeper level.Oh well.

Neural Network C# source code (free)

I stumbled upon Dynamic Notions by John Wakefield where he applies a Backpropogation Neural Network to gain an edge in race track, financial betting. Wakefield has made the entire code sample available in this post along with pretty simple guide lines.

What's really cool here is how he's able to graphically display the data separation, i.e. classification (e.g. up or down predictions) process, which usually runs with mathematical complexity. The user can then visually understand, somewhat, of what the numbers are doing.

Managing Black Swan Risks

Just took a glimpse at Woodshedder's Blog around S&P500 moves following 1.5% up days, and we could see how utilizing these stats alone would have done OK trading the SPY, until 2008. This is a pretty clear cut example for risk management techniques on top of exploiting a money making logic.

Ways to manage risks

1) Options: If the expected net profits are large enough, the trader could use SPY/index/VIX options to hedge against significant moves against the positions. Check out the CBOE tutorial if you're not familiar with these.

2) Hard Stop Exit: Taking a loss earlier is always better if it improves the over all expected return per trade. So where should be stop price levels be? Empirical optimization is probably the most practical manner of getting the answer.

3) Never holding position over session breaks: Yes, intra-session trading holds LESS risk than holding positions overnight (for someone who knows what they're doing), due to the simple fact that positions could be closed without any surprise moves from lunch/overnight gaps.

VIX futures growing in popularity

I've mentioned some stylized facts around VIX behavior, and one way to exploit these statistics is to trade VIX futures. Here we have Ben Londergan, CEO, Group One Trading (also with a Math background) explaining how VIX futures have grown so much in the past few years.

Market making automation with game theory

We have seen in Adaptive Strategies for High Frequency Trading a a very basic sample market making strategy along with some forecasting techniques. Here's an interesting presentation where Algorithmic Game Theory is applied to numerically optimize (maximizing minimum profit while minimizing cost) Market Making strategies.

Cold Fusion: suppressed tech or hot air?

"
Cold fusion refers to a proposed nuclear fusion process of unknown mechanism offered to explain a group of disputed experimental results first reported by Martin Fleischmann and Stanley Pons. Cold fusion, under this definition, was first announced on March 23, 1989, when Fleischmann and Pons reported producing nuclear fusion in a tabletop experiment involving electrolysis of heavy water on a palladium (Pd) electrode. They reported anomalous heat production ("excess heat") of a magnitude they asserted would defy explanation except in terms of nuclear processes. They further reported measuring small amounts of nuclear reaction byproducts, including neutrons and tritium. These reports raised hopes of a cheap and abundant source of energy.

http://en.wikipedia.org/wiki/Cold_fusion
"