publication

People
» TRADERS´: Financials markets are not exactly where your
career started. When did you first hear about the markets
and trading
Kaufman: After leaving aerospace in 1970, I started
my own computer company. We were automating
government medical reimbursements (had I known, I
should have stayed in that field!). Someone came to us
and asked if we could research a way to hedge options.
At that time there was really nothing done on a computer
and the only options were London. IBM wasn’t interested,
so they found someone with mathematical background.
We did that and one thing led to another.
TRADERS´: What was the reason to change your career and
stay with financial markets
Kaufman: After the options project we had a client who
challenged us to beat him trading the market using
mathematics. We were to get a large percentage of
anything we could earn better than him. That was 1972.
We did really well, hitting the Russian wheat deal in
1973 that drove grains up 300 per cent. Unfortunately,
we didn’t beat him because everyone does well in a bull
market. But I was hooked on the markets by then and
never looked anywhere else.
TRADERS´: Over the years and with your growing expertise,
what did you learn and how did you change in the way you
approach the markets
Kaufman: A big question. I’ve learned a lot about the markets
but overall have come full circle. I’ve developed every type
of system, fast and slow, done well
with most, badly with a few, but in
the end, I prefer trading the trend. I F1) Levels of Noise
have learned that markets are more
complex now. Well, actually they’re
noisier. When I started in the 70’s
you could make money with a 10-day
moving average. Over the years the
noise has increased and you need to
trade slower and slower trends. And
you capture less of the move. Still, the
trend finds the big economic moves
which always exist. It’s not the only
method that works, but it’s the safest.
the same technical systems that I offer to clients. I liked
discretionary trading but, for me, it goes in streaks. I can
make money for weeks at a time, then go off and can’t
seem to get anything right. And it’s tiring. Since I’m lucky
enough to be good at both math and computers, I’ve found
that I’m happy to be the turtle and not the hare. Technical
systems aren’t perfect but they are good over time, and
have greater predictability. That’s enough for me.
TRADERS´: From a systematic trading point of view, how do
huge market participants play their game to keep an edge
over their competition
Kaufman: A good question. My experience is that the
biggest players can be either discretionary or algorithmic,
but the bulk of them are algorithmic. And, they are mostly
trend followers. They can get the liquidity they need
because long-term trends don’t change positions very
often. And, they can average in over a week or more so
they don’t push the market. They can also have a large
number of faster strategies, because you can’t trade a lot
on a faster strategy, but you can gain diversification.
Keeping an edge is more difficult. You can see from
the published performance that the big companies often
have similar profits and losses each month. Some of them
will put greater weight in one sector, say interest rates,
but that also increases their risk. My own preference is
equal weighting wherever possible, because I don’t know
anyone who has successfully predicted which sector will
be the best performer next time. So you need to take
greater risk to separate yourself from the competition. Or,
TRADERS´: Did you ever get into
discretionary trading, as well
Kaufman: Yes, I did discretionary
trading early on and traded for
myself. I still trade for myself but I use
Figure 1 shows several paths for the exact same result (price rising from $440 to $475). The difference,
however, is the volatility, or noise on the way.
Source: www.kaufmansignals.com
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