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www.tradersonline-mag.com 04.2014
F2) Noise Ranking of Asian Markets 2005-2010
Kaufman: That would seem easy to
answer: “Because it’s not making
money!” but actually, that’s a
difficult question. Theoretically, we
design a trading program to have a
specific level of risk, measured by
the annualized volatility of returns.
For the futures industry, that’s about
14 per cent, equal to one standard
deviation. So there is a 16 per cent
chance (the left tail) that we’ll see a
loss of more than 14 per cent during
one year. It’s also possible that we
could see a loss twice as large. The
real problem is deciding if that’s
a “normal” loss or whether the
program is no longer working. To
This figure shows several Asian markets sorted for their noise levels. The more mature markets (Japan and find that out, you need to dig deeper
Hong Kong), are the noisiest while the less traded ones (Sri Lanka and Vietnam), are the trendiest.
into the frequency of losses, the
Source: www.kaufmansignals.com
duration, and other statistics. I lean
towards frequency of losses to tell
me that something is wrong. In the
if you’re really smart, you will be the first to find another end you could say “It still could be normal,” but I favour
new way of trading, like high-frequency trading, but that deleveraging when I’m uncertain about the program,
doesn’t happen often.
or when we reach a 1.5 standard deviation loss. In that
sense we manage the “business risk,” that is, both the
TRADERS´: How do you recognise a system you’re using is investor and I want to stay in business. I will give up some
not working profitably anymore
potential profits until I either decide that the program is
fine, or it continues to deteriorate. By
the way, the solution to that problem
F3) Information Ratio, Sorted Highest to Lowest, All Futures from 1990
is still the most elusive.
TRADERS´: In the way markets function,
do you see any consistent edges for
retail traders over the big guys
Kaufman: Yes, retail traders are
more flexible because they can get
in and out of the market without
anyone noticing. They can trade
equal risk in stocks because their
positions are small. The big traders
can’t even trade some opportunities
because they would move the
market too much with the position
size they need.
The U.S. and European index markets are the noisiest. So you want to favour mean reversion systems for
those markets on the right of the chart, and trend systems for those on the left.
Source: www.kaufmansignals.com
TRADERS´: You were already using
moving averages in the 1970s. Many
traders use these concepts today. Do
you still see value in such methods
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