Sunday, June 08, 2008

Knowing When to Turn It Off

One of the highlights of my recent swing through the Pacific Northwest has been a visit with Henry Carstens and his lovely family. In case you're not aware, Henry has quietly build a premiere website featuring his well-researched market forecasts; his guides to testing out trading ideas; and a wealth of trading ideas. What you don't find on his site is self-promotion; nor do you find his (thinly supported) opinions on politics, the economy, Federal Reserve policy, or the latest batch of government statistics. His site is not about *him*; it is about *ideas*. And that, of course, speaks volumes about him.

So why has Henry been successful over the eight or so years I've been privileged to know him, supporting himself and his family with his trading and system development? One reason that struck me early in our conversation is his emphasis on when to shut down his trading systems. He does not view his edge as a particular trading idea or system. Rather, his edge can be found in his ability to find fresh market patterns and build them into new trading ideas and systems.

This confidence in his ability enables him to accept with equanimity the fact that the performance of all such ideas rises and falls, with many systems possessing a limited shelf life. Markets change as their dominant participants change, and with those changes there is a kind of Darwinian process that renders some ideas extinct, while others flourish. The ability to stay on top of this evolutionary process is Henry's true edge.

But psychologically, Henry embraces the failure of his ideas. He is prepared--cognitively and emotionally--to turn off his systems when they no longer perform up to their historical norms. At the same time, he is always on the prowl for new ideas. In between friendly chit-chat, he was eager during our visit to talk about trading and what is making markets move.

Not all traders are system developers such as Henry. But all traders do need the ability to turn off their trading at some times. Perhaps it's a time of day when things are thin and slow; perhaps it's a period of greatly altered trend or volatility. The ability to turn off trading and refresh ideas is itself one's way of adapting to changing markets. The trading dinosaurs don't know how to turn it off. They either *need* to trade (for psychological and/or emotional reasons), or they haven't developed the competency to refresh their market views and trading approaches.

It is one of life's little paradoxes that the ability to shut down trading is what facilitates long-term trading success. But that success only occurs when the shut down period is accompanied by creativity: fresh looks at markets that allow for new strategies, new adaptations to emerging market patterns.


Testing Trading Ideas

Keys to Trading Success

Designing Trading Strategies


Ryan said...

Great post, Doc.

At this point in my young career (4 years) I've determined that the ability to adapt is the most important element of my job as a hedge fund manager. Put differently, developing profitable systems isn't enough. You must be able to identify when you're systems have lost their edge in order to be successful in the long-term. I don't know how to do this yet, but at least I've come to recognize that it's important.


Red Hue said...


As a meteorologist, I often find the similarities between trading and forecasting intriguing. If I just replace a few key words in your posts...I find forecasting wisdom rather than trading wisdom...for instance..."fresh looks at markets that allow for new strategies, new adaptations to emerging market patterns," Becomes: "fresh looks at forecasting that allow for new methods, new adaptions to emerging weather patterns."

Recognizing when a new weather pattern is taking place and the need to adpat to it is a big part of forecasting...I often read your blog for insights and clarity.

Thanks much!

Thanks much for an insightful resource!

Brett Steenbarger, Ph.D. said...

Hi Ryan,

Yes, this is crucial: to be able to track when your results significantly vary from historical norms--


Brett Steenbarger, Ph.D. said...

Hi Red Hue,

Fascinating parallel! Thanks--