Friday, June 4, 2010

Collins, Market Rap

Schadenfreude is a powerful emotion, which probably accounts for the fact that Art Collins’ Market Rap: The Odyssey of a Still-Struggling Commodity Trader (Traders Press, 2000) remains an enjoyable read. We follow him as he leaves his father’s car agency where he had in effect served an eight-year sentence as finance manager, through his stint as a failed rock star, to his arrival on the floor of the CBOT. We understand why, with a little help from his shrink, he abandons the pit for a home office. And we know from the very first page of the book that he isn’t a supertrader, that although he makes money overall “at the end of most years [his] bottom line performance isn’t too far afield of break-even.”

Collins is the author of several books, including When Supertraders Meet Kryptonite, which I wrote about back on July 27, 2009. He continues to share his market insights at Tiger Shark Trading and other trading sites.

Why should we care about this guy’s struggles? After all, might not Tolstoy’s opening line to Anna Karenina—“Happy families are all alike. Every unhappy family is unhappy in its own way.”—be equally true of traders? I suspect not. On the contrary, my hunch is that it is struggling traders who tend to be alike and successful traders who are each successful in his/her own way. But Collins has a knack for describing his struggles in sometimes memorable images, lending them an element of uniqueness.

Take, for instance, the matzo ball trade. “A matzo ball trade (the term loosely borrowed from a comment on Seinfeld), is a kind of chain reaction from hell. It’s one tiny discrepancy between a theoretical and actual execution that culminates, not just in a win turning into a loss, but a WINNN turning into a LOSSS! Like maybe the best trade of your month becoming the worst. . . . Matzos are usually near-afterthoughts; a small incorrect decision/mental lapse that could have just as easily gone one way as the other—a near-instantaneous event that punishes you for the better part of forever.” (p. 84)

Collins gives several examples of matzo ball trades, only some his own. Here’s one that occurred in the overnight yen market. An insomniac trader was poised to sell the yen. He asked for a bid/offer spread, didn’t like it, and hung up. “The next morning, the market was already off to the races toward the netherworld. In the ensuing two years, it lost over half its value; more than 50 full points, each one representing $1250. Needless to say, the trader never participated.”

Collins himself is a mechanical systems trader, and he shares some of his own creations. In style they are similar to one for the British pound: If c > average(c,10), then buy the next bar at open of tomorrow + average(range,4); exit long next bar at c-0.32. Or, an optimized n-day breakout with an exit at the n-day median. Or an S&P day fade: If the close is below the previous eight-day close, buy the next open plus 30% of the previous range on a stop. If it’s above the eight-day average, sell it at the open minus 45% of the range.

For sheer fun, he includes a chapter entitled “Fourteen Things Wrong with Trading Places.”

All in all, Market Rap is perfect summer reading for traders, all of whom struggle from time to time.

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