Monday, January 6, 2014

Carr, Market-Neutral Trading

Thomas Carr is the CEO of an advisory and trader training service, designer of a MetaStock add-on toolkit, and partner in an investment firm. Known online as Dr. Stoxx, he is the author of Trend Trading for a Living and Micro-Trend Trading for Daily Income. His latest work is Market-Neutral Trading: Combining Technical and Fundamental Analysis into 7 Long-Short Trading Systems (McGraw-Hill, 2014).

Carr is an excellent marketer which, as might be expected, is the downside of this book. Without the tools that he sells, the reader cannot implement all of the book’s strategies. He may not even gain the confidence to trade any of them since Carr admits that “blindly following a set of systems” doesn’t work. When real money was on the line, he traded “in a very detached, mechanical fashion” and lost a lot of money—both in his own account and in a small fund for clients. By contrast, he made a lot of virtual money for the subscribers of his newsletters. The difference (aside from the obvious real vs. paper money distinction) was that he added discretion when making calls for his newsletters. He applied “God-given skills of discretionary analysis, skills that [had] been honed by years of apprenticeship under some of the great masters of the game, in addition to a long slog of real-time, real-money trading experience.” (p. 131) How does a trader learn the discretion that is necessary to make trading systems profitable? “You need to find a mentor who already has it and sit by their side for a while.” (p. 134) Yes, Carr is also a mentor.

Now that you know that, without a further outlay of funds to Carr, you won’t be able to trade all of the systems described in this book and that, even if you can trade them all, you will still lose money if you don’t overlay them with a large dose of discretion (gained only by spending still more money), what does this book have to offer?

Carr essentially suggests that the individual investor set up his own long-short hedge fund. He introduces the reader to the potential for double alpha—long-short pairings that will render the account as a whole profitable over time. The minimal expectation is for an outperformance of the long portfolio over the short portfolio during rising markets and the outperformance of the short portfolio over the long portfolio during falling markets. “The maximal expectation, which historical performance demonstrates to be a reasonable one, is that both sides of the system, long and short, will be profitable over time, regardless of general market direction.” (p. 17)

Carr does not himself use the word “hedge” to describe his market-neutral strategies. He views hedging as “paying an insurance premium: It is a pain to pay it each month, but you are glad to have the coverage when disaster strikes. The trading we teach here, on the other hand, operates from a very different mindset. If hedging is about paying a premium to buy down the risk inherent in your market exposure, our trading is about reducing risk without having to pay a premium. Hedging is motivated by the fear of substantial losses. Our trading is motivated by the quest for double alpha gains.”(p. 18)

Carr introduces seven systems—four fundamentals-based and three technicals-based. They are the Piotroski F-Score system, the earnings estimate revision system (Zacks), the O’Neil CAN-SLIM system, the Carr hybrid system, the blue sky/blue sea system, the pullback/relief rally system, and the mean reversion system. He points the reader to several free or modestly priced online tools that will help with some of the scans underlying these systems.

Long-short strategies are tricky to pull off. But investors who want to venture into this kind of “market neutral trading” without handing their money over to a hedge fund manager will find some helpful hints in Carr’s book. They will, however, still have a lot of work cut out for them.

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