Risk Is Quite Easy To Measure
Quadriga Asset Management
Author: Dave Jennings
Last Update: , :
|'There's nothing to learn from history.' 'All the information is already priced in.' 'The market is always right.' Armed with these and other postulates of technical analysis and some advanced trading software, Cristian Baha rides his Quadriga Superfund up the treacherous road of managed futures.
||Quadriga Asset Management|
Q: Based on my sources in the commodities brokerage community, the rally in sugar last year was due more to technical factors rather than fundamentals. The world has much more sugar than it can possibly consume.
Absolutely, I agree. Our opinion about such markets generally is that technical factors are always more important because you trade the market at the market price and you don't trade the fundamentals. You cannot buy or sell on the basis of the fundamental information. You have to always buy or sell at the market price. All the fundamentals, the information, the analyst opinions are already included in the numbers on the charts. Therefore, we just analyze using our Quadriga trading application and the only information that is important for us is the technical information. We say all the information is already in the market. For example, if there is an OPEC meeting, this information is already reflected.
Q: Then what influences price moves in futures markets?
Big market participants, the big players, really affect the market. They normally don't talk about what they do. But, if you look at the charts, you really can see that there is something going on. Is the market going up or going down? There is the bottom. There is the high or low. This is the first information you look at to see what's going on and what the major market participants are really doing. This is the only information we believe you should use to generate your buy and sell signals, your stops and all the other indicators you use for defining buying or selling opportunities.
Q: Richard D. Wyckoff was an early pioneer in technical analysis who believed price movements was largely the result of major operatorís buy and sell decisions.
The principles have always worked in the same way since the beginning of the first exchanges and markets. The thing that investors really don't want to believe is that the market is always right. A lot of times you hear good news but the market is already going down. But the market is always right. You can never have any argument against the market. You have to follow the trend. Either it's an up trend or a down trend. Actually we don't care. But a very important point to remember is not to find just the one right trade or the one right signal or pattern. It is more important to have diversification in the markets that you're trading in. That is the reason also why we trade over 100 very liquid futures markets that do not correlate with each other. The risk you put on each of your positions when you establish a trade is not more than one percent in Superfund Share Class A, or 1.5 percent in the Superfund Share Class B of the net assets we are managing. We never risk more in any kind of position when we enter a market. This is very important. It's called money management or risk management.
Q: You are describing procedures used by highly successful traders.
Risk management is essential when the trade is not successful. The computer models don't worry if they get stopped out. The computer is used to realizing losses. It's the major rule to realize a loss. No problem to lose. If you never lose, you cannot win. But, make sure the losses are always small and let the profits run on the other hand. If you fully automate how you implement all this diversification: when to enter the market, when to exit with the stop loss technique, money management or how much you will enter on each trade, then you will have a fully-automatic trading system. This type of system is what we are using and is what we developed. The rules were implemented in a way so that risk will be kept small. Our capital preservation is more important than capital maximization. To trade futures is quite dangerous for inexperienced investors. A person can put just a one or two percent margin on a trading account and utilize leverage of 50 or 100 times. It can be very dangerous. Risk management, I think, is the most important aspect when trading futures. All the successful hedge fund or managed futures managers know this and trade this point very carefully.
Q: How much data did you collect over how many decades to determine how to manage risk?
The risk is not measured by the number of decades or historic data. Just look at the volatility of each of the markets that you're trading. The more volatile the market, the less the position size can be because the stop has to be farther away. You don't want to get stopped out because of daily volatility. Therefore, the stop has to be farther away and your position size has to be much smaller because you never want to risk more than one percent of your assets in any one trade. Depending on the volatility of the market, you determine your position size. In our case, we did a lot of system testing. This is important for how to generate the signals for getting into a trade or how to get out. In most of the cases, we are flat. That means we take no position. We only take strong signals in the market.
Q: In other words, the computer is programmed to recognize certain signals to buy and/or sell. Otherwise, it folds up its arms and does nothing?
Humans try this. Some are successful. Most arenít. Trading in and of itself is an emotional exercise.
That is true. But it shouldn't be emotional because then you can lose a fortune.
Q: What I have learned of some people that want to get their most bang for their buck is their expectations are such that they want to hit a homerun each time.
That is impossible, actually. Only 50 percent of our trades are profitable. Every second trade is positive. Every first one is negative. But the negative ones are quite small losses compared to the profitable ones.
Q: You always lose less money in a losing trade. The profits are always greater over the long haul -- easy to say but hard to do for an individual. I guess that's why you use a machine.
Right. We want to exclude human emotions completely. This is only possible if you rely 100 percent on your computer programs. Human feelings donít need to be involved. You should stay out of that.
Q: Managers Iíve interviewed that use quantitative models, they say there are only 24 hours in a day. Not enough time to read every opinion. Why bother with that?
That is exactly what we are doing. We don't read only the stocks because they are only one market. If you trade American stocks, EU stocks, Japanese stocks, it's all the same. It's all one market.
Q: Do you have some common stock exposure?
We trade indices. We just don't care about fundamentals. All the fundamentals are in the market price already.
Q: That might hurt the feelings of fundamental analysts.
Itís just not a good investment to be in equities generally. The typically long only strategy, which is the mutual fund strategy, is really poor, in my opinion. All these managers have to be long the equities only. There has been a bear market now for over three years and they just cannot get out of their positions. It's just a strategy that is not really profitable for the investor. You really should have good diversification in your portfolio, to have that ability to go long or short, depending on where the market is going to go. In the 200 years of Dow Jones history, you see all these phases where the market goes 15 or 20 years up and 15 and 20 years down. Up again, down again. I think this is the beginning of a very long bear market. That is what we are seeing now after three years.
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