Nothing much really to say regarding the market. The correction continues to play out. So far this looks every bit like a correction given how most of the downside has occurred in the first hour of the trading day. But, it's quite likely the correction is not over despite the potential for more dead cat bounces. I will be patiently waiting for the dust to settle and I got plenty of patience.
Today I met with a former boss of mine "Joe" (yes that's actually his name). He's an advisor who gave me my first job out of school as his assistant. He wants me to manage some of his money for him. He's an accountant by trade and still practices it along with his advisory business (which he smartly leveraged from his accounting business).
Joe told me about his recent exploits into the forex market whereby his interest in it was sparked by his IT guy of all people (ya, I know....what the fuck does an IT guy know about forex?) One day his IT guy told him about a "black box" system he was deriving for trading currencies which was based upon back testing several types of technical indicators . Based upon this "back testing" this model supposedly produces 70% winning trades. Apparently it took this guy several months along with tons of computing power to come up with this winning "algorithm" and it's still not finely tuned yet. Joe is really excited about this and he's hoping that if this black box is successful he would give up his accounting and financial planning businesses. I smiled and nodded the entire time. Joe is a greedy man...always has been since I've known him. Joe is the kind of guy who wants to make a lot of money quickly in a way that seems easy or risk free... and so I'm not so sure if the word "greedy" is the best way to describe such a person. Anyhow, there are a lot of such people in the world....people who are looking for some sort of loophole in the system that allows them get "free money"and almost all the time these people end up losing their ass.
As Joe was talking to me about his forex spiel I smiled and nodded the entire time. Instead of telling him that he's being naive fueled by his greed-like tendencies, I took the polite path and told him that before he actually puts money on the line he needs to paper trade this "system" for several months to see if it actually works. He agreed that he would have to paper trade first but he would be willing to jump in for real after only a couple of successful months. Oh boy I thought. The best thing that could happen to Joe is that he loses money right away if he ends up trading forex using this idiotic black box idea and realizes that there's no holy grail in the market. Otherwise, he will get a false sense of confidence, bet big and then eventually lose big.
I am opposed to any black box trading system. These systems are derived/back tested using historical data and that's the problem. Every economic cycle is unique and there's no assurance that any particular variable/indicator which behaved a certain way in the past will continue to act the same way going forward. Take for example the Canadian dollar (the loonie). Only in recent years has the loonie been equated as a "risk currency". For at least the past 5 years the general equity markets and the loonie have been strongly correlated. It wasn't always this way. During the roaring bull market of the 1980's and 1990s the loonie was in a long term downtrend. So, a black box system could possibly do well for a while but then eventually the rug gets pulled from underneath it when the market changes stripes.
Black box systems also do a poor job of dealing with fat tails...the so called black swan events. The perfect example of this was the collapse of LTCM in 1998. This fund had a so called black box system derived from some of the greatest minds in finance. If these "geniuses" got their ass handed to them it gives me little confidence that some IT guy can come up with a holy grail to beat other forex traders 70% of the time.
I hope Joe doesn't quit his day job.
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