traders

As a quantitative trader, I could not have been more excited for the new book “The Man Who Solved the Markets” by Gregory Zuckerman which details Jim Simons incredible story.

Jim Simons averaged a 66% return over the past 30 years and a 39% return after his 5% management and 44% performance fee (pg 316 of book).

I plowed through the book and had, what I believe, are some major takeaways to share:

1. Edge is important; not the story of why it exists. 

In other words, data mining is ok.

This is something I’ve long defended since the launch of Build Alpha. You do not need a hypothesis or explanation of why a certain investing/trading edge exists if it is statistically relevant or significant.

In my opinion, it is possible we simply cannot comprehend why a pattern or edge exists because it exists in a dimension too complex for our current understanding. Therefore, we should not discard edges that we do not understand.

This is why I (and BuildAlpha) search the market for edges and let the data tell us where the edge is. Remove the human bias, false ‘truths‘ and the need to explain/justify everything with a hypothesis or reason why it is happening. Many of these patterns are ‘overlooked’ because they don’t have an explanation, but have clearly been profitable for Renaissance!

Here are a few quotes to drive home takeaway #1:

“Simons and his researchers didn’t believe in spending much time proposing and testing their own intuitive trade ideas. They let the data point them to the anomalies signaling opportunity. They also didn’t think it made sense to worry about why these phenomena existed. All that mattered was that they happened frequently enough to include in their updated trading system, and that they could be tested to ensure they weren’t statistical flukes”. (pg 109)

“Simons and his colleagues hadn’t spent too much time wondering why their growing collection of algorithms predicted prices so presciently. They were scientists and mathematicians, not analysts or economists. If certain signals produced results that were statistically significant, that was enough to include them in the trading model” (pg 150).

“I don’t know why the planets orbit the sun. That doesn’t mean I can’t predict them” – Simons (pg 151).

“More than half of the trading signals Simons’s team was discovering were non-intuitive, or those they couldn’t fully understand. Most quant firms ignore signals if they can’t develop a reasonable hypothesis to explain them, but Simons and his colleagues never liked spending too much time searching for the causes of market phenomena. If their signals met various measures of statistical strength, they were comfortable wagering on them.” (pg 204).

“Volume divided by price change three days earlier, yes, we’d include that” – Simons (pg 204)

2. Everyone struggles with discipline and following their system. Even the Greatest of All Time (G.O.A.T)

Discipline is key and the ability to consistently follow your system(s) can be the difference between winning and losing. We all believe discipline becomes easier if you have more reliable edges or have grown your account quite a bit, but Jim Simons would probably argue that is simply not true!

BuildAlpha: In Dec 2018, Simons (worth approx. $23B at the time) called his advisor and wanted to override his systems (pg 308). The systems that have created the most incredible track record in history.

In the “Quant Quake” of 2007, Simons overrode his systems before the eventual rebound. One employee was quoted as saying it cost the firm money (pg 260). Moral of the story.. follow your system and trust your research! Everyone struggles with this, but we must.

Note: Majority of his career Simons was actually the one advocating to NOT override the systems and may be a large part of his success. These were just two small examples.

“Trust the model. We have to let it ride; we can’t panic” – Simons (pg 216)

3. Surround yourself with a great team

This one should be obvious, but no one becomes the G.O.A.T alone. Brady has Belichick, Jordan had Pippen, Kobe had Shaq, Ruth had Gehrig, etc.

A large portion of the book chronicles how Jim sought out help from brilliant individuals, hiring them away from prestigious positions (science, tech and academia) by offering to double their salary. I won’t go over every individual, but a lot of chapters in this book are dedicated to the spectacular individuals that helped create the incredible returns which give Jim Simons the G.O.A.T title.

He recruited great talent to his team. Surround yourself with those that are experts in things you are not or inspire you to push past your limits.

Incorporate different approaches to your own similar to how Simons did. Trading is a lonely business at times.. you don’t need a hedge fund to build your own team.

4. Build strategies using different data.

Sure price and volume are great but the book mentioned other areas of alternative data Renaissance found useful.

Here are some simple ideas the book mentioned:

– sentiment

– correlations and relative moves

– number of times a stock’s ticker appears in major publications (regardless of sentiment)

Additionally, here is a previous See It Market blog I did using Commitment of Traders report to generate a trading signal: https://www.seeitmarket.com/how-to-improve-market-returns-using-alternative-data-17806/

5. Edge doesn’t have to be big.

Renaissance searched for “overlooked” edges and joked about a 50.75% win rate while utilizing the law of large numbers to win in the long-run.

Often times we get caught up searching for the holy grail or the perfect entry/exit for our trading or strategy development. But even with all these PhDs, RenTech was excelling trading a nearly 50% winning system to generate such astronomical returns. Much more can be gained by combining and adding unique smaller edges together than wasting time hunting for the perfect holy grail strategy!

 “We’re right 50.75 percent of the time… but we’re 100 percent right 50.75 percent of the time. You can make billions that way” (pg 272)

Bonus:

Build Alpha: Money isn’t the be all end all. He’s had tremendous tragedy in his personal life. Remember to enjoy LIFE while on the financial quest we are all on! The market isn’t going anywhere.I enjoyed the book and hope you do/did as well.

Originally Posted: https://www.seeitmarket.com/5-lessons-from-one-of-the-greatest-traders-of-all-time-jim-simons/

People who want to learn how to become successful traders require expending a few minutes online before reading phrases such as plan the trade, trade what you have planned, etc. For newbie traders, this information can appear more like a disruption than any actionable recommendation. Actually, people who are new in the trading field just desire to know how to set up their charts so they can make money. There is trading software in the market like Build Alpha, which can make life easier, but using it can make you a trading strategy. However, the new traders also need to learn the rules in order to get success in trading. Each and every norm of trading is crucial. Here are a few trading rules that you need to learn. Let’s have a look:

1. Use a Trading Plan:

A trading plan (or system) is a set of rules that stipulates a trader’s entry, exit and wealth management criteria. Using a trading plan lets traders do this, although it is a time-consuming endeavor. These days, it is easy to test a trading notion before risking real money.

2. Consider Trading like a Business:

 In order to be successful, one must approach trading as a part-time business, not as a hobby or job. This is because if you consider trading as a hobby where no dedication to learning is made, trading can be very expensive. As a job, it can be annoying since there is no regular income. Being a trader, you are basically a small business owner and must do your investigation and plan to maximize your company’s potential.

3.  Use Technology to Your Advantage:

Trading is a competitive industry, and it’s secure to suppose individual sitting on the other side of a trade is taking full benefit of technology. Charting platforms let traders an endless variety of methods for viewing and scrutinizing the markets. Even technology that these days we take for granted, like quick internet connections, can really raise trading performance. These days trading software such as Build Alpha help traders making their strategies with no programming.

   4.  Risk only what you can afford to lose

 It’s a long process to finance your trading account. As a trader begins using real money, it is essential that all of the wealth in the account be really expendable. If it is not you should keep saving until it is.

5. Use a stop loss: 

A stop loss is a programmed amount of danger that a trader is enthusiastic to accept with each trade. This can be either a dollar amount or proportion, but either way it confines the trader’s risk during a trade. Using a stop loss can take some of the feelings out of trading since you know that you will only drop X amount on any given trade.

Wrapping Up:

It’s crucial that individuals understand the trading rules said above. Having knowledge of how the above trading rules work collectively can help traders set up a viable trading company or portfolio. Trading is actually hard and individuals who have the endurance to follow these norms can increase their possibilities of achievement in this competitive arena. These days automation trading software like BuildAlpha help traders creates numerous strategies at click of a button.