Trading Chaos

Williams, Bill & Justine Gregory-Williams.  Trading Chaos: Maximise Profits With Proven Technical Techniques (2nd ed.), John Wiley & Sons, New York, 2004.

The father-daughter authors summarise a personal methodology based primarily on: (1) the technical analysis of oscillations in market securities; and (2) the opportunities for day traders and swing traders to appropriate value from institutional funds through ‘countertrend’ signals which occur in commodities futures and currency/foreign exchange (forex) markets.  The first (1995) and second (2004) editions coincided with the IT and subprime bubbles which created day trading subcultures and market volatility, so it would be interesting to see how the authors have fared during the 2007-08 global financial crisis.

The book’s first half synthesises various ideas on formulating a trading plan and the psychology of market trading.  The ideas include a social constructionist view of money as a holder of value (John Searle); crowd psychology and rational herds in markets (Gustave Le Bon, Charles Mackay); the new paradigm of chaos theory in markets and how fractals and self-similarity create new trading perceptions about pricing and signals (Benoit Mandelbrot), and the popularity of Eastern belief systems amongst traders as models for skills acquisition and stress management (notably Western popularisations of Zen and Taoism).  Thus an awareness of broader intellectual trends can be useful to unpack the building blocks of a system and for comparative analysis with other theorists and models.

Ben Williams’ original contribution is to explain how his background as a psychologist informs his trading approach.  Chapter 7 outlines a generic model of skills acquisition — novice, advance beginner, competent, proficient and expert — that was explored in the book’s first edition, and can be integrated with Agile, CMMI and other frameworks for integrating operations and strategy.  Williams summarises exercises from autogenic training for stress control in the face of market volatility, symbolic interactionist approaches to align the trader’s individual psyche with the market, and cognitive psychology techniques such as cognitive chaining for surfacing deeply held beliefs which lead to self-sabotage and trying to trade out of a losing position without stop losses.  The cognitive psychology approach reminds me of physician John Lilly‘s mid-career work on meta-beliefs and it also parallels recent work in behavioural finance.  However, some descriptions — such as a section on Taoism, Zen and visualising the market as a river which follows the path of least resistance — seem to be closer to New Age beliefs about zero point fields which integrate consciousness and matter than the original metaphysical systems.  I agree these systems can be applied to training however they need far more grounding than detailed here.

From the earlier material on trading approaches, the book’s second half develops a trading system to anticipate the price movements in market securities through fractals and self-similarity which occur in volatility.  It’s always interesting to see how traders justify their approaches and the example trades given.  I’m closer to the adaptive markets, event arbitrage and behavioural finance schools of investing and remain to be convinced about the validity of technical analysis that the Williams propose, beyond the obvious role of pattern recognition.  Actually perceiving nonlinear dynamics and turbulence can be very different to the language and paradigmatic thought that makes chaos theory a popular explanation.

I did experience some perception changes after reading Trading Chaos: (1) charts might be interpreted in a different psychological frame using fractal, self-similarity and volatility metaphors; (2) viewing charts at different timescales (e.g. 1 hour, 1 day, 1 week) might develop the cognition skills to quickly scan signals in a real-time environment; and (3) the juxtaposition of lead and lag signals for trading decisions and triggers has potential, particularly if combined with game theoretic modelling of the market and volatility effects from institutional investors, monetary policy and rational herds.  It remains to be seen if these perceptions are sustainable and verifiable in trading conditions, and not just subjective reactions based on past research about chaos theory models.

That said, the trading system may also have several criticisms and weaknesses. Finding signals in oscillations and nonlinear dynamics may be difficult in a volatile market.  Analysts can be subjective particularly if de-leveraging and other actions by institutional investors are not factored in.  Swing traders may be exposed to market sensitivities (aka the Greeks): Gamma (the rate of change in the underlying security’s price), Vega (sensitivity to volatility), Theta (time-decay) and Rho (time-decay of interest rates).  Finally, modelling turbulence and uncertainty in a grey or white box system remains a major challenge for financial engineers in new market environments.

Threaded throughout Trading Chaos are the mix of useful insights and shibboleths in day trading subcultures.  CNBC, investment experts, and the plethora of courses and newsletters thrive on investor insecurity yet create noise (pp. 34, 42, 56).  Trading decisions, trading volume, and speed and type of momentum may be lead indicators of price volatility (p. 126).  Broad market knowledge purports to trump expert/specialist understanding (p. 135).  Market facts must be distinguished from opinions and beliefs (pp. 8-11).  Trader personalities shape risk tolerance, time horizon, the asset allocation process and types of controls (pp. 92, 155), a factor relevant to human resources consultants and the ‘transition in’ process for trading desks in investment banks.  Analysis risk involves emotions and perceptions of a signal (pp. 52-53).  The interest in Fibonacci numbers and Golden ratios are partly because they are iterative, geometric structures applicable to price movement forecasting (pp. 22-23).  Grey and white box systems with transparent, programmable rules are preferable to expensive, high-end black box systems which use artificial intelligence and neural net algorithms (pp. 53, 56).  A useful bibliography highlights the Santa Fe Institute‘s influence on chaos theory applications in finance and macroeconomics.  It suggests this area needs far more research to verify the claims and provisional findings in this book, to separate the gold from the dross.

Perhaps the most pivotal insight of Trading Chaos is buried in the text.  “We all trade our belief systems.  When some of you think about this, it produces a crisis,” the authors assert.
  Now that could be the basis for a ‘contrarian’ trading system — probably the one that hedge funds with a short/event arbitrage approach use to scalp day traders in currency/forex and commodities futures markets.

Calling All Nations

Several weeks ago I noticed new graffiti on street signs in the Melbourne suburb Northcote from an unknown group: the Saracen Soldiers.  A block away from the most prominent graffiti two houses displayed nationalist flags in their front windows.  It could have been coincidence or maybe a signalling game to establish psychological turf.

At the time I thought of the ominous graffiti in Philip K. Dick‘s posthumously published novel Radio Free Albemuth (1985).  The grafiti also reminded me of the wanna-be teenage mercenaries in Leo Berkeley‘s film Holidays on the River Yarra (1990), who are recruited by a racialist organisation to engage in graffiti, brawls and other low-level politically motivated violence.

Two nights ago police fatally shot 15-year-old Tyler Cassidy during a confrontation in Northcote’s All Nations park.  Earlier that evening, Cassidy left home after a family argument then stole two knives from Northcote’s Kmart store.  Four police were called to arrest Cassidy and Victoria Police will now investigate what happened next.  As Rosie X observes, several media outlets speculated about Cassidys membership in the nationalist group Southern Cross Soldiers (SCS) and posed a ‘suicide by cop’ explanation for Cassidy’s death.

There are a couple of interesting things to note about blogosphere and media coverage.

Journalists described Cassidy’s online life as “subterreanean” – a mix of Sherry Turkle‘s theories about online identity fused with cyberterrorist fears – yet did not link to Cassidy’s MySpace page or mention the SCS sites above.  In contrast, Richard Metzger observed to me in 1998 that Disinformation had a different strategy: it would link to white supremacist groups such as Aryan Nations so that readers would understand their ideological worldview.  This got Metzger into trouble with several anti-racialist organisations who confused him with Tom Metzger of White Aryan Resistance.

Anarchist and anti-racialist bloggers knew SCS for months before Cassidy’s death as a white supremacist gang or youth network. The SCS band has copied Rahowa‘s white separatist music as a recruitment strategy.  The social network Bebo has pages for SCS recruitment and the SCS bandJacques Ellul would be proud: SCS (and perhaps Cassidy unwittingly) use a blend of Australian historical imagery for in-group identity and integration propaganda (“Aussie pride”, the Southern Cross flag, conflation of national identity with ethnicity) with agitation propaganda that is aimed at specific out-group enemies (Italians, Lebanese, anyone who does not meet SCS’s criteria for being Australian).

Several questions: How many other pages are there?  Who has been monitoring them?  What if any threat assessments were made?  Will anyone get an opportunity to conduct a sociometry analysis of SCS’s online social network before the pages are pulled (Marc Sageman established a benchmark with his study of Salafist cells that may have had weak ties to Al Qaeda).

Bloggers and journalists alike noted that police might have de-escalated the incident if they were armed with a Taser electroshock weapon.  The incident captures why there is a tactical role under specific circumstances for law enforcement personnel to use non-lethal or less-lethal weapons that could have saved Cassidy’s life.  The four police will likely receive critical incident debriefs and stress counselling.

A few days after Cassidy’s death Northcote remains largely subdued apart from occasional police sirens in the distance.  In contrast. Greece has faced a week of riots after the shooting of 15-year-old Alexandros Grigoropoulos which may spread to Europe.  As a ‘paired study’ – SCS’s street gang violence, the shootings of Grigoropoulos and Cassidy, and the divergent reactions – illustrate the late sociologist Charles Tilly‘s distinction between individual aggression (Cassidy), brawls (SCS) and scattered attacks (Greece) as different types of collective violence.

Tilly’s urban sociology in the 1960s foresaw how today’s social network sites may be used to coordinate street violence.  Perhaps police intelligence analysts would benefit from a few hours with Tilly’s masterful study The Politics of Collective Violence (Cambridge University Press, Cambridge, 2003) to pre-empt any SCS revenge attacks for Cassidy’s death.  SCS might then remain the purveyers of bad hip-hop/rock/metal hybrids (not exactly Australian), poorly designed web sites and street graffiti: the opportunist yet ineffectual extremists that Dick and Berkeley tried to warn us of . . . and that Greece and Europe may face again.

Mumbai Siege: The Hunt for the Perpetrators

Counterterrorism analysts search for answers as the official death toll from Mumbai’s siege rises to 183 people.  We now enter Susan Moeller‘s second stage of post-terrorist attacks: the hunt for the perpetrators and seeking justice.  See my October 2001 analysis here on the September 11 aftermath and Henry Rollins’ reaction in New York City.

Slate‘s Anne Applebaum observes that we don’t yet know much about the group that carried out the attacks.  Applebaum’s analysis echoes Walter Laqueur‘s ‘new terrorism’ thesis in the mid-to-late 1990s: attempts at mass casualty attacks, tactics from the guerrilla and insurgency playbook, an ideological mix, and groups that either do not claim credit or who are not on the radar of counterterrorism analysts.  Applebaum captures Gregory Treverton‘s distinction between solvable ‘puzzles’ and potentially unsolvable ‘mysteries’ in intelligence analysis.

“The particulars of the attacking group are unknown; the
political-military equation from which the group has almost certainly
arisen is not,” notes The New Yorker‘s Steve Coll.  The most plausible hypotheses for Coll and other counterterrorism experts are: (1) Pakistan’s intelligence services may have funded the group in a clandestine/proxy war with India; or (2) the group emerged as an autonomous cell that was ideologically motivated by the clandestine/proxy war.  Coll explains why at this early stage the Mumbai siege is closer to Treverton’s ‘mysteries’:

If past investigations into such groups prove to be any guide, it may
be difficult to find clear-cut evidence of direct involvement by
Pakistani intelligence or army personnel. This is because Pakistan,
knowing the stakes of getting caught red-handed, has increasingly
pursued its clandestine proxy war against India in Kashmir and on the
Indian mainland through layers and layers of self-managing and
non-state groups. The Pakistani government and its domestic Islamist
proxies, including nominally peaceful charities based in Pakistan but
with operations in Kashmir, almost certainly pass through money and
weapons on a large scale. They do so, however, in such a way that is
very difficult to trace these supplies back to the government.

Applebaum highlights the epistemological challenges that counterterrorism analysts face; Coll offers some guidance on how to conduct an investigation on the basis of ‘contingent’ beliefs and alternative hypotheses.

Pakistan’s government denies any role
in the Mumbai attacks.  Perhaps forensic analysis of crime scene
evidence will provide answers and shift the current speculation from
Treverton’s ‘mystery’ to ‘puzzle’.  Or maybe not.

The next day Coll analyses India’s claim that the group Lashkar-e-Taiba was behind the Mumbai attack.

Polly Borland’s Untitled III

A few months ago publisher Ashley Crawford (of 21C and World Art fame) asked me to contribute to a Photofile Magazine roundtable about a mysterious bunny image.  I sent Ash a brief piece with in-joke references to the Discordianism movement, the horror author H.P. Lovecraft, Richard Adams’ novel Watership Down, intelligent design, and the 1977 hoax Alternative 3 (in Photofile #84, Summer 2008, p. 60).  It was a lot of fun.  The image turned out to be Polly Borland‘s Untitled III (2004-04), and private collector David Walsh now curates a billboard version in Melbourne, Australia.

Neil Chenoweth’s 2008 Walkley Award for Business Journalism

Congratulations to forensic journalist Neil Chenoweth and his colleagues on their 2008 Walkley Award for Business Journalism: an investigation into the failed stockbrokers Opes Prime.

I interviewed Chenoweth in 2002 for a Masters paper on Rupert Murdoch’s negotiation strategies.  During our talk, Chenoweth gave me a couple of “aha!” moments on how to conduct a forensic journalism investigation, Murdoch’s use of game theory to understand other parties in a deal, and the murky underworld of cable and satellite television.

Chenoweth writes regularly for the Australian Financial Review, an Antipodean equivalent of the pre-Murdoch Wall Street Journal.  Chenoweth’s Virtual Murdoch: Reality Wars on the Information Superhighway (Secker & Warburg, London, 2001), published in the US with new material as Rupert Murdoch (Random House, New York, 2004) chronicles his decade-long investigation into the world’s most powerful media mogul.  Read a chapter-by-chapter summary here.  Chenoweth’s book Packer’s Lunch (Random House, Sydney, 2006), reviewed here, also has substantial research on Sydney’s corporate dealmakers in the 1990s and their Swiss bank accounts.

A Challenging Conversation on Integral Futures

The Journal of Futures Studies (Tamkang University, Taiwan) has published a ‘trialogue’ on Integral Futures between colleagues Josh Floyd, Jose Ramos and myself.

The trialogue is an exploratory method that the late ethnobotanist Terence McKenna used at the Esalen Institute and Omega Institute to cocreate new knowledge informed by interdisciplinary expertise.  McKenna’s trialogues featured mathematician Ralph Abraham and biologist Rupert Sheldrake.  More recently, Erik Davis and Douglas Rushkoff have continued the tradition.  The theoretical physicist David Bohm developed a similar method for dialogue and group work.

Floyd, Ramos and I discussed this approach in February-April 2006 after taking three different
iterations of Advanced Professional Praxis a ‘capstone’ project unit in
Swinburne University’s Strategic Foresight program.  Richard Slaughter provided a focal point as he assembled papers for a special issue of the journal Futures (Elsevier) on Integral Futures Methodologies (November, 2007).  For over a decade, Slaughter had synthesised a Futures knowledge base of new frameworks, methodologies and visions.  Informed by Ken Wilber‘s Integral vision, Slaughter proposed Integral Futures as a “broader and deeper” horizon for Futures work.  Wilber and Slaughter galvanised a new cohort of practitioners to develop new Integral Futures methodologies.  Yet new creative horizons may create new problems.

How can Integral Futures practitioners be ethically informed about their new methods?  Our trialogue proposes Embodied Foresight as one possible way to achieve this: the cultivation of ethical sensitivity, situation awareness about the Teacher-Student relationship and pedagogical barriers, and self-reflection on the transformative potential of initiatory knowledge and wisdom traditions.  Or, “foresight-in-context” may anticipate and prevent hazards that might have unforeseen consequences.

The trialogue creates a space for each of us to bring theoretical frameworks and practitioner reflections into the discussion.  Floyd brings expertise in Zen Buddhism, cognitive science and phenomenology, and a familiarity with Wilber and Evan Thompson‘s research.  Ramos brings transcultural experiences in Futures, action research, and postcolonial insights on “model monopolies”.  I added some insights from mid-1990s exploration of the Gurdjieff Work and the Temple of Set, and experiences during Masters studies, publishing and research projects.

From our trialogue’s conclusion:

Embodied Foresight offers some emergent solutions for the individual practitioner to the challenges and difficulties of Integral Futures practice. These reflexive ‘problems’ are part of diffusion, initiation and knowledge transfer in many wisdom traditions. Our ‘trialogue’ has raised several ‘reflexive’ problems-from Teacher-Student relationships and pedagogical barriers to the archetypal dangers of Phobos and Thanatos-that each of us has personally experienced within the Futures Studies community and in other initiatory and wisdom traditions.

CPRF08 Paper: Disruptive Innovation, Radiohead & Nine Inch Nails

I recently blogged about a presentation the 2008 Communications Policy Research Forum in Sydney on disruptive innovation in the music industry.

You can now download an Adobe PDF version of the PowerPoint slides here.

The refereed paper has been published in the Proceedings of the Communications Policy Research Forum 2008 (pp. 155-175 or PDF file pp. 179-199).  You can also download a local copy of the paper here.

The paper’s case study examines why Radiohead and Nine Inch Nails released their new albums as digital downloads.  I suggest a major reason why, and one that was overlooked by Web 2.0 pundits, is that each artist was in the ‘label shopping phase’ of a new contract and defected after negotiation problems with their major labels.  This fits a pattern in mergers and acquisitions: the major labels lost artists due to integration problems in a merger or acquisition.  Terra Firma Capital Partners has since partially confirmed this hypothesis: the private equity firm endures more post-acquisition integration problems with EMI and is fighting against government regulation of Great Britain’s financial services sector.

The paper’s data appendices contrast the artists’ strategies with signficant events and innovations in music industry contracts, conglomerate mergers and deal structures.  Somehow I missed U2‘s March 2008 deal with Live Nation: I found out about it in an October 2008 announcementGuns n’ Roses also finally released Chinese Democracy (MySpace audio stream): a new album that has taken 15 years, a rumoured US$14 million budget and 14 recording studios in New York, Los Angeles, Las Vegas and London.  I may write a paper on it . . .

Efficiency Perils in Global Food Markets

The New Yorker‘s James Surowiecki provides an overview of volatility in the global food market.  Three insights emerge for me:

(1) Differences between policymakers and food security experts at the problem diagnosis stage may have complicated the implementation of structural adjustment programs.  Food security poses solutions that are potentially counterintuitive to policymakers: the former will value food stocks to ensure stability in sovereign nation-state the international political economy whereas the latter may prioritise food flows for international trade, to hedge commodities and currency risks.  Surowiecki explores a contemporary scenario of potential market failure due to demand-supply, pricing and other distortions with the allocation mechanisms.

(2) David Ricardo‘s theory of comparative advantage – in which each nation specialises in the efficient production of goods and services to trade with others for maximum payoff – may not be scalable in its simple form to a complex, interconnected and global system.  Surowiecki’s analysis suggests tha the over-reliance on a few countries for specific foods will undermine the global system’s resilience and capacity to cope with exogenous shocks and volatility.

(3) Paramaters for investor and market models of the global food market using Vensim simulation software: production supply, demand volatility, pricing, subsidies/tariffs, stocks and flows, and leverage points.  Undertake different short- and long-run simulations noting the role of capacities, dynamics and thresholds, and the impacts of exogenous shocks and volatility.

Value Chain 2.0 Precursors

Paul Roberts has an interesting post on Value Chain 2.0: the use of Web 2.0 methodologies and platforms in value chain analysis, process redesign and supply chain management (SCM).

Value Chain 2.0 transformations actually predate Tim O’Reilly’s Web 2.0 term but this is largely hidden from non-domain experts.  One reason why is the historical influence of engineering and mechanistic models on public perceptions of SCM.  Logistics, operations and industrial economics all moulded Michael Porter‘s value chain model.  Mainframe interfaces shaped SAP‘s materials management and enterprise resource planning systems.  A climate of downsizing and recessions influenced how business leaders applied Michael Hammer and James Champy‘s business process reengineering.  SCM has evolved yet the public perceptions remain.

There’s a broader context and history to Value Chain 2.0 that some Web 2.0 descriptions may not do justice to.  Some of the more well-known examples: Eric von Hippel cast the die in The Sources of Innovation (New York: Oxford University Press, 1988) about 3M‘s ideation, innovation and new product development processes; von Hippel elaborated on discussions which occurred since the mid-1970s.  SAP and other ERP vendors have had end-user case studies in conferences for over a decade.  Dell‘s dotcom era choiceboard for consumers to customise their orders meant more efficient throughput and higher inventory turnover.  Lego Mindstorms builds on decades of insights in constructivist learning and robotics.  Procter & Gamble‘s Connect + Develop initiative reflects P&G’s expertise in brand development and consumer goods marketing, and leverages decade-long trends in knowledge management and information systems.  This suggests a deep history or a path dependence to many ‘new new’ Web 2.0 cases and trends.

Perhaps Value Chain 2.0’s initial contributions are to make these initiatives more explicit to non-domain experts and to provide an accessible interface for consumers.

Decision Sciences For The Masses

Malcolm Gladwell‘s new book Outliers: The Science of Success (New York: Little, Brown & Co., 2008) appears to be the publishing event of the week.

Gladwell (The Tipping Point, Blink) spearheads a group of writers who are masterful at using anecdotes about insights from statistics, system dynamics and the decision sciences that will interest a broad readership.  This group also in  Chris Anderson (The Long Tail), James Surowiecki (The Wisdom of Crowds), Nassim Nicholas Taleb (Fooled by Randomness, The Black Swan), Tim Harford (The Undercover Economist), Steven Levitt and Stephen Dubner (Freakonomics), and Michael Lewis (Liar’s Poker, The New New ThingMoneyball) also belong to this group.  Apart from outliers and tipping points these books explore intuitive decisions, long tail distributions, the Law of the Many, chance, low probabilty high-impact events, martingales, and data-driven decisions.  Each author has a different background: Taleb is an epistemologist and former trader, Anderson is a technology pundit, and Lewis, Gladwell and Surowiecki are essayists and journalists.

For me, six observations emerge from these authors.  First, they have a writing style that appeals to a broad audience.  Second , they provide an introduction to quantitative elements of decision-making and judgments.  Third, their publishers have created a niche market in airport reading and popular science paperbacks.  Fourth, they differ in their approach to theory building: Anderson, Gladwell and Surowiecki take an insight, interview people, and promote it; Taleb, Harford and Lewis draw on their domain experience; and Levitt and Dunbar illustrate how a subject matter expert can collaborate with a journalist to reach a broader audience.  Fifth, their books have seeded a range of Web 2.0 strategies, which vary in rigour, validity, generalisability and applicability to real-world analysis.

Finally, their publishers have used their marketing appeal to build an audience during turnarounds and post-acquisition integrations: Gladwell and Surowiecki helped revive The New Yorker, Levitt and Dunbar’s blog gained The New York Times an Internet readership, and Anderson revamped Wired after Conde Nast‘s acquisition.