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.

Dealmaker With The Dead

Randy Nails‘ documentary Dead On: The Life and Cinema of George A. Romero (2008) screened as a ‘work in progress’ at the 2008 Melbourne International Film Festival.  The documentary charts Romero‘s evolution as a director and how his films are responsible for a 40-year-old ‘zombie economy’ worth over US$2 billion.

Three themes are central to Nails’ documentary: how psychopolitics such as Cold War nuclear fears and Vietnam War social activism influenced Romero’s personal vision, why Romero has fought to retain his independence against Hollywood studios, and how the zombie meme has in turn influenced contemporary ‘indie’ directors, subcultures, and musucians such as Glen Danzig and Rob Zombie.

The documentary begins with a nuclear fear montage: stark black-and-white footage of the Trinity nuclear test on 16th July 1945, ‘duck and cover’ safety drills and simulations of the impact on targeted cities.  From this dystopian beginning Nails explores Romero’s early work for the Pittsburgh-based company Latent Image which tapped the market for advertising and industrial films in the ‘go go’ 1960s.  Latent Image would be the nucleus for the team that produced the influential zombie film Night of the Living Dead (1968): Romero used handheld cameras to capture the feeling of newsreels on Vietnam War combat and civil rights protests.  Latent Image cofounders liken their production approach to jamming in jazz and small teams.  However after the follow-up There’s Always Vanilla (1971) the Latent Image team fell apart and Romero continued as an auteur to create films where the Cold War’s Mutually Assured Destruction is the backdrop to dark and apocalyptic forces which threaten to overwhelm individuals.

Latent Image’s DIY ethic was a formative experience for Romero.  He cites Martin (1977) as the film that captures best Romero’s work ethic and small team approach, with Diary of the Dead (2007) as a return to this independence.  Its cast believe Knightriders (1981) was his most personal film, which Romero explains is about the extremes and limits of personal ideologies, and that he was able to maintain a strong team despite the production difficulties due to his respectful way of dealing with the cast and crew (which Ed Harris and Dennis Hopper also attest to in Romero’s later films for major studios).  Romero and special effects wizard Ted Savini worked quickly on the location shoot in a shopping mall for Dawn of the Dead (1978) due to a 3-4 hour time limit: a precursor to the ‘sprints’ in agile software development.  Romero’s DIY approach and his ability to combine multiple roles (scriptwriter, cinematographer, director, producer, editor) appeals to John Landis, John Carpenter, John Waters, Kevin Smith, Robert Rodriguez and Danny Boyle, who Nails interviews.

Pigeonholed as a horror director Romero points out why many of his films have a satirical dimension that the Hollywood major studios often choose to ignore or minimise.  Jack’s Wife (1972) explored a neo-feminist vision of personal empowerment through Wicca symbolism, although the US distributor retitled the film as Hungry Wives to appeal to the softcore porn market.  The Crazies (1973) satirised military contingency planning to prevent a chemical warfare disaster.  Martin (1977) uses vampirism as a metaphor for industrial decline of Pittsburgh’s steel industry: Romero surmises people need vampires as a modern mythology to combat the ‘death of magic’ caused by downsizing and hypercompetitive globalisation.  Spurred on by giallo director Dario Argento, Romero overcomes his desire not to revisit zombie films by turning Dawn of the Dead (1978) into a satire on consumer lifestyles.  Day of the Dead (1985) and Land of the Dead (2005) respectively target the Reagan Administration’s revival of Cold War brinkmanship and nuclear fears, and the second Bush Administration’s widening social gap between the haves and have-nots.  Romero’s personal vision emerges collectively in this body of work as a concern with personal autonomy and class politics.

Why Romero despises Hollywood studios is illustrated through the many anecdotes about his production battles and mistakes.  Night of the Living Dead relied initially on 10 personal investors who lost their money when the film was released with the copyright symbol on its title credits rather than in the correct position, which immediately made NoTLD public domain.  Despite a successful lawsuit Latent Image lost money and the followup There’s Always Vanilla broke up several friendships.  Knightriders, Land of the Dead and Creepshow all had studio distribution problems.  During the preview screenings of Monkey Shines (1988) and The Dark Half (1993) the test audiences demanded the downbeat endings be changed, a Hollywood practice that reviewer Roger Ebert condemns.  The film studio Orion was almost bankrupt during The Dark Half and was unable to finance a score for the film’s third act, which led to director-producer tensions.  Bruiser (2000) was a straight to video release which Romero was relieved to complete.  In a lesson on ‘decision rights’ Romero worked on 8 redrafts over a two-year period for Resident Evil (2002) to ensure the film reflected the first two videogames, before he discovered that the studio executive did not have the decision-making power as he had claimed.  Whilst Romero admits to not being very good at business his criticisms of Hollywood are supported by illusionist Penn Jillette and writer Stephen King.

Despite the wealth of archival footage and interviews Nails’ ‘work in progress’ suffers from a nonlinear narrative.  I had just as much fun sitting just behind Romero and his daughter Tina in the cinema, watching him deal with zombie fans and autograph hunters.  Romero might not have the financial rewards of the ‘zombie economy’ he inadvertently created but Dead On has plenty of lessons on cultivating a personal vision and the mindlessness of the Hollywood zombies known as mid-level studio executives.