A Trading Experiment

Recently, I read Something Incredibly Wonderful Happens, Frank Oppenheimer and the World He  Made Up. This is a fabulous book about the life of the famous physicist. It is a book every trader should read. Here is why.

In this book, Frank Oppenheimer discusses the importance of experimentation and play:

"So much time is spent just playing around with no particular end in mind," he wrote. "One sort of mindlessly observes how something works or doesn't work or what its features are, much as I did when, as a child, I used to go around the house with an empty milk bottle pouring a little bit of every chemical, every drug, every spice into the bottle to see what would happen. Of course, nothing happened. I ended up with a sticky grey-brown mess, which I threw out in disgust. Much research ends up with the same amorphous mess and is or should be thrown out only to then start playing around in some other way. But a research physicist gets paid for this 'waste of time' and so do the people who develop exhibits in the Exploratorium. Occasionally though, something incredibly wonderful happens."

. . . He asked his friend Bob Karplus, a physicist at the University of California at Berkeley, if he thought there was anything a young person must learn before it is too late, and Karplus' answer was "play."

Be creative and experiment.

In 2011, you might want to try the following experiment:

In a sandbox account, create a notional neutral (long notional-short notional=0) portfolio of stocks using the best methods you have developed to find long and short candidates. Track the return of the portfolio and see how it performs over time.

As you are running the experiment, ask the following questions:

• Should you rebalance your portfolio at specific intervals of time to account for changes in your selection criteria or changes in the value of each position?
• Can you think of any ways to improve your results?
• Are you learning anything?
• Have you observed anything unusual in how the portfolio is performing?
• Are you generating alpha? If not, why not?

Written by Michael Bigger. Follow me on Twitter and StockTwits.

Comments

[Asif]

Another great post Michael. You inspired me to think about algorithmic trading and trading strategies in 2010.

Wishing you luck in 2011.

[Michael Bigger]

Thanks. I knew you would like that post Aris! ;-)

[Aris David]

Hey that wasn't me.

Anyway I still like the post!

Aris

[Michael Bigger]

I meant Asif but wrote Aris! Gee

[Asif]

I thought you made a typo but it looks like Aris is a real person. :)