Carstens develops and trades systems through his company, Vertical Solutions, and has recently begun trading other people’s money. He is developing a growing reputation as an insightful teacher of systems development and testing. His ‘Introduction to Testing Trading Ideas’, which is available at www.verticalsolutions.com, is an excellent outline.

Topics I discuss with Henry include:

- Working for Victor Niederhoffer
- Developing an hypothesis of a potential trading edge
- Testing potential edges
- The pitfalls of systems testing
- Automated versus discretionary trading
- How to handle changes in the market

The magazine can be bought in pdf version here

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The Gilmo Report is run by Gil Morales, who was a former trader for William O’Neil. Their stuff is good because it combines hard-core practical trading experience with broader macro perspectives.

Marder’s latest report is particularly interesting. Here are a few points I took out of it:

* Marder says the market is showing signs of weakness – six distribution days in October, hitting new highs on light volume, a narrowing of breadth with a shift to larger caps and a decline in new highs.

* He says this bull market hasn’t been fueled by growth stocks, rather by companies with ‘meat and potato’ products. “In many cases, these stocks do not possess sparkling fundamentals or innovative products or services, as much as they offer the value crowd the ability to buy stocks that had been severely bludgeoned in the bear market,” he said. “As a result, for the growth stock specialist, it is still a challenge to find recession-resistant candidates expected to grow earnings by 25%+ in ’10, let alone those considered institutional quality.”

* Marder expects “basic resource issues” – steels, ores, papers, chemicals, etc – to take over leadership of the market and continue where they left off in 2007. They will be driven by the “dominant secular trend” – “that of roughly 2 billion individuals entering the middle class worldwide – (which) will for a number of years drive the market’s biggest-winning stocks.”

* Marder doesn’t like the health of the brokers, “a group that has often topped some months in advance of the averages at the end of a bull market.” “We do not like the look of its RS line,” he said. “If this was 18-24 months into a bull market, it would be expected. But nine months into a bull appears more ominous than we would prefer. The brokers are similar to the advance-decline line and new-high figures in that the group tends to act as a good longer-term leading indicator of a future top in the averages.”

* Despite the negatives Marder doesn’t believe the market will fall off a cliff just yet. “The view here is that based upon historical precedent in the areas of 1) secondary corrections (the average bull market experiences more than one 8%-12% intermediate-term correction, while the current bull has only had one), and 2) breadth divergences (the broader market tends to peak a number of months ahead of the averages, especially so with a market as powerful as this one), the probabilities do not favor the onset of a bear market at this juncture, but an eventual leg of upward revaluation.”

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One of the positives of the year has been my increased engagement with Acceptance and Commitment Therapy (ACT) which is a relatively new method of psychology that could have a number of implications for traders.

ACT is based on the premise that suffering – including mental illness – is normal, and the greatest damage is done by trying to control or cover up suffering.

At first glance it seems a bit airy fairy. But from my experience a) it works, and b) it is a wise, compassionate psychology.

ACT can be broken down into several areas. But underpinning it all is the acceptance of the human condition: we are inherently designed – largely through how our brains are wired – to suffer; whether its pain, depression, anxiety etc.

Our natural response to suffering is to try and control it. That can be through drinking, drugs, eating, or whatever. Conventional psychology also appeals to our controlling natures by suggesting methods to control/get rid of unpleasant thoughts and emotions by challenging them.

Unfortunately, these attempts at control methods actually make our situation worse. Drinking to get rid of depression, for example, works in the short term, but exacerbates it over the long run. Research suggests that trying to suppress thoughts can make them occur more frequently.

Anxiety, for example, is a natural emotion – particularly for traders. Again, problems occur when we try and get rid of it. From my observations most people do it through drinking. We also shy away from anxiety-producing activities – such as trading – so our lives become smaller and constricted.

One of the least discussed methods of control is muscle tension. I learnt this in Dr Brett Steenbarger’s Daily Trading Coach book. He described traders who brace themselves against negative feelings such as anxiety through tension. That’s exactly what I was doing, which resulted in chronic neck and back pain.

The irony is that realising I was doing this, and then relaxing more, meant I temporarily lost control of my anxiety as it morphed into other sensations and made it (appear) worse. Part of this year has been learning to accept anxiety – in all its weird and wonderful forms – rather than fighting it.

Because ACT is about acceptance of suffering and negative emotions as normal, its practitioners are less into labeling various mental illnesses, which helps avoid stigmatizing people.

The goal of ACT is not to try and get rid of suffering. But through implementing its core principles, research has shown that suffering is diminished.

Apart from acceptance, there are a few other elements of ACT that are also useful:

Mindfulness: Learning to be in the present, rather than worrying about the future and the past

Diffusion: Learning to not get caught up in negative thoughts, emotions and feelings.

The Observing self: Learning to develop the part of one’s self that can neutrally observe the thinking and physical selves.

Values: Discovering what gives your life meaning

Committed action: Setting goals based on your values.

Negative emotions and feelings can be major hindrances to successful trading and other areas of our lives, particularly when we enter into battle with them. ACT is about exiting that battle and getting on with a full and meaningful life.

The best summary of ACT I’ve found is Russ Harris’s The Happiness Trap. He’s also got an internet site ACT Mindfully that has some good material on it.

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I interviewed him just a few months ago.

He was very generous with his time and concluded our interview by offering to help any readers in Australia who wanted to email him with questions.

I liked Ari’s work because he emphasised the need to set an ambitious goal, then accept the discomfort and anxiety of operating in ‘the gap’ — the space separating where we are now and our stated goal.

I suppose that’s the essence of a good life. Setting yourself goals along valued paths and accepting the challenge of meeting them.

The New York Times carried this obituary.

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Michael talks about his new film, ‘Broke: The New American Dream’, which looks at the global financial crisis. He also outlines the key principles of a trend following system, discusses some of the trend following characters he’s met, plus gives his opinion on whether the ‘turtle’ rules still work.

For international readers, a pdf version of the interview can be purchased here.

Pdf versions of my past interviews with the likes of Ari Kiev, Gil Morales, Alex Elder, Brett Steenbarger, Dan Zanger and Charles Kirk can be purchased here.

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The interview can be read by international readers by purchasing a pdf version here

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In the interview Gil talks about rarely discussed topics, including:

- What it was like to manage real money for William O’Neil
- The ‘big stock’ concept
- The importance of looking for ‘re-breakouts’
- Details of his 2005 Apple trade
- Short sale examples: Deere & Co, Amercia Online and Monsanto
- The ‘punchbowl of death’ (POD) short pattern
- The most important market timing tool

Gil now has is own money management operation and publishes the Gilmo report at www.gilmoreport.com.

Back issues of YTE can now be purchased in pdf form here.

Past interviews also include Dan Zanger, Brett Steenbarger, Ari Kiev and Charles Kirk

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Charles, who blogs at www.kirkreport.com, talks extensively about how he’s managed to do what many traders dream about — trade for a living.

He also provided excellent examples of real trades he’s made, including buying General Electric (GE) when oversold in March and going long Telecommunications System (TSYS) when it pulled back in a strong uptrend.

You can read the interview by getting back copies of the edition here.

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It’s hard taking breaks with a young family and work commitments. But they’re absolutely vital to sustain high levels of performance. I was pretty run down. But now I’ve come back refreshed with my motivation much improved.

When I arrived back my copy of Dr Brett Steenbarger’s book The Daily Trading Coach had arrived early from Amazon (it hasn’t hit the book stores in Australia yet as far as I can tell). It was a pleasant surprise and I’ve already studied several chapters, which I’ll write about later.

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The basis of the bourgeois life is innovation. McCloskey’s work makes a lot of reference to Joseph Schumpeter, the Austrian-born economist. Schumpeter theorized that the entrepreneur is the central player in capitalist economies; their innovations drive relentless growth and also create the business cycle.

Schumpeter coined the well-known phrase ‘creative destruction’: entrepreneurs innovate and create new products and enterprises. That spawns imitators and eventually booms. The destruction comes both when the boom busts, but also the destructive impact of innovation on existing businesses.

What has this got to do with trading?

It got me thinking that aggressive-growth/momentum traders are essentially riders of the gales of creative destruction.

The goal is to seek out innovation; to buy entrepreneurial companies that are growing rapidly and changing people’s lives; companies that have created innovative new products and services. Google is a prime example; it is creating new products, but they are also destroying old ones like newspapers.

We can identify the innovators by accelerating growth in earnings and sales. Genuinely successful innovators are producing sales and are not just speculative like most biotechs, tech companies and mining explorers. The fact that something big is happening shows up in their strong price action.

But as Schumpeter noted, innovators eventually lose their edge when they stop innovating and when others adopt their creations. So aggressive growth investors have to be mindful that growth stops; you have to be prepared to hop off before things – company performance and the general market – implode.

It’s a tough thing to do. But it’s also worthwhile. Aggressive growth investors are partners with entrepreneurs, allocating capital to them when they are growing fastest and need it most. It is a crucial role in entrepreneurship and innovation – the essence of capitalism which has pulled most of the world out of extreme poverty.

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