The Trading Digest

If any of you out there have questions or would like to add to the discussion please feel free to leave a comment or email me directly. I know I may have some follow-up questions.

Have a Great Night!

Dave Johnson

Dr. Rene Koch has written articles for Technical Analysis of Stocks and Commodities, created software interfaces for the popular Wealth-Lab software, and has publicly tracked systems on the Collective2.com that are consistently top performers.

Dr. Koch lives in Germany and his native language is German so for our interview we decided to do an e-mail exchange with some questions that system traders or aspiring system traders might find useful.

The Trading Digest - Could you tell me a little about yourself and your background?

Dr. Koch - I am in my forties. 15 Years ago I received a PhD in physics and
computer science from a German Universities. I worked in the field of
acoustics and digital signal processing. After a few years in the
measurement technology business I turned to finance and trading system
development. Surprisingly a financial time series is not much different
from acoustical noise and the math used in both cases is astonishingly
similar.

The Trading Digest - How do you define system trading?

Dr. Koch - Taking advantage of statistical anomalies in financial time series. These
anomalies make future price changes a bit different form a 50% chance.

The Trading Digest - How long have you been designing systems?

Dr. Koch - I started in 2000. My first usable system was ready in autumn 2001 and
showed very good stats at that time. I started trading right before 9/11
and lost quite some money, because system behaved quite different in
these weeks than the years before - an interesting lesson to learn.

The Trading Digest - What software do you use for your analysis and system design?

Dr. Koch - I started with Wealth-Lab and wrote quite a few utilities for it to give
me answers to my (statistical) questions. These days I use RightEdge
(www.rightedgesystems.com) and a bunch of additional software (Excel,
SQL Server, things I develop myself in C#)

The Trading Digest - How do you evaluate the quality or validity of a system?

Dr. Koch - The most important question to ask:
Is any result from a backtest (like overall profit, maximum drawdown,
sharpe ratio) just a statistical fluctuation or does this result hold
for future trades?
It is astonishingly hard to answer this question and most backtesting
software does not assist you but helps to produce false expectations.

I recently developed a new methodology which avoids over-optimization,
data-mining bias, etc. in short: fooling yourself. It is based on
proprietary statistical methods and gives excellent results.

The Trading Digest - Can you tell me any consistent themes you find are more successful in trading systems? In what timeframes?

Dr. Koch - To tell you the truth: after years of research in the stock market I
know one single principle which works consistently: The effects of fear
in the markets. In terms of trading systems this is the pullback, bottom
fisher or mean reversal which in effect talk about the same statistical
effect. You can find this effect in hours, days, weeks, months and even
years. I found the most interesting time frame in the range of 2 to 5
days. Let me emphasize that this statement means at the same time: None
of the so called classical technical indicators works. No RSI, no MACD.
none of them.

The Trading Digest - What advice would you give to beginning trader/investor?

Dr. Koch - First of all: Don’t believe a single word form the books of all these
well known trading gurus. I tested many of the systems/indicators/ideas
they published. None of them worked as advertised.

My advice: Get a sound understanding of “the scientific method”,
statistics, data mining, math.
One of the best books for this is: “Evidence Based Technical Analysis”
by David Aronson and the references herein.

The Trading Digest - Tell me about the systems you track on the Collective2.com site

Dr. Koch - One of my students is a typical “small investor”. He has not much
capital, not much free time during the day and didn’t want to do all the
development of a trading system for himself. After months of discussions
and refinements of published WealthLab systems, we arrived at some
systems which were tradeable for him. They work with small amounts of
invested money and are tradeable with a one-time effort during the day.
Because the systems performed quite well we decided to give them a try
on Collective2. Meanwhile all these systems are among the Top-10 stock
systems there.

The Trading Digest - How many systems do you trade for your personal account?

Dr. Koch - These days I am busy at the development side of the game. There is a
hedge-fund which trades the systems I developed with much more money
than I could afford.

The Trading Digest - What is the minimum account size you recommend for a subscriber to your system?

Dr. Koch - I recommend $15k as the minimum amount. While it is possible to use more
leverage with CFDs or similar products I do not recommend to do so,
because a future drawdown (which is always larger than expected) becomes
simply too dangerous if your leverage is higher than 1:2 or 1:3.

The Trading Digest - What enhancements would you like to see to the collective site?

Dr. Koch - I had some request from European customers to trade European stocks.
Unfortunately C2 is limited to US securities currently.

The Trading Digest - Any books or websites you could recommend?

Dr. Koch - Besides the one mentioned above just - one hot tip:
“Fooled by Randomness” by N.N. Taleb.

I stay away form most websites about trading and try to avoid discussion
forums as much as possible. The only exceptions being the Wealth-Lab and
Right-Edge Forums. 

The Trading Digest - Thanks you so much for your valuable time Dr. Koch and best of luck in all you future endeavors.

Any interested readers can learn more about his stock trading systems (Ruby and Topaz) on Collective2.com