I recently attended the 30th annual conference for the International Federation of Technical Analysts (IFTA). The IFTA Conference is held in a different location every year, and this year's event brought us all together in beautiful Milan.
One of my favorite parts of this conference is the diversity of attendees. Less than 5% of the colleagues are from the United States, which means you have people bringing insights from many different locations and life experiences. This brings a wonderful geographic diversity to conversations about the markets and the financial industry.
Locations of the nine IFTA conferences I have attended
I returned home to Cleveland with pages and pages of notes to review. Here I thought I would share ten quotes from the event that really made me stop and think a bit.
1) "Loose pants fit everyone."
When I was first learning technical analysis, I dreaded Perry Kaufman's book Trading Systems and Methods (sorry Perry!). I am by nature a very right-brained, creative thinker. This book managed to turn technical analysis into a very detail-oriented, left-brained activity.
Duomo di Milano
Over time, I have learned how to use the systematic approaches that Perry wrote about, yet combine them with my more subjective, creative thinking style. So when I heard Perry's presentation in Milan, I was so impressed that he was stressing simplicity.
This quote was a reminder to avoid overfitting. It's best to start with a simple idea, a simple system, a simple execution. Then go from there.
2) "When you invest in the benchmark, you invest in a lot of biases."
Daniel Yannick from BNP Paribas spoke about factor investing, and made some very valid points about benchmark structure. From my years on the buyside, I've been programmed to consider the benchmark as sort of infallible, and your job is simply to outperform it.
His point was that benchmarks themselves have inherent biases based on their member weightings, rebalancing issues, sector weights, etc. As a simple illustration, here's the equal weighted S&P 500 vs. the actual S&P 500.
Note the green line at the bottom, showing the relative performance of the equal weighted index vs. the normal cap weighted index. Even though parking money in a passive index fund feels like a fairly risk-averse move, you're actually making a bet on the validity of the index itself!
3) "The profit factor expresses the degree of overfitting of a strategy."
The conference had a general theme of automation, including trading systems, artificial intelligence, machine learning, and many other recent developments.
Enrico Malverti from Cyber Trade in Italy did a great job highlighting some of the challenges of automation, and shared the quote above from Thomas Stridsman.
One of the common methods used to measure effectiveness of a trading system is the profit factor, which is essentially the profit per unit of risk. Some systems can show amazingly high profit factors. This should be a red flag of sorts, as it may be overfitting the historical data to create a system that would not do nearly as well in the future.
4) "There are no systems so consistent that you can predict their returns."
Perry Kaufman shared a similar sentiment, here stressing the difference between a model and reality.
Many quantitative investors create a model for the markets and basically consider the model and real life markets to be the same. You have to remember that a model is just that- a model! It's not reality itself.
When you try to apply any model to real live markets, things will never be exactly the same and can often create vastly different results.
Gala Dinner at the Museo Nazionale della Scienza e della Tecnologia "Leonardo da Vinci"
5) “Humans are systematically non-rational when faced with risk.”
One of the few behaviorally-oriented presentations was given by Richard Peterson from MarketPsych. I've enjoyed his work since reading his book Inside the Investor's Brain, which detailed many of the ways humans struggle with things like loss aversion.
One of his best examples was a research project where subjects were shown pictures of a human face before answering questions related to risk taking. Some were shown a happy face while others were shown scared or angry faces.
As a beautiful illustration of emotional priming, the participants who first saw the happy face increased their risk taking by 30%. Bear in mind these faces were completely unrelated to the questions that followed. The subjects were simply "primed" to be more risk tolerant.
6) “Buy to the sound of cannons, sell to the sound of trumpets.”
Richard Peterson shared this quote from Baron Rothschild and I thought it was a perfect illustration of the contrarian investing mentality.
It was at this point that I realized how much of the conference was geared toward trend-following systems and quantitative methods as opposed to traditional "buy low sell high" mean reversion.
I love how this quote captures the extreme nature of being a true contrarian. He didn't say, "Buy when things become mildly negative." It's the sound of cannons, blood in the streets, a capitulation of negativity!
7) “We go to where the perceived risk exceeds the actual risk.”
This was a random Wilbur Ross quote but one that made me think a bit about risk. Risk is not just potential downside for an investment, but also how fearful people are about that potential downside.
That fear is what causes markets to become overextended both on the downside as well the upside, triggering technical signals warning of an impending reversal.
The slogan of my research firm is "Managing Risk Through Market Awareness" for just this reason!
8) “Trends are underreaction to information. Reversals are overreaction to information."
I appreciated this thought from Richard Peterson on the relationship between price and investors' reaction to information. Over my career of learning about technical analysis tools and techniques, I have always gravitated to approaches that are easily explained through the lens of behavioral finance.
This made me think of books like Steven Poser's Applying Elliott Wave Theory Profitably, which helped me make that connection. Instead of just laying out the rules for Elliott Wave Theory, he explained the psychology behind each of the waves.
It's not just about identifying a price pattern, it's about understanding what behavior causes that pattern to manifest.
9) “There are always opportunities to provide simple, better products for investors. You don’t need to be complicated.”
One of the things that first drew me to technical analysis was its simplicity. Charts provide an opportunity to step back from the details and get a pure and simple view of the trend. Instead of focusing on what should happen, you focus on what is happening.
Perry Kaufman's quote above was a great reminder that we don't need to make things complicated just to be complicated. We should strive to make things accessible and digestible and understandable.
Riccardo Ronco from Caxton Associates made a great point on how to create a good trend-following model. Start with a simple and robust model, and "feed then with smarter data."
10) “Be open. Share with colleagues. You will get back far more than you give.”
The most inspirational presentation by far was by John Bollinger. He discussed a taxonomy for technical indicators and focused on areas that were ripe for further research and development.
He drove home why conferences like this one are so important. They provide an opportunity for you to get out of your own process and see what else is out there.
By learning from our peers, recognizing those that have come before us, and helping those that come after us, we help to move this industry forward in a positive and constructive way.
Next year's IFTA conference will be in Kuala Lumpur, Malaysia. I will certainly be planning to attend, and I'd encourage you to do so.
One final thought...
What did I find on the streets of Milan during football season?
Buckeyes. No kidding.
RR#6,
Dave
Disclaimer: This blog is for educational purposes only, and should not be construed as financial advice. Please see the Disclaimer page for full details.