The Gateway to Algorithmic and Automated Trading

The art of the fast exit

Published in Automated Trader Magazine Issue 31 Q4 2013

If anyone deserves the label 'market veteran', it may be Jim Moore. Since getting into the business in the late 1960s, he's worked with some of the biggest names around. He also embraced algorithmic trading early on. Adam Cox talks to Jim about his trading techniques and investment philosophy.

Jim Moore, TIF Fund Management

Jim Moore, TIF Fund Management

Jim Moore, head of TIF Fund Management, has worked with some of the biggest names in the business over the years, from Sandy Weill to Paul Tudor Jones. He was also an early advocate of algorithmic trading in the 1990s and the largest trading account in his company is fully automated. As Adam Cox learns, Jim may have been in the market for more than 40 years, but he always wants to be ready to get out in 40 seconds.

Adam: You have a system you developed over many years. Let's talk about how it came to be.

Jim: Basically, we don't believe in buy and hold. We believe that the markets are so volatile today and commissions are so low that it is cheaper for us to exit a losing trade, and look for a safer place to re-enter the market. We are not members of or associated with any broker-dealer and we get no share of commissions, so it's best for our clients for us to keep the commissions as low as we possibly can, and still get good executions of course. Essentially, we protect our capital by trading very actively.

We trade about 80 times a day, 40 are typically new entries, and 40 are liquidations. And that's the underlying concept. It's specifically oriented towards very, very low risk, and active trading. Our average trade for a loss is about 97 minutes, our average trade for a gain is a little under three days, and therefore our average trade is about 1.4 days.

Adam: Regarding the losers, it sounds like you have tight stop-losses and as soon as you get to a certain point you want to get out.

Jim: It might well start losing money right from the outset. And that's okay, but when it gets to a certain point, we exit. Our average loss is less than 1/30th of one percent of our AUM.

Adam: So if you have such small tolerance for downside, does that not add new risk in terms of knocking you out of a lot of positions early on?

Jim: I'm a pilot, and the one thing I can tell you about pilots who are old is a) they're not too bold, and b) they really in most cases would prefer to be on the ground wishing they were in the air, than in the air in a bad storm wishing they were on the ground. We built this program with the exact same philosophy; we would rather be out of a trade, looking for a safe place to enter, rather than be in a bad trade, without a logical place to exit. If you anchor properly, you can be in and out with very little loss and look for another trade in the same market or else proceed to the next opportunity.

Adam: How does the system determine a safe point of entry for a new market?

Jim: Now you're asking for our secret.

Adam: Can you talk about it in general terms?

Jim: I will answer that to some degree. The program designer has looked at the trades and said 'Look, there's a place to enter where the risk is low, and I'd rather enter it and try, and if it doesn't work, okay, so I'm out for a very small loss'.

Here's the fallacy. I don't know how much you watch the promotional word in our industry today, but a vast number of people claim to be right at 65, 75, 85, even 92% of the time. Two pieces of literature I've read in the last week said that. Believe it or not, our program makes money and we're right on only 42% of our trades. People are typically amazed! We count a break-even as a loss, because it was an inefficient use of our money. We committed capital that didn't work for our investors. We might not have lost money but we didn't make any money, therefore it's an inefficient use of our capital. Secondly, why 42%? Why so low? That's not common. Actually, it is common for floor traders. And that's how we think. Basically we take our losses so rapidly, that it brings down that average. But our average gain, what we get on a winning trade, is more than two times what we lose on a losing trade. If you work out that on a non-leveraged basis, no leverage at all, you're still making 9% a year.

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