from Rob Hanna: The below interview is being republished here
with the permission of The Kirk Report. For anyone who may not be
familiar with The Kirk Report, I strongly
recommend checking it out. I'd like to thank Charles Kirk for
taking the time and effort to interview me and for allowing me to
republish the interview. I also hope readers find it helpful.)On
a monthly basis I try to introduce you to someone I think offers
valuable perspectives that will help you become a better trader and
investor. Rob Hanna more than meets that qualification as a hedge fund
manager and quant-focused trader.
For the past two years I've been a loyal reader of both his Quantifiable Edges' blog and newsletter.
What I appreciate most about Rob is his no nonsense statistical
research in creating specific quantifiable edges in the market. Those
of you who desire to trade with a more analytical,
non-emotional/systematic approach, will find Rob's research helpful.
this Q&A we'll talk about how Rob finds his trading edge and the
methods he uses with the goal of making us all better at what we do.
Even if your focus is on investing for the long-term, I think you'll
find Rob's approach of interest.
We hope you find this Q&A interesting, informative and helpful.
Q&A with Rob Hanna
Kirk: Hi Rob. Welcome to the Q&A and thank you for being willing to share your perspectives with us.
Rob Hanna: Thanks
Charles! I'm flattered to have been asked. Having seen many of the past
interviews you've done, I hope this one is able to stand up.
Kirk: I'm sure it will!
For those who don't really know you or follow your blog, please tell us a little about your professional and educational background.
Rob Hanna: As
far as education goes, I went to Boston College and attended their
School of Management for economics. I also did a double major in
philosophy. I'm originally from New Jersey and between my junior and
senior year of college I got an internship working on the trading floor
at Garvin Guybutler in New York. I worked in the area that traded
overnight Fed Funds. Back then it was a lot different. There was a
floor of brokers with desks and phones. My job was to write their bids
and offers on a big marker board using different color magic markers.
The marker board acted like a giant, manual, Level II screen. I updated
everything as bids and offers changed and deals were done. I remember
my first day their they told me - "Welcome aboard. Go sit in the corner and learn your fractions." "Huh? I know my fractions." "No
you don't. Not when you have to know everything between 1/64th and
63/64th and where to place that fraction on a marker board in a split
second with 10 brokers screaming at you. Now go learn your fractions." So that was my intro to trading.
graduation I wanted to stay in Boston. After a while I ended up at
Thomson Financial. I worked in the investment software division. I sold
portfolio management, trading, and accounting software to large money
management firms, banks, insurance companies, mutual funds, etc. The
software was basically the backbone of their operation so it involved a
long sales process, typically 6-12 months where I would become
intimately acquainted with the operations of the firm. I had to
understand the needs of traders, portfolio managers, compliance, and
back office personnel so I could demonstrate how their office could run
using our software. I did that for about 7 ½ years. During this time I
became very interested in trading myself. Of course I think everyone
did during the 90's. Over the course of 4-5 years I taught myself how
to trade. I started with William O'Neils' book for intermediate-term
and Jeff Cooper's for swing and day-trading. From there I devoured tons
of trading books.
In 2001 I left Thomson Financial. Soon after I began Hanna Capital Management and trading became a full-time job.
Kirk: How would you describe your style of trading?
Rob Hanna: Always
evolving. Lately I've focused more on quantitative swing trading
because that's where I've found some of the best opportunities over the
past couple of years. It's also a primary focus of Quantifiable Edges.
I do still trade some momentum strategies and I'll execute an
occasional daytrade, but most of my effort is in the 2-7 day timeframe.
an average week how many trades do you make? What is your average hold
time and how many positions do you have open at any given time?
Rob Hanna: This
varies greatly by market action. Perhaps 10-15 trades per week would be
an average. Some weeks there will be hardly any, and some weeks much
more than that. I consider myself opportunistic with regards to trades.
of the hardest things for many traders to do is sit in cash if they
don't see an edge. They often feel as though they should be taking a
shot with something to try and generate income. From my experience I've
found that if I need to look too hard to try and find an edge, then
it's likely a bit of a stretch. This is not a good situation to trade
why. Say a trader has a strategy that he's very comfortable trading.
He's confident he has an edge and after placing the trade he knows just
how to manage it. He knows how to best size the position. He knows
where a stop should be if he uses one. He knows the best way to take
profits (or losses) for the particular strategy. If he is able to trade
the strategy consistently over time, he should come out ahead.
let's say the same trader doesn't see any of his setups triggering.
Perhaps he reads something or finds a setup that appears to have a
edge. He hasn't traded it before but without any of his regular setups
triggering, he might as well take a shot with this other one - marginal
as it may be. Now - even if he is right and the trade setup has an
edge, does he know the best way to exploit it?
the trade is on, knowing it is not an ideal setup, or at least one
they're comfortable with, most traders will tighten up. They'll manage
the setup in a way that isn't ideal. Whether that means too tightly
because they're afraid of losing, or too loosely because they took an
extra small position, it doesn't really matter. Effectively, by taking
a setup that has a small edge and managing it in a less than ideal
fashion, they have effectively eliminated their edge and are now
trading with a negative expectancy.
So an "average" number of trades per week has a large standard deviation - which I believe is appropriate.
Kirk: That makes a ton of sense Rob and terrific advice about how important it is to wait for the edge to be found!
tell us a little about your initial learning process and anything
significant you learned within the first year or two of trading.
When I first started trading I actually began learning two very
different strategies at the same time. I read William O'Neil's book and
subscribed to IBD which got me to adopt a momentum growth approach for
the intermediate-term. I also had some friends that were day-trading. I
learned how to do a little of that as well. Many of the setups I traded
early on were Dave Landry's or from Jeff Cooper's Hit and Run books.
The strategies focused primarily on buying breakouts or pullbacks in
strong stocks (or short them in weak stocks). Most of Jeff's setups
would require a high ADX because he wanted to get into things that were
used software to scan for stocks that would set up for a daytrade (or
possibly a swing trade) the next day and then I'd program them in to
buy or short if they triggered. After trading the two very different
kinds of strategies for a while I realized 2 things:
1) The best day-trading opportunities often came in the high RS stocks I was looking to buy on an intermediate-term basis.
2) The best intermediate-term opportunities often occurred in those stocks that exploded out of my day-trading setups.
basically led me to marry the two techniques and I would only daytrade
stocks that I felt I'd like to hold for an intermediate-term trade.
Also, I began trading around my intermediate-term positions. Rather
than just sitting in an intermediate-term position for six weeks and
trailing a stop, I'd look to jump in and out of that position several
times. If I did it well it would basically allow me to reduce the cost
of my position and I could profit on intermediate-term trades that
would otherwise end up breakeven or worse.
than anything this taught me that it's possible to learn from others
and mimic their style, but ultimately, if you can adapt that style and
make it your own, you're much better off.
Kirk: Amen to that. So, where do you think most traders go wrong in the first couple of years?
They take trades without a solid concept of the potential risk/reward.
Many publicly available strategies, especially if the trades aren't
managed properly, won't provide traders with a substantial edge. Poor
risk management is also a problem. Although that's not really specific
to beginning traders. As was demonstrated so well by a good number of
banks, investment firms and governments in the last couple of years, if
you don't manage your risk properly, you can really find yourself up a
Kirk: Unless, of course, you have Uncle Sam willing to bail you out!
After the initial learning curve, what do you think marked the next stage of your progress of becoming a successful trader?
2004. It was my worst year. I barely broke even. In 2003 I made
fantastic returns and at the end of 2003 I really felt I'd learned so
much that year that I should have done much better. I figured it was
going to be all up hill from there. Then in 2004 the market changed. It
became very rotational. The breakout strategies that had performed so
well for me in 2003 were chopping me to bits. To compound that the
daytrading strategies I used completely lost their edge because
volatility dried up. Every step forward was followed by a step back.
led me to look into ways to improve the momentum based strategies I'd
been employing. The first thing I did was determine where I felt my
strategies fell short. The answer was fairly obvious and is likely the
same for most trend following techniques. I did great in the middle,
but I did poorly at the tops and bottoms. Basically I found myself over
invested at tops and under invested at bottoms.
conducted a huge study into the character of tops and bottoms. I wanted
to determine not only how the general market moved but how the
different sectors acted as well. What sold off the hardest from the
tops? What bounced best off the bottom? The answer to these two
questions I found to be fascinating at the time.
stocks that sold off the hardest were often the most overbought. They
were the momentum stocks that had run up the furthest and were leading
the market. They were the same stocks I was often long. They were also
the same stocks I'd been taught that tend to hold up the best when the
bottoms I'd been taught to look for leading stocks to try and jump
aboard. This was dead wrong. The stocks that bounce the best off the
bottom are almost always those that are beaten down the most. Take a
look at the banks. The S&P is up a little over 60% from the March
bottom. The BKX? 175%. Now this is an extreme example and really the
outperformance rarely lasts this long. But the 1st few days and weeks
off of a substantial bottom you will normally see the really beat up
stocks do the best. I addressed this in a timely blog post in January 2008. I also followed up on that post a few weeks later along with some results.
my findings when conducting this research along with my poor 2004
performance led me to basically rethink everything I'd been doing.
First I decided that the best way to improve my trend-following
techniques was not to refine them at all, but rather to design some
complimentary techniques that could take advantage of the tops and
bottoms. It would allow me to make more efficient use of capital. Trend
following is great…in the right market. And mean-reverting strategies
are also great…in the right market. So when I realized you could
combine the two without having to neuter one of them it was a chocolate/peanut butter moment for me.
2nd thing all this research did was to spark my curiosity. I began
testing more and more ideas. The more tests I ran, the more ideas I
had. It's what led me down the path of developing a huge research
database and eventually to begin Quantifiable Edges.
back to the original question, what led me to progress as a trader? My
own struggles. They say necessity is the mother of invention and I
think that's certainly true in my case.
remember reading those posts Rob and they helped me quite a bit this
year to focus my screening efforts in a way that has helped
tremendously. So thank you for doing that!
the number of studies and research projects you've undertaken, what
would you say is the most significant lesson you've learned about
yourself and trading over the past few years?
The market is constantly evolving and you need to be able to change
with it. For me the best way to do that is by studying it. I'm always
trying to find new ways to do things. I've traded using many different
techniques, from very short-term intraday to long-term strategies. The
one constant I've found is that no strategy works forever. At least no
static strategy. You need to adapt your approach as the market changes.
Some people think they can learn a couple of easy patterns and just
trade using them the rest of their lives and they'll be fine. If those
patterns are adaptive somehow, then maybe. If they can work in calm
markets and choppy markets and trendy markets and panicky markets then
great. Perhaps you can use them forever. I'm not aware of any simple
patterns that work in all markets and can be traded often enough to
make a living.
an example. Like I said, I was a big fan of Jeff Cooper's stuff when it
first came out in the late nineties. There was a pattern in one of his
books he called the Hot IPO Pullback. Basically he looked for an IPO
that rose a certain amount above its offering price on the first day.
The first time it put in a multi-day pullback on the daily chart he
would look to jump aboard. At the time many IPO's were taking off and
they might double or triple again over their first few days or weeks of
trading without ever pulling back. It was the internet craze. So I
adapted the strategy. Instead of waiting for a pullback I would look at
each IPO that came to market. If it had a great first day (say up 75%
or more on day one - which was a little above average those days) then
I'd get ready to buy. I was looking to buy on day 2 and my trigger was
the high of day 1. This strategy was the best trading strategy I had
for about a year and a half. It was mostly day trades but they could
make very big money.
the 2000 bear came and the IPO market dried up. My best trading
strategy was gone...probably forever. Time to adapt. If that strategy
isn't working - something is.
other words, none of us can be a "one trick pony" if we expect to excel
over the long-term. In addition, if something you're doing right now is
working very well, chances are fairly good at some point it won't.
That's the nature of the beast.
of you who read you know that you share quite a bit of statistical
research/studies at both your blog and newsletter. If we can, let's
talk about some of those and how you create and backtest those studies.
Among all of the studies you create and share, what are a few of your personal favorites and why?
Rob Hanna: Hmm. I'll pick a few from the blog so everyone can read them if they wish.
I did one last winter that discussed the importance of position. The example I used in the study was a sharp one-day selloff.
you look at very sharp one day selloffs over time you may get jumbled
results. If you instead look at sharp selloffs relative to where the
market is trading, then the results will be vastly different. This
study looked at 2.5% one day drops. It first looked at such drops
immediately following a new short-term high. It then looked at 2.5%
drops when they occurred following a short-term low. I won't spoil the
ending but the results are vastly different.
isn't only important when considering sharp selloffs. It's important no
matter what you're examining. The market behaves differently near a top
than it does near a bottom. Another example of this was when I looked
at how the market behaved intraday following large gaps. I did this for
both gaps up and down. The action prior to the gap had a major impact
on the potential success of the gap. If the market closed one way for 2
days in a row then had a large gap in that same direction, odds favored
a reversal. If the market was not already extended in the direction of
the gap (assuming the gap was large), then odds favored continued
follow through. I'll get you some links to these studies.
Large Gaps Up After The Market Has Already Risen
Putting Large Gaps Down Into Context
concept I've discussed and found value with that I haven't seen
elsewhere is what I call "Time Stretches." Basically I measure the
amount of time a security spends above or below a moving average. Once
that time period becomes over-extended a reversion back to the other
side of the moving average often takes place. This is a concept that
I've successfully incorporated into some systems that I track on the
website. For systems I've found relatively short-term moving averages,
such as the 10-day, work quite well. I think I've written two blogs
that discuss time stretch systems - one with a long system and one
short. Subscriber Letter Time Stretch System
How Time Stretches Can Provide An Edge
these favorite studies, are there any additional studies you think are
important for us to be aware of for both the short-term and further
Rob Hanna: One
thing the recent rally has had is incredible breadth numbers. This is
not at all unusual when coming off a long-term bottom. It is unusual
several months after the bottom. The rally in July was accompanied by
some incredible breadth numbers. To my detriment, I didn't value them
enough versus some of the other things I was seeing. We've again had
some breadth thrust signals here in September which are suggesting we
may not be at the top quite yet.
a big picture point of view I believe the current market is most like
the 1930's. This means I expect both rallies and selloffs will be much
more exaggerated than most market participants are used to. Just as the
bear market up to March 2009 was incredibly extreme, so has the been
the rally since then. I believe there is going to be a lot of back and
forth over the next few years and the swings will continue to feel
extreme. I wrote a blog post about this in March with several illustrations.
is the catalyst for undertaking a new study? Do you start with a rough
concept you wish to further test or do you start with noticing
something in your research (or others) and then take the time to verify
its value through backtesting?
Rob Hanna: Curiosity
and current market conditions are what drives many of the studies. Each
night I examine the market to see what happened that day. How were the
breadth numbers? What about volume? What was moving the most? How about
volatility? I'm basically looking for standout readings in price,
volume, breadth, volatility, sentiment, or some indicator I may track.
It doesn't have to be anything earth-shattering. Just something that
might provide a hint. The market hit an X-day high or low, or breadth
was extremely weak, or volume was very high. Anything like that. Here's
a simple process for coming up with ideas to test:
1) Observe what's happening in the market.
2) Describe what you're seeing.
3) Test what you just described.
one of the 1st paragraphs of the subscriber letter each night I just
describe that day's action. It's a very simple description. A typical
description of the day may sound something like this "The market
gapped up big this morning but failed to gain any traction. It pulled
back and was trading lower just 45 minutes into the day. After trading
down much of the day it rallied strongly in the last hour to close
barely above where it opened the day. This was the 3rd day in a row the
market closed up and today it made a fresh 20-day high. Breadth was
mildly positive as the NYSE Up Issues % came in at 55% and the Up
Volume % at 59%. Total volume rose to the highest level in over 2
many studies are there to look at in the above description? Countless.
Start broad. What happens after the market gaps up and closes higher on
the day? What happens after 3 up days?
Now get more specific.
What if the gap is large vs. small?
Does the fact that the gap filled during the day have an affect?
What if volume is higher than the day before?
What if volume is the highest in 20 days?
What if volume was high and the market rose at least X% but the Up Issues % couldn't even manage 60% advancers?
like I spoke of earlier, don' forget market position. What if all this
is happening at a 20-day high? A 10-day high? After 3 up days?
days there really is a lot to look at. If you're having trouble
thinking of what might be worthwhile to test, a little reading can
often help. What are others noticing about the market? Perhaps there's
some action that you didn't notice that others picked up on. For
instance perhaps today was the 1st 20-day high in over 2 months. Or
perhaps it was the 3rd 20-day high in a row. Those things might matter.
After you do these studies for a while you'll get a feel for what
things are important and what may not be. You'll know where to look.
And if you can't find something then perhaps current action isn't
providing that much of an edge - so don't sweat it.
Kirk: Can you slowly walk us through the all of the steps you go through to test a specific datapoint or idea?
Once you have some ideas it's just a matter of taking historical data
and filtering and sorting it in a way that you can see how the market
has performed under similar circumstances in the past. To do this I
most often use Tradestation. For certain tests I'll also use Excel. The
tool doesn't matter much. If you want to run studies based on
observations like I discussed earlier, here's a simple way to do it:
Set up each observation as a condition. In Tradestation this would mean
something along the lines of condition1 = open > yesterday's close
or (Open > Close). In Excel it would be a column. If the opening
prices were in column C and the closing prices in column F then it
would look something like this: IF(c5>f4,1,0). Remember, you want a
new condition for each observation you are going to test.
Set up your exit criteria. For most of my testing I normally look out X
number of days to see how the market has performed. In Tradestation
this would be a statement like: "If barssinceentry = X then sell this
bar on close" Then you would optimize on X to create a table with a
bunch of different days on it.
Like we discussed earlier, start with a broad test and then get more
specific. Make sure you look at things a number of different ways. When
testing you need to approach it all with an open mind. You're not
trying to prove that today's action was bullish or bearish. You're
trying to see if there is a convincing edge either way. When you get
more specific you're doing so in search of truth. You want to
understand if certain observations have a substantial effect on the
results. You're not data mining in a effort to find the perfect setup.
If you're looking at things a few different ways and consistently
seeing the same answer then there is a pretty good chance there's an
Let's say you see an edge and looking at it a few different ways
confirms it. Another thing that really needs to be done is you need to
look at the history of your results. If you are running the test over a
long period, the edge may be significantly stronger or weaker now than
it was in the 70's or 80's or 90's. You need to take this into account
when deciding whether your results suggest an edge. Let's take a simple
example. Mondays. From 1960 to until 1987 Mondays were consistently
negative. After the Crash of '87 (which happened on a Monday) this no
longer held true. Since '87 Mondays have not had a negative bias.
Instead they've basically performed in line with the general direction
of the market. I'll provide a chart
to illustrate this. So if a condition of your test is that you're
buying on Friday's close and selling on Monday's close, I probably
wouldn't run that test all the way back to 1960. I'd go from '88 -
present at the longest.
Compare your perceived edge to a baseline. Consider the current market.
If I ran a test and found that over the last 6 months, every time the
market closed up on higher volume there was a 60% chance it would rise
the next day and the average return was about 0.25%, would you say
there is an upside edge? Consider the fact that the market is up 60% in
the last 6 months. That's 60% in 120 trading days. Now the 0.25% gain
per day doesn't look so impressive. If these same results had been
achieved in March when the market was down close to 50% over the
previous 6 months - well now you're talking a HUGE edge. So make sure
you put the results into some context by looking at what the market has
done over your test period as well.
Kirk: Wow. I think that process really is helpful Rob. Thank you for sharing it with others.
your vast experience, I'm curious to know your opinion on seasonal
strategies (like sell in May and go away, buy first day of the trading
month, the market tends to gain more on Wednesdays than Mondays, etc.)?
Are there are any you think are of importance to pay attention to (or
not) that you run into quite a bit?
Rob Hanna: I'm
not a huge fan of seasonal strategies. One reason is that the market is
always evolving. The Mondays test I just mentioned is a perfect
example. With a seasonal edge, especially if it's an annual setup, it
may take many years to realize it just isn't working anymore. If there
is a reasonable explanation behind a seasonal tendency I tend to give
it a little more credence. Outperformance at the beginning and end of
the month is an example of this. It supposedly works because that's
when 401k contributions arrive and the money gets immediately put to
use. So there may be some value there. For my trading, though, I
believe breadth, volume, price action, sentiment and volatility carry a
much bigger influence on future direction than what day of the
week/month/year it is.
is one seasonal-type influence I do think is worth trading - and that's
Fed days. Eight days a year the Fed comes out with an announcement.
Over the years there have been some pretty consistent biases that form
around these days. I've documented many of them in the blog.
the past your "mythbusting" posts have proved popular. In your
experience, what are a few myths that you think traders should know and
try to avoid?
Rob Hanna: Volume
related myths are the biggest. So many people teach that a low-volume
pullback is a bullish. Not necessarily. I did a blog post
on this and showed that very light volume on the first day of a
pullback often led to a deeper pullback. When volume wasn't extremely
low the expectation over the same time period was bullish.
are another. Supposedly when the market is in an uptrend and then it
suffers a series of high volume selloffs that is a sign of a top. In
reality it is often a buying opportunity and not a time to start
Of course my biggest series of myth-busting came with regards to follow-through days.
I did a series of about 10 posts that looked at follow through days in
great detail to determine whether they were a useful tool. My general
determination was that they provided little value and certainly were
not all that they were cracked up to be. There were some aspects that
were useful, though. For instance, while the follow through day itself
has almost no predictive value, the action 1-5 days AFTER a follow
through day is fairly predictive. I'd encourage traders that utilize
follow through days to check out that series.
interesting. Thinking back, I know at least a few times I've made some
poor decisions due to the influence from these myths as I'm sure others
have as well.
your view, are there any studies that even an average investor not
devoted to incorporating statistical research into their strategy
should be aware of?
Rob Hanna: Here's
one: the average investor loses money. Armed with that knowledge I'd
incorporate any edge I could to get above average.
biggest misconception about quantitative / historical / statistical
research (or whatever you want to call it) is that it's very difficult
to learn and incorporate. It doesn't need to be. Almost all of what I
do is simple analysis. Using 2 or 3 conditions I'll tell you how the
market has performed under similar circumstances in the past. You don't
need to be a math wiz or a computer guru to take advantage of some
Here's 3 very simple truths I learned/confirmed through testing:
1) You're generally better off buying pullbacks in an uptrend than you are in a downtrend.
2) You're generally better off shorting rallies in a downtrend that you are in an uptrend.
Don't be too eager to short rallies that are coming off a potential
long-term bottom (like a 200-day low). Those might steamroll you.
a beginning trader who wanted to focus on trading pullbacks took those
three things into account, they'd likely be much better off than the
beginning trader who didn't. If they really take them to heart and they
learn to incorporate a few more tricks, then that beginning trader
might even be "above average" and make some money.
isn't necessary for everyone to run studies the way I do to make money.
It is necessary to trade with some kind of an edge. Knowledge can
provide an edge. Traders should learn about the market and then figure
out how to use that knowledge to their advantage.
I hoped, this Q&A is going to encourage many who read it to
actually test and validate their strategies. In my experience, this is
often something you'll see occur only when traders really get serious
about improving their ability to trade. Why you make it look easy Rob,
in reality it does take time and practice!
At your subscription-based website, you offer daily updates of the following indicators:
Among all of these, which are your favorites and why?
use some of the breadth indicators most often. Every night I look at
advancers/decliners (Up Issue %) and Advancing/Declining Volume (Up
volume %). They give me a lot of test ideas.
CBI (Capitulative Breadth Indicator) has been a valuable one for me. I
have one system I trade called the Catapult system. It looks for
individual stocks in the S&P 100 that are undergoing possible
capitulative selling. The CBI is basically a count of all the active
Catapult signals I have at one time. Generally when you see a large
cluster of Catapult trades occur, it strongly suggests the market is
likely to bounce. It generally only happens once or twice a year, but
there are some nice opportunities when it does happen. There's tons of posts and information on the blog about the CBI, and when it spikes I normally will alert blog readers to it.
CBI data goes back to 1995. I let subscribers download the whole
history in case they want to study it or incorporate it in their on
your website you share a proprietary volume based indicator for the
S&P 500 and Nasdaq. Can you share a recent chart of both and
explain what both are indicating now?
Unfortunately, they aren't saying much of anything right now. Like many
indicators I track, they're really only valuable when they hit
extremes. The Volume Spyx indicators look for unusual relative volume
activity. When there are very high readings - over 80 or 100 then
risk/reward swings especially positive for the next day. Very low
readings - below 20 or 0 show flat to negative risk/reward for the next
day. I'll occasionally conduct studies related to these indicators that
may suggest implications farther out than just 1 day. I've posted some
of these studies and information to the blog.
Kirk: Many traders keep a close watch on net new highs? Why is this info so important?
New highs/new lows data is typically used for two purposes: 1) To spot
divergences suggesting a weakening of a trend, and 2) extreme measures
can be used to alert traders to probable reversals.
one is more popular but I've found limited value with its use. For
instance, a few weeks ago I published a study in the subscriber letter
that questioned whether a market making higher price highs, but with
fewer stocks hitting new highs, had bearish implications. The results
were inconclusive. Basically, you were looking at a toss-up in this
kind of scenario. In looking at instances where new highs expanded when
new price highs were achieved, performance there was substantially
better than the 1st test. My conclusion was that the failure to see an
expanding number of new highs in a rally was not an actionable red
flag. That said, you'd rather see an expansion of highs.
percentages of stocks hitting new lows often lead to at a least
short-term reversal. So that's something I do always watch for.
Kirk: How helpful do you think the VIX is and where do most people go wrong using it?
Rob Hanna: I
use it in my analysis and have identified some decent edges. Most of my
early VIX testing was based on Larry Connors' work. Larry found that
absolute levels of the VIX were basically meaningless. Instead he
compared the VIX to its short-term moving averages and found that when
it became stretched from those moving averages it often was followed by
a reversal - both for the VIX and the SPX.
nowadays will throw 10% bands around a 10-day moving average and when
the VIX gets stretched one way or the other they'll consider that a
reversal signal. This works ok when the VIX is overbought and the
market is oversold, but an oversold VIX is not a very good signal
unless it is VERY oversold.
I did a study
about a year and a half ago that showed over the previous 10 years,
when the VIX was stretched more than 10% below it's 10-day moving
average the S&P performed significantly BETTER on average than
those times the VIX wasn't stretched far below the 10-ma.
results were somewhat surprising to most people - including myself. Now
when it gets REALLY stretched, then you typically have a decent
downside edge for the SPX. Last November I published a study that illustrated this using a 20% stretch from the 10-day moving average.
mistake people make is that they try and overanalyze the VIX. Every
little wiggle or stretch doesn't necessarily mean something. Although
it often trades counter to the index they will sometimes close in the
same direction. If this is minor, or involves a weekend volatility
adjustment, then it really isn't a big deal. If you get sizable moves
in the same direction, especially if it is over a period of several
days, then there's a decent chance it can provide you a nice
to know Rob. Thinking back, how did you first learn how to properly
backtest your ideas? I'm sure others will be curious to know about how
you developed this skill set.
Curiosity and determination. I was somewhat familiar with easylanguage
so I taught myself how to code better using that. When I got stumped I
posted on their forums. I also read a lot of what other people posted
there. I showed some of my results to other traders to elicit feedback
and listened to where they felt I might be missing something.
Eventually you just get it. I wish there was an easier way. Joining a
trading group would be one way to go. I've participated in a few email
groups over the years and have learned tons from other members.
someone does not already know how to test and create statistical
studies like you share or would like to improve their own methods, how
do you recommend they learn? Do you have any resources other than your
own website (i.e. software, other websites, books, etc.) to share to
help get them started in the right direction?
Rob Hanna: The best thing I've seen was in Dr, Brett Steenbarger's newest book "Become Your Own Trading Coach."
He dedicated a whole section to historical analysis and described in
great detail how to perform studies using Excel. It's a great place to
start for anyone wanting begin testing ideas. One very important thing
to do is to save templates of all your work. You don't want to have to
rewrite every calculation every time you want to perform a study. Save
your calcs somewhere so you can easily copy and paste them.
sure there must be a decent number of other resources these days as it
is becoming a bit more popular. Since I'm beyond the learning stage I
haven't paid attention to most of them in the last few years.
do you properly organize all of the research and studies you undertake
in order to know what to review and look at over time?
The more studies you conduct the more important this becomes. I imagine
most people that do a lot of historical analysis must categorize them
in some searchable database. I decided to take it further than that.
The problem with having a searchable database is that you still have to
do the searching. This means you have to recognize there may be
something happening in the market that you've studied before and then
you have to be able to find where that study resided.
Instead of searching for my studies I created a program I call the Quantifinder
The Quantifinder looks at basically all the market action for the day
and then matches it up with all of my previous research studies. It
then outputs links to the studies that triggered today along with
descriptions of them. So if there is a study I conducted a year ago
that I may have forgotten about, I just pull up the Quantifnder and it
reminds me. Then it's just a matter of clicking the link and I can read
what I wrote back then.
originally wrote the Quantifinder to make my life easier. I liked it so
much that I decided to make it accessible to subscribers as well. The
ones that really seem to like it are the overseas subscribers. I tend
to work very late at night and sometimes don't get the Subscriber
Letter out until European markets are already open. With the
Quantifinder they can get a sneak peak at what I'll be writing about.
there are times that studies you've create conflict with each other.
Can you give us a recent example of when this occurred and how you deal
Rob Hanna: Oh
sure. This conflict always happens and it's perfectly normal. I treat
my studies like other people treat a list of indicators. It's pretty
rare that ALL your indicators are all lining up and saying the same
thing. Same with the studies.
To quantify what the studies are suggesting I created an indicator I call the Quantifiable Edges Aggregator.
Basically the Aggregator takes the projections of all of the studies
from the past few days or weeks that I consider "active" and generates
a short-term projection based on their combination. This result
provides a net expectation for the next few trading days. I then look
to see how the market has done over the last few days compared to
recent net expectations. What I look for to find the most significant
long-side edges are 1) positive expectations over the next few days and
2) a market that has underperformed expectations over the last few days
(and is therefore considered oversold). For short-side edges I look for
exactly the opposite. If I have positive expectations in an overbought
market or negative expectations in an oversold market then that is
typically considered a neutral configuration.
there studies recently that no longer have been working as well as they
have been in the past? If so, why do you think that might be?
Rob Hanna: Yes.
That happens occasionally. When I determine a study has lost its edge I
eliminate it from the Quantifinder. A study could lose its edge for a
number of reasons. One possible reason is that there really wasn't an
edge to begin with. Perhaps the market moves following the setup were
coincidental and there wasn't causation. This is always a possibility.
I do my best to analyze the studies thoroughly enough that the chances
of this are relatively slim.
second reason is that the market dynamics may have changed. We've
already talked about how the market is constantly evolving, so this is
something I'm always on the lookout for. A good example here is
Put/Call ratio studies. As regulations have changed and as new products
have emerged over the years the way investors use options has also
changed. What this has done is it has changed what is relatively high
and what is relatively low with regards to put/call ratios. For
instance a put/call ratio over 1 at some point in 2000 would have been
and extremely high reading. In 2008 it was about average. Any study
conducted in 2002 that used a put/call of 1 to decipher an edge would
be obsolete in 2008. I avoid this problem by normalizing put/call
ratios in all my studies, but this does provide an example of how
evolving market conditions can render certain studies obsolete.
For more on put/call ratios and the need to normalize them, you could check out the post I published in August.
it's important to watch for wholesale shifts in market dynamics. Mass
failures of studies over a period of many months or more could suggest
such an event. This is fairly rare but does occur. One example is the
crash of '87. Many studies I've conducted have shown ineffectiveness
prior to this date. After the crash there were numerous new regulations
put in place - trading curbs for one. Plus the government seemed
afterward to take a more active role in monitoring the stock market. An
example of a study that stopped working after '87 is the Mondays study
I referenced earlier. My inclination as to why Monday's changed is that
Black Monday was so bad that afterwards people began taking extra
precautions going into the weekend. Everybody being so afraid of Monday
effectively killed the Monday downside edge.
couple of things to takeaway here. First, I always weight more recent
results higher. This is important in case dynamics are changing.
Second, monitoring the success rates of many of the studies is always
important. Failures may alert you to a change in market dynamics that
it could take others many years to realize and adjust to.
Kirk: Great stuff Rob.
sharing the work of your studies, you seem to talk little about money
and risk management? What are your thoughts regarding this important
Rob Hanna: It
really needs to be paid attention to. Since I've been running the
website I've heard some stories of traders that have basically blown
out there accounts. Those that wrote and told me cited the fact that
they gotten overly aggressive and failed to manage their risk. While I
publish and track some trade ideas in the newsletter I don't ever
suggest position sizes. My subscribers vary from beginning traders to
large hedge fund and institutional portfolio managers. I can't possibly
account for everyone's risk tolerance and experience and so it has
become a topic that while I feel it is important, I'm not in a position
to offer much guidance.
Kirk: What are your thoughts regarding portfolio position sizing?
Rob Hanna: There's plenty of ways to determine optimal position sizes. Some of the best books on this subject are by Ralph Vince.
From my standpoint I think position sizing, being that it is part of
risk management, is a very personal decision. If the "optimal" position
size for a particular strategy is 10% of your portfolio, but you
personally have trouble coping with the swings of a 10% position, then
it really isn't the optimal position size. A position that is sized too
large will take you out of your comfort zone. In doing so you will
likely manage that position in a non-optimal manner and the edge could
completely disappear - or worse. So from a position sizing standpoint
my general advice is this: take positions that are big enough to help
you grow the account but not so big that you're not comfortable trading
enough. So, when applying a recent study to your trading, how do you
know where and how to set your profit targets and stops?
I think it important here to distinguish what I refer to as a study vs.
what I refer to as a system. A system is a complete set of rules that
tells you what to trade and gives an entry trigger and an exit
strategy. A study just looks at the market, whichever market that may
be, and evaluates how it performed under similar conditions in the
past. So if I'm trading a system, then the rules are there for me. If
I'm establishing a bias using market studies then stops and profit
targets aren't necessarily part of the picture.
Kirk: Can you share some of your personal trading rules?
Rob Hanna: There's really just two rules:
1) If I have an edge - take a position.
2) When the edge is no longer there - get out.
doesn't matter what my entry point was and it doesn't matter how much
I've gained or lost on the trade. When the edge is no longer there, I
shouldn't be either. And when it is there - I should stay in the trade.
This actually requires some discipline because there's always a
temptation to bail when it begins to go against you and there's also
always a temptation to try for too much when things are going your way.
Kirk: That's great. In two simple rules, you've pretty much said everything that needs to be said.
you know,all successful traders dedicate a lot of time and effort to
improvement and reducing mistakes. How has your trading method evolved
and improved over the years?
Rob Hanna: The
biggest change from say 5 years ago is how I incorporate my
quantitative research. Knowing a good number of probabilities gives me
greater confidence. It's having that confidence that has allowed me to
view the market more objectively and then manage my trades in a more
optimal - and less emotional - manner.
you provide an example of something you thought was true when trading
early in your career and now believe is just dead wrong?
The mythbusting posts we discussed earlier come to mind. Most of the
myths I've busted are ones I believed in at some point in time. Another
thing I came to realize is that classic chart patterns are not as
reliable as I thought they were early on. Don't get me wrong - they're
still very useful - they're just not reliable. Take a cup & handle
best year I ever had trading cup & handles was 2003. I found some
great stocks that doubled, tripled and more and my returns were very
good. At the end of the year I went back and ran stats on all my
trades. The cup & handle was by far the most common and most
successful pattern I traded that year - and I did great with it. Do you
know how many of the cup & handle breakouts that I bought were
deemed "successful"? Successful in this case meaning they embarked on
some kind of uptrend move that I was able to take advantage of and earn
better than a scratch or a very small gain. Best year. Best pattern.
Are you ready? 10% -15% success rate. Now I traded them very
tight around the breakout point and therefore did get shaken out of
some eventual winners, but still - 10% - 15% was about 60% worse than
what I was led to believe when I first started trading the pattern. Now
like I still consider patterns like this very useful and will still
trade them. By keeping risk minimal when trading these it only takes 1
winner to make up for a bunch of losers. A 10% success rate still
provides some nice risk/reward. You just need to be aware that it takes
some hard work and determination (or luck) to wade through enough
losers to find those few winners that will make it all worth your
my eyes classic chart patterns don't offer high probability trades.
They DO offer nice risk/reward. Buy a breakout of a resistance level.
Place a stop under a support level. Hope for a nice trend. It rarely
works but when it does its great.
Kirk: As traders are fond of saying, you've got to kiss a lot of frogs out there!
your intense research, how much time and attention to you pay attention
to others' opinions about the market and/or stocks you are trading?
None. I do read what others are saying, but mostly just to understand
what they are looking at. If it sounds like a worthwhile idea or
indicator then I'll test it to see if it does indeed provide an edge.
I don't trust anyone's conclusions (including my own) without testing them.
Kirk: Please describe a typical trading day for you? How do you organize and dedicate your time?
I'm not a big morning person - more of a night owl. Therefore I've
always done my preparation at night. This allows me to have a game plan
ready as soon as I wake up. I often get up between 6:30 and 7 along
with the kids. Like everyone else I'll check the markets when I first
get up in the morning to see what may have happened since I went to
bed. I'll see if any of my positions are looking to gap significantly
and then I'll check why if they are. Often I'll write my blog in the
morning and then post it between 8-9 am Eastern. Then I'll normally do
a little morning reading. Check out some blogs or columns on line.
the trading day I monitor the markets and execute any ideas I came up
with based on last night's research. I don't do much day-trading so few
decisions are made in the heat of battle. Most of them have been
thought out in advance. With the website now I spend some time each day
answering emails, updating the website, and conducting new research.
Around 2:30 - 3:00 I'll run the Intraday Quantifinder. This helps me to begin thinking about tomorrow and whether I want to exit or establish any positions at the close.
the bell rings I normally take some time off. The only thing I do in
the few hours after the bell is to re-run the Quantifinder. I spend
family time between 4 and 8 or so and then start to gear everything up
again. I'll spend 45 minutes to an hour downloading and updating data,
charts, etc. After that the research and writing begin. It's a lot of
work each night. I typically get the subscriber letter completed and
sent out by sometime between 2-3 am. Then I head up and go to sleep. On
weekdays there really isn't much sleep, but my wonderful wife allows me
to catch up and sleep late on Saturdays.
you give us some idea of what tools you use to monitor the markets
(i.e. your trading platform, software, websites, etc?)
Much of my testing is done on Tradestation, although as I mentioned
earlier I also use Excel for some of that. I also trade using
Tradestation. I use Quotes Plus and Worden Bros. TC2000
for data as well. The Worden Bros. product I always liked due to its
note-taking ability. It allows me to make a brief dated notation on a
stock, which keeps me from going back and doing research on it a 2nd
and 3rd time if I didn't recall looking at it previously. Most of the
reading I do is blogs rather than news services. There's probably about
15-20 blogs I read all the time, and then another group that I look at
occasionally. Yours is one I read all the time. All my favorite blogs
can be found on my blogroll. The blogroll has grown over the years but
it still is only about 30-35 deep.
everyone else, we both experience hot and cold hands at times. Are
there any tricks of the trade that you use to help maintain a
consistent successful approach over a long period of time?
Rob Hanna: I
try and take a fresh look at the market each night. I find that going
through my research and determining an edge helps me to get focused and
prepared for the next day. Even if today was horrible, hopefully my
edge plays out tomorrow.
would you say are the biggest changes in the markets and trading in
general you've seen during your career both good and bad?
ETF's and now leveraged ETF's have arrived. SPY has been around a long
time, but other than that it was either stocks or mutual funds. I find
ETF's to be great trading vehicles. You're less exposed to individual
company risk, you've got some great liquidity, and if it's volatility
you crave, there's plenty of volatile etf's as well.
Kirk: What kind of advice would you give a person just now beginning in trading the markets?
Rob Hanna: Spend more time studying the markets when they are closed than you do trading them when they are open.
think it was Dr. Steenbarger who said that the best work traders do
always come during non-market hours. How very true!
of your website I'm sure you are privileged to know a lot of different
kinds of traders. Where do you see traders missing the boat?
Rob Hanna: Many
traders misuse their resources. They'd rather be given a signal than be
presented with a few ideas to consider. I often use the term "idea machine." That's what all your resources should be if they are going to foster growth.
that gets my Letter each day and just skips down to the bottom to see
if I posted any trade ideas is completely missing the point and will
not get a whole lot from my service. It's the same with other services
I use. In my mind, something that sparks ideas or teaches something has
Kirk Report is an excellent example of a resource that both sparks
ideas and teaches. Members here that take the time to explore the site
and mine for ideas once in a while can benefit a great deal more than
those that just read an occasional post.
you for saying that Rob, but websites like yours even goes further than
I do on a daily basis. No doubt, that's why you've earned so much
respect and admiration by so many traders over the past few years. It
is well deserved in my view!
So, I must ask, what are some qualities you frequently find among the most successful traders you know?
Rob Hanna: They're
incredibly curious. They're disciplined. They work hard when the market
is closed. They maintain an open mind to try and understand what the
market is saying rather than looking for evidence that backs up their
opinion. And perhaps most important, they only trade when they have an
Kirk: Thinking back, what was most instrumental in your development into becoming a successful trader?
Rob Hanna: Never
thinking I was. It keeps me humble and alert with regards to my
positions. It also keeps me hungry to continue to learn and improve.
Kirk: When all is said and done, in your experience what is the best way to learn how to trade?
Rob Hanna: Wow.
I don't know. I was pretty much self-taught. Lots of reading. Lots of
actual trading. Lots of studying and testing. I wish there was more of
a curriculum to follow. The one person I've read that talks about
having a curriculum is Dr. Steenbarger. His "How to become your own trading coach" book which I mentioned earlier is designed to help traders help themselves and it has tons of good ideas.
that I'd say find someone whose work appeals to you and follow them. If
you're comfortable examining company fundamentals, then find someone
that does that and follow them. If you're interested in momentum or
trend trading, follow someone that does that. Historical analysis,
technical analysis, day-trading, options strategies - whatever it is,
there is someone doing it and writing about it. Buy their book, get
their newsletter, follow their blog, go to their seminar, whatever.
Soak up what they know about that particular discipline and then over
time adjust what they do to better fit your own personality and
And then keep in mind that you'll need to adapt as the market evolves.
suspect like all good traders you are working on improving your
performance in some manner. Can you share what you're specifically
working on right now?
I have a few projects going on and many, many, more in the pipeline. A
big focus for me now is releasing a few systems I've developed. One
which is due out in a matter of days is based on my Aggregator chart.
The returns of this system have served as strong confirmation of the
value of my studies. The system basically looks to trade in the manner
that I've always preached: long if the studies are net bullish and the
market has been underperforming expectations over the last few days.
Short if the studies are net bearish and the market has been
outperforming expectations over the last few days.
taken a long time to get the system ready for actual trading for two
reasons. First, I needed a decent amount of Aggregator history before I
could show results. Second, many of the studies are based on end-of-day
data. Prior to development of the Quantifinder it was harder to
anticipate what studies were going to be active and how that would
alter expectations going into the close. Now I can run the Quantifinder
intraday and generate a pretty good estimate of how the Aggregator is
going to be positioned that night.
also planning on allowing subscribers to download historical Aggregator
data. That way they can use it to design new systems or incorporate it
into current ones they may have.
One other project I'm involved in is a new website. It's being spearheaded by David Varadi of CSS Analytics and Jeff Pietsch of Market Rewind.
There's going to be 5-7 of us that will provide 1-day market
predictions near the close each day. It will take the predictions and
output an aggregate group prediction. There will also be algorithm at
work that weights each of our predictions based on who has the hot hand
lately and who is cold. It's an interesting concept, and the list of
probable participants is impressive, so I'm excited to be a part of it.
Kirk: I look forward to seeing this and will let others know. No doubt, it will be a lot better than the dubious Ticker Sense sentiment poll.
You seem to trade both discretionary and use systems. How do you feel about one vs. the other?
Rob Hanna: I've
never been of the opinion that they need to be mutually exclusive. I
use a lot of my systems to help me establish a bias for my trading,
rather than simply autotrade them. There are a few I pretty much trade
as designed. From my standpoint, I see no reason why discretionary
traders couldn't benefit from tracking a few systems to aide them in
their decision making.
Kirk: At this point of your career, who do you look up to for inspiration and guidance?
Rob Hanna: The
wife and kids provide plenty of inspiration. I've also developed
relationships with some other traders with whom I'll share ideas. The
back and forth is very helpful. Subscribers are a source of inspiration
for me also - in more than 1 way. First, I know I can't slack off if
I'm broadcasting my outlooks. Second, feedback and ideas from
subscribers has helped me to develop new tools, systems, etc.
I know both of us share of love for the markets and trading, what are
your long-term career plans and future for your website?
Rob Hanna: Quantifiable
Edges has evolved since inception. It was just a newsletter and blog to
start with. Then subscribers wanted code for some of the systems so I
created web pages to allow them to download the code. From there the
functionality began to grow. Studies are always being added to the
database and I'm constantly looking to implement new tools and ideas
(like the Quantifinder).
love the research and so I don't think I'll ever stop doing that.
Long-term who knows what it will look like. I'm a lousy web-designer so
the site isn't a good-looking as it should be. That will need to be
addressed one of these days. At some point I may consider partnering
Quantifiable Edges with another firm. With more resources I think I
could really produce some interesting products.
Kirk: What are some of your personal passions beyond the market?
Rob Hanna: My
kids are young and I love spending time with them and my wife. Skiing
has always been a passion of mine. I spend as much time as I can skiing
in the Winter - which isn't nearly as much as it used to be. I've
always been a big Celtics fan and try and get to a good number of those
games during the year. BC football is also fun to follow. I have a
group of 10 friends that I graduated with and we've had tickets
forever. It's a great excuse to get together on Saturdays in the Fall.
The tailgates - like the market - have evolved over the years. It used
to be a bunch of guys with an occasional girlfriend. Then wives began
attending. Now we all have kids with us as well. We've had to adapt and
now there's more juice boxes than beer in the coolers.
Kirk: Finally, if you had one piece of advice to share with all investors and traders, what would it be?
Rob Hanna: Let
your curiosity guide you. Things you are truly interested in and really
want to learn about are the things that will drive and motivate you.
That may mean studying historical analysis and probabilities like I do.
It may mean learning how to be a successful tape-reader. It will likely
mean something altogether different and unique. But if you want to be
good at it, then you need to truly be interested in it.
Kirk: Thank you Rob for all of the wonderful insights!
* Those who wish to follow Rob are highly encouraged to visit his blog and subscribe to his newsletter. You may also sign up for a free 1-week trial by clicking here.
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