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"People Were Thinking that this was the End of American Capitalism"


Graduate Programmer and Trader


On the morning of October 19, 1987, a young Roy Niederhoffer had been working on Wall Street for three weeks.

He was a programmer and trader, working at his brother, Victor Niederhoffer's, hedge fund. Roy had developed a bond trading strategy using statistical analysis. A vast amount of historical data had been processed to develop his strategy.

The Street was braced for a rough morning, but this was something else. The Dow Jones opened 3.5% down and continued to fall. Black Monday was just getting started.

The Dow was to close more than 22% down.



Just as traders were thinking that the end was nigh, the Federal Reserve stepped in and lowered interest rates. This provided liquidity, and the markets started to recover. And what was fascinating to Roy is that many traders who survived the initial carnage made a fortune on the recovery.
 

Hedge Fund Manager


In 1993 Roy founded his own systematic trading Hedge Fund. His initial investment capital came from the money that he made trading bonds on Black Monday. The firm has been continuously trading since then, and its Diversified Offshore Fund returned an annualized 18.7% between 1995 - 2016

His philosophy of trading is: the best opportunities are when the market is behaving irrationally. And that this usually occurs during periods of high volatility. Most notably, the lessons of Black Monday helped Roy's hedge fund to post a return of over 50% on $2 billion of capital in 2008. In the same year, the Dow fell more than 30%.
 

Systematic trading


Roy trades using rules. These rules were carefully developed over many years. The advantage of systematic trading is that they take the emotion out of trading.

Ask yourself: if the market opens down 1%, will I do the right thing? What about if it opens down 5%? You have to rely on your rules. 
 

Look for Patterns


Roy points out that Mondays became a tremendous buying opportunity for 10 or 15 years after Black Monday. Because when the market fell on a Friday, panicked investors would sell out on Monday morning, often leading to a market rally in the afternoon.

Forget the idea that markets are efficient, look for patterns that are based on human emotions and see how you can trade them.
 

Think differently


Most of the time, the financial markets behave rationally. However, there are times, when markets become driven by emotion. Market participants now trade instinctively and tend to follow the herd. This is what makes people sell at market bottoms.

Turn your rules upside down. If you have read about a trading strategy, try trading the opposite.
 

Test everything


Never assume anything is true. Test your assumptions, test your theories, and test your strategies. 

If you want to learn more about Roy, check out his recent interview with James Altucher. Roy Niederhoffer Interview
 

Should you Backtest?


"Markets can do something that they have never done before, completely out of the database and all of the historical data in the world won't help you"

The shocking market move in October 1987 is still the biggest one day fall in most stock markets around the world. 

Some people might say that this means you should not test historical data because shocking events can occur. 

BUT, do you think that Niederhoffer gave up backtesting in 1987. No way!

He is a systematic trader. Everything he has done since then up until the present day is tested and re-tested on historical data.

If you learn to backtest, you can find opportunities to develop new strategies, boost your profitability and dump your losing strategies. So you can relax and let the markets work for you.
 

Update Guide: How to Use a Backtest Model


I am redeveloping the Tradinformed Models to make them more powerful and easier for you to use. You can also see the updated online guide which includes six brand new videos.

You can see the guide here: How to Use a Tradinformed Backtest Model
 

I want to hear from you!


Let me know what you think about the site, the backtest models, any changes that you want to see, new articles or just say Hi. Contact me via the website or by email.
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