I am sure we are :) What I meant is Nero and Taleb himself were trading options, right? I have been through few black swans by now starting form August 2008 till few weeks ago Japan earthquake. None had any impact upon me. Went to appointment, came back, saw market dropped on May 6. I was flat. same with Japanese earthquake :) But options traders they are always in the market...
Yes, you are correct. Taleb is an option trader but the book is not about option trading. It is about luck in life, in business, and also in trading. Trading without a stop loss or using martingale betting is playing Russian Roullette with your account. Most of the time, you will come out a winner until the black swan catches up with you.
I found the concept of Monte Carlo experiments very interesting in the book. Consider the difference between finding a square root using the Newton-Raphson method, and estimating the value of Pi with the Buffon's needle experiment.
In the first case, you are closer to the final number in every iteration. In the second case, you don't know if the next needle drop will get you any closer, in fact, quite often it won't:
Thanks for sharing the link with us. It took me 1869 tries to get to pi. I designed my trading systems before I read his book. It was intuitive for me to have more than 1,200 trades over a period of 12 years. Having a large statistical sample, I was able to avoid curve fitting. Also I was able to identify the drawdown period also known as the black swan. Fooled by Randomness is truly thought-provoking.
“When models turn on, brains turn off.” –Til Schulman
The Japanese disaster
Contrary to common belief, the disaster at the Fukushima Daiichi nuclear power plant was not a direct result of the 9.0 earthquake which hit Northeastern Japan on 11 March. In fact, all 16 reactors in the earthquake zone, including the six at the Fukushima plant, shut down within two minutes of the quake, as they were designed to do. But Fukushima is a relatively old nuclear facility – also known as second generation - which requires continuous power supply to provide cooling (the newer third generation reactors are designed with a self-cooling system which doesn’t require uninterrupted power).
When the quake devastated the area around Fukushima, and the primary power supply was cut off, the diesel generators took over as planned, and the cooling continued. But then came the tsunami. Around the Fukushima plant was a protection wall designed to withstand a 5.2 metre tsunami, as the area is prone to tsunamis. However, this particular one was the mother of all tsunamis. When a 14 metre high wall of water, mud and debris hit the nuclear facility, the diesel generators were wiped out as well. But the story doesn’t end there, because Fukushima had a second line of defence – batteries which could keep the cooling running for another nine hours, supposedly enough to re-establish the power lines to the facility. However, the devastation around the area was so immense that the nine hours proved hopelessly inadequate. The rest is history, as they say.
Other tail risk events
I have included this sad tale in order to put the concept of risk into perspective. You cannot quantify a risk factor such as this one because, if you try to do so, the prevailing models will tell you that this should never happen. Take the October 1987 crash on NYSE. It was supposedly a 21.6 standard deviation (SD) event. 21.6 SD events happen once every 44*1099 years according to the mathematicians amongst my friends1(1096 is called sexdecillion, but I am not even sure if there is a name for 1099). The universe is ‘only’ about 13.7*109 years old (that is 13.7 billion years). Put differently, 19 October 1987 should quite simply never have happened. But it did. (My source is Cuno Pümpin, a retired professor of Economics at St. Gallen University.)
So did the Asian currency crisis which resulted in massive losses in October 1997, which statistically should only have happened once every 3 billion years or so. By comparison, our planet is ‘only’ about 2 billion years old. And the LTCM which created mayhem in August 1998 was apparently a once every 10 sextillion years (1021) event. And I could go on and on. The models we use to quantify risk are hopelessly inadequate to deal with tail risk for the simple reason that stock market returns do not follow the pattern assumed by the models (a normal distribution).
Below are the trading results of my five expert advisors since May 21, 2010 (11 months).
Haley = -1,575 pips (-15.75%) after 673 trades with GBPUSD Jasmine = +12,020 pips (+120.02%) after 1,039 trades with EURUSD Leah = +6,606 pips (+65.83%) after 979 trades with EURUSD Mellisa = -772 pips (-6.37%) after 596 trades with USDCHF Sienna = +316 pips (+3.16%) after 1,151 trades with EURUSD
View my real money accounts updated daily with this link
HIGH RISK WARNING: Foreign exchange trading carries a high level of risk that may not be suitable for all investors.
Leverage creates additional risk and loss exposure. Before you decide to trade foreign exchange, carefully consider your investment objectives, experience level, and risk tolerance.
You could lose some or all of your initial investment. Do not invest money that you cannot afford to lose. Educate yourself on the risks associated with foreign exchange trading, and seek advice from an independent financial or tax advisor if you have any questions.
Any data and information is provided 'as is' solely for informational purposes, and is not intended for trading purposes or advice.
Past performance is not indicative of future results.