The Real Value of Rule-Based Trading
What you need to take away from this information is that the real value isn’t in the rule itself, but in the approach, which is a rules-based approach.
Basically, you need to think about the fact that, okay, that rule doesn’t work anymore, and I more or less understand why, but there must be others. So I need to find those other rules. Once I find some rules, I can use those rules to trade to my trading edge.
I want to wrap this up, because I spent some time talking about the Turtles, who were still an important chapter in the world of trading, but I want to finish this overview of famous figures, and I’m sure all of you are familiar with Larry Williams.
Larry Williams’ Extraordinary Record
Larry Williams shocked the world with his performance. In 1987, he won the World Cup Trading Championships with a return of 11,376%, a performance that, to this day, no one has even come close to matching.
That performance was based on two things: precise system rules and position sizing that, in his case, was very aggressive. He even used the Kelly Formula, which I advise everyone against using in trading. He realized that afterward because, when the year became less volatile, let’s put it that way, and less “favorable” to him, he paid the price, because his approach was definitely too aggressive.
However, that aggressiveness allowed him to turn his initial $10,000 into more than $1.1 million, which was indeed an 11,000% return.
Among other things, I know from various sources that he could have made much, much more if he had been lucky. That’s because, one good or bad day, depending on your point of view, he had an extremely large position in 30-year bonds. It was a very large position. A choppy move started and triggered his stop by one tick. I imagine that happens to us too.
Then, from that point on, the market reversed and moved precisely in the original direction he was positioned for, making one of those really big moves. If that stop hadn’t been triggered and he had caught that move with a position of that size, we would probably be talking about a much bigger performance. I’m not saying he would have reached $10 million, but he would have come close.
In fact, anyone who followed the story of that competition will know that his account had reached $2 million at one point. Then, following that setback, it fell to $700,000 before climbing back to $1.1 million by the end of the competition, swinging wildly, of course.
Then everyone is quick to say, “Well, if I know it’s going to reach $1.1 million, I can do that too.” Sure, but while you’re going through it, it isn’t that easy.
Larry Williams’ daughter’s performance in the championship
But what is important, once again, is that this proves that rules can be taught. Why? Because he later involved his daughter, whom you know for other reasons, Michelle Williams, who is also a successful actress. She even won a Grammy and appeared in Melrose Place… No, Dawson’s Creek! She’s the one who dies at the end. Sorry for the spoiler if you haven’t seen it.
Anyway, she’s a famous actress, and in 1997 she entered the same competition her father had won and won it with a 1,000% return.
Clearly, that year she used different position-sizing rules because they had abandoned the Kelly Formula after realizing that it was too risky.
However, the basic rules were based on fairly well-known patterns that were very popular at the time. If you browse the Unger Academy YouTube channel, you’ll find them explained there, along with all the details you need.
Jim Simons and the Quantitative Approach
And after Larry Williams, the other and final figure that many of you may be familiar with is Jim Simons. Unfortunately, he passed away two years ago, and he was well known for introducing a 100% quantitative approach.
As a mathematician, he actually created mathematical models to study market movements. Keep in mind that you don’t need a degree in mathematics to trade systematically. It helps you build models and do things faster, but if you have the right tools, you don’t need to earn a mathematics degree first. I don’t have a degree in mathematics.
And he basically created rules for every edge. Whatever came to mind, he would write a rule, test it, and, if it looked promising, put it into production. He even did this with the phases of the moon, which is something I would never attempt, but then again, he’s Jim Simons and I’m a nobody!
The Medallion Fund and Its 66% Annual Return
But what is he known for? The Renaissance Medallion Fund, which was essentially an internal fund available only to the company’s employees. From 1988 to 2021, it generated something like 66% per year before fees.
Keep in mind that 66% is enormous. Whenever I’ve been asked, I’ve always said in my presentations that a good systematic trader, someone who is truly, truly good, can make between 30% and 35% per year, and of course I’m talking about the average across multiple years.
I made 672% in a competition, yes, okay, but that was a competition, and I did it for one year. So, what I’m saying is that 30% to 35% is already enormous in itself. Imagine going even higher, and they were achieving 66%. In my opinion, that’s almost unimaginable.
They have also experienced some difficult periods recently. Of course, everything needs to be fine-tuned, adjusted, and updated, but they had the team to do that and quickly got back on track.
Like all the other people I’ve shown you, he also built his entire approach around rules.
