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Hedge Fund Market Wizard

Jaffray Woodriff: The Third Way

In Woodriff’s view, there are four important ideas about trading systems:

  • It is possible to find systems that work better than the most common approaches of following trend or countertrend.
  • Data mining methods can be applied to search huge quantities of data to find useful patterns without necessarily falling victim to curve fitting. Although, most people trying to do so will misapply the technique and end up finding past patterns that worked very well, but fail in actual trading.
  • Old price data, even greater than thirty years, can be nearly as meaningful as recent data.
  • Systems that work well across many markets are more likely to continue than systems that do well in specific markets. It is important to develop systems that work broadly instead of market-specific systems.

The core of Woodriff’s risk management technique comprises adjusting position sizes according to the change in overall volatility. It is also relevant to in line with changing overall volatility—has applicability to a lot of traders, even those who don’t use a systematic approach. 


When the market is more volatile, Woodriff trades a smaller quantity of the asset. 


Woodriff uses the average dollar range in contract value for adjusting portfolio exposure. With this approach, he could maintain his portfolio volatility close to the target level, despite widely deviating volatility over the past 20 years.


Almost like all successful traders, Woodriff too developed a methodology that suited his personality. He deeply felt the need to develop an approach that was different from what everyone else was doing. He developed it but also understood it very early when the method didn’t suit him. 


He asks traders to look where others don’t and adjust position sizes to general risk to target specific volatility. They should also pay careful attention to transaction costs as well.

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