Archives of “January 16, 2019” day

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6 Universal principles of successful traders

  
  Education
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1). Preparation

Author Brent Penfold is in the minority believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. His point is that if your risk of ruin is not zero then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin but it also depends on your systems win/loss ratio. But the point is to test any system with 30 trades first then determine your risk of ruin.

2). Enlightenment

Your most important goal is to lower your risk ruin to zero. In trading, the trader with the best ability to cut losses short wins. Simple trading strategies work the best based on traditional support and resistance while trading with the trend on either retracements of break outs. The 10% of winners in the market win by treading where others fear, buying on break outs when they first occur and going short when a new low is made, or buying into the abyss when a security finds support or resistance and reverses at the end of a monster trend.

3). Developing a trading style (more…)

Hendry takes a big bet on China crash

  
Analysis, Economy, Education
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Hugh Hendry, the voluble hedge fund manager well known for his bearish but highly successful calls on the global economy over the past two years, has taken a big position that is designed to profit from a crash in China.

Mr Hendry’s London-based Eclectica Asset Management has constructed a “short credit” portfolio that stands to make gains of 250 per cent for his flagship fund in the event of a slump in China’s growth.

Eclectica is also poised to launch a standalone fund to benefit from the strategy next month, the Financial Times has learned.

The new fund will stand to deliver even larger gains than those for the main fund if successful.

“The investment team and I have carefully constructed a short credit portfolio made up of over 20 single-name industrial, cyclical businesses that have the dubious distinction of suffering from gigantic financial leverage and Asian/commodity overdependence,” Mr Hendry wrote to investors in his monthly letter this week. (more…)

Four Steps to Taking Bigger Risks

  
  Education
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1. Create an information edge so that you are ahead of the curve.

 

2. Have a thesis that you can support with data.

 

3. Assess the sources of the data.

 

4. Trade on the basis of this data against others in the marketplace.

 

The trader who understands risk will pay attention to corporate numbers and guidance and will try to analyze the relevance of these numbers to where the company stands relative to its major competitors. He is also able to differentiate between companies and does not simply trade noise or daily movement.

 

The best traders focus on the company balance sheet, earnings reports, and an assessment of the growth prospects of the company. They also compare the company on a relative valuation basis to other companies in the same space. They consider the state of the economy and any significant macroeconomic variables, such as Federal Reserve interest rate cuts, the cost of energy, and the cost of doing business, and try to assess the nature of the market at the time.

To improve your data, ask yourself: Is this a market that is trading on fundamentals, or is it trading on macroeconomic variables and market sentiment? Then try to get a handle on relevant short-term catalysts — fresh earnings news, changes in top executives, new technology, for example — that may influence the market’s perception of the value of a stock. Once you take these steps, you can try to make a calculated bet on the impact this data will have on the price of the stock. (more…)

7-Day Commercial Paper Rate Hits 18 Month Highs

  
Analysis, Economy, Education
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The crunch in funding continues. There is $673 billion in Commercial Paper maturing over the next month and a half. The problem is that the rolling of all this paper will come at increasingly higher costs. Today the market for US 7 Day CP hit level of 0.61%. As the chart below indicates, the current CP rate is not only the highest in 2010, but higher than CP costs during the March 2009 market lows. More worrying is that despite the recent unprecedented volatility in daily rate swings, the trend is one of an accelerated increase. At this rate of increase, the Fed may soon need to put the CPFF program back in play.The most worrying is the implication 7 Day CP rates have for the FF rate: while 7 Day CP historically has tracked the Fed Funds tick for tick, over the past few months we have once again seen a major divergence between the two. In this closest proxy to short-term funding, the market is now notifying Bernanke that the Fed Funds rate is now about 36 bps off and increasing.

And the spread to the Fed Funds rate:

Sun Tzu’s Art Of War For Traders And Investors

  
  Education
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Nice passage I just came across going through various trading books this weekend. The following quote is from Dean Lundell: “Sun Tzu’s Art Of War For Traders And Investors”. It is an important reminder to pay attention when to deploy capital, when to be aggressive and when it is best to do nothing. Enjoy.

Sun Tzu finishes this lesson by reminding us to act only when it is to our benefit. A kingdom once destroyed cannot be brought back, nor can the dead be restored to life. This is the way to keep a country at peace and an army intact.

It is often said that the business of a trader is to stay in business. If you are frivolous in your methods, your equity will soon be gone and you will be out of business. So act when you see an opportunity and be content to stand aside when you do not.

Ed Seykota Quotes

  
  Education
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Markets
The markets are the same now as they were five or ten years ago because they keep changing-just like they did then.
Short-Term Trading
The elements of good trading are cutting losses, cutting losses, and cutting losses.
Outcomes
Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.
I think that if people look deeply enough into their trading patterns, they find that, on balance, including all their goals, they are really getting what they want, even though they may not understand it or want to admit it.
Market Trends
The trend is your friend except at the end where it bends.
Charles Faulkner tells a story about Seykota’s finely honed intuition when it comes to trading: I am reminded of an experience that Ed Seykota shared with a group. He said that when he looks at a market, that everyone else thinks has exhausted its up trend, that is often when he likes to get in. When I asked him how he made this determination, he said he just puts the chart on the other side of the room and if it looked like it was going up, then he would buy it… Of course this trade was seen through the eyes of someone with deep insight into the market behavior.
Predicting the Future
If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it’s coming in, it’ll never happen. The market is always right.
Trading
To avoid whipsaw losses, stop trading.
Here’s the essence of risk management: Risk no more than you can afford to lose, and also risk enough so that a win is meaningful. If there is no such amount, don’t play.
Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top.
Markets are fundamentally volatile. No way around it. Your prolem is not in the math. There is no math to ge you out of having to experience uncertainty.
It can be very expensive to try to convince the markets you are right.
System Trading
Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible. (more…)

The Pain is Unjustified…

  
  Education
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Think about this clearly. Breaking your rules or being impulsive in trading causes loss. Loss causes PAIN. REAL PAIN. We are responsible for the pain we create for ourselves.

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I’ve always said, you don’t have to blow out an entire account before we figure out the significance of being disciplined. You don’t need to feel pain to learn that lesson. You just have to commit to the process of becoming disciplined. It poses a more fundamental question, are you willing to do what it takes to become consistently profitable? (more…)

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