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The Chart Angle Delusion

  
  Education
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“The lack of intrinsic meaning of angles on a bar chart has significance even for chart-oriented traders who do not employ angles. How sharply a trend slopes on a chart is often a psychological consideration in making a trade. If you fall prey to this influence, you’re letting the chart maker’s practical and aesthetic considerations impinge on your trading. Any trend can be made to look either gentle or steep by adjusting the price scale. ”

– William Eckhardt, New Market Wizards

If you use price action as a filter — and visually interpret charts as part of your process — how do you guard against the chart angle delusion?

One potential remedy is focusing on hard inputs that are independent of chart aesthetics. High and low point successions, moving average crosses, and volatility expansion / contraction (changes in average trading range) are three examples.

Another helpful practice is deliberately viewing more horizontally extended (flattened) charts in tandem with the main view (as such mutes the ‘exciting angle’ temptation)…

Hesitation

  
  Education
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Hesitation-You are watching a stock that has all the signals you look for in an opportunity. The proper point to enter comes, but you wait. You second guess the opportunity and don’t buy the stock. Or, you bid for the stock at a price that is not likely to get filled if the opportunity does pan out the way you anticipate it will. As a result, you get left behind while the market pushes the stock higher. A short while after the initial entry signal, when the stock has made a decent gain, you decide to finally enter the trade. After all, the market has proven your analysis correct, so you must be smart, and right! Not long after you enter, the stock turns south and you end up with a losing trade. If only you had bought when you first thought about it.

The Solution

This is really just a confidence issue. You are either not confident in your ability to analyze stocks, or you are not confident in the methodology that you are using to pick trades. (more…)

The 8 Downfalls of Jesse Livermore

  
  Education
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Jesse Livermore was a pioneer in the trading world. He was one of the very first trend traders, rule based discretionary traders, and traders of pure price action. He was a trail blazer. It was not his methodology that was his undoing, it was other short comings. After reading books about the life of this trading legend along with his own, here are my eight observations that I believe was his ultimate undoing.

  1. Letting losers run: Many times he did not cut his losses. “I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.”– Jesse Livermore
  2. Over Trading: “What beat me was not having brains enough to stick to my own game – that is, to play the market only when I was satisfied that precedents favored my play.” – Jesse Livermore
  3. Following tips: “Gradually, as I began to accept his facts and figures, I began to fear I had been basing my previous position on misinformation. Of course I could not feel that way and not cover. And once I had covered because Thomas made me think I was wrong, I simply had to go long. It is the way my mind works.” “It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind.” – Jesse Livermore
  4. Risk of ruin: From the quantity of his account blow ups and personal bankruptcies it appears that he did not understand the mathematical risk of ruin based on winning percentage and the loss of  capital per trade.
  5. Position sizing: The sheer size of his astounding wins at key times shows that he did not really have a position sizing model to limit his exposure to risk, he was likely all in with leverage on his biggest wins. Which results in inevitable account blow ups.
  6. Discipline: In his writings he seems to always hint that he had trouble following his own rules and advice and lost money when he didn’t follow his own plan.
  7. Lavish lifestyle: Livermore spent money lavishly on his lifestyle with mansions, vacations, and the best things money could buy. He had no number that allowed him to ever really retire and enjoy his wealth. He continued to trade with full size and aggressively through his career.
  8. Mental risk of ruin: In the end, for whatever reason he ended his life. The stress and strain of trading, finances, and his personal life probably took its toll.
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