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Is the China bubble about to burst?

  
Analysis, Economy, Education
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China bubbleAn aggressive and arrogant China is entering 2010 with a bit of uncertainty. Although there was no let-up in its exports in 2009, its internal financial position looks uncertain. China watchers are expecting a bubble that will eventually burst.

In 2009 banks in China lent internally about US$1.4 trillion to businesses, including the real estate industry, with dubious performance records. James Chanos, a successful U.S. stock market dealer, has predicted that China’s financial collapse could be far worse than Dubai’s.

China soothsayers wish to prove Chanos wrong – and they may be right. With US$2.2 trillion in foreign reserves, it would seem China could weather any storm. But the problem is that its cash reserves are uncashable. The United States and Europe are not just waiting to repatriate the money to China. So China could be left to its own devices if it faces a financial storm where markets tumble and poor people with money tied to investments see their savings vanish.

Easy credit, too much money in the economy, excessive foreign direct investment, a completely undervalued currency and rising real estate prices have definitely created a bubble. This bubble could burst with any minor international event. That is the price China would have to pay for designing policies that serve Western consumer markets. (more…)

Checklist for Day Traders

  
  Education
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Here’s a list I came up with for the forgotten man, the hundreds of thousands of traders in stocks, futures and options.

Before the Trade

1. Do you know the name and numbers of all your counterparts, especially if your equipment breaks down?

2. When does your market close, especially on holidays?

3. Do you have all the equipment you’ll need to make the trade, including pens, computers, notebooks, order slips, in the normal course and in the event of a breakdown?

4. Did you write down your trade and check it to see for example that you didn’t enter 400 contracts instead of the four that you meant to trade?

5. Why did you get into the trade?

6. Did you do a workout?

7. Was it statistically significant taking into account multiple comparisons and lookbacks?

8. Is there a prospective relation between statistical significance and predictivity?

9. Did you consider everchanging cycles?

10. And if you deigned to do a workout the way all turf handicappers do, did you take into account the within-day variability of prices, especially how this might affect your margin and being stopped out by your broker? (more…)

12 Things Traders Should Not Do at all

  
  Education
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  1. A big ego that wants to prove they are right by stubbornly staying with a position that is wrong becasue they want to be right eventually so bad.12-Number
  2. A trader that want to prove he is a hot shot by trading big position sizes especially in options or futures.
  3. Not wanting to take a stop loss and instead just hope the trade comes back.
  4. Trading with emotions instead of a trading plan can get very expensive very fast.
  5. Being a bear in a bull market.
  6. Being a bull in a bear market.
  7. Being overly eager to start trading with real money before fully testing out a trading system.
  8. Trading without doing adequate homework on how to win.
  9. Dollar cost averaging down in a trade is many time expensive to fight that trend.
  10. Ignoring the charts and just trading your opinion.
  11. Ignoring the probability of the risk of ruin based on your current position sizing.
  12. Not really understanding the true danger of  ‘Black Swan’ and ‘Fat Tail’ events.

Images for options traders

  
  Education
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I had just started reading David L. Caplan’s book The New Option Secret: Volatility. But today I merely want to share two powerful images from the book that might make it easier for beginning option traders to understand the impact of time on their position. More experienced traders can empathize.

Let me quote Caplan.

“The short premium trader thinks like a troubled adolescent who cannot wait for the time to pass, and move on to the next stage of life. . . . Each day presents the possibility of a major tragedy. The adolescent thinks, ‘When will it be over?’

“The long premium trader worries like an old man who has not yet left his mark on life, but is still trying to. He knows his days are numbered. . . . He says to himself, ‘If I only had more time.’”

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