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How close are you to perfect?

  
  Education
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Becoming the perfect trader is no easy task, and I daresay that nobody has been able to achieve this great feat. The perfect trader buys at the absolute low of the day and sells at the absolute high. And depending on whether the high happens first or the low happens first determines if he is long or short for the day. It’s really easy to calculate this metric. It is simply the absolute value of the daily range or the high minus the low.

To get an accurate handle on the concept, we first ask what time frame we will be using. For end-of-day traders or swing traders, the daily bar is your competition. If you day-trade off the five-minute bar, well then use the five-minute bar to gauge your performance.

This concept is used in system trading and because vast amounts of data are typically used, we system traders need to resort to our super-duper calculators, also referred to as our programming language. This is an example of what code looks like for our daily perfect trader. The language is TradersStudio’s version of Visual Basic, but you can get the idea and use it with any program you wish. It’s the basic loop function.

For i = FirstBar to LastBar step 1

Next

PerfectProfit = PerfectProfit + Range [i]

You’ll need to dimension your PerfectProfit variable as an array if you want it to tally up daily ranges. (more…)

Confusion Is Part Of The Learning Curve

  
  Education
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learning_curve4Confusion and frustration is part of the learning curve. Frankly, if you’re not getting confused by the array of opinions and information out there, then you’re doing something wrong. The key is to keep working though it and continue learning as much as you can. With time and effort, the confusion you have now will be replaced with a clear understanding of key elements of trading that can’t be learned in a different way. But, it takes time

Do successful traders have different mental models

  
  Education
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While much of the focus on trading is around chart patterns, scanners, analytical techniques, indicators, quantitative techniques etc., most of it is commodity. Everyone has access to same tools, techniques, books, research or analysis. So why is it that some traders are very successful and some are not. You can largely divide the traders in to those with consistently good returns, those with mediocre returns and those who are unsuccessful. Most of the time you will find mediocre traders continue to have mediocre returns for long time and their best years never exceed beyond a certain thresh hold.

Much of the same things you will notice in life in general. Vast majority remains stuck in sea of mediocrity. It has nothing to do with innate talent or efforts. Much of it has to do with mental models.

Mental models are deeply held mental images, beliefs, and assumptions. The mental models play a very important role in dealing with world around us. We interpret the world according to our mental models. Two people with different mental models react and interpret same data and same situations differently. Mental models include what a person thinks is true but not necessarily what is actually true.

Successful people in most walks of life have different mental models than mediocre people. That is why successful people can see and act on opportunities which others do not see.

One thing which you can do to be successful in trading or in life in general is to change your mental models. But in reality it is one of the most difficult things to do. Movies often have very dramatic scenes of mental model change leading to transformation in leading character. But in real life changing mental models requires a sustained and structured process and many times requires facilitation by an outside entity. There is a vast array of books and techniques dealing with this field. I have spent years studying this fascinating field of mental modeling.

Once you have the right mental models you see the markets and the trading opportunities differently.

Dangers detailed for banks in Europe

  
Analysis, Economy, Education
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Despite recent improvements in the health of European banks, they remain vulnerable to a daunting array of hazards that are expected to produce another round of sizable write-offs in the next couple of years, the European Central Bank said.

Its report cataloged in detail the problems facing the region’s financial institutions.

The challenges for banks in the 16-nation euro zone include exposure to a weakening commercial real estate market, hundreds of billions of euros in bad debts, economic problems in East European countries, and a potential collision between the banks’ own substantial refinancing needs and government demand for additional loans, the central bank said.

In its twice-yearly review of risks facing the nations that use the euro currency, the central bank expressed particular concern about banks’ need to refinance long-term debt of an estimated 800 billion euros, or $984 billion, by the end of 2012.

European banks will need to set aside an estimated 123 billion euros in 2010 for bad loans, and an additional 105 billion euros in 2011, the report said. That would be in addition to the 238 billion euros they set aside from 2007 to 2009.

Buffett: Capitalism Works

  
  Education
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Here’s a recent interview with Warren Buffett in which he discusses a broad array of topics.  It’s worth 15 minutes if you have the time, but here’s the bullet points:

  • The US economy is still growing and “will continue” to grow into 2014.
  • Confidence creeps into a system while fear overwhelms it quickly.  It takes time to get the confidence back.
  • The American system has always persevered.  We’ve questioned capitalism time and time again, but the system works.
  • We’re 6 TIMES better off now than when Buffett was born.
  • The recovery is being driven by the “natural juices of capitalism and not the government”.
  • Advice for entrepreneurs: listen to your customers.
  • The capitalist system works because it unleashes human potential.

Louis Ehrenkrantz’ 7 Golden Rules for Investing

  
  Education
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First rule: develop a large appetite for
reading; it will hone your instincts for finding successful companies.

Second
rule: don’t overdiversify; ten stocks, in at least three sectors, are
enough for the average investor.

Third rule: stick with your winners and sell
your losers; do not automatically sell when a stock hits a target price, but
continue to hold it as long as it performs well and has good prospects for the
future.

Fourth rule: look for top-quality, out-of-favor companies; look for
companies that produce an array of high-quality products and/or services.

Fifth
rule: don’t worry about earnings if a company makes a popular product; strong
earnings growth will follow.

Sixth rule: don’t tinker with your portfolio; check
your portfolio’s performance only once or twice a year.

Seventh rule: don’t be
afraid to hold cash; it’s okay to be prepared to purchase stocks with
beaten-down prices after a correction.

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