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Four Keys to Understanding Uncertainty

  
  Education
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1) Uncertainty is always subjective. It is a state of mind that is derived from a mix of objective data, emotions and personal experience. To say that the market is always equally uncertain is to say that mood is always the same. It is not. It constantly changes.

If the perceived uncertainty is always the same, earnings reports would not have such huge impact on prices. We all know that this is not the case. In many cases, earnings reports provide new data that changes market expectations and therefore prices. Options premium is higher before earnings exactly because uncertainty is higher.

2) Uncertainty has become a synonym for bad mood in our everyday life.

The future is always uncertain, but our perceptions of the future vary. And perceptions define actions. Actions (supply and demand) define prices. Somehow uncertainty is used with a highly negative connotation in our everyday life. It is a game of words. Just like the weather people always say that there is a 30% chance of rain and never that there is 70% chance of sun.

3) Uncertainty is basically another word for market sentiment. High levels of perceived uncertainty (bad mood) and high levels of perceived certainty (good mood) have historically been good contrarian indicators, IF your investing horizon is long enough.

4) There are different types of uncertainty.

There is an economic uncertainty. Uncertainty leads to a decline in economic activity. Less people are hired. Old machines and software licences are used longer. Investments are cut. This is what it has been happening in Europe for 2 years.

Two Trading related Films

  
  Education
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Question. Have you seen the new Wall Street film, Money Never Sleeps? If so, what did you think?

http://www.wallstreetmoneyneversleeps.com/

The original film is, of course, a classic. I have no idea how many times I’ve seen it over the years, and no doubt will see it again several times in the future. I haven’t, as yet, seen the new one, but I fully expect to do so. 

It seems like the box office figures haven’t held up very well, but that’s not necessarily a reflection of the quality of the film where someone from a markets background is concerned. This doesn’t strike me as being one that requires the big screen experience, however, so I can see myself waiting for it to come out on DVD.

Should I not do that? I’d love to hear from folks who been. If so, leave a comment below with your thoughts.

A film I did see recently is Floored, the documentary about the decline of pit trading in the Chicago futures exchange arena. It was screened at the Vegas Futures & Forex expo, with the director in attendance. There were some interesting elements, but I’m not going to sing its praises from the rooftops or anything like that. Basically, it’s a tale of a disappearing business, which is part of they way things work in a free enterprise society. New, better ways replace older ones and folks who cannot adopt are left behind.

One of the most amazing scenes in Floored is one where a guy who clearly has embraced computer assisted trading is facing off against a floor trader. The latter is ranting about how computers are evil. It’s sad, really.

“Four stages” of stock movement

  
  Education
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First, I would like to point out that the four stages are not a concept I came up with. I learned of the four stages of; 1-Accumulation, 2- Markup, 3- Distribution and 4-Decline in Stan Weinstein’s excellent book “Secrets for Profiting in Bull and Bear Markets”. Briefly, accumulation is the process of buyers gaining control after a bearish trend, markup is the bullish phase represented by higher highs and higher lows, distribution is the process of sellers gaining control after the markup phase and decline is the bearish phase which is represented by lower highs and lower lows.

Trading Rules: Strategies For Success

  
  Education
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tradingrulesforsuccess
1. Divide your trading capital into ten equal risk segments
2. Use a two-step order process
3. Don’t overtrade
4. Never let a profit turn into a loss
5. Trade with the trend
6. If you don’t know what’s going on, don’t do anything
7. Tips don’t make you any money
8. Use the right order to get into the markets
9. Don’t be whimsical about closing out your trades
10. Withdraw a portion of your profits
11. Don’t buy a stock only to obtain a dividend
12. Don’t average your losses
13. Take big profits and small losses
14. Go for the long pull as an outside speculator
15. Sell shorts as often as you go long
16. Don’t buy something because it is low priced
17. Pyramid correctly, if at all
18. Decrease your trading after a series of successes
19. Don’t formulate new opinions during market hours
20. Don’t follow the crowd – they are usually wrong
21. Don’t watch or trade too many markets at once
22. Buy the rumor, sell the fact
23. Take windfall profits when you get them
24. Keep charts current
25. Preserve your capital
26. Nothing new ever occurs in the markets
27. Money cannot be made every day from the markets
28. Back your opinions with cash when they are confirmed by market action
29. Markets are never wrong, opinions often are
30. A good trade is profitable right from the start
31. As long as a market is acting right, don’t rush to take profits
32. Never permit speculative ventures to turn into investments
33. Don’t try to predetermine your profits
34. Never buy a stock because it has a big decline from its previous high, nor sell a stock because it is high priced
35. Become a buyer as soon as a stock makes new highs after a normal reaction
36. The human side of every person is the greatest enemy to successful trading
37. Ban wishful thinking in the markets
38. Big movements take time to develop
39. Don’t be too curious about the reasons behind the moves
40. Look for reasonable profits
41. If you can’t make money trading the leading issues, you aren’t going to make it trading the overall markets
42. Leaders of today may not be the leaders of tomorrow
43. Trade the active stocks and futures
44. Avoid discretionary accounts and partnership trading accounts
45. Bear markets have no supports and bull markets have no resistance
46. The smarter you are, the longer it takes
47. It is harder to get out of a trade than to get into one
48. Don’t talk about what you’re doing in the markets
49. When time is up, markets must reverse
50. Control what you can, manage what you cannot

Guidelines from Donchian

  
  Education
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  1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move.
  2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.
  3. Limit losses and ride profits, irrespective of all other rules.
  4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing.
  5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.
  6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation to the chart formation.
  7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons a decline from 50 to 25 will net only 50 percent profit, whereas an advance from 25 to 50 will net 100 percent profit.
  8. In taking a position, price orders are allowable. In closing a position, use market orders.
  9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules.
  10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag.
  11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.

The Wyckoff Spark

  
  Education
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On a recent plane trip, yours truly polished off “How I Trade and Invest in Stocks and Bonds” by Richard D. Wyckoff.

Originally published in 1924, this short little book is a classic — well worth revisiting — and will later get a full review in its own right. (There is just something wonderful about old trading books.)

For now, though, the below passage is excellent — a classic demonstration of utilizing all the principles of the game.

Next in importance to knowing what to buy is the question as to when it should be done. (more…)

Japan Mar Retail Sales +4.7% Y/Y, Biggest Rise In 13 Years

  
Analysis, Economy, Education
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– Japan Retail Sales Post 3rd Straight Y/Y Rise; Feb +4.2%
– Japan Mar Retail Auto Sales +19.6% Y/Y Vs Feb Revised +14.8%
– Japan Mar Retail Sales Also Pushed Up By Higher Fuel Prices

TOKYO (MNI) – Japanese retail sales surged 4.7% in March from a year earlier, posting the largest year-on-year gain in 13 years, data from the Ministry of Economy, Trade and Industry released on Wednesday showed.

It was the third straight year-on-year increase after an unrevised rise of 4.2% in February. (more…)

5 Trading quotes for Weekend

  
  Education
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-If you are hesitating to take a position, that indicates a lack of confidence that is not necessary. Just get into the position and PLACE A STOP. Day Traders lose money in positions everyday. Keep them small. The confidence you need is not in whether or not you are right, the confidence you need is in knowing you will stick to your stop no matter what. Therefore you can actually alleviate this hesitancy to pull the trigger by continually sticking to your stops and reinforcing this behavior.

-You want to own the stock before it breaks out, then sell it to the momentum players after it breaks out. If you buy breakouts, realize that professional day traders are handing off their positions to you in order to test the strength of the trend. They will typically buy it back below the breakout point which is typically where you will set your stop when you buy a breakout. (In case you ever wondered why you get stopped out on a lot of failed breakouts).

-Embracing your opinion leads to financial ruin. When you find yourself rationalizing or justifying a decline by saying things like, “They are just shaking out weak hands here,” or “The market makers are just dropping the bid here,” then you are embracing your opinion. Don’t hang onto a loser. You can always get back in.

-Professional day traders focus on limiting risk and protecting capital. Amateur traders focus on how much money they can make on each trade. Professionals day traders always take money away from amateurs traders.

-In the stock market, heroes get crushed. Averaging down on a losing position is a “heroic move” that is akin to Superman taking a spoonful of Kryptonite. The stock market is not about blind courage. It is about finesse. Don’t be a hero.

The influence Of Hope & Fear

  
  Education
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In trading psychology, two emotions that are constantly to the fore are hope and fear. One of the traders who recognised this was the legendary trader W D Gann. 

“Hope and fear: I have written about this often in my books and I feel I cannot repeat it too often. The average person buys commodities because they hope they will go up, or because someone advises them, they will go up. This is the most dangerous thing to do, never trade on hope. Hope wrecks more people’s lives than anything else. Face the facts, and when you trade, trade on the facts, eliminating hope”
“Fear causes many losses. People sell out because they fear commodities are going lower, but they often wait until the decline has run its course and sell near the bottom – never make a trade on fear”

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