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25 Points -Before the Trade

  
  Education
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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…)

Links For Traders

  
Education, LINKS
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Close view of links in a chain
Interesting reads:

 

Stress hormone linked to financial crisis

  
  Education
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STRESS TRADINGThe stress that financial traders suffer during periods of high volatility in the markets reduces their appetite for risk, according to a study led by Cambridge university neuroscientist and former Wall Street trader John Coates. This may prolong financial crises.

The research, published in Proceedings of the National Academy of Sciences, combines field and lab work. Prof Coates and colleagues discovered that levels of the stress hormone cortisol increased by 68 per cent on average in a group of City of London traders over eight days in which market volatility increased.

 The scientists took this finding to Addenbrooke’s Hospital in Cambridge where they used pharmacology – hydrocortisone tablets – to raise cortisol levels in volunteers, also by 68 per cent over eight days. Participants then played an incentivised risk-taking game. The appetite for risk collapsed, by as much as 44 per cent according to one measure, in those with raised cortisol. (The study was double-blinded with a control group taking dummy tablets.) (more…)

Must see 4 Charts

  
Analysis, Education
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There’s a reason why I warn you to get out of a bubble a little early rather than a little late. It’s because the first wave down tends to happen in a matter of a few weeks or months, sometimes days. It’s fast and furious.

I know this because I’ve studied every major bubble in modern history – all the way back to the infamous tulip bubble in 1637, when a single tulip cost more than most people made in a single year! And what I’ve seen in each case, without exception, is that bubbles do not correct in nice stair steps when they’re coming off their highs. They burst, crash, collapse, clatter, clang – however you want to say it!

When the bubble deflates, it typically crashes 50% minimum to as high as 90%. But it’s that first wave down that can wipe out 20% to 50% right off the bat!

Below I have four charts that make the argument for me.

They show the 1929 bubble burst… the 1987 crash… the 2000 “Tech Wreck”… and the latest of 2015 from the Red Dragon itself – China’s Tsunami.

In each case, the fact that these bubbles were destined to burst were only obvious to the few that weren’t in denial. Most give into the bubble logic that new highs are the new norms. They think: “This time is different.” It’s not! It never is.

It’s always hard to predict exactly when bubbles will peak and crash. It’s like dropping grains of sand on the floor. A mound will build up – becoming like a Hershey’s kiss that grows more narrow at the top. At some point, one grain of sand will cause the avalanche. Who knows which grain of sand that one will be!

Here are those charts. Like I said, they speak for themselves! (more…)

15 Crucial Points for Traders

  
Analysis, Education
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  1. You don’t have a crystal ball, and therefore accept you cannot predict a non-existent future. All you can do is can place your bets, control your risk, and then sit back and watch what happens.
  2. Price can only do one of three things: go up, go down, or go sideways. Ultimately, it is only when price moves that a profit or loss is generated. Therefore, as a trend follower it makes sense to focus your attention on price.
  3. Accept that you can only control the things you can control – namely when to enter or exit a trade, which markets to trade, how much equity to risk etc. All these elements should be part of your trading plan. Your entry parameters should be designed to identify when a trend may start developing, and your exit parameters when a trend has finished.
  4. Equally, accept that once you are in a trade you are no longer in control. You cannot control the market – to make money you have to let the trades play themselves out.
  5. Acknowledge that you can lose money even when all your criteria are met. You need to accept that you are playing an odds game, and there are no “can’t lose” trades out there.
  6. Being very conservative in the amount of equity you risk on each position means that you can have an emotional indifference towards each individual profit or loss generated.
  7. You MUST take full responsibility for your trading decisions, and adherence to your system rules.
  8. If things go against you do not blame anyone else, or any other external factor. You make all your trading decisions off your own back.
  9. Accept that luck (good or bad) may play a part on any one individual trade, however over the long run luck plays no part in your success or failure.
  10. Using a system with positive expectancy, allied to good risk control, and having control over your emotions will mean that, in the long term you will make money. However, there is a complete randomness about which trade will produce a profit or a loss. All you do is look for a set up which matches your own criteria, and then open the trade once the desired entry price level is reached.
  11. Once in a trade, your only concern is controlling your open risk, by cutting losses aggressively, By the same token, you need to let profits run. Providing the trend is still intact, then you should remain in the trade. Correct placing of your stops will keep the trade open until that happens.
  12. If done properly, trend following can take up very little of your normal day. Other than placing orders to open new trades, or to update stops on existing positions, there is very little to do in market hours. The process of identifying potential new setups can be done when the markets are closed, in the evening or at weekends.
  13. You only ever get taken out of a trade when price breaches your stop level. Do not close a position simply because price has moved a reasonable amount in your favour. Do not fear an open profit evaporating.
  14. Once a trade is closed, review the trade. Did you enter when you should have done? Was your initial stop correctly placed, and consequently were your position size and equity risk correct as per your trading plan? Was the trailing stop placed properly? If you can answer yes to all these questions, then it was a good trade, irrespective of whether you ended up with a profit or a loss.
  15. You know that, if you have a high level of trading efficiency, then it proves you are able to follow your trading rules, both emotionally and operationally. If the system you are using is proven to have a positive expectancy, then you will make money.

MRI’s of Succesful Traders

  
  Education
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I’ve seen this study making the rounds on several websites now as a type of neuroeconomic confirmation of Buffetological principles…

Perhaps procedure might be slightly useful as a means of seeing physical brain improvement by training– such as that found through meditative practices.

“Traders who buy more aggressively based on NAcc signals earn less. High-earning traders have early warning signals in the anterior insular cortex before prices reach a peak, and sell coincidently with that signal, precipitating the crash. These experiments could help understand other cases in which human groups badly miscompute the value of actions or events.”

“Neuroeconomists Confirm Warren Buffet’s Wisdom”:

“Seeing what’s going on in people’s brains when they are trading suggests that Buffett was right on target,” says Colin Camerer, the Robert Kirby Professor of Behavioral Economics at Caltech.

That is because in their experimental markets, Camerer and his colleagues found two distinct types of activity in the brains of participants—one that made a small fraction of participants nervous and prompted them to sell their experimental shares even as prices were on the rise, and another that was much more common and made traders behave in a greedy way, buying aggressively during the bubble and even after the peak. The lucky few who received the early warning signal got out of the market early, ultimately causing the bubble to burst, and earned the most money. The others displayed what former Federal Reserve chairman Alan Greenspan called “irrational exuberance” and lost their proverbial shirts.

Sviokla & Cohen, The Self-Made Billionaire Effect- Book Review

  
  Education
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self

Becoming a millionaire, even a multimillionaire is not all that extraordinary, becoming a billionaire is. What do self-made billionaires (and there are about 800 of them in the world) have that the rest of us don’t? John Sviokla and Mitch Cohen tackle this question in The Self-Made Billionaire Effect: How Extreme Producers Create Massive Value (Portfolio / Penguin, 2014).

These billionaires (or Producers, as the authors call them) may be wired differently. They certainly think differently. They balance judgment and imaginative vision, a daunting mental task since “for most people, judgment and imagination sit on opposite ends of a mental spectrum. The more skilled one is at seeing things as they are (judgment) the harder it is to see things as they might be (imagination).“ (p. 4) Not only do they “revel in bringing clashing elements together,” “they seamlessly hold on to multiple ideas, multiple perspectives, and multiple scales.” (pp. 16, 15)

Since they “cannot predict the exact time to make an investment, … they are willing to operate simultaneously at multiple speeds and time frames. They accept that timing is not under their control, and so they work fast, slow, super slow, or in all these modes at the same time. They urgently prepare to seize an opportunity but patiently wait for that opportunity to fully emerge.” (p. 19)

(more…)

16 +1 Differences Between Good Trades & Bad Trades

  
  Education
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Good Trades are made by managing the mind, ego, and emotions.

1. A good trade is taken with complete confidence and follows your trading method; a bad trade is taken on an opinion. 
2. A good trade is taken with a disciplined entry and position size; a bad trade is taken to win back losses the market owes you.
3. A good trade is taken when your entry parameters line up; a bad trade is taken out of fear of missing a move. 
4. A good trade is taken to be profitable in the context of your trading plan; a bad trade is taken out of greed to make a lot of money quickly. 
5. A good trade is taken according to your trading plan; a bad trade is taken to inflate the ego.
6. A good trade is taken without regret or internal conflict; a bad trade is taken when a trader is double-minded.

Good trades are just one trade inside a robust methodology that gives the traders an advantage int eh long term.

7. A good trade is based on your trading plan; a bad trade is based on emotions and beliefs. 
8. A good trade is based on your own personal edge; a bad trade is based on your opinion. 
9. A good trade is made using your own timeframe; a bad trade changes timeframe due to a loss. 
10. A good trade is made in reaction to current price reality; a bad trade is made based on personal judgment. 
11. A good trade is made after identifying and trading with the trend; a bad trade fights the trend. 
12. A good trade is made using the trading vehicles you are an expert in; a bad trade is when you trade unfamiliar markets. (more…)

9 things know yourself in order to obtain success in trading

  
Analysis, Education
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  • An aspiring trader has to understand what her/his hook is and construct her/his style of negotiation around this hook. Ask yourself some questions and determine what about the markets attracts you to it.
  • Do you like the adrenaline and the emotion of the competition? Or do you prefer a more controlled form of making decisions?
  • Are you more academic and inclined to perform investigations of the market? Or do you feel more comfortable trusting your instincts and intuition?
  • Are you set by defined rules and prefer to use a calculator? Or are you more qualitative in making your decisions?
  • Are you interested in international matters?
  • Are you interested in the ins and outs of individual companies? Or are you interested in economic theory?
  • What is it that you want from trading, to be the next George Soros? Do you want the liberty of working from home? Do want an additional source of income and profit?
  • Responding to these questions will help you easily in defining what type of trader you will become.
  • To determine what motivates you in the markets. But this is just the beginning. Once you know what motivates you, you can begin to determine the type of markets in which you should operate, the trading profile that you should adopt, and the additional preparation so that your trading will go further than just the basics. This is the best way to become a successful trader, the comprehension of the markets, the strategy, and the profile that best adjusts for you, by this manner you will maximize your profitability.

Quotes From – The Battle of Investment Survival, by Gerald M Loeb

  
  Education
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LoebHere are some interesting quotes from The Battle of Investment Survival, by Gerald M Loeb, Simon and Schuster, 1957 (14th printing).

“There are some rules that hold, and my first is to buy only something that is quoted daily and can be bought and sold in an action market daily. The greater the volume of trading and the broader the market in a particular security, the closer to a fair price at a given moment that security is likely to be.”

“In my opinion, the primary factor in securing market profits lies in sensing the general trend. Are we in a deflation or inflation period? If the former, I would hardly bother to analyze most equities.”

“In short, in my opinion everything of an analytical nature covering specific securities should be persistently linked to past market appraisals and set up for use solely to determine future market possibilities.”

“Any program which involves complete investment of all capital at all times is certain to fail unless the amount of it is extremely small.”

“All this suggests the question – are we learning to trade for the quick turn or to invest for the long pull? We are investing for appreciation, and the length of time one holds a position has noting to do with it. I lean towards rather short turns for many reasons. To begin with, experience is gained much more rapidly that way. Short-term investing once mastered has very much more the elements of dependable business than the windfalls or calamities of the long pull.”

“Obviously, our ideas will sound wrong to the most people. Any investment policy followed by all naturally defeats itself. Thus the first step for the individual trying to secure or preserve capital is to detach himself from the crowd.”

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