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Ten Key Principles in Economics

  
Analysis, Education
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ASR-10Everything has a cost. There is no free lunch. There is always a trade-off.Cost is what you give up to get something. In particular, opportunity cost is cost of the tradeoff.

 

One More. Rational people make decisions on the basis of the cost of one more unit (of consumption, of investment, of labor hour, etc.).

iNcentives work. People respond to incentives.

Open for trade. Trade can make all parties better off.

Markets Rock! Usually, markets are the best way to allocate scarce resources between producers and consumers.

Intervention in free markets is sometimes needed. (But watch out for the law of unintended effects!)

Concentrate on productivity. A country’s standard of living depends on how productive its economy is.

Sloshing in money leads to higher prices. Inflation is caused by excessive money supply.

Jesse Livermore Quotes -Must Read & Follow

  
  Education
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1) The stock market is never obvious. It is designed to fool most of the people, most of the time.

2) Play the market only when all factors are in your favor. No person can play the market all the time and win.There are times when you should be completely out of the market, for emotional as well as economic reasons.

3) Do not use the words “Bullish” or “Bearish.” These words fix a firm market-direction in the mind for an extended period of time. Instead, use “Upward Trend” and “Downward Trend” when asked the direction you think the market is headed. Simply say: “The line of least resistance is either upward or downward at this time.”Remember, don’t fight the tape!

4) The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.

5) The only thing to do when a person is wrong is to be right, by ceasing to be wrong. Cut your losses quickly, without hesitation. Don’t waste time. When a stock moves below a mental-stop, sell it immediately. (more…)

Trading Mathematics and Trend Following

  
Analysis, Education
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Some quick points, to be making money, Profit Factor must be greater than 1.

  • Profit Factor (PF)
  • = Gross Gains / Gross Losses
  • = (Average win * number of wins) / (Average loss * number of losses)
  • = R * w / (1-w)
    • where R = Average win / Average loss
    • w = win rate, i.e. % number of winners compared to total number of trades

Re-arranging, we have

  • w = PF / (PF + R)
  • R = PF * (1 – w) / w

Sample numbers showing the minimum R required to break-even (i.e. PF = 1, assuming no transaction costs) for varying win rates.

  • w = 90% >> R = 0.11
  • w = 80% >> R = 0.25
  • w = 70% >> R = 0.43
  • w = 60% >> R = 0.67
  • w = 50% >> R = 1
  • w = 40% >> R = 1.5
  • w = 30% >> R = 2.33
  • w = 20% >> R = 4
  • w = 10% >> R = 9

(more…)

The Most Influential Prizes in the World is The Nobel Prize in Economics

  
Analysis, Education
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I’ve been mum on the Nobel prize in economics because I honestly don’t know much about Jean Tirole and his microeconomic work.  But I think we should silence one discussion that inevitably arises every time the award is handed out.  That’s the idea that the award is somehow fake or something.  It’s true that the award in economics wasn’t conceived by Alfred Nobel and was added over 70 years after he died.  And it’s true that the award was created by the Swedish Central Bank in large part to celebrate its 300th anniversary.  So what?

No matter how many times people say that the award isn’t “official” it just doesn’t matter.  The reason why is because the award actually acts as an incredibly powerful status symbol.  If you’re an economist with a Nobel prize you are automatically lifted onto a pedestal above everyone else.  Your words carry greater influence and your impact on the world undoubtedly increases.  This is particularly true in the field of economics because economists have such a tremendous impact on public policy which impacts all of us.

In my opinion, it doesn’t matter one bit if Alfred Nobel didn’t conceive the award.  It doesn’t matter if certain people think it’s fake.  The bottom line is that winning the Nobel prize in economics is a huge huge deal that lifts the winner from being important to being beyond important.  Alfred Nobel might not have approved of the award, but the fact that his name is attached to the economics prize is a big deal.  And its winners will continue to have a tremendous impact on all of our lives in the future.  That reason alone makes the Nobel in Economics important and arguably more important and impactful than any other Nobel that is awarded.

Oh, and congratulations Mr. Tirole!  Don’t let your new found influence go to waste….

Strategy

  
  Education
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  • Adaptable- a strategy must be able to adapt to a changing market.  It must also be able to adapt to your internal changes.  If nothing changes there would be limited chances for profit. Every trader must root for changes but it does not matter if you cannot adapt.
  • Definable- there are times when you need to override your strategy but that happens for less frequently than we think.  A majority of your trades you should have a definite reason for a action.
  • Quickly explainable– if you can’t explain your strategy or reason for a trade in a minute or less it is probably too complicated.  Until you fully understand your strategy a majority of your “indicators” are just putting a band-aid over a gaping wound that is your lack of understanding.
  • Personal- You are an input into the way you execute.  You cannot be something you are not.  Do not get me wrong there are things about yourself that you need to bend to trading but strategy should not be that one.  It is hard to fake being tall and expensive to be a type of trader you are not.
I am not saying a trading plan will make you a successful trader, there are other factors.  It is a necessary first step.  You need a trading plan to consistently and confidently execute.  Your trading rules should answer whatever questions the market asks you.  Originally I made the mistake of planning out my trades, for example.  If the market does x I am going to do y.  Well when I was creating that plan that was what was working.  When I started to apply that plan the market had changed. That is why many probably scrap their plans or do not work on them in the first place.

You are either a system trader or a discretionary trader.  Each has it’s own equity curve and set of responsibilities. Below are some videos that you will find helpful.

 

These 7 Things -Traders Must Avoid

  
  Education
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  • Trading with no stop losses. You can’t control how big your profits are, the market will trend as far as it does. However, you can control and limit the size of your losses with a stop loss and a carefully managed positions size. Not having an exit plan if you are wrong can be very expensive when a trend takes off against your position and you start hoping instead of just cutting your losses and moving on.
  • Your opinion can cost you money. Trading your opinion against all other market participants can be very expensive. The market goes where it wants and when you disagree with where it is going it will cost you. Going with the flow in your time frame is the best way to make money. Fighting the flow of the market can be expensive.
  • Egos are expensive things. Inflated egos cause a trader’s #1 priority to be proving they are right and refusing to admit when they are wrong. It is very expensive for ego gratification to be higher on a trader’s list than making money.
  • Trading off predictions can cost a lot of money when they are wrong. There is more to be made by reacting to what the market is doing instead of predicting what you think it will do later. The future does not exist and it is expensive to pretend like it does.
  • Stubbornness causes small losses to become big losses. It causes a trader to make the same mistake over and over because they do not assimilate feedback. Instead they keep doing the same thing over and over and expect different results but keep getting the same results. Stubbornness is expensive.
  • Not having an exit strategy for a winning trade can be very expensive. It is possible to ride a big winning trade back to even. If there is no plan to lock in profits while they are there a winning trade can even turn into a big loser. Trailing stops and targets can put the profits in the bank.
  • Trading too big of position sizes for your account can be very costly because no manner how good your winning trades are you are set up to give back the profits with a few big losing trades in a row,

10 Worst Cases -Hyperinflation

  
Analysis, Economy, Education
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Inflation is hot property today, hyperinflation is even hotter! We think we are modern, contemporary, smart and ready to deal with anything. We’ve got that seen-it-all-before, been-there-done-it attitude. But, we are not a patch on what some countries have been through in the worst cases of hyperinflation in history. Here’s the top 10 list of worst cases in history. We’ll start with the worst first…let’s think positive!

Hungary 1946

Inflation at its peak reached a staggering figure of 13.6 quadrillion % per month! That’s 13, 600, 000, 000, 000, 000%. The largest denomination bill was a 100 Quintillion note. Prices ended up doubling every 15 hours at the time.

Zimbabwe 2008

Prices doubled here every 24.7 hours in November 2008 and inflation reached levels of 79 billion-odd %. They eventually stopped using the official currency and switched to the South African Rand or the $US. A loaf of bread ended up costing $35 million. This is the most recent case. It was Mugabe’s land-redistribution program that caused this.

Yugoslavia 1994 (more…)

Succeeding At Trading By Not Trading

  
  Education
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One important performance variable that isn’t tracked often is the variability in a trader’s risk-taking. Opportunities are not distributed perfectly evenly over time: some markets offer more opportunity, some less. As a result, the skilled trader will vary risk-taking as a function of the opportunity set: sometimes trading actively and in size, other times pulling back from trading. What traders refer to as “overtrading” is the result of an inability to regulate decision-making by opportunity set: taking risk when rewards are quite uncertain.

“When are you mostly out of markets?” is a question I like to ask. The ability to not trade is itself a performance edge when it helps traders hang onto their gains during times of market uncertainty. This is yet another area where having a full and rich personal life becomes important to trading success. If all you have to sustain you psychologically is your trading, it is going to be difficult to not trade. If you have a full and rich life outside of trading, then it is much easier to take risk when rewards justify the effort—and put trading aside otherwise.

It’s great to have a passion for trading; better to have a passion for successful trading. And sometimes that means engaging in other passions and refraining from marginal trades.

5 Points for Discretionary Traders

  
  Education
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1)  A discipline of pre-market preparation:  All emphasize the importance of process and preparation: sticking to what you do best and being prepared for fresh opportunity–and threat–each market day.

2)  Selectivity:  All have some methods for screening stocks and focusing on a core group that offer opportunity.  Often, these screens focus on stocks that are trading actively, that show good movement, and that are setting up for directional price moves because of earnings reports, breakout patterns, etc.

3)  Patience:  This follows from the first two.  The experienced traders emphasize risk management and waiting for high quality trades, rather than overtrading.  All stress understanding the current market environment and adapting to it.

4)  Diversification:  These traders don’t focus on one or two opportunities, but look at a range of promising shares and setups and trade more than one thing at a time.  All the proverbial eggs are not in one basket.

5)  Simplicity:  My sense is that the traders are focused on understanding what is happening now, not predicting what will happen in the future.  If I had to guess, I’d say that they are talented in detecting the flow of activity in and out of shares and are riding moves as they are getting under way.  They don’t appear to be researching deep value and holding for long periods to wait for that value to be realized.

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