Archives of “Financial economics” tag

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David Halsey,Trading the Measured Move -Book Review

  
  Education
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David Halsey throws out the old notion of a measured move: that you copy an AB move up (or down) and paste it on a retracement low (or high) of C to get your price target D. In Trading the Measured Move: A Path to Trading Success in a World of Algos and High Frequency Trading(Wiley, 2014) he substitutes Fibonacci levels.

He uses three trade setups: the traditional 50% retracement measured move (MM), the extension 50% MM, and the 61.8% failure. When a trade is entered, its target is 123% from a swing high or low (and sometimes from a breakout) that is followed by a retracement (50% in the traditional setup). That is, the target is AB + 23%. Halsey shows both successful and failed MM trades on charts—unfortunately usually grey bars on a black background, which makes them hard to decipher.

The measured move trade setups are not stand-alones. Halsey discusses the use of multiple time frames, seasonality, NYSE tools, tick extremes and divergences, and gaps. He also discusses how to manage positions and take profits, advanced (actually, pretty basic) risk management, trading psychology, and having a trading plan and journal. (more…)

Candlestick Pattern Dictionary

  
  Education
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  • Abandoned Baby: Abandoned Baby Candlestick example image from StockCharts.comA rare reversal pattern characterized by a gap followed by a Doji, which is then followed by another gap in the opposite direction. The shadows on the Doji must completely gap below or above the shadows of the first and third day.
  • Dark Cloud Cover: Dark Cloud Cover Candlestick example image from StockCharts.comA bearish reversal pattern that continues the uptrend with a long white body. The next day opens at a new high then closes below the midpoint of the body of the first day.
  • Doji: Doji Candlestick example image from StockCharts.comDoji form when a security’s open and close are virtually equal. The length of the upper and lower shadows can vary, and the resulting candlestick looks like, either, a cross, inverted cross, or plus sign. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level.
  • Downside Tasuki Gap: Downside Tasuki Gap Candlestick example image from StockCharts.comA continuation pattern with a long, black body followed by another black body that has gapped below the first one. The third day is white and opens within the body of the second day, then closes in the gap between the first two days, but does not close the gap. (more…)

10 Greedy Characteristics

  
  Education
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1.  You find yourself forgetting your rules.  Which during day trading is the last thing you want to happen since your profit margins are often based on smaller movements.

2.  When reviewing your pre-market plays, every stock looks like a winner.

3.  Shortly after opening your position you see a price target that is much higher but you have no justification for the target.

4.  Trading feels stressful all of the time.  From the minute you get up in the morning, until you close your last position.  Instead of approaching trading with a calm head, you have a constant feeling of fighting and living on the edge.

5.  You stop reviewing your trades.  If someone were to ask your win/loss percentage over the last week you would have no idea; however, you would know how much money you need to make for the week.

6.  You abandon limit orders and start placing more and more trades at market.  Most of the times this will occur when you are trying to get into the position, because you can’t stand the idea of not being in on the winning trade.

7. You start to over trade.  If you normally put on 3 trades per day, you will now find yourself placing 6 or more trades per day.  This sort of behavior will run its course as the increase in trading activity while abandoning your day trading rules always points to losing money. (more…)

Citi forecasts Greek devastation, unstoppable debt spirals in Italy and Portugal

  
Analysis, Education
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If Citigroup is right, the slight rebound in Europe over the summer will not be enough to stop Club Med going from bad to worse, with a string of soft defaults/restructurings.

I pass their latest forecasts on to readers. I do not endorse them.

Italy will bounce along in near-permanent recession with growth of 0.1pc in 2014, zero in 2015, and 0.2pc in 2016. The debt will punch above 140pc of GDP, beyond the point of no return for a country with no economic growth or sovereign currency.

“We do not expect the public debt ratio will enter a downtrend in coming years, and we suspect that some form of debt restructuring (maturity lengthening and/or coupon reductions) may be likely eventually,” said the bank.

Portugal is in an even worse state, with growth of: 0.6pc, 0.0pc, 1.0pc, over the next three years, with debt hitting 149pc of GDP by 2015, and unemployment rising again to 18.3pc:

Given the fiscal tightening still to come, ongoing private deleveraging and ensuing poor nominal GDP growth prospects, doubts still exist about the sustainability of the Portuguese public debt in our view.”
A second full bail-out programme remains a clear risk in the event of market sentiment deteriorating. In any case, we think a Greek-style public debt restructuring unlikely in the near future, but a restructuring of some government contingent liabilities is still possible. (more…)

Speculation, Trading, and Bubbles-by José A. Scheinkman (Book Review )

  
  Education
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SPECULATION-TRADING-BUBBLESTo pay tribute to one of its most famous graduates, Kenneth J. Arrow, Columbia University launched an annual lecture series dealing with topics to which Arrow made significant contributions—and there were many. Speculation, Trading, and Bubbles stems from the third lecture in the series given by José A. Scheinkman, with adapted transcripts of commentary by Patrick Bolton, Sanford J. Grossman, and Arrow himself. I’m going to confine myself here to a few excerpts that encapsulate some of the lecture’s key points, ignoring the often perceptive commentary.
Scheinkman offers a formal model of the economic foundations of stock market bubbles in an appendix to his lecture, but he lays out its basic ideas in the lecture proper. The model rests on two fundamental assumptions—“fluctuating heterogeneous beliefs among investors and the existence of an asymmetry between the cost of acquiring an asset and the cost of shorting that same asset. … Heterogeneous beliefs make possible the coexistence of optimists and pessimists in a market. The cost asymmetry between going long and going short on an asset implies that optimists’ views are expressed more fully than pessimists’ views in the market, and thus even when opinions are on average unbiased, prices are biased upwards. Finally, fluctuating beliefs give even the most optimistic the hope that, in the future, an even more optimistic buyer may appear. Thus a buyer would be willing to pay more than the discounted value she attributes to an asset’s future payoffs, because the ownership of the asset gives her the option to resell the asset to a future optimist.” (pp. 15-16)

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John S. Wasik,Keynes’s Way to Wealth-Book Review

  
  Education
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John Maynard Keynes was not only a renowned economist, he was an investor. He managed his own money as well as that of King’s College, his friends and family, and insurance companies. As John C. Bogle writes in his introduction to the book, “His spectacular success showed not only his passion for making money, but his growing aversion to losing it. As someone who had gained two fortunes through his trading prowess and lost them through his hubris, Keynes is a stellar example of how an investor can learn, fall on his face more than once, and still come out ahead.” (p. xxxiv)

John S. Wasik explores this investing journey in Keynes’s Way to Wealth: Timeless Investment Lessons from the Great Economist(McGraw-Hill, 2014). Let me start with the rewards of the journey: what Keynes did with his wealth. He bought art as well as rare books and manuscripts. The Keynes collection of rare books, bequeathed to King’s College in 1946, is, according to the college’s web site, “especially strong in editions of Hume, Newton and Locke, and in sixteenth and seventeenth century literature. About 1300 books in this collection have been catalogued on the online catalogue. … Keynes’s collection of manuscripts by Newton, Bentham, John Stuart Mill, etc., is housed in the Modern Archive Centre.” A man after my own heart, but with a bigger budget.

Keynes was a speculator. According to his own definition, “The essential characteristic of speculation … is superior knowledge. We do not mean by this the investment’s actual future yield … we mean the expected probability of the yield. The probability depends upon the degree of knowledge in a sense, therefore it’s subjective. If we regard speculation as a reasoned effort to gauge the future from present known data, it may be said to form the reins of all intelligent investing.” (p. 8) (more…)

You Should Have All 4 Elements To Be Successful

  
  Education
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Trading is a very complex undertaking and if you miss one element you will likely eventually fail  in this endeavor.

Here are the four different elements we must have working for us for success in trading:

The Knowledge

If we don’t do the homework to know what we need to know we will fail due to ignorance. Understanding historical price action, reading books by and about the best traders, seminars, mentor-ships, and  systems testing is all part of the homework we must do to get the needed knowledge.

The Resources

While trading with a small account is a good place to start it is not a good place to stay. Traders must be adequately capitalized for meaningful trading. We must have an affordable broker that does not charge bloated commissions and gives great execution on orders. A trader must have a platform and charting service that is adequate for his trading style. Trading a small account with an expensive broker with poor execution is a path to eventual failure.

The Desire (more…)

The Foundation of Technical Analysis

  
  Education
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First Principles

  • Markets are highly random and are very, very close to being efficient.
  • It is impossible to make money trading without an edge.
  • Every edge we have is driven by an imbalance of buying and selling pressure.
  • The job of traders is to identify those points of imbalance and to restrict their activities in the markets to those times.
  • There are two competing forces at work in the market: mean reversion and range expansion.
  • These two forces express themselves in the market through the alternation of trends and trading ranges.

The Four Trades

  • Traders usually view market action through charts, which are useful tools, but are only tools.
  • Trades broadly fall into with-trend and countertrend trades. These two categories require significantly different mind-sets and approaches to trade management.
  • There are only four technical trades. Some trades are blends of more than one trade, or an application of one trade to a structure in another time frame, but these are just refinements. At their root, all technical trades fall into one of these categories:
  • Trend continuation.
  • Trend termination.
  • Support and resistance holding.
  • Support and resistance failing.
  • Each of these trades is more appropriate at one phase of the market cycle than another. If you apply the wrong trade to current market conditions, you will lose.

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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”: (more…)

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