1) The less successful traders are anticipating market movement and trading accordingly. The highly successful traders are identifying asset class mispricings and trading off those.
2) The less successful traders are trading particular instruments and pretty much stick to those. The highly successful traders recognize that any combination of trading instruments can be considered an asset class and appropriately priced (and gauged for mispricing).
3) The less successful traders think of their market as *the* market. The highly successful traders focus on interrelationships among markets that cut across nationalities and asset classes.
4) The highly successful traders place just as much emphasis on understanding markets as predicting them. The less successful traders don’t ask “why” questions.
5) The less successful traders are convinced they have proprietary information of value that they must not disclose to anyone. The highly successful traders use their proprietary information to selectively share with other highly successful participants, thereby gaining a large informational edge.
If I had to use one phrase to capture the essence of the highly successful traders, it would be analytical creativity. These traders are creative in their thinking about markets and rigorous in their pursuit of this creativity.
Archives of “Financial economics” tag
rssMarkets: They Trend, They Flow, They Surprise
Markets go up, down, and sideways. They trend. They flow. They surprise. Have markets changed? Not only have markets changed, they will continue to change. Check your history books. If you have a valid market philosophy, learning to accept that change and flow with it is your greatest asset. No matter how ridiculous market moves appear at the beginning, and no matter how extended or irrational they seem at the end, following trends is the rational choice in a chaotic, changing world.
That thinking leaves trend followers as generalists when it comes to their trading strategy and that’s not easy to accept for many. The dominant trend within universities is ever-narrower specialization. A higher premium is placed on deep knowledge within a single field (read: fundamental expertise in one market), versus broad wisdom across multiple fronts.3
For example, one trend following practitioner started trading trends in 1974—making hundreds of millions in profits and perhaps billions for clients. The major strategic elements of his trend following trading systems have never changed. He was blunt: “The markets are just the markets. I know that is unusual sounding.” (more…)
The best investors (and traders) are modest
Let’s face it you suck at investing. Your advisor sucks at investing too. You have all seen where monkeys picking stocks or throwing darts at a list can do better than many if not all advisors.
But Quartz is out with their annual analysis of just how bad you suck at this game. If you had picked the best stock to buy every day you could have turned $1000 into $179 billion by mid December. That is a 17.9 billion percent return.
Did you even get a 1 billion percent return? How about 1 million percent? 1000%? 100%? If you did not hit a 100% return then you did not get even 4/10 millionths of what was out there. Translation: You suck at stock picking. People like Jack Bogle will use this type of data to tell you that you are wasting your time even trying and that you should just index your portfolio.
Coincidentally he runs a few dollars in an index fund. I find it more interesting when some manager makes a killing and convinces themselves that they are geniuses. No one in this game is a genius. 100% return sucks remember? (more…)
10 Trading Books -Every Trader Must Read
“If there was easy money lying around, no one would be forcing it it into your pockets.” – Jesse Livermore
There is so much garbage out there concerning trading online and the temptation for easy money that many new traders are lured into childish beliefs about getting rich quick, following a guru that can predict the future, or confusing a salesman for a trader. Contrary to popular belief, trading is not about picks, predictions, or personal gurus. Trading is really about entry signals with an edge, following price action, and learning to trade a system that fits who you are as a trader. Real long term profitable trading is about, risk management, robust trading systems, and mental and emotional discipline. I would not trust anyone that did not have those three things at the core of their trading. Here is the right reading path for a new trader to follow to avoid all the hype, foolishness, con-artists, and childishness that arises from ignorance of a solid understanding of the subject of trading in the real world in real time.
Trade Like a Casino: Find Your Edge, Manage Risk, and Win Like the House (Wiley Trading) “If we are properly managing the risk and adhering to a positive expectancy model, the act of trading a position should be boring.” – Richard Weissman
Trading Without Gambling: Develop a Game Plan for Ultimate Trading Success “If all your decisions were made during nonmarket hours with timing and execution being your main concern during market hours, you will dramatically increase your chances of success.” – Marcel Link
Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets “Trend followers are the group of technical traders who use reactive technical analysis. Instead of trying to predict a market direction, their strategy is to react to the market’s movements whenever they occur. This enables them to focus on the market’s actual moves and not get emotionally involved with trying to predict direction or duration.” – Michael Covel
Market Wizards, Updated: Interviews With Top Traders “The most important rule of trading is to play great defense, not great offense.” & “Don’t focus on making money; focus on protecting what you have.” – Market Wizards (more…)
Physics To Help Deal With Market Risks
Misako Takayasu, a Tokyo Institute of Technology associate professor, spoke with The Nikkei about how “big data” will be used in the future to help market players manage risks based on principles of physics.
Excerpts from the interview follow.
Q: How do you use big data in your research?
A: Big data has allowed us to record human behavior and analyze it mathematically. Broader economic or social phenomena can be observed more clearly (in this way), like particles in physics.
As more and more trading data is accumulated, it is becoming increasingly possible to analyze and predict fluctuations using methods common in physics. The exponential growth of computer calculation speeds has also helped the process.
Q: What can you deduct from market data using these tools?
A: Data on ticks — the smallest increment of movement in the price of a security — can be used to gauge investor sentiment and how volatility is triggered. Market swings cannot be explained by a simple random-walk theory.
Markets become more stable when the number of contrarian investors increases. Conversely, they become unstable when more and more investors follow a market trend.
If market-followers dominate a market as it continues to climb, it will crash in the end. We may be able to explain the dynamics of a bubble with big data.
Q: What are the possible applications of big data in the market? (more…)
Trader Psychology
- Transcending Common Trading Pitfalls
- All market behavior is multifaceted, uncertain, and ever changing.
- “I am employing a robust, positive expectancy trading model and am appropriately managing risk on each and every trade. Losses are an inevitable and unavoidable aspect of executing all models. Consequently, I will confidently continue trading.”
- Denial of loss and uncertainty is extremely destructive because it prevents us from thinking in terms of probabilities, planning for the possibility of loss, and consequently from the necessity of consistently managing risk.
- If we view markets as adversarial we cut ourselves off from emotionally tempered, objective solutions to speculation (opportunities to profit)
- Blind faith is no substitute for research, methodical planning, stringent risk management, playing the probabilities, and unwavering discipline
- Depression is a suboptimal emotional state because it allows past losses or missed opportunities to limit our ability to perceive information about the markets in the present
- We are not our trades; they are merely an activity in which we are engaged
- Greed is linked to fear of regret, which is the greatest force impeding a trader’s performance outside of fear of loss
- Market offers limitless opportunities for abundance
- Trading biases prevent us from objectively perceiving reality, thereby limiting our ability to capitalize on various opportunities in the markets.
10 points To Become Great Trader
- Cutting losses short is an edge. Only having small losing trades will save you from the big losses.
- Letting your winning trade run as far as it will go is a huge advantage over most traders. Having some huge winning trades will help your overall profitability.
- Eliminating the risk of ruin through limiting the total amount of capital you will lose on any one trade will keep your account intact and is an edge over those traders that eventually blow up their trading account.
- Proper position sizing will allow you to keep your correct decision making process in place by limiting the emotional impact of any one trade. This is an edge over many others that panic during a big trade and make an emotional decision.
- Having the discipline to consistently follow a predetermined written trading plan is an edge over many others that make decisions based on opinions and feelings.
- Having the confidence and faith in your trading method to follow it through losing periods is a huge edge. Most drift to new methods right when their last one finally starts working. (more…)
10 Unsuccessful Trading Behaviors
- Refusing to define a loss.
- Not liquidating a losing trade, even after you have acknowledged the trade’s potential is greatly diminished.
- Getting locked into a specific opinion or belief about market direction. I.E. “I’m right, the market is wrong.”
- Focusing on price and the money
- Revenge-trading to get back at the market from what it took from you.
- Not reversing your position even when you clearly sense a change in market direction
- Not following the rules of the trading system.
- Planning for a move or feeling one building, then not trading it.
- Not acting on your instincts or intuition
- Establishing a consistent patter of trading success over a period of time, and then giving your winning back to the market in one or two trades.
Twenty Rules For Traders
- 1. Forget the news, remember the chart. You’re not smart enough to know how news will affect price. The chart already knows the news is coming.
- 2. Buy the first pullback from a new high. Sell the first pullback from a new low. There’s always a crowd that missed the first boat.
- 3. Buy at support, sell at resistance. Everyone sees the same thing and they’re all just waiting to jump in the pool.
- 4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.
- 5. Don’t buy up into a major moving average or sell down into one. See #3.
- 6. Don’t chase momentum if you can’t find the exit. Assume the market will reverse the minute you get in. If it’s a long way to the door, you’re in big trouble.
- 7. Exhaustion gaps get filled. Breakaway and continuation gaps don’t. The old traders’ wisdom is a lie. Trade in the direction of gap support whenever you can.
- 8. Trends test the point of last support/resistance. Enter here even if it hurts.
- 9. Trade with the TICK not against it. Don’t be a hero. Go with the money flow.
- 10. If you have to look, it isn’t there. Forget your college degree and trust your instincts.
- 11. Sell the second high, buy the second low. After sharp pullbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try. (more…)
9 Rules by Nassim Taleb’s Risk Management
Rule No. 1- Do not venture in markets and products you do not understand. You will be a sitting duck.
Rule No. 2- The large hit you will take next will not resemble the one you took last. Do not listen to the consensus as to where the risks are (that is, risks shown by VAR). What will hurt you is what you expect the least.
Rule No. 3- Believe half of what you read, none of what you hear. Never study a theory before doing your own observation and thinking. Read every piece of theoretical research you can-but stay a trader. An unguarded study of lower quantitative methods will rob you of your insight.
Rule No. 4- Beware of the nonmarket-making traders who make a steady income-they tend to blow up. Traders with frequent losses might hurt you, but they are not likely to blow you up. Long volatility traders lose money most days of the week.
Rule No. 5- The markets will follow the path to hurt the highest number of hedgers. The best hedges are those you alone put on. (more…)