Archives of “financial markets” tag

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Jesse Livermore and natural disasters

  
  Education
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Those of you who have read Reminiscences of a Stock Operator, Edwin Lefevre’s classic book reportedly based on Jesse Livermore, will know that ‘Larry Livingston’(Livermore) profited from shorting stocks immediately prior to the 1906 San Francisco earthquake. Initially the market held up, but Livermore was patient enough to sit in his positions, and the market finally succumbed to a sharp downdraft after a couple days.

In Michael Covel’s book Trend Following, there is a section devoted to major events that have occurred, which have significantly affected the markets, and that it was pointed out how often a trend follower was trading in the correct direction at that particular time. By definition, a trend follower would be trading in the correct direction when there is a major market specific event (such as the 1987 market crash, the dot.com bubble, the 2008 crash etc), but also more often than not when other major events occur, such as the collapse of Barings Bank, 9/11 etc.

Back to Livermore. While he started shorting stocks on a hunch prior to the earthquake, I follow the trend on the indices as a basis for whether I should be long or short stocks. Indeed, Livermore himself came to the same conclusions:

“I began to see more clearly – perhaps I should say more maturely – that since the entire list moves in accordance with the main current… Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn’t it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. It took me a long time to learn to trade on those lines.”

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You wanna be right? Or make money?

  
  Education
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We all have ego. Everyone likes to be right, likes to be seen as intelligent, and likes to be a winner. We all hate to lose, and we hate to be wrong; traders, as a group, tend to be more competitive than the average person. These personality traits are part of what allows a trader to face the market every day—a person without exceptional self-confidence would not be able to operate in the market environment.

Like so many things, ego is both a strength and a weakness for traders. When it goes awry, things go badly wrong. Excessive ego can lead traders to the point where they are fighting the market, or where they hold a position at a significant loss because they are convinced the market is wrong. It is not possible to make consistent money fighting the market, so ego must be subjugated to the realities of the marketplace.

One of the big problems is that, for many traders, the need to be right is at least as strong as the drive to make money—many traders find that the pain of being wrong is greater than the pain of losing money. You often have minutes or seconds to evaluate a market and make a snap decision. You know you are making a decision without all the important information, so it would be logical if it were easy to let go of that decision once it was made. (more…)

Balenthiran 17.6 Year Cycle

  
  Education
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Interesting take on the longer term Secular Bear Market Vs. Cyclical Bull Market, via Kerry Balenthiran:

“My research has identified that a 17.6 year stock market exists within the markets consisting of downtrends lasting 2.2 years and uptrends lasting 4.4 years (2 x 2.2 years), with a combined cycle length of 17.6 years. I have called this cycle the Balenthiran Cycle and demonstrate how the intermediate turning points match stock market behavior going back to the early 1900s and extrapolate the cycle forwards to provide a market roadmap of the next secular bull market to 2035 and subsequent secular bear market to 2053.”

A few caveats: The 17.6 year cycle has been bantered about for a long time by various people. (See “previous” below).

Second, I would add is that cycles can be interrupted by external events — like Bailouts, QE, etc.

Last, the world changes over time, and I doubt that any oscillation period dependent upon humans would stay all that consistent over decades and centuries.

6 Points For Traders

  
  Education
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1.  Consistently profitable trading is not about discovering some magic way to find profitable trades.
2.  Consistently successful trading is founded on solid risk management.
3.  Successful trading is a process of doing certain things over and over again with discipline and patience.
4.  The human element of trading is enormously important and has been ignored by other authors for years.  Recognizing and managing the emotions of fear and greed are central to consistently successful speculation.
5.  It is possible to be profitable over time even though the majority of trading events will be losers.  “Process” will trump the results of any given trade or series of trades.
6.  Charting principles are not magic, but simply provide a structure for a trading process.

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…)

Something You Need to Know

  
  Education
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A trader with a superior trading strategy but lacking in self-management skills will generally underperform a trader who has a less than superior strategy  (but still has en edge) and is superior in self-management. I see this all the time.

Consider re-directing some of your energy and time toward self-mgt. Self mgt. includes a lot of things….but the big one is understanding how your emotions – including subconscious emotions – influence your decisions and actions.

Your trading plan or your strategy must include self management.

10 Rules If You USE Charts

  
  Education
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Rule 1 – If you cannot see trends and patterns almost instantly when you look at a chart then they are not there. The longer you stare, the more your brain will try to apply order where there is none.
If you have to justify exceptions, stray data points and conflicting evidence then it is safe to say the market is not showing you what you think it is.
Rule 2 – You can torture a chart to say anything you want. Don’t do it.
This is very similar to Rule 2 but it there is an important point to drive home. You can cherry pick indicators to justify whatever biases you bring to the table and that attempts to impose your will on the market. You cannot tell the market what to do – ever.
Rule 3 – Be sure you check out one time frame larger than the one in which you are operating (a weekly chart for a swing trader, a monthly chart for a position trader).
It is very easy to get caught up in your own world and miss the bigger picture getting ready to smack you. It can mean the difference between buying the dip in a rising trend and selling a breakdown in a falling trend.
Rule 4 – Look at both bars (or candles) and close-only line charts to see if they agree. And look at both linear and semi-logarithmic scaled charts when price movements are large.
Short-term traders can ignore the latter since prices are not usually moving 30% in a day. But position traders must compare movements at different price levels.
As for bars and lines, sometimes important highs and lows are set by intraday or intra-week movements. And sometimes intrday or intra-week highs and lows are anomalies that can safely be ignored. Why not look at both?
Rule 5 – Patterns must be in proportion to the trends they are attempting to correct or reverse. I like the trend to be at least three times as long as the pattern. (more…)

The Agoraphobic Trader

  
  Education
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http://en.wikipedia.org/wiki/Agoraphobia

The market is risky.  There is nothing about it that isn’t risky.  Risk never changes, your understanding and ability to make decisions based on what you are likely to achieve does change.  

One of the most important things about risk is liquidity. Agoraphobia is a “Panic disorder with agoraphobia is an anxiety disorder in which a person has attacks of intense fear and anxiety. There is also a fear of being in places where it is hard to escape, or where help might not be available.” –A.D.A.M Medical Encyclopedia

This plays out in two ways:

  • Physical limitations: The ability to get out of a position because there are ample orders on the other side of your trade.   We have seen many positions get too big to win.  Amaranth Nat Gas trade, CDS, and most recently the London Whale Trade.  For most of us we will never have the ability to get into a position that size but if you trade penny stocks you might find yourself in trouble and with some serious momentum trades.
  • Mental limitations:  As it is often said “second trade first”, meaning have your exit in mind before you get into a position. We have all been there before.  Not getting out of a trade where we should have.  Now we are down money or gave back open profits.  We are essentially trapped.  The trade begins to own us.  We have created an extra branch on the decision tree that does not need to be there.  

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4 Valuable Trading Lessons

  
  Education
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A). No matter how good you think you’re in the knowledge of the financial markets, your perception would change when your hard-earned money is at stake. No matter how much you’ve read about trading, you’ll realize that theory is different from practice when the market shows you its true color.

B). If you lose in the markets, don’t despair. It means you’re only paying tuition fees to the markets. Eventually, you’ll stop losing more than you gain and become a great trader and harvest profits from the markets on annual basis. It may take some time and perseverance to achieve this. Just make sure you learn from your mistakes and never repeat them.

C). The best strategies are trend-following strategies. One of the best trading methods is to buy pullbacks in an uptrend or sell rallies in a downtrend. Some indicators can be used to attain this aim (like moving averages). It pays to go with the overall trend. When a trend changes, it must be confirmed before one starts going with it.

D). It is very dangerous to trade without stop loss or to refuse to go out of the market that’s going against you. There are no other ways protect your account as a private trader. This is a way to deal with the permanent uncertainty in the markets. You mayn’t make profits sometimes, but you can make your losses to be as small as possible. By taking risk management serious, you’ll never lose a huge percentage of your portfolio. When you specialize on not losing, you’ll eventually make money and go ahead in the markets.

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