Archives of “future” tag

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Great Strategy For Traders

  
  Education
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In Reminiscences of a Stock Operator there is a scene where a tout runs up the the Commodore and says buy such and such stock. The Commodore phones his broker and says sell 10K, then says sell 10 more. Tout goes, “What are you doing, I said Buy!, not sell”. Commodore says, I need to see how the market is taking the orders.

Does it make a difference how your orders are being filled? Are they gobbled as price passes thru as if you weren’t even there, or does it nibble nibble at the order and partially fill, or does it touch and fill, or does it sit on price touch, touch, not fill, then fill? Do these variations even make a predictive difference in what happens in the near future?

Reason For Trading Failure

  
  Education
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bellaquote

The quote above is from Mike Bellafiore’s  The Playbook: An Inside Look at How to Think Like a Professional Trader.

Unfortunately, too few make it in the trading business, not for lack of desire or want for success, but for ignorance of what is necessary for success.  Successful trading is not about predicting the future but about managing it.

If you find that each day your time is consumed with searching for the next great indicator or a combination thereof or with the endless search for the best time frame to use, then you are trying to predict.  If, on the other hand, you focus on a specific, well-defined price pattern for entry and exit on a specific time frame, allowing the price to dictate your future action (win, lose, or draw) then you are managing the future.

The former is a “path to trading failure”; the latter the road to success.

 

Eight Cognitive Biases That Affect Trading

  
  Education
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8

  1. Loss Aversion – The tendency for people to have a strong preference for avoiding loses over acquiring gains.
  2. Sunk Costs Effect – The tendency to treat money that already has been committed or spent as more valuable than money that may be spent in the future. (more…)

Links For Traders

  
Education, LINKS
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Interesting reads:

My take on how to read financial news headlines

  
Analysis, Education
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Headline: Stocks Rose/Fell Today by 1% Because of _______
How to read it: Millions of shares traded hands today because investors all have different goals, strategies, risk profiles, holding periods and ideas.

Headline: [Popular economist/fund manager] Expects Market Volatility to Pick Up Later This Year
How to read it: Saying you expect volatility to pick up at some point in the future is like saying you expect it to rain at some point in the future. And volatility works both ways — to the upside and the downside — so really this is just a way of saying the markets will fluctuate, which of course they will.

Headline: George Soros Gained/Lost $1 Billion
How to read it: Soros has around $25 billion so what he does with his money shouldn’t concern most investors.

Headline: Markets Got Slaughtered Today: A Sign of Worse Things to Come?
How to read it: No one ever really knows why stocks rise or fall on a single day. The market is up just over 50% of all trading days and down just under 50% of all trading days so you can never put too much stock in any one day.

Headline: Investors Are Dealing With More Uncertainty
How to read it: The future is always uncertain. The past just feels more certain because now we know what really happened.

Headline: Are Market Overbought Here? 
How to read it: Ask us again in a few months.

Headline: [Democrats/Republicans/current or past president] Caused X% of Economic or Stock Market Growth
How to read it: Presidents or political parties don’t personally control economies or stock markets made up of millions of participants and trillions of dollars all wrapped up within a complex adaptive system. These things don’t come with levers that you can pull to make them rise or fall.

Headline: The Stock Market Enters a Painful Correction
How to read it: Retirement savers rejoice as stocks fall on the week. Those with decades to save & invest should hope it continues.

Headline: _____ Could Cause Gold Could Rise to $1500/oz.
How to read it: Total guess. No one has a clue.

Headline: Is This the Stock-Picker’s Market We’ve Been Waiting For?
How to read it: It’s both always and never a stock-picker’s markets because it all depends on the quality of the stock-picker, not the market.

Headline: Goldman Sachs Expects Stocks to Rally For the Next 3 Months
How to read it: Big financial firms have so many strategists that there will surely be a research piece put out in the coming days that totally contradicts whatever they just predicted.

Headline: When Will the Fed Raise Rates?
How to read it: Has Fed policy really ever helped you make better investment decisions? Even if you knew exactly what they were going to do in the future you still have no idea how other investors will react. 

Headline: Investors Panic as Stocks Enter a Bear Market
How to read it: Don’t panic — expected returns and dividend yields go up during bear markets. This is a good thing for long-term investors.

Headline: A Perfect Storm Caused Markets to Fall
How to read it: Stuff happens in the markets and we like to attach important-sounding narratives to everything. 100-year storms now seem to come around once a month or so. (more…)

Super forecasting: the Art and Science of Prediction by Philip Tetlock -Book Review

  
Analysis, Education
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I have found the bookSuperforecasting: the Art and Science of Prediction by Philip Tetlock to be interesting, provocative and useful. I strongly recommend it.

Philip Tetlock is on the faculty of Wharton in the Management Department, and Dan Gardner is a journalist and author.

The basic story is that Philip Tetlock and his colleagues formed the Good Judgment Project (or “GJP”), and joined a prediction competition sponsored by the Intelligence Advanced Research Project Activity, or IARPA, which is the intelligence community’s version of DARPA. GJP recruited volunteer forecasters, gave them some basic training, and put them into teams. The GJP teams were so successful that eventually the competing groups, including Michigan and MIT, were shut down or merged with Tetlock’s group. As they screened out their most successful participants, Tetlock called them “superforecasters”. (more…)

Essentials of a Winning Psychology

  
  Education
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fear-1
Four fears that block a winning psychology:

  1. Fear of Loss
  2. Fear of being wrong
  3. Fear of missing out
  4. Fear of leaving money on the table.

Realize that trading is based on probabilities, as such, every trade is unique. In other words, the past does not equal the future.

Probability thinking manifest other states and beliefs:
  • Because we know that we will succeed in the long run and because we know we will protect ourselves no matter what the market does, we acquire the state of “self trust” and the state of being “carefree”.

In turn these states allow us to remain….

  • Focused, confident and carefree when we are experiencing the inevitable prolonged drawdown.
  • Because at the micro level we know that the market is random, we will not allow euphoria to set in and lead us to reckless trades. Each trade will only be one in a series of probabilities.
  • We will view market information not as a source of pleasure or pain but merely as data providing us with opportunities.

Personal Attributes Essential to a Winning Mentality
  • Awareness – the ability to step outside ourselves and observe. The more effectively we can do this, the easier our progress to “Acceptance”.
  • Honesty – the ability to seek to perceive reality in spite of our filters.
  • Courage – the willingness to bear the pain brought about by our awareness and honesty.
  • Commitment – the willingness to do whatever is necessary to achieve our goals

To succeed, a trader must have a vision about where he is heading, and must internalise that a winning attitude is total submission to the trading outcome.
This means managing Fear and Euphoria. To do this, we need to ACCEPT, with every fibre of our body, the belief that at the micro level the market is uncertain and unpredictable and at the macro level it is relatively certain and predictable.

12 ways the world could end

  
Analysis, Education
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Since the dawn of civilisation people have speculated about apocalyptic bangs and whimpers that could wipe us out. Now a team from Oxford university’s Future of Humanity Institute and the Global Challenges Foundation has come up with the first serious scientific assessment of the gravest risks we face.

Although civilisation has ended many times in popular fiction, the issue has been almost entirely ignored by governments. “We were surprised to find that no one else had compiled a list of global risks with impacts that, for all practical purposes, can be called infinite,” says co-author Dennis Pamlin of the Global Challenges Foundation. “We don’t want to be accused of scaremongering but we want to get policy makers talking.”

The report itself says: “This is a scientific assessment about the possibility of oblivion, certainly, but even more it is a call for action based on the assumption that humanity is able to rise to challenges and turn them into opportunities. We are confronted with possibly the greatest challenge ever and our response needs to match this through global collaboration in new and innovative ways.”

There is, of course, room for debate about risks that are included or left out of the list. I would have added an intense blast of radiation from space, either a super-eruption from the sun or a gamma-ray burst from an exploding star in our region of the galaxy. And I would have included a sci-fi-style threat from an alien civilisation either invading or, more likely, sending a catastrophically destabilising message from an extrasolar planet. Both are, I suspect, more probable than a supervolcano.

But the 12 risks in the report are enough to be getting on with. A few of the existential threats are “exogenic”, arising from events beyond our control, such as asteroid impact. Most emerge from human economic and technological development. Three (synthetic biology, nanotechnology and artificial intelligence) result from dual-use technologies, which promise great benefits for society, including reducing other risks such as climate change and pandemics — but could go horribly wrong.

Assessing the risks is very complex because of the interconnections between them and the probabilities given in the report are very conservative. For instance, extreme global warming could trigger ecological collapse and a failure of global governance.

The authors do not attempt to pull their 12 together and come up with an overall probability of civilisation ending within the next 100 years but Stuart Armstrong of Oxford’s Future of Humanity Institute says: “Putting the risk of extinction below 5 per cent would be wildly overconfident.” (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…)

Predictions vs. Expectations

  
  Education
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There are two VERY DIFFERENT terms to consider when it comes to trading: 1) Prediction and 2) expectation (or confidence) surrounding the prediction. 

Placing a trade involves making a prediction. It is not possible to place a trade without making a prediction, and that is true even for trades that might or might not execute, such as those placed using a stop order or limit order, for example.

Every trader who places a trade does so because the trader believes there is some chance, greater than 0%, that the trade will be beneficial, perhaps based on historical probability (back testing) perhaps based on intuition (years of trading experience) perhaps based on hopes and prayers or possibly based on nothing more than a need to gamble. Whatever the basis, there must be SOME chance to benefit or else the trader would not entertain it. The trader predicts he or she will benefit, or else the trader does not enter a trade order.

No matter what the prediction may be, so long as the EXPECTATIONS for the prediction are based in reality, there is nothing inherently wrong with making a prediction. As long as a trader accepts a 30% win rate, for example, and makes allowances accordingly, there is nothing wrong with taking such a trade. The same is true for trades with 50/50 odds, as long as the trader properly predicts, expects, and is prepared for 50% failures; which is why it is possible to flip a coin and still be successful. 

Many successful traders may say they never predict, when what they may really mean is that they never EXPECT their prediction to come true. Thus they may say things like “I only react” when more accurately they are reacting… to a failed prediction. For, it is virtually impossible to trade without predicting. So, I say to all you new traders out there “Don’t be afraid to predict. Just know how likely it is that you’ll be wrong, and know what to do when your prediction fails!”

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