They have the resilience to come back from early losses and account blow ups.
They focus on what really matters in trading success.
They have developed a trading method that fits their own personality.
They trade with an edge.
The harder they work at trading the luckier they get.
They do the homework to develop a methodology through researching ideas. (more…)
Valuation alone is insufficient reason to get short a stock — History teaches us that cheap stocks can get cheaper, dear stocks can get more expensive
ALWAYS work with a pre-determined loss – either a physical or mental stop loss — Never leave yourself open to infinite losses
Fundamentals tell you WHY to short something, not WHEN to short it. ALWAYS have some technical confirmation before shorting. Make a short selling wish list, then WAIT for technical confirmation.
A good physician knows that, before cure comes a diagnosis. You cannot treat a problem before you identify what that problem is.
All too often, traders assume that their performance problems are due to a single cause: trading the wrong chart pattern or indicator, having the wrong mindset, etc. As a result, they seek out one trading guru or coach after another, only to see their P/L head steadily south.
The reality is that there are quite a few reasons why trading might be unprofitable. Figuring out which might apply to you is the first step is getting the right help.
Here’s a fourfold scheme that I have found helpful in conceptualizing trading problems:
1) Problems of training and experience – Many traders put their money at risk well before they have developed their own trading styles based on the identification of an objective edge in the marketplace. They are not emotionally prepared to handle risk and reward, and they are not sufficiently steeped in markets to separate randomness from meaningful market patterns. They are like beginning golfers who decide to enter a competitive tournament. Their frustrations are the result of lack of preparation and experience. The answer to these problems is to develop a training program that helps you develop confidence and competence in identifying meaningful market patterns and acting upon those. Online trading rooms, where you can observe experienced traders apply their skills, are helpful for this purpose.
2) Problems of changing markets – When traders have had consistent success, but suddenly lose money with consistency, a reasonable hypothesis is that markets have changed and what once was an edge no longer is profitable. This happened to many momentum traders after the late 1990s bull market, and it also has been the case for many scalpers after volatility came out of the stock indices. Here the challenge is to remake one’s trading, either by retaining the core strategy and seeking other markets with opportunity or by finding new strategies for one’s market. The answer to these problems is to reduce your trading size and re-enter a learning curve to become acquainted with new markets and methods. Figuring out how you learned the markets initially will help you identify steps you need to take to relearn new patterns. (more…)
Bull Markets: Fear of missing out.
Bear Markets: Fear of being in.
Bull Markets: Everything I buy is going up — I’m a genius.
Bear Markets: Everything I buy is going down — I’m an idiot.
Bull Markets: See, fundamentals always win out.
Bear Markets: See, technicals and sentiment rule the markets.
Bull Markets: I knew I should have had more of my portfolio in stocks.
Bear Markets: I knew I should have had more of my portfolio in bonds.
Bull Markets: That guy’s been calling for a crash for years — he’s an idiot.
Bear Markets: That guy just called the crash — he’s a genius.
Bull Markets: I want to be a long-term buy and hold investor.
Bear Markets: I want to be a short-term trader.
Bull Markets: I’m glad I was buying during the last market crash.
Bear Markets: Never try to catch a falling knife.
Bull Markets: I’ll sit tight when the market falls.
Bear Markets: Dear Lord, get me out of stocks NOW!
Bull Markets: Time to buy stocks?
Bear Markets: Time to sell stocks? (more…)
Assuming you use rules in your trading, here’s an exercise that can bring new insight into analyzing your trade metrics. The next time you review your trade history (you do review it, right?) focus on the rules of the trade. Specifically, ask yourself how you responded to the rules.
For this exercise we will use two types of rules—external and internal. An example of an external rule would be one generated from your trading system. Let’s use a simple moving average cross as a buy order. An example of an internal rule would be discretionary in nature. Usually we can find these in statements like “I told myself that I’d trade smaller ahead of my vacation so I wouldn’t have to worry about positions and truly relax.”
Take a piece of paper and divide it into two columns; one for external and one for internal. Now process your prior trades to see which types of rule you followed and didn’t follow. Take it a step further to see which type of rule had larger profits or losses over time. See if there’s a correlation between length of trade and type of rule. Perhaps there’s a common thread between losing trades and not following your internal rules. If so, this would suggest a lack of discipline on your part which can be fixed by creating an external rule to avoid or lessen losses in the future. Have fun with the exercise but approach it with the intent to improve your trading. (more…)
Trend Following with Managed Futures: The Search for Crisis Alpha (Wiley, 2014) by Alex Greyserman and Kathryn M. Kaminski is an academically rigorous book with a practical bent. Although on the surface it appears to have a narrow focus, in reality it covers a broad spectrum of important but often overlooked investing concepts. Even readers who have no real interest in managed futures can learn a great deal from it, especially if they have some familiarity with financial statistics.
The authors start with an 800-year historical perspective and then discuss trend following basics, theoretical foundations, trend following as an alternative asset class, benchmarking and style analysis, and trend following in an investment portfolio.
Here I’ll simply highlight a couple of ideas that are central to the book’s thesis.
Let’s start with the notion of crisis alpha. “Crisis alpha opportunities are profits that are gained by exploiting the persistent trends that occur across markets during times of crisis.” (p. 145) Viewed in the context of the adaptive market hypothesis set forth by Andrew Lo in 2004, “for both behavioral and institutional reasons, market crisis represents a time when market participants become synchronized in their actions creating trends in markets. It is only the select (few) most adaptable market players who are able to take advantage of these ‘crisis alpha’ opportunities.” (p. 73)
1. “An investor looks for safety… The speculator looks for a quick profit.” Livermore is saying that what differentiated him and other speculators from investors was: (1) a willingness to make bets with short duration and (2) not seeking safety. Anyone reading about Livermore must remember that he was not a person who often/always followed his own advice. He eventually shot himself leaving a suicide note which included the sentence: “I am a failure.”
2. “A professional gambler is not looking for long shots, but for sure money…Since suckers always lose money when they gamble in stocks – they never really speculate…” Livermore believed he was not a gambler since he only speculated when the odds were substantially in his favor (“sure money”). Livermore’s statement reminds me of a quotation from Peter Lynch: “An investment is simply a [bet] in which you’ve managed to tilt the odds in your favor.” Livermore’s statement also reminds me of the poker player Puggy Pearson who famously talked about need to know “the 60/40 end of a proposition.” When the odds are substantially in your favor you are not a gambler; when the odds are not substantially in your favor, you are a sucker.
3. “I trade in accordance to my means and always leave myself an ample margin of safety. …After I paid off my debts in full I put a pretty fair amount into annuities. I made up my mind I wasn’t going to be strapped and uncomfortable and minus a stake ever again.” Livermore is not referring here to seeking a Benjamin Graham style “margin of safety” on each bet but rather to this: once you establish a big financial stake as a speculator, setting aside enough money so you don’t need to “return to go” financially is wise. Livermore wanted a margin of safety in terms of safe assets so that he would always have a grubstake to start over in his chosen profession of speculation. On this point and others, he failed to follow his own advice.
4. “Keep the number of stocks you own to a controllable number. It’s hard to herd cats, and it’s hard to track a lot of securities.” There is only so much information a single person can track in terms of stocks whether you are in investor or a speculator. By focusing on a smaller number of stocks you are more likely to (1) know what you are doing (which lowers risk) and (2) find an informational advantage you can arbitrage.
5. “Only make a big move, a real big plunge, when a majority of factors are in your favor.” Only bet when the odds are substantially in your favor. And when that happens, bet in a big way. The rest of the time, don’t do anything. (more…)
Two articles are doing the rounds. The first is a letter from Bridgewater hedge fund titan Ray Dalio, who has long believed the world is in a great deleveraging. He doubles down today and says the next ‘big’ Fed move will be more QE.
Here’s the crux:
the ability of central banks to ease is limited, at a time when the risks are more on the downside than the upside and most people have a dangerous long bias. Said differently, the risks of the world being at or near the end of its long-term debt cycle are significant.
That is what we are most focused on. We believe that is more important than the cyclical influences that the Fed is apparently paying more attention to.
While we don’t know if we have just passed the key turning point, we think that it should now be apparent that the risks of deflationary contractions are increasing relative to the risks of inflationary expansion because of these secular forces. These long-term debt cycle forces are clearly having big effects on China, oil producers, and emerging countries which are overly indebted in dollars and holding a huge amount of dollar assets-at the same time as the world is holding large leveraged long positions.
While, in our opinion, the Fed has over-emphasized the importance of the “cyclical” (i.e., the short-term debt/business cycle) and underweighted the importance of the “secular” (i.e., the long-term debt/supercycle), they will react to what happens. Our risk is that they could be so committed to their highly advertised tightening path that it will be difficult for them to change to a significantly easier path if that should be required.
Next is NYSE floor veteran Art Cashin at UBS. Some of his comments are mute because he talks about the potential for China to cut rates and that’s already taken place. He says to watch high yield closely and Jackson Hole.
Vice-Chair Stanley Fischer will be speaking later this week at the Jackson Hole conference. I think he will be addressing the problem of inflation and that it’s not growing in the pace they want it. That will give the world a hint that the Fed is not quite ready to raise interest rates.
Top Trader Frustrations
It is common for traders to complain of a lack of confidence in their trading, but very often it is overconfidence that does them in. Overconfidence results from a lack of appreciation of the complexity of markets and an underestimation of the challenges of trading them successfully. In a sense, overconfident traders lack respect for the markets. They think that reading about a few setups or buying the newest software will prepare them to make money. Overconfident traders don’t want to work their way up the trading ladder: they resist the idea that screen time is the best teacher. They also chafe at the idea of growing their account. Rather than start with one contract and wait until they’re profitable before trading larger size, they want big positions—and profits—right away. Because they’re so eager to make money—and so sure they can make it—overconfident traders generally trade impulsively. They won’t wait for the setup to form; they’ll jump the gun—and get whipsawed in the process. Instead of being patient and waiting for short-term patterns to align with longer-term patterns, they will take every trade, enriching their brokers in the process. (more…)
