When it comes to market timing, you’ve got to UNLEARN responses that you’ve spent your whole life learning. Market timing isn’t about you. It is just a strategy that works over time. In other fields, probability plays little if any role. You put in effort, make sure you meet the expectations of the people who pay you, and you’re a success. In the traditional workplace, it makes sense to put a little ego and pride into your work. Your effort and talent often have a direct payoff. But with market timing, the odds can go against you, no matter how much work you put in. The perfect trade can go wrong. That’s hard to accept for most people because it means that being a successful (profitable) market timer or trader, to some extent, is just a matter of the odds randomly working in your favor. But there is good logic behind this randomness. And a successful timing or trading strategy uses this logic to profit. A successful timing strategy will exit losses quickly. It will not stay with a bullish or bearish position to sooth the ego of the strategy’s designer. It will also stay with a successful trade and not exit quickly to lock in a profit. That may feel good for a day, but if the profitable trend lasts two, three, five times longer, you have lost out on a huge profit. Recognizing that odds are part of trading takes some of the glory out of it. But on the other hand, understanding odds helps you cope with inevitable drawdowns.
Archives of “lifetime” tag
rss4 Dirty Words of Trading
Should– Phrases include: “The market should have” and “I should have”. Those phrases are often used to socialize losses. They are a strong signal something is off. They should be used to aid you in correcting your vision not make you feel better.
Must– Phrases include: “The market must…”, “I must make money”, or “I must trade”. The market does not have to do anything and neither do you. When you use the word “must” it is hardly ever from a position of strength. The market knows when you are desperate and will take full advantage of you. Keeping your expenses as low as possible will make it easier to not make those statements.
Won’t– Phrases include: “The market won’t…” or “I won’t make money”. Notice a theme here? You are part of the market, you are not the market. Not getting what you expect, even if it is positive, confuses the brain. If you expect to lose and don’t it is still a bad outcome. Your brain is going through enough as it is. The market is a one way walkie talkie, you listen, it talks.
Can’t– Phrases include: “The market can’t..” or “I can’t…” or “I can’t lose anymore”. Yes the market can, go look at a chart. Go look at a Fed day or about any chart from 2008. Not only can it happen, it does happen. There are no more once in a lifetime moves in the market. There are and always have been life changing moves. No one ever said trading was easy but at least in the case of futures someone is taking your money. If you think you can’t, you probably wont. The market will take every penny you have. If can take every penny you put at risk. Fix the problem, when you run out of money it is too late.
Do Stocks Fall Faster than They Rise?
1) Markets fall faster than they rise — and options traders know this. Otherwise, arbitraging this difference would be a meal for a lifetime.
2) Market participants perhaps anticipate that the realized volatility during a bear market is greater than a bull market. However, the problem with this analysis is one might expect to see an upward sloping volatility yield curve in out-of-the-money puts (during bull markets), and yet that does not usually occur based on my tests. Conversely, right now have a downward sloping yield curve in out of the money calls — which confirms the hypothesis that market participants anticipate slower price rises in the future. [Note to quants: I am not confusing delta, gamma and vega. I’m using options to predict terminal price at expiration.]
3) For most humans, fear of loss is a stronger emotion/motivator than the pleasure of gain (greed). This is well documented in the psychology and behavioral finance literature. Hence, ceterus paribus, capital market participants (who have a net long position) will, as a group, pull their rip cord faster — to flee from risk — than they will embrace the possibility of profit.
Traders -Remember These Two Words-Won't & Can't
Won’t– Phrases include: “The market won’t…” or “I won’t make money”. Notice a theme here? You are part of the market, you are not the market. Not getting what you expect, even if it is positive, confuses the brain. If you expect to lose and don’t it is still a bad outcome. Your brain is going through enough as it is. The market is a one way walkie talkie, you listen, it talks.
Can’t– Phrases include: “The market can’t..” or “I can’t…” or “I can’t lose anymore”. Yes the market can, go look at a chart. Go look at a Fed day or about any chart from 2008. Not only can it happen, it does happen. There are no more once in a lifetime moves in the market. There are and always have been life changing moves. No one ever said trading was easy but at least in the case of futures someone is taking your money. If you think you can’t, you probably wont. The market will take every penny you have. If can take every penny you put at risk. Fix the problem, when you run out of money it is too late.
Qantas Explosion– from the Cockpit
This is an absolutely brilliant interview that is full of insights for the market. The interviewee is one of the pilots aboard the Qantas Airbus A380 last month that had an extremely serious uncontained engine explosion shortly after take-off.
In the interview they cover – inter alia – such things as
– The importance of checklists
– Dealing with contradicting signals
– Over-riding systematic considerations in favour of discretionary controls
– Keeping your head during a major catastrophe which constantly shifts its dynamics and has a lot of what we might call negative gamma…rapidly developing, interacting, non-linear issues that can rapidly move beyond your ability to keep up with them
– The importance of training and professionalism
– The importance of excess redundancy and robustness
– The importance of improvisation – and the ability to keep a clear enough head in a panic to ensure your creativity can be brought to bear on the problem.
– Power of teamwork.
Best part are the pictures of the cockpit showing the checklists and procedures they are working through.
As it turns out, this incident was very much more serious than the media ever picked up on. What an amazing story. I’m sure all will benefit greatly from reading this. For myself, I will be referring to this interview many times. A banquet for a lifetime.
Hope it benefits you all as much as it did me. Also hoping Mr. Tucker weighs in with some insights!
Trading Decision-Making Process
There is a huge difference between a wish and a decision. A wish is a negative and puts the trader in a frozen state waiting for something to happen (generally associated with trying to get even on losing trades). That is negatively charged energy. Decisions, on the other hand, are positively charged energy. It makes the trader take action. Taking action is taking responsibility. You alone are responsible for your current mental state or condition. Decisions can be both good and bad of course. The sooner the trader realized the bad decision, the sooner they can act to correct it.
The first step in the decision-making process is to realize that what you are doing is not working. Remember that falling down is a positive motions is you bounce right back. Make a list of the positive and negative things that will happen when you take action on the decision.
Don’t expect instant gratification if you make the decision. Decision-making is a process that begins with the first step but these steps are the foundation for a stronger behavioral structure. This structure will give you the confidence in your trading. Confidence plays a key role in successful trading. Having the confidence necessary for successful trading can help the trader in difficult trading environments. Whereas one trader lacking confidence and good decision-making skills may be frozen and unable to act, the trader who has taken the time to build this foundation will be prepared to take the appropriate actions.
Many times specific decisions a trader makes will not yield profits, they will result in a loss, but more importantly, it will position the trader to be able to recognize and act on the next opportunity. Practicing and applying this process will pay dividends throughout your lifetime.
Jim Rogers: Here's The Most Important Thing On What Investors Should Do
I would say one lesson we all need to learn is that after you’ve had a great success, you really should be very worried. Let’s say you sell and say you’ve made 10 times on your money. You should be extremely worried. You should close the curtains, not read, look at the TV, or anything because that’s when you’re full of hubris, arrogance, confidence. You think, “God, this is something easy,” and you’re desperate to jump around to something new. You should do your very best to avoid making another play until you’ve calmed down a lot. Just wait. It’s a very dangerous time for any investor.Likewise, if you take a huge loss and there’s a big panic and things are dumped on your head because you’re overextended or wrong for whatever reason, calm down, don’t say, “I’m never gonna invest in stocks again or commodities or whatever.” That’s the time you really should be willing to invest again if you can gather together some capital money. The investments can be terribly emotional. You have to figure out a way to control your emotions and deal with your emotions if you’re going to survive in these markets.
My advice is that, most of the time, most investors should do nothing. They should look out the window or go to the beach. You should wait until you see money lying in the corner and all you have to do is go over and pick it up. That’s how most investors should invest. The problem is we all think we need to jump around all the time and be jumping in and out and that’s not good. (more…)
10 Things that each Trader Must Master
THE THREE M’s: Mind (psychology), Method (a trading edge) and Money (risk or money management).
But what does each of those things mean? Many of these answers came from other great traders sharing their wisdom in books and my own successful trading through all types of markets with bigger and bigger accounts that created a need for me to up my game and get better and better.
Mind (psychology) You must have the right winning mind set to make it in trading.
Discipline to follow your trading plan.
Perseverance to keep going through the losing periods.
Faith that your trading method works. (more…)
How Indian investors get a lifetime of free meals
In one of the AGMs that I attended, there was an impatient “investor” sitting next to me.
He confided to me that he was waiting for this AGM to get over so that he could have his lunch and then he could attend two more AGMs !
I remarked that he must be having lots of shares to attend so many AGMs. He replied in Hindi “Nahi, Nahi.Sab mein 5-10 shares hai .”
Looking at my puzzled expression, he explained” You buy 5-10 shares of a company.In a AGM, they normally have a meal (lunch or snacks). If the venue is nearby, you attend the AGM.By attending two/three AGMs, you recover the cost of your shares.Sometimes the management gives gifts also.Plus, you get dividends and a lifetime access to free meals !”
If Ben Graham heard this approach to value investing, he would probably turn in his grave !
The wrong ways to trade
Without a plan. Get one already. It does not have to be good right now. I have been accused more than once of always thinking I am always right. I am just confident. The only reason I can be confident is because I am willing to change if the information changes. I have to admit I am wrong a lot. You will have to admit your plan is flawed too.
Without good notes. The market changes very fast. The brain is over stimulated, especially in the beginning. Your recall of events will be better if you write them down. The goal is to learn the most, the cheapest. At the end of the day when you review the charts you will not believe you took that trade. There will be something that you missed that could have helped you to act differently. It is your job to make sure it does not happen again, good notes help.
Not maintain trading environment equilibrium (TEE). Have you ever said or done something that you were not proud of because of emotion? What if you could stop time, take a few breathes, evaluate the situation and then act? You have that opportunity in trading, use it. They say that you regret not saying or doing something when you have a chance. That does not apply to trading. Those situations are a few in a lifetime type situations. No trade is more important than another unless it is your last. Let me say that again, no trade is more important than another unless it is your last. Yes you are going to miss the “winner” but it was hypothetical.
Losing more than you budgeted. Every Rupee counts, for every Rupee you lose you have to make another to get to even. This is not a normal transaction, you are not guaranteed anything other than experience. You should be a better trader tomorrow. There is nothing worse than having to have your “best day ever” to get back to even. Sometimes you are wrong, sometimes your system is broke, be able to trade tomorrow. Tomorrow may be next week.
Not having risk capital. If the market has to go your way a certain amount for you to pay your mortgage you are in trouble. The mind goes from reacting to what is there to hoping and praying. It may work from time to time but it is not a dependable strategy.
To summarize. There are no right ways to do anything, there are more efficient ways but that is based on experience. There is a path to failure, fight those battles. Call your father or those that have/ had a positive effect on you and thank them.