1) The majority of traders think directionally, and they think linearly. That has them trading momentum and that has them trading trends. Even the traders who look for reversals look for momentum and trend, just in a different direction.
2) Market behavior can be described as a combination of cyclical and linear (trend) components over any particular time frame. As markets become more crowded, cyclical components dominate over time, reducing the Sharpe ratio of those markets.
3) Traders fail because they are thinking in straight lines when they should be thinking in cycles. They think of cycles as sources of choppiness and noise, not as sources of signals that are different from linear, trending ones.
4) Any market cycle consists of mean-reverting behavior at cycle peaks and troughs and trending behavior between peaks and troughs. This ensures that any single approach to trading markets (looking for trend/momentum; looking for reversal/mean reversion) will draw down substantially over many cycles.
Archives of “market behavior” tag
rssIllusion
If you have the feeling that the market has a split personality, one day out to shower you with peace and blessings and the other to punish mercilessly, it can only mean that on some level you are still taking it personally. Think of it this way – there are too many players with too many conflicting ideas about market direction for it to ever form one cohesive personality. The only exception I have witnessed to this rule is when fear clearly dominates the scene, and ironically these are times that are the easiest to trade. The highest attainment for a traders developing psychology is to achieve what has been called “intellectual purity” – that is the state free from emotional reactiveness to market behavior; the ability to accept both reward and punishment with equanimity and understanding. That said, we know that big players perform ‘market sweeps’ to take out stops at sitting duck levels, so we can at least attempt to protect against that. The main point though is to struggle against any dimly forming impression of the market being a single entity with a personality. That is an illusion.
The Ten Best Things Ed Seykota Ever Said.
Arguably one of the greatest traders of all time with his trend following system.
Charles Faulkner tells a story about Seykota’s finely honed intuition when it comes to trading: I am reminded of an experience that Ed Seykota shared with a group. He said that when he looks at a market, that everyone else thinks has exhausted its up trend, that is often when he likes to get in. When I asked him how he made this determination, he said he just puts the chart on the other side of the room and if it looked like it was going up, then he would buy it… Of course this trade was seen through the eyes of someone with deep insight into the market behavior
The Ten Best Things Ed Seykota Ever Said:
Psychology
“To avoid whipsaw losses, stop trading.”
“It can be very expensive to try to convince the markets you are right.”
“A fish at one with the water sees nothing between himself and his prey. A trader at one with his feelings feels nothing between himself and executing his method.”
Risk Management
“The elements of good trading are cutting losses, cutting losses, and cutting losses.”
“Here’s the essence of risk management: Risk no more than you can afford to lose, and also risk enough so that a win is meaningful. If there is no such amount, don’t play.”
“In your recipe for success, don’t forget commitment – and a deep belief in the inevitability of your success.”
Trading System
“The trend is your friend except at the end when it bends.”
“If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it’s coming in, it’ll never happen. The market is always right.”
“Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.”
“I don’t predict a nonexisting future.”
Ed Seykota is a legend in the trend following community and has returns that would make Bernie Madoff jealous, because his are real. If you can fully grasp what Ed is saying in these quotes it will improve your trading dramatically.
Amos Hostetter :Invaluable Trading Principles
Try to find a long term trend and ride it up. Stay with the trend and don’t be tempted to grab a quick profit. Patience is one of the most important traits of a trend follower.- Be careful not to be shaken out by market fluctuations. Instead try to sit tight as long as there are no warnings showing up. Prices that come back so that your initial gain halves are not necessarily a reason to sell.
- Big wins can only be achieved with major trends. Find them and don’t hesitate to buy at high prices when you may think it is too late. A market is never too high to buy or too low to sell.
- Necessary is of course a stop loss near the entry point. A stop is the easiest way to put your capital at work on a trend, because otherwise you are too often and too long stuck in a trading market which goes nowhere or worse in a falling market.
- Absolutely forbidden is averaging down or fighting the market trend.
- To think that a market is cheaper now after prices came down and therefore must offer a better chance than it did when prices were higher, will put you in the wrong stocks at the wrong times.
- Never try to sell at the top. The trend may continue. Sell after a reaction if there is no rally.
- On the other hand don’t expect the market to end in a blaze of glory. Look out for warnings.
- Tape reading can tell you only that something is wrong. Don’t try to analyze the flow of transactions as the tape shows them in too much detail.
- Don’t look for breaks. Look out for warnings.
- Pyramid stocks only if the initial investment shows a gain.
- Look out for normal market behavior. If a market doesn’t act right, don’t touch it.
- If in a bear market a complete demoralization develops suddenly it may be a sign for a starting bull market.
- Observation of the market gives the best tips of all. Follow your experience to exploit them, while sticking to facts only.
Try to find a long term trend and ride it up. Stay with the trend and don’t be tempted to grab a quick profit. Patience is one of the most important traits of a trend follower.The Market Is Never Wrong In What It Does
“The market is never wrong in what it does; it just is. Therefore, you as an individual trader interacting with the market—first as an observer to perceive opportunity, then as a participant executing a trade, contributing to the overall market behavior—have to confront an environment where only you can be wrong, and it’s never the other way around. As a trader, you have to decide what is more important—being right or making money—because the two are not always compatible or consistent with one another.”
Mark Douglas, in The Disciplined Trader
Hank Pruden on "Behavioral Finance" and Technical Analysis
Hank Pruden’s theory of “Behavioral Finance” proposes that human flaws are consistent, measurable and predictable, and being aware of and utilizing this phenomenon can benefit a trader.
“For the better part of 30 years, the discipline of finance has been under the thrall of the random walk\cum efficient market hypothesis. Yet enough anomalies piled up in recent years to crack the dominance of the random walk. As a consequence, the popular press has been reporting the market behavior,” said Pruden. One of these new methods discussed is “behavioral finance.”
Pruden is a professor in the School of Business at Golden Gate University in San Francisco. He was a featured speaker at the 20th annual Telerate Seminars Technical Analysis Group Conference (TAG 20). (more…)
6 Mistakes
Mistake number one: not having any knowledge of the simple visual indications for when to enter a trade based on market behavior and common sense.
Mistake number two: not being on the right time frame at the right time for the current trading opportunity.
Mistake number three: entering trades long AFTER the real entry occurred and exiting way BEFORE the exit occurs.
Mistake number four: no trading plan or direction for a consistent entry and exit strategy.
Mistake number five: following some scam Forex system they recently bought on the internet and using dozens of “proprietary” indicators.
Mistake number six: entering and exiting trades for reasons other than their own trading method. (fear, greed, etc)
Successful traders are committed
ACCEPTANCE OF OFTENTIMES ILLOGICAL MARKET BEHAVIOR
DISCIPLINE IN THE FACE OF UNCERTAINTY
PATIENCE WHEN LITTLE IS TO BE ACCOMPLISHED OTHERWISE
FOCUS ON THE RIGHT NOW INSTEAD OF WHAT MIGHT BE
PERSONAL RESPONSIBILITY FOR EVERY ACTION AND REACTION
PASSION WHEN ALL ELSE FAILS
MAKING MONEY WHEN WRONG
Trading is simple. The trader is complicated
Here is a very short list of comments from very reliable sources—successful professional traders.
From my collection of Books
John F. Carter: “It is important to remember that there is no need to spend wasted years looking for complicated setups or the next Holy Grail. There are very simple setups out there to use. Some of the best traders I know have been trading the same setup, on the same time frame, on the same market for 20 years. They don’t care about anything else, and they don’t want to learn about anything else. This works for them, and they are the masters of this setup. They have nothing else coming in to interfere with their focus” (p. 31, Mastering the Trade: Proven Techniques for Profiting from Intraday and Swing Trading Setups).
Clifford Bennett: “While there have been some spectacular front-cover traders, the ones who amass fortunes year after year tend to stay in the background. At the very least, they display a simple and down-to-earth approach to markets if they are ever interviewed” (p. 117, Warrior Trading: Inside the Mind of an Elite Currency Trader).
Mark Douglas: “What you want to do is become an expert at just one particular type of behavior pattern that repeats itself with some degree of frequency. To become an expert, choose one simple trading system that identifies a pattern, preferably one that is mechanical, instead of mathematical, so that you will be working with a visual representation of market behavior. Your objective is to understand completely every aspect of the system-all the relationships between the components-and its potential to produce profitable trades. In the meantime, it is important to avoid all other possibilities and information” (pp. 208-09, The Disciplined Trader: Developing Winning Attitudes).
Marcel Link: “Systems should be kept as simple as possible. Overdoing things doesn’t make a system better; on the contrary, it can take away from a good system. Trying to make a system too complicated with too many indicators and variables is a common mistake with some traders: some of the best systems are the simplest. As a rule of thumb, a system should fit on the back of an envelope and be easily explained so that someone can understand what every indicator does and every rule does. Otherwise it’s too complicated. Always remember the old adage ‘Keep it simple, stupid’ and you’ll be okay” (p 249, High Probability Trading).
George Angell: “One observation I’ve made over the years, which is especially notable on the trading floor, is that everyone who truly succeeds is a specialist. Unlike the novice trader, who may dabble in as many as a dozen different futures contracts, the professional floor trader is identified with just one kind of futures and one specific type of trading…moreover, the professional is identified by his specialty-scalper, short-term trader, spread trader, or whatever. He does the same thing every day (pp. 10-11, Sniper Trading).
John Murphy: “My work has gotten better due to simplifying my approach.” (KEY TO SUCCESS)
Dennis Gartman: “Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.” (From Dennis Gartman’s Trading Rules List, Rule #12).
Ed Seykota Quotes
Markets
The markets are the same now as they were five or ten years ago because they keep changing-just like they did then.
Short-Term Trading
The elements of good trading are cutting losses, cutting losses, and cutting losses.
Outcomes
Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.
I think that if people look deeply enough into their trading patterns, they find that, on balance, including all their goals, they are really getting what they want, even though they may not understand it or want to admit it.
Market Trends
The trend is your friend except at the end where it bends.
Charles Faulkner tells a story about Seykota’s finely honed intuition when it comes to trading: I am reminded of an experience that Ed Seykota shared with a group. He said that when he looks at a market, that everyone else thinks has exhausted its up trend, that is often when he likes to get in. When I asked him how he made this determination, he said he just puts the chart on the other side of the room and if it looked like it was going up, then he would buy it… Of course this trade was seen through the eyes of someone with deep insight into the market behavior.
Predicting the Future
If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it’s coming in, it’ll never happen. The market is always right.
Trading
To avoid whipsaw losses, stop trading.
Here’s the essence of risk management: Risk no more than you can afford to lose, and also risk enough so that a win is meaningful. If there is no such amount, don’t play.
Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top.
Markets are fundamentally volatile. No way around it. Your prolem is not in the math. There is no math to ge you out of having to experience uncertainty.
It can be very expensive to try to convince the markets you are right.
System Trading
Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible. (more…)