Archives of “market trend” tag

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Is The Market Always Right?

  
  Education
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George Soros likes to joke that market has predicted seven of the past two recessions. And he is right. Since the market is forward looking, it will sometimes discount fundamentals that will never become a reality.

Prices reflect people’s expectations about the future, mostly about the near-term future. To say that the market is always right means to assume that people’s expectations about the future always come true. We all know that this is not the case. No one has a crystal ball. People are often wrong.

Is the market always right?

No, but this does not stop people who follow price trends to make a lot of money. The market could remain “wrong” (irrational) for a very long period of time and even become “wronger”. (more…)

A Review: “Two Centuries of Trend Following”

  
  Education
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The paper “Two Centuries of Trend Following” by Lemperiere, Derenble, Seager, et al of Capital Fund Management purports to show that trend following has been profitable, over a wide range of markets, consistently over 200 years. It deserves to be reviewed as it represents a case study of the statistical practices, and armchair explanations that are sometimes used to justify a system that in the most recent five year period has lost its mojo. Rocky has asked me to review it.

The amazing thing is that the authors seem to know how to compute hyperbolic tangent regressions, and compute the duration of a drawdown given a sharpe ratio, yet they seem completely unaware of the problem of multicollinearity, overlapping observations, and lack of independent observations.

In a nutshell, they compute hundreds of thousands of means, and they combine them and measure how far away from randomness they are. Recall that the average of two random observations is about 0.7 times as variable as one observations. The average of 100,000 observations is about 1/320 as variable as 1 observation. (more…)

Hedge Fund Market Wizards – Joe Vidich

  
  Education
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A critical distinction of all great investing books is that every time you re-read them, you find insights that you somehow missed the previous times. Recently I had the opportunity to re-read some of the chapters in Hedge Fund Market Wizards. The section about equity traders is my favorite one, so I delved into it again. In this post, I am featuring some interesting observations from Jack Schwager’s conversation with Joe Vidich:

1. Position sizing is a great way to manage risk

The larger the position, the greater the danger that trading decisions will be driven by fear rather than by judgment and experience.

If you are diversified enough, then no single trade is particularly painful. The critical risk controls are being diversified and cutting your exposure when you don’t understand what the markets are doing and why you are wrong.

It is really important to manage your emotional attachment to losses and gains. You want to limit your size in any position so that fear does not become the prevailing instinct guiding your judgment. Everyone will have a different level. It also depends on what kind of stock it is. A 10 percent position might be perfectly okay for a large-cap stock, while a 3 percent position in a highflying mid-cap stock, which has frequent 30 percent swings, might be far too risky.

2. Charts are extremely important.

One of the best patterns is when a stock goes sideways for a long time in a narrow range and then has a sudden, sharp up move on large volume. That type of price action is a wake-up call that something is probably going on, and you need to look at it. Also, sometimes whatever is going on with that stock will also have implications for other stocks in the same sector. It can be an important clue. (more…)

10 Trading Quotes

  
  Education
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“Good investing is a peculiar balance between the conviction to follow your ideas and the flexibility to recognize when you have made a mistake.“ –Michael Steinhardt

Do not stay bullish or bearish go with the current flow of the market>

“There is only one side of the market and it is not the bull side or the bear side, but the right side.”-Jesse Livermore

Putting it all together, it is more than just numbers>

“Successful trading depends on the 3M`s – Mind, Method and Money. Beginners focus on analysis, but professionals operate in a three dimensional space. They are aware of trading psychology their own feelings and the mass psychology of the markets. Each trader needs to have a method for choosing specific stocks, options or futures as well as firm rules for pulling the trigger – deciding when to buy and sell. Money refers to how you manage your trading capital.” – Alexander Elder

The money is in the primary market trend, not jumping in and out>

“I think it was a long step forward in my trading education when I realised at last that when old Mr. Partridge kept on telling other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements-that is, not in reading the tape but in sizing up the entire market and its trend.” – Jesse Livermore

This is one of the best ways i Know to measure short term trends, and be on the right side of the primary moves>

“The 10 day exponential moving average (EMA) is my favourite indicator to determine the major trend. I call this “red light, green light” because it is imperative in trading to remain on the correct side of moving average to give yourself the best probability of sucess. When you are trading above the 10 day, you have the green light, the market is in positive mode and you should be thinking buy. Conversely, trading below the average is a red light. The market is in a negative mode and you should be thinking sell.” – Marty Schwartz

Why it is so important to let your winners run and cut your losers short>

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you‘re wrong.” -George Soros

Eliminating the risk of ruin in one easy step>

By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical.” Larry Hite.

Never add to a losing position becasue you are fighting the trend>

“Losers average losers.” this was posted in Paul Tudor Jones’ Office

This is successful stock trading summarized>

“My basic philosophy is: Expose your portfolio to the best stocks that the market has to offer and cut your losses very quickly when you’re wrong. That one sentence essentially describes my strategy.” – Mark Minervini

Trend Trading in a nut shell>

“It is always the best discretion to let the market show us where it is going and just simply follow (this would be prudent), rather than predict where the market is going and place a position (this would be gambling).” -Anne-Marie Baiynd

7 Warning Signs for Traders

  
  Education
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  1. You stop trading your plan and start “shooting from the hip” you are losing or winning so you believe that you are above your own rules, you start trading your opinions instead of your plan.

  2. You are about to take a trade you are 100% sure of, you have no doubt that it will work out. Trades that feel good to do and feel like can’t lose trades rarely win because everyone is already positioned in those trades.
  3. When you ignore your first stop and start deciding that you should give your trade “more room”, when you allow a loss to grow and rationalize why you should hold it instead of following your plan and stopping out you are in trouble.
  4. Averaging down in a position that is going against you is never a good idea, fighting trends are very dangerous amplifying your losses by increasing your position size can be fatal to your account.
  5. Fighting against the prevailing market trend over an over again can chop your account to pieces.
  6. When losing, you start trading bigger and bigger to get back to even. When you are losing you should start trading smaller and smaller to decrease losses.

  7. When you actually disagree with the market and believe it is wrong and you are right. Price is reality wherever it is, your job is to trade trend and price action not your own opinion.

10 Cruel Rules of Traders

  
  Education
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I) You will not buy low or sell high.

II) You will cut your winners and let your losers run.

III)  You will wish you owned more of what’s going up and less of what’s going down.

IV) You will be fearful when others are fearful.

V) You will fight the trend.

VI) You will not buy when there is blood in the streets.

VII) You will spend too much time worrying about low probability outcomes.

VII) You will invest for the long-term, or until we get a ten percent correction, whichever comes first.

IX) You will go broke taking small profits.

X) You will not just sit there, you’ll do something.

12 Truths-Traders Should Know

  
  Education
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1. Stock prices run in cycles. Periods of re-pricing are usually quick and powerful and then they are followed by trendless consolidation.

2. Stocks are very highly correlated during drastic selloffs and during the initial stage of the recovery. In general, correlation is high during bear markets.

3. Bull markets are markets of stocks, where there are both winners and losers. When the market averages consolidate, there are stocks that will break out or down, revealing the intentions of institutional buyers.

4. In the first and last stage of a new bull market, the best performers are small cap, low float, low-priced stocks.

5. Try to trade in the direction of the trend. It is not only the path of least resistance, but also provides the best profit opportunities. Have a simple method to define the direction of the trend.

6. Traders’ attention (and market volume) is attracted by unusual price moves. Sudden price range expansion from a consolidaiton is often the beginning of a powerful new trend.

7. Opportunity cost matters a lot. Be in stocks that move. Stocks in a range are dead money. (more…)

Trading Wisdom

  
  Education
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tradingwisdom

The most important thing is to have a method for staying with your winners and getting rid of your losers. By having thought out your objective and having a strategy for getting out in case the market trend changes, you greatly increase the potential for staying in your winning positions. The traits of a successful trader: The most important is discipline – I am sure everyone says that. Second, you have to have patience; if you have a good trade on, you have to be able to stay with it. Third, you need courage to go into the market, and courage comes from adequate capitalization. Fourth, you must have a willingness to lose; that is also related to adequate capitalization. Fifth, you need a strong desire to win. You have to have the attitude that if a trade loses, you can handle it without any problem and come back to do the next trade. You can’t let a losing trade get to you emotionally. If a trade doesn’t look right, I get out and take a small loss.

WallStreet Movies and S&P 500 :Great Correlation

  
Analysis, Education
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WALLSTREET AND MOVIES AND SPX

If you had gotten out of the market when these movies were released, you’d definitely have missed some big moves…to the upside.  Wall Street came out after the crash of ’87 in December 1987, and taking money off the table for the multi-year bull market that followed would have been a big miss.  Boiler Room came out just a month before the peak in 2000, so in this case it was a good sell signal.  

The sequel to the original Wall Street, Money Never Sleeps came out during a leg down in the current bull market in 2010, and its placement in the upper chart is a bit misleading.  Yes, filming for the movie began in late 2009, but the market bottomed in early 2009.  Whether you use the dates they began filming or the release date, Money Never Sleeps did not coincide with a peak for the equity market, and in retrospect was a great time to get in.  As for the Wolf of Wall Street?  Only time will tell, but keep in mind that unlike the other movies, it is not intended to be set in present day, instead romanticizing the heady days of the 1990s. (more…)

OVERCONFIDENCE

  
  Education
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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…)

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