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Emerging markets at risk from a gigantic bubble

  
Analysis, Economy, Education
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From :FT

By orchestrating a massive appreciation of the yen in the mid 1980s, the US condemned Japan to decades of stagnation and ended the challenge to its own economic hegemony. Effectively, Japan was forced to commit financial hara-kiri.

This theory, once confined to Japan’s nationalistic fringe, is now being used by the Chinese authorities to justify their resistance to a substantial revaluation of the renminbi. By so doing they are misdiagnosing Japan’s woes and misperceiving the true threat to their own economy. The threat to China does not lie in an appreciating currency, but elsewhere.

Here’s what happened in the case of Japan. In the Plaza Accord of 1985 the G7 attempted to address global imbalances – worrying then, but small beer by today’s standards – by “encouraging” significant changes in currency parities. They got what they wanted. The yen took off and never looked back.

Japanese policymakers accepted the loss of competitiveness not because they were submissive, but because they were brimming with self-confidence. They believed their economy would survive any downturn with little damage, and they were right: the recession of 1986 was short and shallow.

Furthermore they saw a strong yen as a useful weapon in a world in which Japan’s trading partners were imposing quotas on its most successful companies. Again they were right. The all-powerful yen allowed Japanese auto makers to build up manufacturing capacity inside key Western markets.

They also believed it was high time to shift the Japanese economy from exports to consumption, and that a stronger yen would raise the purchasing power of households. Here, though, they were wrong.

The spending spree of the late 1980s – when Japanese salarymen sprinkled gold-flakes on their noodles and secretaries stayed in the same upmarket Hawaiian resorts as American chief executives – is now a distant memory. (more…)

Veneziani, The Greatest Trades of All Time

  
  Education
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Vincent W. Veneziani’s The Greatest Trades of All Time: Top Traders Making Big Profits from the Crash of 1929 to Today (Wiley, 2011) is not the greatest trading book of all time. The problem is that most of its material is readily available in greater detail elsewhere. For instance, if you want to read about John Paulson’s subprime short, the obvious source is The Greatest Trade Ever by Gregory Zuckerman. Or why read ten pages about Jesse Livermore when we have Reminiscences of a Stock Operator? The only original material comes from the author’s interviews with Kyle Bass and Jim Chanos.

For those who are new to trading, however, this book provides an introduction to some icons of the business and their winning trades. Featured, in addition to Livermore, Paulson, Bass, and Chanos, are Paul Tudor Jones, John Templeton, George Soros, David Einhorn, Martin Schwartz, and John Arnold. The final chapter deals briefly with Phillip Falcone, David Tepper, Andrew Hall, and Greg Lippmann.

Each chapter has a life of its own, but all conclude with very brief sections that recreate the person’s trading strategies and his top traits. For instance, we read that “Jones’s brazen utilization of Elliot [sic] wave theory is legendary.” (p. 43) Jones was not a wave counter; rather, he embraced Elliott’s notion of repeating cycles. The author shows a chart overlaying data from 1982-1986 on 1932-1936 data and notes the striking correlation. Jones “extrapolated a time period with a high correlation and began making investments as if he were living in the past with a roadmap to the future” (p. 38), a technique that was chronicled in the 1987 PBS documentary about him. (Despite the best efforts of Jones and his lawyers, the film is still available online.) Veneziani also notes that “Jones helped define the cliché Wall Street traits that much of the industry and its participants attempt to emulate today.” (p. 44) Among them: intensity, keeping a comprehensive viewpoint, and having a methodical approach. (more…)

Quotes from Reminiscences of a Stock Operator

  
  Education
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reminiscencesofstockoperatorFrom my trove of interesting market quotes, here are my favourite snippets from “Reminiscences of a Stock Operator” by Edwin Lefevre. I enjoyed Reminiscences greatly, both on the first and second readings.While I disagree with some of his pearls of wisdom, many are definitely worth taking on board. For your contemplation:

I did precisely the wrong thing.  The cotton showed me a loss and I kept it.  The wheat showed me a profit and I sold it out.  Of all the speculative blunders there are few greater than trying to average a losing game.  Always sell what shows you a loss and keep what shows you a profit.If all I have is ten dollars and I risk it, I am much braver than when I risk a million if I have another million salted away.
I’ve got friends, of course, but my business has always been the same – a one-man affair.  That is why I have always played a lone hand.
What beat me was not having brains enough to stick to my own game – that is, to play the market only when I was satisfied that precedents favoured my play.  There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time.  No man can have adequate reasons for buying or selling stocks daily – or sufficient knowledge to make his play an intelligent play.
It happened just as I figured.  The traders hammered the stocks in which they figured would uncover the most stops, and sure enough, prices slid off.
For one thing, the automatic closing out of your trade when the margin reached the exhaustion point was the best kind of stop-loss order. 
The game taught me the game.  And it didn’t spare me rod while teaching. 
If somebody had told me my method would not work I nevertheless would have tried it out to make sure for myself, for when I am wrong only one thing convinces me of it, and that is, to lose money.  And I am only right when I make money.  That is speculating.
I knew of course, there must be a limit to the advances and an end to the crazy buying of A.O.T.-Any Old Thing-and I got bearish.  But every time I sold I lost money, and if it hadn’t been that I ran darn quick I would have lost a lot more. 
Early that fall I not only was cleaned out again but I was so sick of the game I could no longer beat that I decided to leave New York and try something else some other place.  I had been trading since my fourteenth year.  I had made my first thousand dollars when I was a kid at fifteen, and my first ten thousand before I was twenty one.  I had made and lost a ten thousand stake more than once.  In New York I had made thousands and lost them.  I got up to fifty thousand and two days later that went.  I had no other business and knew no other game.  After several years I was back where I began.  No-worse, for I had acquired habits and a style of living that required money; though that part didn’t bother me as much as being wrong so consistently.
There were times when my plans went wrong and my stocks did not run true to form, but did the opposite of what they should have done if they had kept up their regard for precedent.  But they did not hit me very hard – they couldn’t, with my shoestring margins.  My relations with my brokers were friendly enough.  Their accounts and records did not always agree with mine, and the differences uniformly happened to be against me.  Curious coincidence-not!  But I fought for my own and usually won in the end.  They always had the hope of getting from me what I had taken from them.  They regarded my winnings as temporary loans, I think.
Don’t misunderstand me.  I never allowed pleasure to interfere with business.  When I lost it was always because I was wrong and not because I was suffering from dissipation or excesses.  There were never any shattered nerves or rum-shaken limbs to spoil my game.  I couldn’t afford anything that kept me from feeling physically and mentally fit.  Even now I am usually in bed by ten.  As a young man I never kept late hours, because I could not do business properly on insufficient sleep.
For instance, I had been bullish from the very start of a bull market, and I had backed my opinion by buying stocks.  An advance followed, as I had clearly foreseen.  So far, all very well.  But what else did I do?  Why, I listened to the elder statesmen and curbed my youthful impetuousness.  I made up my mind to be wise carefully, conservatively.  Everybody knew that the way to do that was to take profits and buy back your stocks on reactions.  And that is precisely what I did, or rather what I tried to do; for I often took profits and waited for a reaction that never came.  And I saw my stock go kitting up ten points more and I sitting there with my four-point profit safe in my conservative pocket.  They say you never go broke taking profits.  No, you don’t.  But neither do you grow rich taking a four-point profit in a bull market.
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. 
The market does not beat them.  They beat themselves, because though they have brains they cannot sit tight.  Old Turkey was dead right in doing and saying what he did.  He had not only the courage of his convictions but also the intelligence and patience to sit tight. 
Disregarding the big swing and trying to jump in and out was fatal to me.  Nobody can catch all the fluctuations.  In a bull market the game is to buy and hold until you believe the bull market is near its end. 
Remember that stocks are never too high for you to begin buying or too low to begin selling.
Suppose he buys his first hundred, and that promptly shows him a loss.  Why should he go to work and get more stock?  He ought to see at once that he is in the wrong; at least temporarily.
The Union Pacific incident in Saratoga in the summer of 1906 made me more independent than ever of tips and talk – that is, of the opinions, surmises and suspicions of other people, however friendly or however able they might be personally.  Events, not vanity, proved for me that I could read the tape more accurately than most of the people about me.  I also was better equipped than the average customer of Harding Brothers in that I was utterly free from speculative prejudices.  The bear side doesn’t appeal any more than the bull side, or vice versa.  My one steadfast prejudice is against being wrong. 
When I am long of stocks it is because my reading of conditions has made me bullish.  But you find many people, reputed to be intelligent, who are bullish because they have stocks.  I do not allow my possessions – or my prepossessions either – to do any thinking for me.  That is why I repeat that I never argue with the tape.
Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. 
… I came to learn that even when one is properly bearish at the very beginning of a bear market it is not well to begin selling in bulk until there is no danger of the engine back-firing.
Of course, if a man is both wise and lucky, he will not make the same mistake twice.  But he will make any one of ten thousand brothers or cousins of the original.  The Mistake family is so large that there is always one of them around when you want to see what you can do in the fool-play line. 
Losing money is the least of my troubles.  A loss never troubles me after I take it.  I forget it overnight.  But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul. 
“I can’t sleep” answered the nervous one.
“Why not?” asked the friend.
“I am carrying so much cotton that I can’t sleep thinking about.  It is wearing me out. What can I do?”
“Sell down to the sleeping point”, answered the friend.
He will risk half his fortune in the stock market with less reflection that he devotes to the selection of a medium-priced automobile.
It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it.  But in actual practice a man has to guard against many things, and most of all against himself – that is, against human nature.
A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him.  Never argue with it or ask for reasons or explanations.
He should accumulate his line on the way up.  Let him buy one-fifth of his full line.  If that does not show him a profit he must not increase his holdings because he has obviously begun wrong; he is wrong temporarily and there is no profit in being wrong at any time. 
Fear keeps you from making as much money as you ought to.
That was the only one case.  There isn’t a man on Wall Street who has not lost money trying to make the market pay for an automobile or a bracelet or a motor boat or a painting. 
More than once in the past I had run up a shoe-string in to hundreds of thousands.  Sooner or later the market would offer me an opportunity.
The game does not change and neither does human nature.
After I paid off my debts in full I put a pretty fair amount in to annuities.  I made up my mind I wasn’t going to be strapped and uncomfortable and minus a stake ever again. 
Among the hazards of speculation the happening of the unexpected – I might even say of the unexpectable – ranks high.
I started my buying operations in the winter of 1917.  I took quite a lot of coffee.  The market however, did nothing to speak of.  It continued inactive and as for the price, it did not go up as I had expected.  The outcome of it all was that I simply carried my line to no purpose for nine long months. 
I trade on my own information and follow my own methods.
He was utterly fearless but never reckless.  He could, and did, turn on a twinkling if he found he was wrong. 
At the same time I realise that the best of all tipsters, the most persuasive of all salesmen, is the tape.
The speculator’s deadly enemies are: Ignorance, greed, fear and hope.  All the statue books in the world and all the rule books on all the Exchanges of the earth cannot eliminate these from the human animal. 
On Pat Hearne – He made money in stocks, and that made people ask him for advice.  He would never give any.  If they asked him point-blank for his opinion about the wisdom of their commitments he used a favourite race-track maxim of his: “You can’t tell till you bet.” He traded in our office.  He would  buy one hundred shares of some active stock and when, or if, it went up 1 percent, he would buy another hundred.  On another points advance, another hundred shares; and so on.  He used to say that he wasn’t playing the game to make money for others and therefore would put in a stop-loss order one point below the price of his last purchase.  When the price kept going up he simply moved up his stop with it.  On a 1 percent reaction he was stopped out.  He declared he did not see any sense in losing more than one point, whether it came out of his original margin or out of his paper profits.
“You know, a professional gambler is not looking for long shots, but for sure money.  Of course, long shots are fine when they come in.  In the stock market Pat wasn’t after tips or playing to catch twenty-points-a-week advances, but sure money in sufficient quantity to provide him with a good sense of living.  Of all the thousands of outsiders I have run across in Wall Street, Pat Hearne was the only one who saw in stock speculation merely a game of chance like faro or roulette, but nevertheless had the sense to stick to a relatively sound betting method.
“After Pat Hearne’s death one of our customers who had always traded with Pat and used his system made over a hundred thousand dollars in Luckawana.  Then he switched over to some other stock and because he had made a big stake he thought he need not stick to Pat’s way.  When a reaction came, instead of cutting his losses he let them run – as though they were profits.  Of course every cent went.  When he finally quit he owed us several thousand dollars.
And he was right.  I sometimes think that speculation must be an unnatural sort of business, because I find that the average speculator has arrayed against his own nature.  The weaknesses that all men are prone to are fatal to success in speculation – usually those very weaknesses that make him likable to his fellows or that he himself particularly guards against in those other ventures of his where they are not nearly so dangerous as when he is trading in commodities or stocks. 
The public ought always to keep in mind the elementals of stock trading.  When a stock is going up no elaborate explanation is needed as to why it is going up.  It takes continuous buying to make a stock keep going up.  As long as it does so, with only small and natural reactions from time to time, it is a pretty safe proposition to trail with it. 
But if after a long steady rise a stock turns and gradually begins to go down, with only occasionally small rallies, it is obvious that the line of least resistance has changed from upward to downward.  Such being the case why should anyone ask for explanations?  There are probably very good reasons why it should go down…

Personal Strengths and Weaknesses

  
  Education
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We all have different personal strengths and weakness.  Many people focus on transforming a weakness into a strength. While that is admirable, the reality is that it’s not always possible. Although I agree with the basic idea of brain plasticity, and I whole-heartedly agree with the idea of always striving for self-improvement, I also know that as humans we have a certain degree of natural-born temperament and not everything about us can be changed.

Although we can’t always build or change every weakness into strength, the good news is that we can always leverage our strengths, if we know how. And that is mighty powerful. It’s so powerful that if you leverage the right strengths in the right way they can do an excellent job of not just counter-balancing your weaknesses, but can propel you so far ahead  that those weaknesses pale in comparison.

One of the most powerful things you can do for yourself is identifying your natural strengths and then work to see how you can build on them.

We all have different personal strengths, and knowing how to leverage them is an important part of successful trading. A major consideration here is that you try to identify and leverage your own personal strengths, and not simply copy someone else’s. All too often I see struggling traders running from one style to another style whenever they see someone else’s success. One of the primary reasons why copying someone else’s trading style doesn’t always pay off in trading is because of different personal strengths.

The Hidden Variable in Your Trading Success

  
  Education
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Most traders realize that trading involves a lot of psychology. And most traders readily admit that a significant portion of their trading losses, or lack of performance, is due to “psychology”. Although the term ‘psychology’ isn’t always mentioned as an explanation, you can see it easily enough in the following statements ……”I froze just as I was about to pull the trigger”….. ”I hesitated and missed that trade and was so pissed that I got myself into an impulse trade right after”….. “That large loss was not what I wanted, I held it thinking it would come back because last time I bailed out of this type of trade I got stopped out right before it reversed”….. “I was really nervous about losing money again so I got out of my winning trade way before my target”

Those are four common examples of trading psychology issues manifesting in one’s trading. Do you recognize yourself in the above statements?

All four of those statements have in common one thing, fear. Whether it’s the fear of not being perfect, the fear of being wrong, fear of losing money, fear of missing out, the fear of not being approved by others, or some other fear, the common theme is fear. Most trading mistakes are a maladaptive attempt to deal with fear or anxiety.

Emotions like fear and anxiety cannot be eliminated; it is part of the human experience. But how you respond (your behavior, the action you take in response) to anxiety and fear will determine how successful you are as a trader. Some traders recognize this and do something about it; they learn to work with the fear and anxiety to reduce the chance that they’ll continue to fall into the same old behavioral response pattern to fear and anxiety.

Fear will never disappear. Yes, maybe some days you feel more ‘in the zone’ and fear is less of an issue, but most days you’re probably not in the zone; and on those days the fear is unavoidable. Most likely, those are the days when you have your largest losses. The question is, what are YOU going to do to work with the fear? If you cannot eliminate fear, you must learn to work with it, use it to your advantage. Emotions are a form of self-communication; you need to learn what the message is (e.g. If this trade loses I won’t succeed as a trader) in order to begin to learn how to control your actions in response to the fear and anxiety. Your performance will not change until you learn to manage yourself differently when experiencing fear and anxiety.

Why Traders Lose Their Discipline

  
  Education
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  • Environmental distractions and boredom cause a lack of focus – All of us have limits to our attention span and these are easily taxed during quiet times in the market;
  • Fatigue and mental overload create a loss of concentration – The demands of watching the screen hour after hour make it difficult to be sharp, creating fatigue effects that are well-known to pilots, car drivers, and soldiers;
  • Overconfidence follows a string of successes – It is common for traders to attribute success to skill and failure to situational, external factors.  As a result, a string of even random wins can lead traders to become overconfident and veer from trading plans–especially by trading too frequently and/or trading excessive size;
  • Unwillingness to accept losses – This leads traders to alter their trade plans after trades have gone into the red, turning what were meant to be short-term trades into longer-term holds and transforming trades with small size into large trades by adding to losers; (more…)

Three Questions for the End of the Trading Day

  
  Education
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1) Did I trade well today? – Did I make good use of my preparation? Did I follow rules about position sizing and execution? Did I adapt well to shifts during the trading day? Was I patient in finding trades with good risk/reward characteristics?
2) What did I learn about myself today? – What about today’s trading can I bring to the next day to make myself better? How can I learn from what I did right and wrong today? What goals can I set for tomorrow to make sure that I carry over that learning?
3) What did I learn about markets today? – Did markets do what I expected? Are my views on markets any different based on today’s trade? What levels did I observe in today’s trade that can inform decision making tomorrow? What themes from today will I be tracking tomorrow?

7 Deadly Sins of Trading

  
  Education
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Perfectionism: There is no perfection in trading as far as making money on every trade or having a perfect system. All you can hope to be perfect at, is following your system, rules, and trading plan. A winning trade should be measured as one in which you followed all your preset guidelines. Even the best traders only average about a 50%-60% win rate at best over long periods of time. The key is having bigger winners than losers, not being perfect. Like in baseball where a .300 hitter can get into the hall of fame. A .500 trader in the market can become wealthy if his wins are much bigger than his losses.

Fear:  Faith in your system is the only way to overcome your fear of trading. You must complete enough back testing on your system until you know that you have a valid edge over the market in the long term. You must see opportunity in trading and just accept that there will be possible losses. You must take your systems trade signals each time and if you can’t overcome your fear of loss and failure then perhaps trading is just not for you. Traders are entrepreneurs not employes they get paid only when successful there is no guaranteed paycheck.

Pride:  We are not our trading account and staring at our profit and loss too much is a major detriment in one’s trading. Traders must cut losses at their predetermined stop, not pridefully hang on trying to prove they are right. We must separate ourselves from the trading. A person’s value is not tied to a trade or performance record. If we followed our system then we can’t view that as a personal loss. The market was just not conducive to our system that we followed with discipline. (more…)

Book Review :Elder, The New Sell & Sell Short

  
Analysis, Education
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Most traders have read Alexander Elder’s Trading for a Living, originally published in 1993. Elder has, of course, written other popular books such as Come into My Trading Room (2002) and Entries and Exits (2006). His latest work, The New Sell & Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines (Wiley, 2011) is an expanded second edition of his 2008 book. It comes with a built-in study guide: three sets of questions and answers. Although it is a paperback, the charts and graphs are printed in color and the stock is of high quality.

The first part of the book covers Elder’s signature contributions to the trading literature: psychology, risk management, and record-keeping. It is brief because we’ve been there before, but Elder does describe some new ways to keep records—an ongoing project because he believes that “the single most important factor in your success or failure is the quality of your records.” (p. 341)

Part two tackles the all-important question of how to exit a (long) trade. Elder offers three alternative scenarios: sell at a target above the market, be prepared to sell below the market using a protective stop, and “sell before the stock hits either a target or a stop—because market conditions have changed and you no longer want to hold it.” (p. 59)

Elder then moves on to shorting stocks, futures, and forex; he also has a section on writing options. Finally, he points out some lessons of the 2007-2009 bear market. (more…)

3 Biases That Affect Your Trading

  
  Education
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Van K. Tharp mentioned there are 3 biases that will affect one’s trading:

1) Gambler’s fallacy bias

People tend to believe that after a string of losses, a win is going to come next. Take for example that you are playing a game of coin tossing with a capital of $1000. You lost 3 bets in a row on heads and cost you $100 each bet. What will you bet next and how much would you stake?

It is likely you will continue to bet on heads and with a higher stake, say $300. You do not ‘believe’ that it can be tails consistently. People fail to realize coin tossing is random and past results do not affect future outcomes.

Traders must treat each trade independently and not be affected by past results. It is important that your trading system tells you how much to stake your capital which is also known as position sizing, so that the risk-reward ratio will be optimal.

2) Limit profits and enlarge losses bias

People tend to limit their profits and give more room to losses. Nobody likes the feeling of losing. Most investors tend to hold on to losses and hope their investments will turn around soon, and they will be happy if their holdings break even. However, chances are that they will amount to greater losses. On the other hand, if they are winning, most investors tend to take profits early as they fear their profits will be wiped out soon. Thereafter, they regretted that they didn’t hold a little longer (sounds familiar?). (more…)

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