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Abu Dhabi Lecture: Short Summary

  
Economy, Education
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He began by explaining why extreme deflation scenarios are extremely unlikely under the Bernanke Fed, comparing the Fed chairman’s commitment to an anti-deflation strategy to Hitler’s Mein Kampf, a book that also clearly stated a policy program in advance but was not widely believed until it was too late.

Likewise Dr Faber believes Mr. Bernanke is committed to printing money and will in any case have very little choice because of entitlements and the US constitution. Thus he could see the S&P 500 dropping back from current levels to say 950 in this autumn but by then Fed monetary policy would be strongly inflationary and bring the market back up.

Dr Faber pointed out that with the US so deep in debt the Fed thinks it cannot allow asset prices to drop below a certain point because that would devastate the balance sheets of the banks with debt deflation. But he thinks in the long run this is just rolling up another crisis for the future that will destroy the US dollar and cause an even bigger financial crisis.

Declaring himself the ‘most pessimistic of forecasters, nobody is more pessimistic than me’ Dr Faber outlined a scenario in which the dollar has to be replaced by another unit after a future inflation, and holders of cash and bonds lose virtually everything in the process.

Eckhardt on Losses

  
  Education
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The people who survive avoid snowball scenarios in which bad trades cause them to become emotionally destabilized and make more bad trades. They are also able to feel the pain of losing. If you don’t feel the pain of a loss, then you’re in the same position as those unfortunate people who have no pain sensors. If they leave their hand on a hot stove, it will burn off. There is no way to survive in the world without pain. Similarly, in the markets, if the losses don’t hurt, your financial survival is tenuous.”

Losses happen and they are part of our trading education. If you don’t learn anything out of them, it is money wasted. Always ask yourself: what did I learn form that loss? What could I do, not to repeat it again.

Five Qualities For Successful Trader

  
  Education
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  1. Capacity for Prudent Risk-taking.The young successful trader is not afraid to go after markets aggressively when the opportunity presents itself.
  2. Capacity for Rule Governance. The young successful trader has the self-control to follow rules in the heat of battle, such as rules of position sizing and risk management.
  3. Capacity for Sustained Effort.The trader uses productive time to do research, preparation, work on himself, outside of market hours.
  4. Capacity for Emotional Resilience. All young traders will lose money early in their development and experience multiple frustrations. The successful ones will not lose self-confidence and motivation in the face of loss and frustrations.
  5. Capacity for Sound reasoning. The successful young trader exhibits an ability to synthesize data and generate market and trading scenarios.

If-Then

  
  Education
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READ atleast twice and Read Daily :

The idea of IF-THEN scenarios in trading is often misconstrued one. I often see it being interpreted in a sense of predicting stock’s action. A trader trying to apply it in this sense tries to think in terms ‘If a stock does this, it’s going to do that“. This approach is more acceptable if a trader thinks in terms of probability instead of certainty in which case the above sentence becomes “If a stock does this, it’s likely to do that“. Nothing’s wrong with that as long as a trader realizes that probability is just that – a probability that is going to work in a statistically valid number of samples but will not predict the outcome of each given case.

I, however, apply IF-THENs in a slightly different manner. For me it’s about defining my own action in response to market fluctuations. My IF-THEN is a scenario where IF is what market does and THEN is what I do in response. My intepretation thus becomes ‘If a stock does this, I do that”.

Certainly, it’s a derivation of the version above – you can arrive to it from “if a stock does this then it’s likely to do that, so I am going to react in such and such way”. My version is just more cut and dry.

What are the advantages of this aproach and why do we need to build a set of such scenarios? (more…)

Objectivity and The Fundamental Theorem of Poker

  
  Education
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 poker-

From David Sklansky’s The Theory of Poker:

Every time you play a hand differently from the way you would have played it if you could see all your opponents’ cards, you lose; and every time you play your hand the same way you would have played it if you could see their cards, they lose.

An analogy in trading can be made concerning objectivity while holding a position:

Every time you execute a trade that you would not have executed had you been flat, you lose; additionally, every time you refrain from executing a trade that you would have executed had you been flat, you lose. (more…)

No Control

  
  Education
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Don’t think about what the market’s going to do; you have absolutely no control over that. Think about what you’re going to do if it gets there. In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there’s nothing more for you to do. Focus instead on those things you want least to happen and on what your response will be

Vision

  
  Education
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While total clairvoyance as to future price movement is unrealistic. It is my goal as a trader to assimilate as much information as possible with the goal of playing out scenarios that tie in together. It’s not always easy to do, yet understanding trading does not occur in a vacuum and markets do exhibit funny things get you mentally prepared to deal with these outlier events. Those that can think for themselves and need not rely on templatized news releases for their ideas usually put themselves in a position to benefit from their forward thinking.

We have heard many times about leaders who saw an industry trend before it happened. This was no accident. It came as a result of their understanding of their field and what could change it for the better. Traders who gain an understanding of how things can potentially play out and factor that into their trading strategy go a long way to keeping their objectivity when things unfold in a fast and volatile market. 

Stock Market Learning

  
  Education
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1. Read the works of Soros, Jesse Livermore, William O’Neill, Warren Buffett and Nick Darvis.
2. Choose one and copy exactly what they do.
3. See each stage they go through to reach their conclusions and the actions they take and the inferrences they derive from the outcomes.
4. Pick stocks and plan out the course of action and all the permutations of what will happen in all price scenarios and put them into practice.
5. Memorise the details of the great coups and all the rules the masters have made in trading.
6. Keep all your trading a secret and don’t let others’ views interfere with your own. Keep your mind totally on the facts at hand and the details of what you see.
7. Before going to sleep look at the coups of other traders and of your own. Talk with the masters you are studying and meet them in your mind for interviews.
8. When the markets are not open or the market isn’t acting right for you then study past trades and memorise the actions you took and piece together the trade again looking for the lesson.
9. Be a better trader than your teachers and ask yourself how you can do better.
10. When you have practiced and ‘perfected’ position entry, move to exits, patterns, money management, probability theory, etc..
11. Look at situations and look at them as you would a trade. What would you do? Are there any interesting things to learn here that can be used in the markets?
12. See what’s happening rather than guess.
13. Play games like the one played in Liar’s Poker, where you invent scenarios and ask each other what you would do in that situation. E.g. nuclear explosion in Tokyo…
14. Be aware of views you are taking on a trade. Look at it always as if it’s the first time you have seen it and review an open trade every day as if you have just placed it.

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…)

Five qualities for Successful Traders

  
  Education
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secrets_successful_trader

  1. 1)Capacity for Prudent Risk-taking.The young successful trader is not afraid to go after markets aggressively when the opportunity presents itself.
  2. 2)Capacity for Rule Governance. The young successful trader has the self-control to follow rules in the heat of battle, such as rules of position sizing and risk management.
  3. 3)Capacity for Sustained Effort.The trader uses productive time to do research, preparation, work on himself, outside of market hours.
  4. 4)Capacity for Emotional Resilience. All young traders will lose money early in their development and experience multiple frustrations. The successful ones will not lose self-confidence and motivation in the face of loss and frustrations.

5)Capacity for Sound reasoning. The successful young trader exhibits an ability to synthesize data and generate market and trading scenarios.

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