Trading Intuition

I’ve heard from many traders that they often take decisions based on instincts. Actually, all non-quants use intuition in some form or another. If you are not using a program that takes all signals that your system produces, how do you decide between several equally good looking trading setups with similar risk to reward? Do you take them all or do you concentrate on only a few? The odds are that you are doing the latter and your ultimate choice for capital allocation is subconscious.

Even though we are defined by our decisions, we are often completely unaware of what’s happening inside our heads during the decision-making process.
Feelings are often an accurate shortcut, a concise expression of decades’ worth of experience.
The process of thinking requires feeling, for feelings are what let us understand all the information that we can’t directly comprehend. Reason without emotion is impotent. (more…)

25 Trading Mantras

Seeing an opportunity and acting upon it are two different things.

•  Price has memory. Odds are what price did the last time it hit a certain level will be repeated  . . . (BR:  Until support or resistance fails).

•  Pay attention to price action, regardless of what the charts are saying.

•  Look for a reversal at the same place you’re expecting a breakout or breakdown.

•  Price action sets up against the majority; the best profits are often in the opposite direction of the way you’re planning to go.

• Add to your winners and cut your losers. ’nuff said.

•  Opportunities come along all of the time. Wait for the best ones.

•  Don’t overly anticipate or see things that aren’t there. Wait for your signals. (more…)

Ignorance, Greed, Fear and Hope

Ignorance, Greed, Fear and Hope

In the book “Reminiscences of a Stock Operator,” Edwin Lefevre writes: 
The speculator’s deadly enemies are: Ignorance, Greed, Fear and Hope.

In today’s commentary we will take a look at “Hope” and see why it is one of the four deadly enemies of successful market timing. 
Each of us has a desire for success. That is why we use market timing in our investing. Not only to increase our gains in both bull and bear markets, but importantly to protect our capital against loss. 
But that same desire for success can stand in the way of our ability to recognize reality, even if it is right before our eyes. All of us have a survival instinct that typically causes us to focus on good news. Bad news is avoided, or at least put on the back burner. 
When we take a position in the market, whether bullish or bearish, we hope it will be successful. Hope can be such a powerful emotion, that when the same trading plan that told us to enter a position originally, reverses and tells us to exit immediately, our emotions may very well focus on the possibility that if we just hold on a bit longer, any loss may be erased.  (more…)

4 Pillars of Trading

4 Pillars

I “see” the market through the lens of four primary metrics: fundamentals, technical, structural and psychology.

When viewed in isolation, each of those approaches has inherent flaws.

1. Fundamentals are best at the top and worst near a low.

2. Technical indicators often trigger buy signals higher, on breakouts, and sell signals lower, after a stock has broken down.

3. Structural factors — debt, derivatives and currency effects — can self-sustain in a cumulative manner until such time they overwhelm the system.

4. Psychology, such social mood and risk appetites, can gain momentum until they snap under the weight of the herd mentality.

Managing Risk

Over the years I’ve been fortunate enough to get to know thousands of market participants. Some are long-term investors others are scalping pennies per trade on thousands of shares while others manage millions of other people’s money. The interesting theme I picked up on with nearly every one of them is that they each experienced panic and uncertainty at certain times in the market. Oftentimes, this panic stems from the inability to make sense of the market, to gain control of market participation. Thoughts such as whether or not too much capital is at work or perhaps not enough or even whether or not to be in the market at all seemed to consume them.

This ambivalence can consume and debilitate even the best market participants. The uncertainty or self-doubt about market participation is common yet finding a solution is not. The greater the level of uncertainty felt the higher the odds are that risk is being misperceived. Here are some questions that I’ve asked to assess whether risk was real or perceived:

  • What are your reactions, both physical and emotional, to a losing trade? A winning trade?
  • Have you rationalized recent losses?
  • Has your out-of-market homework/research fallen behind?
  • Do you monitor your positions by dollars or percentages?
  • Have you ever not taken a trade that made sense simply because you were burned before?
  • Has the number of indicators you use to enter/manage/exit a position increased/decreased lately?
  • Do you know the Beta of your portfolio?
  • What would others say about you when asked about your risk management?

In a sense, managing risk involves managing the emotional side of trading so that the focus can be on the cognitive side of trading. As an example, if I’m concerned with the direction of the market because my traditional analysis methods are giving unclear signals then it probably doesn’t make much sense for me to participate. My biases will impact the data, whether it’s of a technical or fundamental nature, and lead to poor decisions. If I’m unable to clearly define what sectors are leading and which are lagging and, more importantly, why they are moving in the direction they are, then my risk is skewed. It’s times like these that large losses can accrue as objectivity is clouded by subjectivity.

I’ve always used sleep as a gauge to help me know if I’m in-line with real risk. If I’m able to sleep at night and wake up excited to participate in the market then I know that the odds are good I’m managing my risk. If I’m unable to get a good night’s sleep and lay awake wondering about positions I have on the odds are good that my risk management is off. Yea, I’m pretty simple.


Hesitation-You are watching a stock that has all the signals you look for in an opportunity. The proper point to enter comes, but you wait. You second guess the opportunity and don’t buy the stock. Or, you bid for the stock at a price that is not likely to get filled if the opportunity does pan out the way you anticipate it will. As a result, you get left behind while the market pushes the stock higher. A short while after the initial entry signal, when the stock has made a decent gain, you decide to finally enter the trade. After all, the market has proven your analysis correct, so you must be smart, and right! Not long after you enter, the stock turns south and you end up with a losing trade. If only you had bought when you first thought about it.

The Solution

This is really just a confidence issue. You are either not confident in your ability to analyze stocks, or you are not confident in the methodology that you are using to pick trades. (more…)

The Ten Most Foolish Things a Trader Can Do

In the spirit of April Fools Day here are the ‘Ten Most Foolish Things a Trader Can Do’. In no particular order of foolishness.

  1. Try to predict the future movement of a stock, and stay in it no matter what.
  2. Risk your entire account on one trade with no stop loss plan.
  3. Have a winning trade but no exit strategy to get out, no trailing stop or exhaustion top signal.
  4. Ask for and follow the advice of others instead of trading with your own trading plan, method, rules, and system.
  5. Trade your emotions instead of signals: buy when you are greedy and sell when you are afraid.
  6. Trade your opinions, not a quantified method.
  7. Do not bother to do your homework on trading, just jump in and trade, you are smart, you will figure it out.
  8. Short the best and most expensive stocks in the stock market and buy the cheapest junk stocks.
  9. Put on trades you are 100% sure are winners so you do not even need a stop loss or risk management.
  10. Buy more of a trade that you are losing money in and sell your winners quickly to lock in small profits.

Do not trade foolishly my friend.

40 Gems for Traders and Investors

  1. There are only three kinds of investors – those who think they are geniuses, those who think they are idiots, and those who aren’t sure.
  2. One of the clearest signals that you are wrong about an investment is having the hunch that you are right about it.
  3. Investors who focus on price levels earn between five and ten times higher profits than those who pay attention to price changes.
  4. The only way to be more certain it’s true is to search harder for proof that it is false.
  5. Business value changes over time, not all the time. Stocks are like weather, altering almost continually and without warning; businesses are like the climate, changing much more gradually and predictably.
  6. When rewards are near, the brain hates to wait.
  7. The market isn’t always right, but it’s right more often than it is wrong.
  8. Often, when we are asked to judge how likely things are, we instead judge how alike they are.
  9. Most of what seem to be patterns in stock prices are just random variations.
  10. In a rising market, enough of your bad ideas will pay off so that you’ll never learn that you should have fewer ideas. (more…)

Trend following..

Trendfollowing-The objective of the trend follower is to employ discipline to offset biases in order to extract signals from prices to the exclusion of other information. In fact, this has greater similarity to a statistical or engineering problem than to a finance problem. Because prices are surrounded by or filled with noise, trend following is a form of price smoothing. You eliminate the noise to obtain a clearer signal. It also can be thought of as a filtering problem. You throw out the excess information that may be associated with trades that are not driving the trend signal.

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!

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