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Ed Easterling’s 12 Rules of Market Cycles

  
  Education
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Here are Ed Easterling’s 12 Rules of Market Cycles:

1. Secular cycles are driven by the inflation rate (deflation, price stability, and higher inflation)

2. Secular bulls occur when P/E starts low and ends high over an extended period

3. Secular bears occur when P/E starts high and ends low over an extended period

4. Cyclical bulls and bears are interim periods of directional swings within secular periods

5. Cyclical cycles are driven by market psychology, illiquidity, or other generally temporary condition(s)

6. Time is irrelevant to the length of secular stock market cycles

7. Secular bulls require a doubling or tripling of P/E

8. Secular bears occur as P/E stalls and falls by one-third to two-thirds or more

9. When real economic growth is near 3%, there is a natural floor for P/E between 5 and 10, a natural ceiling around the mid-20s, and a typical average in the mid-teens

10. If economic growth shifts upward or downward for the foreseeable future, the natural range moves upward or downward, respectively

11. Inflation drives P/Es location within the range; economic growth drives the level of the range

12. The stock market is not consistently predictable over months, quarters, or periods of a few years; the stock market is, however, quite predictable over periods approaching a decade or longer based upon starting P/E

7-Day Commercial Paper Rate Hits 18 Month Highs

  
Analysis, Economy, Education
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The crunch in funding continues. There is $673 billion in Commercial Paper maturing over the next month and a half. The problem is that the rolling of all this paper will come at increasingly higher costs. Today the market for US 7 Day CP hit level of 0.61%. As the chart below indicates, the current CP rate is not only the highest in 2010, but higher than CP costs during the March 2009 market lows. More worrying is that despite the recent unprecedented volatility in daily rate swings, the trend is one of an accelerated increase. At this rate of increase, the Fed may soon need to put the CPFF program back in play.The most worrying is the implication 7 Day CP rates have for the FF rate: while 7 Day CP historically has tracked the Fed Funds tick for tick, over the past few months we have once again seen a major divergence between the two. In this closest proxy to short-term funding, the market is now notifying Bernanke that the Fed Funds rate is now about 36 bps off and increasing.

And the spread to the Fed Funds rate:

Top Ten Reasons Traders Lose Their Discipline

  
  Education
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Losing discipline is not a trading problem; it is the common result of a number of trading-related problems. Here are the most common sources of loss of discipline, culled from my work with traders:

10) Environmental distractions and boredom cause a lack of focus;

9) Fatigue and mental overload create a loss of concentration;

8) Overconfidence follows a string of successes;

7) Unwillingness to accept losses, leading to alterations of trade plans after the trade has gone into the red;

6) Loss of confidence in one’s trading plan/strategy because it has not been adequately tested and battle-tested;

5) Personality traits that lead to impulsivity and low frustration tolerance in stressful situations;

4) Situational performance pressures, such as trading slumps and increased personal expenses, that change how traders trade (putting P/L ahead of making good trades);

3) Trading positions that are excessive for the account size, created exaggerated P/L swings and emotional reactions;

2) Not having a clearly defined trading plan/strategy in the first place;

1) Trading a time frame, style, or market that does not match your talents, skills, risk tolerance, and personality.

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…)

Emotions

  
  Education
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Emotions are at the root of trading problems. Yes, emotions can interfere with concentration and performance, but that doesn’t mean that they are a primary cause. Indeed, emotional distress is as often the result of poor trading as the cause. When traders fail to manage risk properly, trading size that is too large for their accounts, they invite outsized emotional responses to their swings in P/L. Similarly, when traders trade untested patterns that possess no objective edge in the marketplace, they are going to lose money over time and experience an understandable degree of emotional frustration. I know many successful traders who are fiercely competitive and highly emotional. I also know many successful traders who are highly analytical and not at all emotional. Trading is a performance field, no less than athletics or the performing arts. Success is a function of talents (inborn abilities) and skills (acquired competencies). No amount of emotional self-control can turn a person into a successful musician, football player, or trader. Once individuals possess the requisite talents and skills for success, however, then psychological factors become important. Psychology dictates how consistent you are with the skills and talents you have; it cannot replace those skills and talents.

Spotting the Best Trades

  
  Education
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Let me begin by telling you of my system for isolating trades with odds 10 to 1 in my favor. Those are million dollar odds. Unfortunately, I still haven’t developed a method for calling all the big moves all the time. What I have done is develop a set of criteria that will, when they coincide, tell you the odds are heavily in favor of either an up or down move.

This method seldom speaks, but when it does, you have as close to a sure thing as you’ll ever get. As you will see, this method will not call all the swings, but that’s not its purpose. Its function is to segregate the super trades from trades that are questionable.

Trading in this manner is much easier because it allows you to take a longer term view of the market. I have found there is no need to monitor the market on a trade-by-trade basis, or, at times, even a daily basis. The signals are so strong that you don’t need to concern yourself with a microscopic view.

I use two major tools for selecting “bankable trades”. They are: 1) premium relationships, and 2) open interest. When these two click, the odds are 75% in your favor. To further substantiate the 75% probability, I also check contrary opinion, the market’s reaction to news, trend direction, and a few chart formations.

by Larry Williams, excerpt from his book, How I Made $1,000,000 Trading Commodities Last Year.

Overconfidence

  
  Education
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OverConfidenceIt 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…)

Helpful Lessons

  
  Education
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Helpful Lessons1. Remain Flexible – do not let your bias (”The Market MUST Go Down”) cloud the reality of what’s happening

2. Seek High Probability, Low Risk Set-ups
(In this case, we had the trend, resistance, and a doji working in our favor, and were risking 2 points to play for 8 points)

3. Take Your Stop-Loss when the Trade Fails
(You would have been in a worse situation if you stubbornly held short into the sudden 10-point rally)
(In fact, some of the largest swings occur AFTER a high-probability set-ups has failed … I call this “Popped Stops”)

4.  “Anything Can Happen” in the Market (Mark Douglas)
Even the best set-ups can … and sometimes do… fail and that’s perfectly fine as long as you control risk.
Don’t blame FII’s ,Global Market  or Mutual Funds – trading is a game of probabilities instead of certainties.

Study each day to learn more concepts and do your own end-of-day analysis of the charts to make yourselves even better traders!

Three Myths of Trading Psychology

  
  Education
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Myth #1: Emotions are at the root of trading problems. Yes, emotions can interfere with concentration and performance, but that doesn’t mean that they are a primary cause. Indeed, emotional distress is as often the result of poor trading as the cause. When traders fail to manage risk properly, trading size that is too large for their accounts, they invite outsized emotional responses to their swings in P/L. Similarly, when traders trade untested patterns that possess no objective edge in the marketplace, they are going to lose money over time and experience an understandable degree of emotional frustration. I know many successful traders who are fiercely competitive and highly emotional. I also know many successful traders who are highly analytical and not at all emotional. Trading is a performance field, no less than athletics or the performing arts.Success is a function of talents (inborn abilities) and skills (acquired competencies). No amount of emotional self-control can turn a person into a successful musician, football player, or trader. Once individuals possess the requisite talents and skills for success, however, then psychological factors become important. Psychology dictates how consistent you are with the skills and talents you have; it cannot replace those skills and talents.

 Myth #2: Anyone, with dedicated effort, can get to the point of trading for a living. That is nonsense. How many people make their living from acting or musical performance? What proportion of people playing sports can actually make their livelihood from athletics? Many people play chess or poker, but how many can sustain a living from it?Quite simply, to make a living from any performance activity means that you are consistently good at what you do. Not everyone has the talent, skill, or drive to be that successful—in any field. Across the many traders I’ve met in various settings, from home-based, independent traders to professional ones in firms, the best predictors of trading success have been the size of the trader’s account and the resources available to the trader. If a person were to make 30% per year on their accounts year after year, they would be among the world’s most successful money managers. Most money managers of mutual funds, hedge funds, and pension funds cannot sustain such performance. This leads the trader to accept huge leverage and court a risk of ruin when an inevitable string of losing trades occurs. Indeed, such excess leverage is a main cause of emotional distress in trading. Take a look at how the Turtles made their money: they learned a trading method, learned to be consistent with that method, and were given enough money by Richard Dennis that they could trade multiple markets with enough size to scale into positions in each. Even with those resources, not all of the Turtle students could succeed. Talent, skill, and opportunity are the ingredients of success, and these are relatively normally distributed in the trading population, just as they are relatively normally distributed in the population at large. (more…)

‘Alexander Elder Quotes’

  
  Education
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Trading is not all about just stock picking, it is not just about a winning system. Yes, first you have to understand how to trade and put the odds in your favor of winning, but that is not enough. You must also add in risk management so when you lose ten times in a row your trading career and account does not end there. You also must have  faith in your system and method to be able to keep trading it even when you are losing, and you will have losing months, maybe even a losing year, can you keep going to be around for the big wins?

One dimensional traders just pick stocks, if they are right they win for a while, but eventually they do not stop out when they are wrong and they blow up their account. They also eventually get emotionally frustrated from wild equity swings  and they eventually quit and blame the market.

Two dimensional traders have a good system and cut their losses but have trouble with self confidence and belief in their system. They tend to blame themselves when their accounts draw down 10% to 20% and have trouble understanding that it is just part of the game. The market environment is determining wins and losses not the trader, they don’t  understand this. All they can do is take their entries and exits as they come and let the market do what it does. They have not separated themselves from their trading.

The three dimensional trader takes entries and exits based on his methodology that he believes in, he manages risk per trade carefully and never loses more than 1% t0 2% of his capital on any one trade. The 3D trader’s self worth and confidence is not tied up in any one trade, or monthly performance he understands this is a long term process with ups and downs. Wins and losses do not change his mindset. It is just a business, stocks are just inventory, the market gives and the market takes away, and he just takes what it is giving.

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