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Swope and Howell, Trading by Numbers

  
  Education
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The title of this book by Rick Swope and W. Shawn Howell is somewhat misleading. It’s not intuitively obvious, or at least it wasn’t to me, that Trading by Numbers: Scoring Strategies for Every Market (Wiley, 2012) is primarily about options.

But let’s start, as the authors do, with their trend and volatility scoring methods. The trend score has four components: market sentiment (the relationship between a long-term moving average and a short-term moving average and the position of price in relation to each moving average), stock sentiment (the same parameters as market sentiment), single candle structure (body length relative to closing price), and volume (OBV trend). The range is -10 to +10. Volatility scoring has three legs: historical market volatility, historical stock volatility, and expected market volatility. The range is 0 to +10.

Before moving on to the standard option strategies, the authors address risk management, which they wisely describe as nonnegotiable. Risk management again has three legs: risk/reward, concentration check, and position sizing. 

And, with chapter five (of sixteen), we’ve reached covered calls. The reader who has no experience with options will be lost. Even though the authors push all the right buttons (ITM, ATM, OTM strategies; the Greeks; position adjustments), they push the buttons almost as if they were playing a video game. Very fast.

Assuming that the reader is not new to the option market, what can he/she learn from this book? Let’s look very briefly at three strategies and see how they reflect three different market or individual stock conditions: a long call, a straddle/strangle, and an iron condor. Traditionally described, in the simplest of terms, the first is looking for a significant bullish directional move, the second anticipates a surge in volatility, and the third expects a rangebound market. (more…)

Market Metaphors

  
  Education
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Market MetaphorsWhat we perceive is not just a function of what is out there, but also the lenses that we wear. Many of our cognitive lenses are so much a part of our thinking that we forget they are there. We assume that what we’re perceiving is what objectively exists…but that’s not always the case.
Some of the most powerful lenses are the metaphors that we use in describing markets. Consider the following: (more…)

Market Metaphors and Perception

  
  Education
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Day Trading* A trader views the market as an enemy to be conquered;

* A trader approaches the market as a puzzle to be solved;

* A trader sees the market as a paradise of potential riches;

* A trader regards the market as a mistress to be wooed;

* A trader views the market as a dangerous minefield;

* A trader looks at the market as a video game.

How do these metaphors affect our trading? Our emotional responses to trading?
How would being aware of our metaphors–and shifting them–change how we trade
and how we experience our trading?

This story is my favorite metaphor for the Stock Market.

monkey-with-glasses

I wonder what it says about my perception? Personally, I favor the puzzle to be  solved approach.

“Once upon a time, in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each.

The villagers, seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10 and, as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20 for a monkey.

This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each, and the supply of monkeys became so small that it was an effort to even find a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers. ‘Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35, and when the man returns from the city, you can sell them to him for $50 each.’

The villagers rounded up all their savings and bought all the monkeys. They never saw the man nor his assistant again, only monkeys everywhere!

Now you have a better understanding of how Stock Market works!

Market Metaphors and Perception

  
  Education
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What we perceive is not just a function of what is out there, but also the lenses that we wear. Many of our cognitive lenses are so much a part of our thinking that we forget they are there. We assume that what we’re perceiving is what objectively exists…but that’s not always the case.
Some of the most powerful lenses are the metaphors that we use in describing markets. Consider the following:
* A trader views the market as an enemy to be conquered;
* A trader approaches the market as a puzzle to be solved;
* A trader sees the market as a paradise of potential riches;
* A trader regards the market as a mistress to be wooed;
* A trader views the market as a dangerous minefield;
* A trader looks at the market as a video game.
How do these metaphors affect our trading? Our emotional responses to trading? How would being aware of our metaphors–and shifting them–change how we trade and how we experience our trading?

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