Archives of “volatility” tag

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Overcoming 8 of the Pains in Trading

  
  Education
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Here are 8 painful aspects of trading and what to do about them.8number

  1. The pain of losing money. (Trade smaller so it is much less painful, and just one outcome of the next 100.)
  2. The pain of being wrong about a trade you were sure about. (You lost simply because the market wasn’t conducive to your particular trade, trend followers lose money in choppy markets, swing traders lose money in trending markets, the market picks the particular winning trade not you.)
  3. Consecutive trading losses hurt. They make you doubt yourself, your method, and your system. (You need to remember your winning trades, your winning years, or your proof in back-testing, or paper trading of your method’s profitably.)
  4. The embarrassment of public losses. You told everyone who would listen about a great trade, and you were wrong. (Never be overconfident in any trade, but always be sure of your stop loss. Always be uncertain in your trade winning or losing, just follow your plan. )
  5. The pain of of admitting you were wrong. (Cut your loss and move on to the next trade, trade reality not your ego.)
  6. You are following a guru and come to realize he truly is a salesman and not a trader. (You stop following gurus and look to learn how to trade all by yourself.)
  7. You take a position that meets all your entry guidelines and then it hits your stop loss. (Follow your plan, exit the trade, and say “next”)

  8. You start trading a system that did amazing in back-testing and promptly lose 10% of your account in a draw down. (You have to double check to see if you made any mistakes in your research, if the method is valid then stick with it so it can win in the long term, you may need to make slight adjustments in position sizing or stops to account for volatility that you may have missed.)

"Maintaining Sanity in a Schizophrenic Market"

  
  Education
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The current market seems to be manic depressive without even a shred of memory from one day to the next.  How does a trader preserve control and commitment when faced with this challenge?

I think the first place to begin is with the questions we ask ourselves.  Is there an opportunity here? Where is the opportunity now?  How can I take advantage of this opportunity?

Then ask yourself, how do I deal with the volatility?  Do I decrease size and stretch out the risk parameters?  Do I increase size to take advantage of this extraordinary opportunity?  Do I shorten or increase my time frames to increase my safety and profitability?  As traders we are always faced with the dual needs to seize a significant opportunity and to preserve our capital.  This balancing act is at the core of trading.

Of course, you need to address the underlying fundamentals.   What are they? Are they becoming more so or less so?  Are they changing or remaining the same?

Define the problems you are facing and redefine them.  Einstein was asked how he would go about solving a problem if he only had 60 minutes in which to solve it.  He answered that he would spend the first 59 minutes defining the problem.  Once you’ve identified and defined the issues you’re facing, look for workable solutions.  See problems as challenges not as threats.  I always assume if there is a problem, there is a solution.  Once you’ve found a solution, test it.

You need to sustain an optimistic outlook.  This means not taking market conditions personally.  Know that the difficulties will pass as well as the opportunities.  You can learn from difficulties and let them go even as you learn from and utilize opportunities.  Keep honing your skills and see the glass as more than half full.  You can heal your trading by finding a way to understand evil even as you find a way to make the best of a situation.  Any crisis can make you stronger if you don’t let it make you weaker.

So let’s go back to the original question.  Where is the opportunity here and now, and how do you go about taking full advantage of it?  When you find it, go for it.  If you don’t find it, wait for it to develop, and carpe diem (seize the day).

My Personal Trading Rules

  
  Education
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  • Turn off the news.

  • If you’re not feeling well for whatever reason, take the day off.

  • Feeling overly confident? Decrease your size.

  • Waffling on a trade? Pull the trigger! The hardest ones are usually winners.

  • Resist the urge to take off half when a trade is going your way.

  • Have a target in mind for every trade. Exit when price approaches that level.

  • Support, resistance and targets are ‘areas’, not specific prices. Give them some leeway.

  • Trade in the direction of the Cumulative TICK.

  • Unusually strong/weak Cumulative TICK? Increase your size.

  • Use mental stops. Adjust your stops based on the current volatility.

  • Establish a total maximum loss you’ll take in one day and stop trading if that’s hit.

  • Be conscious of your self-talk. Maintain a positive inner dialogue with yourself.

10 Pitfalls of Trading & Answers

  
  Education
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What are the 10 major mistakes that these traders make that cost them dearly?

  1. Having no trading plan

When you don’t have a plan, you don’t have a template to follow. It becomes very costly when your emotions are high and you have to make decisions on the fly.

  1. Using strategies that do not match your personality

You hear of a trading strategy that has worked very well and you are anxious to follow it. One important factor to consider is: does it match who you are and your lifestyle?

  1. Having unrealistic expectations

Most traders assume that it is very easy to make money in trading. They have unrealistic expectations with regard to their initial capital, their risk profile and how much money they can expect to make.

  1. Taking too much risk

Usually when traders are down, they want to make their money back very quickly. Therefore, they increase their position size without thinking about the risk/rewards.

  1. Not having rules to follow

Most traders think if they have rules to follow, they are restricting themselves. It is on the contrary. Having rules allows you to be more flexible since you have thought about lots of issues beforehand.

  1. Not being flexible to market conditions (more…)

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…)

Wisdom from William Eckhardt

  
  Education
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1. What is the state of the market?
2. What is the volatility of the market?
3. What is the equity being traded?
4. What is the system or the trading orientation?
5. What is the risk aversion of the trader or client?
Regardless of how you trade or invest … you better have those answers in advance of betting real money. 

Thoughts About Traders and Trading

  
  Education
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* Risk Management – If you lose 10% of your trading account, you need to make 11.1% on the remaining capital to get back to even. If you lose 20% of your account, you need to make 25% on the remaining capital to return to breakeven. At a 30% loss, you have to make 37.5% to become whole; at 40% loss, you have to make 67% to return to even. Once you’ve lost half your trading capital, you need to double the remainder to replenish your account. Much of trading success is limiting losses and avoiding those fat tails of risk.
* What is a Trader? – If you ask a trader what is a good market, he will tell you that it’s a market that has good volatility; a good market is one that moves. If you ask an investor what is a good market, he will tell you that it’s a rising market. Lots of people try to succeed as traders with the mindset of investors. It doesn’t work.
* Refutation – The story goes that Samuel Johnson, upon hearing Bishop Berkeley’s theory that objects existed in mind only, kicked a rock in front of him, announcing, “Thus I refute Berkeley!” The incident came to mind when I met with a trader today who trades very actively every day, has made money on more than 80% of days this year, and has made several million dollars this year. His performance was clearly documented by his firm and the firm’s risk manager. Thus he refutes efficient market theory. 
* Success – When I see traders like the one above (quite a few at his firm are up more than a million dollars this year), it’s an inspiring reminder that success *is* possible to those who work diligently at trading as a career. The support of a superior firm doesn’t hurt, either.

Soros Says "Crisis Far From Over, We Have Just Entered Act 2"

  
Analysis, Economy, Education
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The bearish case has just gotten another notable supporter in the face of George Soros, who during his remarks at a conference in Vienna, said that the “we have only just entered Act II” of the global financial crisis.

Bloomberg reports:

Billionaire investor George Soros said “we have just entered Act II” of the crisis as Europe’s fiscal woes worsen.

“The collapse of the financial system as we know it is real, and the crisis is far from over,” Soros said today at a conference in Vienna. “Indeed, we have just entered Act II of the drama.”

Concern that Europe’s sovereign-debt crisis may spread sent the euro to a four-year low against the dollar on June 7 and has wiped out more than $4 trillion from global stock markets this year. Europe’s debt-ridden nations have to raise almost 2 trillion euros ($2.4 trillion) within the next three years to refinance maturing bonds and fund deficits, according to Bank of America Corp.

“When the financial markets started losing confidence in the credibility of sovereign debt, Greece and the euro have taken center stage, but the effects are liable to be felt worldwide,” Soros said.

One wonders if Soros, who made a name for himself originally in the currency markets, is involved in the current record FX volatility. Of course, with animosity toward “speculators” at unprecedented levels, it probably would not be very prudent of anyone to disclose they are now taking on Central Banks directly.

Trading Without Targets

  
  Education
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Focused on entries, traders often don’t explicitly identify where they would harvest profits. They hold trades too long, exiting in a panic after reversals, or they take profits quickly, missing opportunity. They don’t factor current volatility into estimates of how far the market could move on their time frame, and they often don’t explicitly look for targets based upon prior moves and ranges.

Physics To Help Deal With Market Risks

  
  Education
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READANDLEARNMisako Takayasu, a Tokyo Institute of Technology associate professor, spoke with The Nikkei about how “big data” will be used in the future to help market players manage risks based on principles of physics.

Excerpts from the interview follow.

Q: How do you use big data in your research?

A: Big data has allowed us to record human behavior and analyze it mathematically. Broader economic or social phenomena can be observed more clearly (in this way), like particles in physics.

As more and more trading data is accumulated, it is becoming increasingly possible to analyze and predict fluctuations using methods common in physics. The exponential growth of computer calculation speeds has also helped the process.

Q: What can you deduct from market data using these tools?

A: Data on ticks — the smallest increment of movement in the price of a security — can be used to gauge investor sentiment and how volatility is triggered. Market swings cannot be explained by a simple random-walk theory.

Markets become more stable when the number of contrarian investors increases. Conversely, they become unstable when more and more investors follow a market trend.

If market-followers dominate a market as it continues to climb, it will crash in the end. We may be able to explain the dynamics of a bubble with big data.

Q: What are the possible applications of big data in the market? (more…)

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