Archive for ‘investing theory’

Free INO-TV Training

By , 2 September, 2009, No Comment

If you have read my blog for any period of time you know that I stress training and reading to develop a solid foundation for your trading.  While I may be a little overboard in my non-stop reading, my general observation is that most novice traders, and no small amount mildly experienced traders have learned to trade some, but lack the requisite foundation to be a super trader.

Note:  I do not consider myself anywhere near a supertrader, just very experienced.

Anyway, INO-TV offers a free, I SAID FREE, set of videos for you to watch, and they are just excellent.  I seem to absorb information very readily from videos and these videos are packed with information.


Check out the videos, it will be some of the best money you didn’t spend.

Paper Trading versus Real Money Trading

By , 15 August, 2009, No Comment

Anyone who has read very much of this blog knows that I recommend extensive paper trading on a demo account before you trade a live account.  As a matter of fact, my exact advise is to be able to put together 5 days of consistent profits before you even consider tinkering with real money.  I think this is a realistic strategy for learning trading.

You will also find that I recommend some serious reading of some of the classic authors of investment techniques and theory.   I think it is important to understand the underpinnings of trading and have a well thought out philosophy on how the market functions.   On a humorous note, there are so many different perspectives on market theory that you are bound to find one that resonates with your own particular thinking.

I am a chaos theory guy.   You don’t have to be a chaos theory guy to be successful in your trading endeavor, but you ought have some philosophical underpinning to your actual trading style.

Which brings me to the point of this post, and that is the transition from paper trading a demo account to trading an account with real money.  You would think it would be the same…ah, erm…it is the same, at least the technique should stay the same.

But, it doesn’t.

Perfectly normal, intelligent people go absolutely brain dead when real money is involved.  I cannot explain this phenomena, I can’t even describe why it happens…but it does happen in an alarming number of cases and sometimes in a highly catastrophic manner.

Is it greed?

Is it fear?

Does real money make people trade different?    The answer, at least in many cases and in the early part of a traders career, is unequivocally YES.   I warn people of this and they vehemently deny that THEY could succumb to this sort of silly stupidity.    A very good friend, who I personally helped in his emini training and was absolutely gifted when we traded together, (he on paper, me with a real account) started trading and promptly lost 25,000 dollars in two days.  I had instructed, and he had always followed, the strategy of trading one of two contracts, and to use tight stops, when traded.  Boom, 25 grand disappeared as if we had never spoken.

When I asked him what went wrong, he was unable to explain his dilemma.  “I lost my mind”, he said.

And I have seem it happen so many times I felt it necessary to forewarn new traders, the transition from paper to cash is a quantum leap.  Be extra conservative, if anything.  Use the technique you perfected on paper and don’t overtrade or mismanage your money.

Okay, ‘nuf said…but don’t say I did not warn you.

From the Baseline Scenario Blog…

By , 27 July, 2009, No Comment

After Peak Finance: Larry Summers’ Bubble

There are three kinds of “bubbles” -  a term often used loosely when asset prices rise a great deal and then fall sharply, without an obvious corresponding shift in “fundamentals“.

  1. A short-run bubble.  Think about 17th century Dutch Tulip Mania: spectacular, probably disruptive, but not a major reason for the decline of the Netherlands as a global power.
  2. A distorting bubble.  In this case, the increase in asset prices contributes to a reallocation of resources across sectors.  Think of the Dot-com Bubble: fortunes were made and lost, the collapse was scary to many, and – at the end of the day – you’ve built the Internet and some good companies.
  3. A political bubble.  Here rising asset prices generate resources that can be fed into the political process, through bribes, building politicians’ careers, and lobbying of all kinds.  Bubbles in Emerging Markets often generate resources that impact the political process, sometimes in good ways – but most often in bad ways, which eventually contribute to a collapse.

Larry Summers seems to think we are dealing with the consequences of bubble type #1.  In his speech last week, “the bubble” is a modern deus ex machina – it explains why we have a crisis, but there is no explanation of where this bubble came from, what exactly was bubbling, and what changes this bubble brought to the real economy or to our politics.

To the extent that Summers talks about the bubble at all, it seems to be in residential real estate.  It’s hard to argue that there was an unsustainable run-up in housing prices and that the fall has real consequences.  But what model – or even story – can explain the size of the global disruption we are facing without reference to what happened specifically in the financial sector?

The overall official consensus - which Summers continues to shape – seems to be that our problems are: housing bubble plus bad management in a few big financial firms and slightly too weak regulation.  So we’ll tweak regulation, ever so gently, and let the “good” big firms gobble up the people, market share, and perhaps even assets of those that fall by the wayside.

But what if we are looking at the effects of a distorting bubble?  In previous formulations – but not last week – Summers acknowledged that when financial sector profits hit 40 percent of total corporate profits, a few years ago, we should have seen that as a “warning sign”.  But was this a warning sign of something just about houses, or more broadly about the financial process in and around securitization that was both feeding the housing price increase and also reflecting a longer-run shift of resources into the financial sector?

Even James Surowiecki, a most articulate defender of our current financial sector, implicitly concedes that as a percent of GDP, finance is likely to fall from around 8 percent to GDP back towards 6 percent of GDP (its level of the mid-1990s; see slide 19 in my recent presentation; update, this link now fixed).  Of course, there is no way to know exactly where finance is heading – except that it is likely down as a share of the economy.

If the bubble (or metaboom with a series of bubbles) was in finance and pulled resources into that sector, we face an adjustment away from Peak Finance – and perhaps this will even more overshadow the next decade than Peak Oil.

The economic adjustment will not be easy for the U.S. but it will be much more painful for smaller countries that have specialized in finance.  The U.S., however, will likely struggle with the political adjustment – the financiers will not easily give up their licence to extract resources from citizens, either directly or through newly found rents channeled through the state (and coming ultimately out of your pocket, of course).

The political consequences of Peak Finance greatly complicate our economic recovery.

By Simon Johnson

Efficient Market Theory’s Demise: Where do we go from here?

By , 25 July, 2009, No Comment

Mendelbrot had the problem pegged long ago, chaos and randomness…there has been no real explanations because a degree of randomness exists in the market and it is difficult to account for irrational behavior, or market noise.

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Emini Trading: Do you have style?

By , 22 July, 2009, 1 Comment

I think before anyone embarks upon serious study of trading, then trying to make a living at trading, he/she ought consider the style of trading that best fits their personality.  Unfortunately, the term “trader” means a lot of things and encompasses a wide range of trading styles and methodologies.   My personal style of trading reflects my personality, I like immediate gratification and results, so I am a scalper.

So what is a scalper?

Most scalpers, especially the scalpers who trade the eminis, seek to exploit the natural rhythm of the market and carve out small gains on each trade.  My goal is often 12 ticks, though that can change depending upon the mood of the market and an indicator I used (and have written a post about) called the Average True Range.  My trades seldom last more than 10 or 15 minutes and I exit.  I never carry positions overnight.  My account is trade free at the end of the trading session, or at least, the period of time I am trading.

I scalp because it suits my personality.  I like the fast paced action and the lack of dependence on intermediate term prognostications on the direction of the market.  Some scalpers, seek to exploit the big/ask disparities in the market, though that is never my goal.  Scalpers need to implement strict money management guidelines in their trading, and never risk more than 5% of their capital on a given trade.  There are a host of traits scalpers use, and those traits even vary from scalp trader to scalp trader.  The important thing to remember in scalping is that I am looking for very short term moves in the market to exploit, and I do not attempt to predict any overall direction of the market as a whole.  I am interested in certain moves in very specific contracts.  The market as a whole does not interest me and, generally speaking, I don’t pay much attention to overall market conditions.  I trade the chart I am looking at, not the news, not the economy, just the chart before me.

Swing traders are a different matter, though.

Swing traders are really fundamental traders who hold their positions longer than a single day. Most fundamentalists are actually swing traders since changes in corporate fundamentals generally require several days or even weeks to produce a price movement sufficient enough for the trader to claim a reasonable profit.  The important difference between a swing trader and a scalper are basic: A swing trader has a notion or idea which way the market is going to move, or which way an individual stock is going to move, and invests based upon his belief.  Swing traders usually identify a specific characteristic or event in the market and trade based upon this theory.   I should point out that though many swing traders are interested in market and stock fundamentals, there is also a field of swing trading that invest based solely on technical trading.  Oscillators, Gann lines, Dow theory….there are scads of theories that swing trader may implement to ascertain the timing and direction of the trades they choose to execute.

Technical Traders, Fundamental Traders and Efficient Market Traders.

There is scant space in this post to cover the myriad of styles these three titles cover.  I should also point out that there is often very little agreement upon methodology by the three trading camps.  Each lays claim to correctness, though I incorporate parts of all three trading styles into my personal trading style.  I will devote some posts in the future to contrasting the mindset of each of these trading theories.

The point here is a basic one, a trader ought to decide who and what he is and what style he will implement in his trading activities.  This decision is usually gained through extensive reading and trading experience.  There are some great books written on each of these trading styles, and all traders out to consider spending some time reading about the great theorists of trading and the style and rationale they employed to reach the conclusions they write about.

Some suggested reading would include:

Dr. Burton Malkiel, “A Random Walk Down Wall Street”  (efficient market theory)

Benjamin Graham and David Dodd, “Security Analysis”  (value investing, fundamental investing)

Benjamin Graham, “The Intelligent Investor”  (value investing, fundamental investing)

John Murphy, “Technical Analysis of Financial Markets” (technical trading)

J. Welles Wilder, “New Strategies in Technical Analysis” (technical trading)

Martin Pring, “Introduction to Technical Analysis” (technical trading)

Dr. Bill Williams, “Trading Chaos” (chaos and fractal theory)

Benoit Mendalbrot “The Misbehavior of Markets”

All of these fine books will provide you with a great theoretical background to begin your journey as a trader.  I have dog eared copies of each of the books, and often refer back to them to refresh my own knowledge base.

So read, trade, experiment…then find the style of trading with which you can succeed.  As always, best of luck trading.

Top Fund Manager Goes to Cash: Are the Bears Getting the Upper Hand?

By , 13 July, 2009, No Comment

Dan Sullivan has decided to go 100% cash… and that’s bad news, since Sullivan is not just any adviser.

According to Mark Hurlburt, Sullivan’s newsletter, The Chartist is in first place for stock market timing over the last three decades among those newsletters the Hulbert Financial Digest has tracked over this period. And though his mutual-fund newsletter — The Chartist Mutual Fund Letter — hasn’t been published for all three of those decades, it also is one of the top performers over the years it has existed.

Looks like the bull rally of the last four months is running out of gas.  As a scalper, it means little to me, but I would really like to see the economy improve for the sake of our country.  There have been far to many layoffs and jobs continue to be outsourced to cheaper foreign labor as companies struggle to eek out profits, or minimize loses.

So the bull market has lost a formidable ally.

I started a new commentary blog, “The Fractal Traders Commentary”

By , 8 July, 2009, No Comment

I am a fairly opinionated fellow and felt like I would like to express my ideas of financial events but felt “The Fractal Trader” should be devoted to matters pertaining to trading and theory.  So, Voila!  You can now here me rant and rave, if you choose to, at The Fractal Traders Commentary.

Hope you enjoy it and laugh some and get mad some.  I will be adding articles periodically.

More on the Economic Recovery…(?)

By , 16 June, 2009, No Comment

With the current unemployment picture, where will the spending for this recovery originate? I would think any recovery would need some encouraging jobless numbers to be authentic.

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