Friday, December 14, 2018

Are We Going To Crash?

That is the question I've been hearing a lot lately.  I don't hear anyone talking about stocks running to new all-time highs.  I do hear about all the market woes, from tariffs and trade wars to discord in Europe to political turmoil in the U.S.  My job, as a trader and as an investor, is to entertain a variety of scenarios based upon the data in front of me.  As much as possible, I want to stay open minded to what others are not looking at.  Very often that is where an edge can be found.

For example, on September 24th my blog post highlighted caution signals for the overall market.  A variety of supply/demand flow measures had turned decidedly negative.  We've seen weakness in stocks overall since that time.  Reports indicate record amounts of cash being taken out of the market, with 49% of surveyed investors expecting a market decline over the next six months.  That is the highest percentage since 2013.

And, yet, with all the selling, all the negative news, and all the bearishness, we have merely roundtripped the early 2018 performance.



This chart shows the ES futures from May of 2017 to the present.  Each data point represents 50,000 contracts traded.  You can see that the entire bear period to date has, so far, been a relatively flat correction on a large time scale.  That is not so unlike the 1994 market, which dipped in the first and last quarters of the year, forming a range.  The upside break of that range lasted six years.

Thus far, the flow and breadth measures that I track are not telling me that the selling has dried up.  I need that confirmation before more seriously entertaining the upside.  But I'm open to both sides of the market and am monitoring day over day strength versus weakness to handicap the odds of a big picture break from the longer-term range.  The key is stepping back and seeing 2018 as a range.

Further Reading:


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Monday, December 10, 2018

Three Keys To Trading Performance

In the latest Forbes article, I share three important trading lessons that I have learned from Victor Niederhoffer.  These are not the usual trading psychology homilies; they reflect real-world experience with making sense of market behavior.

The truth is, I could have offered a dozen more lessons I've learned from Vic--all of which are highly relevant to trading.  Here are a few keys to trading performance inspired by his example and reinforced over the years:

1)  It's all about the reps - Vic became a squash champion with fanatical practice, drilling and mastering shots.  In preparing for more active trading this coming year, I am using each trading day as a review, tracking the "trades of the day" and the ways in which they have set up, the ways of best entering them, the ways of best managing positions after entry, etc.  Every day becomes a textbook lesson in good trading.  As markets change, the trades of the day also shift--and the reps are helpful in adapting to the new market conditions.

2)  Think outside the box - I am convinced, based on years of experience working with successful traders, that there is no edge in being consensus.  If you are part of the herd looking at the same charts, regurgitating the same narratives, there is no way to achieve distinctive returns.  My own trading has undergone a renaissance as the result of making cycles the most basic unit of analysis.  Identifying dominant market cycles within stable market periods allows the trader to know when markets are likely to exhibit momentum and when they are likely to reverse.  This has freed me from bullish or bearish biases--there are always ups and downs to be exploited in markets.

3)  Collect people - Vic is a consummate collector.  He has collections of art, collections of books, collections of historical artifacts.  His house is a veritable museum.  But where Vic has been most successful is in collecting people.  He seeks out accomplished people in various fields and brings them together, whether online, in meetings, or in parties.  I don't know any successful traders who don't have well-curated professional networks.  Quite simply, people who are excellent in their domains bring out our own excellence.  We internalize what we experience; that is why we should always surround ourselves with excellence.

Life is too short to settle for mediocrity.  What are you doing in your practice, in your thought processes, and in your social life that elevates you toward excellence?  Such reflections are an excellent way to begin planning for a new trading year.

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Thursday, December 06, 2018

Finding A Mentor, Not A Guru

One of the best things a developing trader can do is find mentors.

One of the worst things a developing trader can do is follow gurus.

Gurus are not mentors.

Gurus offer answers; mentors teach you how to arrive at answers.

Gurus promote the right way to do things; mentors teach you to find the right ways for you.

The recent Forbes article highlights the sobering fact that 95% of people are imitators; only 5% are initiators and innovators.  Isn't it interesting that those odds are similar to the odds of independent traders becoming consistently profitable?  Imitation is not a winning strategy.  It is a sure path for being part of a herd.

When I spoke with traders at the recent meetup for My Investing Club, I emphasized the importance of learning from your own trading experience:  what works for us and makes sense to us often reveals our underlying strengths.  A mentor can help you learn from your experience; not follow their advice and experience.  

The MIC home page begins with the phrase, "Mentorship is the shortcut to success."  That calls to mind a story recalled in a Jewish book called Tanya.  A Rabbi was trying to find his way to the city and asked a child for directions.  The child explained that there was a "short and long way" and a "long and short way".  The Rabbi took the short and long way and found his path obstructed.  He then returned and asked the child why he had said the path was short.  The child said, "Didn't I also tell you it was long?"

The path of the guru is the short but long way.  It promises quick answers, but these don't work in practice, because they do not draw upon *your* strengths and *your* ability to adapt to shifting markets.  When you follow the guru, you become obstructed--and that makes it a long way.

The long but short way is mentoring.  It takes time to learn from experience and internalize those lessons, just as it takes time to become a golf champion or an Olympic winner.  Mentoring can accelerate the development process by helping you learn from both successes and mistakes--and by giving you *many* models of success that you can integrate to make your own.  That makes mentoring the long but short way--the real shortcut, as MIC notes.

The Forbes article points out how easy it is for us to become influenced by others.  I have never met a consistently profitable trader who has not demonstrated a high degree of intellectual independence.  At SMB, for example, developing traders are part of a team and receive mentoring from senior, successful traders.  They are expected, however, to develop their own "playbooks" and cultivate their own understandings of markets, stocks, and opportunities.

One of the most common errors we make in thinking about trading success is that mentoring is limited to the early years of development.  If markets always traded the same way and followed the same patterns, this would be the case.  It is the ever-changing nature of markets that ensures we not only learn, but continually relearn and update our learning.  That means it is helpful to have mentors throughout one's trading career: colleagues we can learn from.  In dynamic fields, such as medicine and technology, education is not enough.  Success requires continuing education.  And that means ongoing mentoring.  

Further Reading:


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Monday, December 03, 2018

When Your Past Overwhelms The Present

Margie and I are currently fostering a lovely young cat who spent the first year of life in a relatively confined space.  He was wary upon first meeting us, but warmed up and began to play and purr.  This morning, I set up his cat bed in a larger room so that he could become accustomed to new space.  When he saw me carrying the bed, he had a complete meltdown.  He panicked, hurled himself against the window to escape, and shook and growled.  When I put the bed down and spoke to him softly, he calmed down and was eventually able to resume play--but only after returning to his safe bedroom space.

Trauma occurs when life incidents become such threats that they overwhelm our coping.  Not all trauma is full-blown PTSD.  Many events in our lives leave scars that can be reopened at various times in our lives.  A person who was mistreated as a child may function quite well as an adult, but suddenly "overreact" when treated unfairly at work or in a romantic relationship.  Not so different from the cat.

All of us bring our personal histories to trading.  When unresolved issues of self-worth, anger, or anxiety are triggered by the challenges of markets, we can be a bit like the cat.  We can "overreact".  But, of course, what looks like an overreaction in the present is really nothing by a reaction to our emotional past.

Not all of us are acting out our past in our current trading.  But if you find yourself "overreacting" to life events outside of markets--at work, in relationships--there is a high probability you'll bring those issues to your trading.  That's when a professional counseling relationship can be useful to resolve those issues.  No amount of playing with indicators or listening to trading coaches will put your past into perspective.  Investing in the right kind of help could be the best thing for your trading.

Further Reading:


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