Wednesday, October 17, 2012

Unbearable Boredom of Trading

Ah, glamorous life of a trader... Shimmering monitors, scrolling news headlines, whispering TV, hot coffee... You are alert, in control, overseeing and managing complicated situations... Suddenly something big develops, you catch a whiff of a big move coming, you are among the first to hear fresh news and evaluate just how significant it is - and on a moment notice you spring to action, pounding the keyboard, sending orders, talking into your headset. By the time mere mortals come home from their mundane day jobs and find out about what transpired, you already profited from it and moved on. When they ask you about that event at the weekend party, you will remember (with some feigned effort) how it went down... And how you moved right on to that next big deal between Japanese electronics company and German concern, followed by FDA approving new miracle drug...

Fun, isn't it? Except of course it's nothing but adolescent fantasy that has zero to do with reality. Well, almost... TV screen is there, monitors too - and even coffee if you make it. News headlines are scrolling but by the time you got them, so did half of trading world... and the other half just doesn't care. Now, I am not going to debunk the parts about being in control etc.; we are on a somewhat different topic here so let's assume you know what you are doing when pushing those buy and sell buttons.

One crucial part of that image however is utterly and irreparably wrong: good trading is not exciting. It's boring. And it should be. More than that - if it's exciting, you are doing it wrong. Let's see why.

Some traders feel that they have to be in the middle of the battle, in the hottest stock of the day. It's almost as though unless they take part in the "water cooler topic" of the day, the trading day doesn't count. The truth is, however, those scorching hot stocks are much more likely to cause heavy losses than bring you profits. They tend to be extremely volatile, move with hard to handle speed, move to extremes that provoke emotional reactions - and if all that was not enough, they get halted. If you ever tried to find a bottom in one of those "oversold” stocks cut in half or so, you know what I mean. Ditto for shorting freight trains that just keep going.  Do these deliver in the excitement department? No doubt - but that's where you have to ask yourself about your motivation for trading: is it profit you are after or the exultation of being a participant in a hot event? If it's profit (and if not, just stop reading this and go look for another huge mover to donate more of your money to), then remember that the amateurs evaluate profit potential while professionals gauge risk first. If you can't control risk properly, move on to another trade, no matter how tempting the opportunity seems. Remember also that it looks just as tempting to many others - do you want to be a part of the crowd which, as we all know never makes money?

Another frequently seen reason for one's trading being exciting is creative approach to each given trade. Yes, this is not a mistype (not that I am a stranger to those). You see, good trading doesn't call for the whole thinking process to happen during trade search, evaluation and development. All this process should take place during designing your trading system, at the drawing board. Trading time is execution time. You don't get creative during the battle when your decisions are more likely to be influenced by emotions and made in a rush - you execute pre-planned solutions.

This takes us to the idea of correct trading approach. It should include IF-THEN scenarios that make your responses pre-planned. Those scenarios are implemented in a form of setups that are nothing more than a set of recognizable situations and instructions how to trade them. In my case, those setups are chart formations; in yours it can be something else. Time for thinking, for creative process is when you create, test and tweak your trading system. Providing you have such setups in your arsenal, got them tested, tweaked to perfection and adjusted for the current market conditions, your trading turns into quite robotic affair. You are scanning for your setups and as soon as they appear, it’s purely a matter of execution. It’s pure eye-finger coordination, with no brain in-between. See setup – take setup – wait for the market to tell you what it’s going to be, stop or profit. Take either with no second-guessing. Move on to the next. Repeat. Repeat. Shut down software at the end of trading day, to fire it up the next morning and go over whole exercise once again.

Does the process described above strike you as boring? It should – because it is. You may sit for undetermined length of time waiting for your trade to come along and doing nothing. Learn to do that, because when you start pushing for trades just to break boredom, you start trading marginal setups. Automatic execution of your trades isn't very exciting, it makes you feel like a robot – and as far as your wallet is concerned, it’s a good thing because your actions won’t be influenced by your emotions. You want excitement? Get your kicks, whatever you do for them, after market close. Trading time is for profit, after hours time is for other stuff… like life, you know. Dull me with profits and I will yawn all the way to the bank.

Friday, June 29, 2012

How This Market Is Unique

I have to say, current is the most unusual market environment I've witnessed over almost 16 years of trading (sheesh, has it really been THIS long??). No, it's not algos or HFT that make it so unusual. None of those things ever influenced the method I deploy to read the market in any significant way. Here is what is so unique about it.

Normally market is in one of two states in relation to coming news. First, it has no idea about news coming its way. This is usually what we call "Genuine News" - earthquake would be a good example. So, the market trades in its own way, reacting on this and that, until unexpected comes and changes the picture. Second state is, market knows about news coming, evaluates it in advance and starts discounting it. This is the most frequently seen state of the market and the one on which whole trading methodologies are built. We called it Fleece Sheep News in that same article linked above.

What we have right now though is a weird hybrid of those two modes -  the market knows about news ahead but isn't able to factor it in effectively. It remains a matter of speculation and guesses for incredibly long time, and we are not much closer to resolution than we were two years ago. Those who thought the whole EU charade should collapse continue thinking so; those who believed it will print its way out of debt burden still believe it. This very unusual mode for such unusually long time causes very abnormal volatility and bi-polar market that soars like an eagle one day and digs the hole like a mad rabbit another. Even intraday, market acts like a frog in a football kicked by yet another headline. I suspect we will remain in this mode for a good while. Higher volatility goes hand in hand with shorter time frames. Investors turn into swing traders, swing traders become day trader, day traders become scalpers, scalpers... well, they remain scalpers I guess.

Sunday, June 10, 2012

Three Kinds of Crash, re-visited

Below is the article I have written on October 16 2011, with some forecasts about most probable scenarios in the economy and market reactions. Interesting to look at it now and compare the unfolding events with forecasts. Seems that the second scenario, one that I deemed the most probable, takes place. Market reactions are pretty much on target as well. IMO, everything remains intact, so let's re-read it. 

Look Ahead: Three Kinds of Crash

                                                  Life never gets so bad that it can't get worse" 
                                                                                            - Solomon Short

Putting together pieces of mosaic gathered over last few months by observing both news headlines and market reactions, let me offer my view on the future big picture developments. Everyone has one, why not add another voice and see how reality matches the forecast (rather set of scenarios in my case but you get the idea). Want to say from the start - this is a forecast that I will be happy to be mistaken about.

We will break it by two distinctive parts - economy and market developments. Let's start with economy.

European Union is non-viable and not-salvageable entity. Its deep underlying problem is discrepancy between various aspects of union. It's a monetary union - but not fiscal. Economic - but not political. This patchwork creates situation where decisions are difficult to make and even more difficult to implement, and solutions help one member at the expense of another. Authorities would be happy to throw more money at the problem but taxpayers of one sovereign state are not keen on bailing out another - and those taxpayers are voters. Push for collateral and austerity threatens autonomy of a debtor - and taxpayers start rioting over there too. There is no third party that could bail it all out (rumors spiking now and then about Latin America or China lending money to EU is pure nonsense and if anything, show the degree of desperation). Thus, there are only two ways forward: crash or money printing. Are these two really two? Not in my view - money printing does nothing but stretches crash in time, turning it into slow motion crash. It's fine with authorities though if they can stretch it by decades - today's decision-makers leave the office till then. So, real choice is between three options, none of which is warm and fuzzy.

First is Crash Now. No printing, no bailouts, let's rip the band-aid off, take the (admittedly huge) pain and start healing and rebuilding, with lessons learned in mind. Probability of this? Well, only if enraged taxpayers/voters find the way to force the hand of their respective governments and abandon the attempts to save the union. No politician wants to preside over collapse ("Crash?? Not on my watch!"). Thus,

Second is some printing now, masked as bank recapitalization, insurance guarantees etc etc. As we were shown by Fed, there are many ways to create money out of thin air. If Powers That Be manage to agree among themselves and push some kind of package through their respective elected bodies before people take on the street in numbers impossible to ignore, this will postpone the crash a bit. Such solution is nothing but kicking the can down the road, and reality will catch up with fantasy of salvation once again (after all, the debt remains as unsustainable as it was, and even becomes worse). At that point political will to continue on that path runs out, and we face second variation: Crash Later. How much later? Well, depends on how much is printed. Odds? Feels to me, this is the most probable option.

Finally, third option is printing gradually over extended period of time. That would be politicians preferred way if they could find the way to do it quietly and as a trivial matter, under the radar so to speak. This is Crash in Slo Mo. Pity the savers; inflation tax forever.

One more aspect of the big picture is China (and Asia overall). My feel is, it's a whole new can of worms down the road. It's not in a focus of attention much at this point since European troubles are more imminent. China's turn is to come yet, and unsustainability of economy geared to supply the West which cuts off its demand and of putting money in ghost cities to keep people working and economy humming - unsustainability of all this is going to reveal itself at some point.

Let's move to the market side of the picture. How is it going to react in each of the scenarios? In the first one, Crash Now, it's will mirror the economy and crash with it. Second - Crash Later - is what market is betting on over last couple weeks by climbing in the face of grim news. If this option materializes, market will spike first in relief, then drop quickly reflecting the part of reaction built in already by this recent climb and killing later arrivals; then new news will overtake and new worries (or lack of such) will start influence the movement. Finally, third option (Slo Mo Crash) is what market will be most happy about, staging big long term rally, quite possibly to new all time highs. After all, inflation is not only tax - it's also a wealth transfer to those who has what to invest.

There. Hope life proves me wrong and things turn more rosy.

Monday, February 20, 2012

Is market a battlefield for you?

Have you ever heard something like "The market is a battle, be ready to fight with all you've got," or "The market is a war," or any variation of this theme?  I bet you have, it's a fairly common theme. But is it true, or better question might be: is this a mindset that you want to adopt? 

Don't get me wrong - by no means do I want to present a marketplace as a happy place where  refined gentlemen high-five your each win (hmm, do refined gentlemen high-five at all? or they back-slap only?) and console you with fine whiskey and cigar after each loss. No, they are out to get you just as much as you - them. In that sense, anyone in the market is an enemy of anyone else. But that's not really the point. The point is, is this kind of attitude toward the marketplace and its happenings going to help you survive it, navigate it successfully? Or is it going to undermine your success? 

If the market is war for you, you are going to be in the fighting mode all the time. Can you function well for long in a constant fight mode? It's extremely tense mode which is going to wear you out rather quickly. Instead, allow me to offer you a very different attitude - one where a market is a natural environment for a trader - environment where certain patterns govern all the comings and goings. Is it a dangerous place for a trader? Of course it is. Think of it as of ocean. It's a dangerous place to be and swimming in it is a dangerous thing to do - just as trading the markets.

But is it practically useful to think of ocean as a battlefield and sharks as enemies? Try to approach it this way, and you start making your decisions based on emotions, anger, frustration, feeling of being powerless and moving to inevitable defeat.

Instead, try to think of it as a place that is indifferent to you - not friendly, not hostile - but simply a natural environment where incorrect behavior gets you killed. Now instead of emotions you focus on studying patterns - which current goes where, whether it will take you where you need to be, where the sharks are and what the signs of them circling are, how you recognize their approach, how you spot fish that you can catch and eat... That's your cold-blooded trading approach where you act accordingly to the patterns and not to what your emotions would have you do.

Those who you may want to dub as enemies based on the concept of fairness and other similar ideas (which are not the nature ideas but entirely man-made) are those who create these patterns and are part of them. Consider them enemies - and you find yourself fighting those patterns. Consider them part of the environment - and you start studying and following those patterns.

Reread this paragraph above before you start your next trading day. See if it puts you in a calm confident state of mind where you feel in control of your emotions and actions.