A Day in the Life of a Trader

June 24, 2009 – 10:55 pm

Trading shares/stocks/options or spread bet, depends on your experience and available time.

If you are trading in The States, then market data have to be downloaded the next day as the markets only close at 9.00 pm UK time and update overnight.

For the UK, look at the FTSE100 index (250 and 350), for the US the DJIA index etc. This will provide a view of the overall market, strength, weakness, support, confrontation etc.

All shares and stocks are separated and sub divided into different industry and market sectors. Analyze every industry sector chart, for strength and weakness, as well as support and resistance. Do not buy shares or stocks in a sector of the market which is particularly weak or selling short in a strong sector. Naturally, there is no assurance that any share you desire within a sector which is performing well will guarantee it will follow the trend, but it is a rational supposition to make as a start.

Accepting and identifying industry and market sectors can be scandalously difficult. Having downloaded the end of day data, check all charts. As always, look for trends, volume, support and resistance, breakouts from a channel, turning points and candle patterns. Identify a list of possible prospects, compare them with their sector, see whether they were in a good sector or not, and how they were performing relative to the sector.

It is important checking on any share or stock that you are considering as to details of any directors who have bought or sold shares recently. Buy a share one day before the date then and be entitled to the dividend, but if you buy on the day you will not be entitled. There is a three day window between the ex-dividend date and the date of record.

On the broader front, there are four clear periods to the economic cycle-full recession, early recovery, full recovery and early recession. The markets tend to lead the economic cycle. In early recovery industrial, basic industry and energy sectors tend to lead, in full recovery staples and service sectors tend to lead, in early recession utilities and finance sector stocks tend to lead, and finally in full recession cyclical and technology stocks tend to lead the way.

Pay attention to the announcements on interest rates etc. Be rational rather than trying to acquire some deep knowledge of facts and figures that only economists comprehend. After all, if they know anything of value they would have retired long ago. Trading and investing is hard work and is about making money – not losing it!

By TradingMentor | Posted in Articles, Stock Market | Tagged | Comments (0)

8 Types of Penny Stocks to Avoid

June 24, 2009 – 10:03 pm

There are many fine penny stock investments existing, which could turn a small amount of investment into a small fortune very quickly.

The Phone Salesman – Anyone who is trying to sell you investments over the phone should be considered an enemy. They have high-pressure sales tactics, and effectual, believable arguments.

There has never been a need for good companies that are going places to remedy to these types of tactics, but there has always been a need for poor, sinking, or shady companies to do so. If you choose to ignore this advice you deserve what happens to your investment.

Very Low Volume Stocks – Without much trading activity it becomes progressively more difficult to buy or sell for the prices you want. As well, it becomes nearly impossible to get an understanding of where the stock price is heading, or to calculate fair valuations for the company’s stock price.

Not only do those, but companies subject to low trading volume generally not have a lot of positive interest.

The Hot Tip Stock – There are really professional promoters who make a very good living generating and nurturing rumors about some penny stock that’s certain to go through the roof.

Guaranteed Performance – If a stock is assured to go up, it will almost always go down. When someone guarantees definite performance out of a stock, they may be a promoter, naive investor, self-serving broker, or have heard the guarantee from another source.

Commission Free – If you are interested in getting stock charge free you may think you are saving money, but it generally means that you are buying over the counter stock directly from a promoter or the company.

International Penny Stock – We’re not talking about living in the U.S. and routing clear of Canadian stock, or vice versa. We are talking about penny stock issues from Africa, Australia, European, Russian, or South American penny stock markets. Besides, if you can’t find good penny stock investments in North America, you won’t be able to find them anywhere else either.

Warrants and Rights – These are not technically stocks, but instead are derivative investments based on an underlying company’s shares. Nonetheless, they often appear like penny stocks because they sometimes get listed in the stock pages, and often trade for pennies.

By TradingMentor | Posted in Articles | Tagged | Comments (0)

Destructive Patterns in Trading

June 24, 2009 – 9:17 pm

Before we get into the topic of destructive trading, allow me to explain how psychologists assess whether or not a person has a problem with alcohol consumption.  Here are ten questions that a professional might ask in order to assess any kind of substance use disorder, including alcohol abuse:

1) Have you found that your drinking is bringing unwanted, negative consequences?

2) Have you recently felt guilty over the way you have been drinking?

3) Do you find you need to drink more just to get the good feeling?

4) Do you find that your personality changes when you drink excessively?

5) Do you find it difficult to take a break from drinking, even when part of you knows that this would be best for you?

6) Do you find yourself drinking to feel good about yourself?

7) Do you sometimes feel that you cannot control how much you drink?

8) Do you find yourself getting angry when someone close to you questions your drinking?

9) Do you find yourself vowing to limit your drinking, only to slip back into overdrinking?

10) Do you find it difficult to not drink given the opportunity, even when the occasion is not really appropriate?

Now for the topic of destructive trading:  Please answer the above questions, but substitute the word “trading” for “drinking”, and substitute the word “trade” for “drink”.

Fear and greed are potent influences on trading, but the greatest trading problems, I find, are addictive in nature.  Successful traders really want to trade; they have a passion for trading.  Addictive traders need to trade; they have a passion for action and excitement.

An addictive trader will not manage his risk.  That is because risk is part of the high.

An addictive trader will not stop trading, even when losing money.  That is because action, not profit, is the goal.

An addictive trader will cycle between periods of guilt and responsibility and periods of excess and irresponsibility.

Good traders trade actively.  Addictive traders overtrade.

If you see yourself in this profile, do the right thing, before your patterns ruin your career and harm those who depend on you.  Get help.  You can change.  Your trading and your happiness lie in the balance.

Brett N. Steenbarger, Ph.D. is Director of Trader Development for Kingstree Trading, LLC in Chicago and Clinical Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY.  He is also an active trader and writes occasional feature articles on market psychology for a variety of publications.  The author of The Psychology of Trading (Wiley; January, 2003), Dr. Steenbarger has published over 50 peer-reviewed articles and book chapters on short-term approaches to behavioral change.  His new, co-edited book The Art and Science of Brief Therapy is a core curricular text in psychiatry training programs.  Many of Dr. Steenbarger’s articles and trading strategies are archived on his website, www.brettsteenbarger.com

By TradingMentor | Posted in Articles | Tagged , | Comments (0)

The Guppy Multiple Moving Average (GMMA)

June 24, 2009 – 8:35 pm

The Guppy Multiple Moving Average (GMMA) is an indicator that tracks the inferred activity of the two major groups in the market. These are investors and traders. Traders are always probing for a change in the trend. In a downtrend they will take a trade in anticipation of a new up trend developing. If it does not develop, then they get out of the trade quickly. If the trend does change, then they stay with the trade, but continue to use a short term management approach. No matter how long the up trend remains in place, the trader is always alert for a potential trend change. Often they use a volatility based indicator like the count back line, or a short term  10 day moving average, to help identify the exit conditions. The traders focus is on not losing money. This means he avoids losing trading capital when the trade first starts, and later he avoids losing too much of open profits as the trade moves into success.

We track their inferred activity by using a  group of short term moving averages. These are 3, 5, 8, 10, 12 and 15 day exponentially calculated moving averages. We select this combination because  three days is about half a trading week. Five days is one trading week. Eight days is about a week and a half.

The traders always lead the change in trend. Their buying pushes  prices up in anticipation of a trend change. The only way the trend can survive is if other buyers also come into the market. Strong trends are supported by long term investors. These are the true gamblers in the market because they tend to have a great deal of faith in their analysis. They just know they are right, and it takes a lot to convince them otherwise. When they buy a  stock they invest money, their emotions, their reputation and their ego. They simply do not like to admit to a mistake. This may sound overstated, but think for a moment about your investment in AMP or TLS. If purchased several years ago these are both losing investments yet they remain in many portfolios and perhaps in yours.

The investor takes more time to recognize the change in a trend. He follows the lead set by traders. We track the investors inferred activity by using a 30, 35, 40, 45, 50 and 60 day exponentially calculated moving average. Each average is increased by one week. We jump two weeks from 50 to 60 days in the final series because we originally used the 60 day average as a check point.

This reflects the original development of this indicator where our focus was on the way a moving average  crossover delivered information about agreement on value and price over multiple time frames. Over the years we have moved beyond this interpretation and application of the indicator. In the notes over the coming weeks we will show how this has developed.

Our starting point was the lag that existed between the time of a genuine trend break and the time that a moving average cross over entry signal was generated. Our focus was on the change from a  downtrend to an up trend. Our preferred early warning tool was the straight edge trend line which is simple to use and quite accurate. The problem with using a  single straight edge trend line was that some breakouts were false. The straight edge trend line provided no way to separate the false from the genuine.

On the other hand, the moving average crossover based on a 10 and 30 day calculation, provided a higher level of certainty that the trend break was genuine. However the disadvantage was that the crossover signal might come many days after the initial trend break signal. This time lag was further extended because the signal was based on end of day prices. We see the exact cross over today, and if we were courageous, we could enter tomorrow. Generally traders waited for another day to verify that the crossover had actually taken place which delayed the entry until 2 days after the actual crossover. This time lag meant that price had often moved up considerably by the time the trade was opened.

The standard solution called for a combination of short term moving averages to move the crossover point further back in time so that it was closer to the breakout signaled by a  close above the straight edge trend line. The drawback was that the shorter the moving average, the less reliable it became. In plotting multiple moving averages on a single chart display four significant features emerged. They were:

  • A repeated pattern of compression and expansion in a group of six short term averages.
  • The behavior was fractally repeated across different time frames. These short and long term groups were useful in understanding the inferred behavior of traders and investors.
  • The degree of separation within groups and between groups provides a method of understanding the nature of the trend and trend change.
  • The synchronicity was independent of the length of the individual moving averages. That is, at major trend turning points compression occurred across both long and short term groups and this provided early validation of signals generated by the straight edge trend line.

From these features there emerged this conclusion.

  • The relationship between moving averages and price was better understood as a relationship between value and price. The crossover of two moving averages represented an agreement on value over two different time frames. In a continuous open auction which is the mechanism of the market, agreement on price and value was transient and temporary. Such agreement often preceded substantial changes in the direction of the trend. The GMMA became a tool for identifying the probability of trend development.

These broad relationships, and the more advanced relationships used with the GMMA are summarized in the chart. Over the following series of articles we will examine the identification and application of each of these relationships.

This is the most straightforward application of the GMMA and it worked well with “V’ shaped trend changes. It was not about taking the lag out of the moving average calculation. It is about validating a prior trend break signal by examining the relationship between price and value. Once the initial trend break signal is validated by the GMMA the trader is able to enter a breakout trade with a higher level of confidence.

The CBA chart shows the classic application of the GMMA. We start with the breakout above the straight edge trend line. The vertical line shows the decision point on the day of the breakout. We need to be sure that this breakout is for real and likely to continue upwards. After several months in a downtrend the initial breakout sometimes fails and develops as shown by the thick black line. This signals a change in the nature of the trend line from a resistance function prior to the breakout to a support function after the breakout.

The GMMA is used to assess the probability that the trend break shown by the straight edge trend line is genuine. We start by observing the activity of the short term group. This tells us how traders are thinking. In area A we see a compression of the averages. This suggests that traders have reached an agreement on price and value. The price of CBA has been driven so low that many traders now believe it is worth more than the current traded price. The only way they can take advantage of this ‘cheap’ price is to buy stock. Unfortunately many other short term traders have reached the same conclusion. They also  want to buy at this price. A bidding war erupts. Traders who believe they are missing out on the opportunity outbid their competitors to ensure they get a position in the stock at favorable prices.

The compression of these averages shows agreement about price and value. The expansion of the group shows that traders are excited about the future prospects of increased value even though prices are still rising. These traders buy in anticipation  of a trend change. They are probing for a trend change.

We use the straight edge trend line to signal an increased probability of a trend change. When this signal is generated we observe this change in direction and separation in the short term group of averages. We know traders believe this stock has a future. We want confirmation that the long term investors are also buying this confidence.

The long term group of averages, at the decision point, is showing signs of compression and the beginning of a change in direction. Notice how quickly the compression starts and the decisive change in direction. This is despite the longest average of 60 days which we would normally expect to lag well behind any trend change. This compression in the long term group is evidence of the synchronicity relationship that makes the GMMA so useful.

This compression and change in direction tells us that there is an increased probability that the change in  trend direction is for real – it is sustainable. This encourages us to buy the stock soon after the decision point shown.

The GMMA picks up a seismic shift in the markets sentiment as it happens, even though we are using  a 60 day moving average.. Later we will look at how this indicator is used to develop reliable advance signals of this change. This compression and eventual crossover within the long term group takes place in area B. The trend change is confirmed. The agreement amongst investors about price and value cannot last. Where there is agreement some people see opportunity. There are many investors who will have missed out on joining the trend change prior to area B. Now the change is confirmed they want to get part of the action. Generally investors move larger funds than traders. Their activity in the market has a larger impact.

The latecomers can only buy stock if they outbid their competitors.  The stronger the initial trend, the more pressure there is to get an early position. This increased bidding supports the trend. This is shown by the way the long term group continue to move up, and by the way the long term group of averages separates. The wider the spread the more powerful the underlying trend.

Even the traders retain faith in this tend change. The sell off that takes place in area C is not very strong. The group of short term averages dips towards the long term group and then bounces away quickly. The long term group of averages show that investors take this opportunity to buy stock at temporarily wakened prices. Although the long term group falters out at this point, the degree of separation remains relatively constant and this confirms the strength of the emerging trend.

The temporary collapse of the short term group comes after a 12% appreciation in price. Short term traders exit the trade taking short term profits at this level of return and this is reflected by the compression and collapse of the short term group of averages. As long term investors step into the market and buy CBA at these weakened prices, traders sense that the trend is well supported. Their activity takes off, and the short term group of averages rebounds, separates, and then run parallel to the long term group as the trend continues.

The GMMA identifies a significant change in the markets opinion about CBA. The compression of the short term and long term groups validates the trend break signal generated by a  close above the straight edge trend line. Using this basic application of the GMMA, the trader has the confidence necessary to buy CBA at, or just after the decision points shown on the chart extract.

Using this straightforward application of the GMMA also kept traders out of false breakouts. The straight edge trend line provides the first indication that a downtrend may be turning to an up trend. The CSL chart shows two examples of a false break from a straight edge trend line. We start with decision point A. The steep downtrend is clearly broken by a close above the trend line. If this is a  genuine trend break then we have the opportunity to get in early well before any moving average crossover signal.

This trend break collapses quickly. If we had first observed this chart near decision point B then we may have chosen to plot the second trend line as shown. This plot takes advantage of the information on the chart. We know the first break was false, and by taking this into account we set the second trend line plot. Can this trend break be relied upon? If we are right we get to ride a new up trend. If we are wrong we stand to lose money if we stay with a continuation of the downtrend. The straight edge trend line by itself does not provide enough information to make a good decision.

When we apply the GMMA we get a getter idea of the probability of the trend line break actually being the start of a new up trend. The key relationship is the level of separation in the long term group of averages, and trend direction they are traveling. At both decision point A and decision  point B the long term group is well separated. Investors do not like this stock. Every time there is a rise in prices they take advantage of this to sell. Their selling overwhelms the market and drives prices down so the downtrend continues.

The degree of separation between the two groups of moving averages also makes it more difficult for either of the rallies to successfully change the direction of the trend. The most likely outcome is a weak rally followed by a  collapse and continuation of the down trend. This observation keeps the trader, and the investor, out of CSL.

Looking forward we do see a convergence between the short term group of averages and the long term group of averages. Additionally the long term group begins to  narrow down, suggesting a developing level of agreement about price and value amongst investors in April and May. In late March the 10 day moving average closes above the 30 day moving  average, generating a classic moving average buy signal.

Using the GMMA we ignore this signal and the other GMMA convergence relationships. This decision is based on a more advanced understanding of the relationships revealed by the GMMA and we will examine these strategies in future articles.

INDICATOR BUILDER
GUPPY MULTIPLE MOVING AVERAGES
These are two groups of exponential moving averages. The short term group is a 3, 5, 8, 10, 12 and 15 day moving averages. This is a proxy for the behaviour of short term traders and speculators in the market.
The long term group is made up of 30, 35, 40, 45, 50 and 60 day moving averages. This is a proxy for the long term investors in the market.
The relationship within each of these groups tells us when there is agreement on value – when they are close together – and when there is disagreement on value – when they are well spaced apart.
The relationship between the two groups tells the trader about the strength of the market action. A change in price direction that is well supported by both short and long term investors signals a strong trading opportunity. The crossover of the two groups of moving averages is not as important as the relationship between them.
When both groups compress at the same time it alerts the trader to increased price volatility and the potential for good trading opportunities.

By TradingMentor | Posted in Articles, Technical Analysis | Tagged , , , | Comments (0)

Trading and Ego

June 24, 2009 – 7:16 pm

It’s a short odds bet that the loudest yell for foremost man / woman will arrive from the ego. Brushing aside sagacity and requests for enclosure alike, the ego will articulate his / her pre-eminence and seize control.

Statistics that habitually substantiate that only 10-20% of traders are reliable net winners are music to the ego’s ears. No self respecting ego could tolerate the prospect of being in the realm of the also ran, those poor, impoverished, less able 80-90%.

Moving back into the unfamiliar shadows the ego usually brings with it an account balance fresh from a rendezvous with nemesis.

A renegade from self inspection, the ego, as befits the original usurper, skulks off in search of more accommodating environment.

Ironically, the ego enjoys its separateness yet slashes towards an undeclared desire for belonging that cannot be articulated. With the ego in the head trader’s seat the drive for action will be dominant, for the ego both needs and loves being in the thick of the action, whatever the merits marketwise. The ego is a vicious force in our trading.

No question that on our trading skills balance sheet the ego is an everlasting occupant in the liability column, the benefit column being considerably overshadowed until it reaches for the light. The way of the deliberately undertaken “egodectemy”, self sought and administered.

The diminishing noise of the ego facilitates the growing incidence of quieter qualities such as intuition. Intuition is perhaps the yin to the ego’s yang, the passive to the active. Unlike the ego which announces itself with such instantaneous urgency, intuition presents itself self effacingly.

It doesn’t require the ego’s display. Intuition is not exempt from egos predatory pulse. To the ego, all is fair game. So, as well as the necessity to be watchful in monitoring our trades we need to be vigilant for contaminations by the ego. For trading mastery, read 24/7 ego monitor.

Prioritizing intuition allows for the gradual development of trust which in turn allows for intuitive insights to be made tangible as signals to act upon. Running before you can walk is one of the ego’s most cherished mantras. Of course, intuition is only one of the skills available to counter the ego’s threat and itself is not infallible, in trading or elsewhere. Trading intuitively doesn’t preclude mistakes.

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Trading for a Living

June 24, 2009 – 6:42 pm

Prior to you even think about trading for a living you have to know how much money you need to live on, that is, how much cash do you need to produce every month in order to survive. As a fiscally minded person you already have good home accounts, or are at the very least vaguely aware of where the money goes. Because there will always be unexpected expenses, and as traders we are always prepared to expect the unexpected. Now you know how much money you need each month, you can look at your savings and work out how much buffer money you have, that is, how long you could survive without earning anything at all. An important but often overlooked aspect of under capitalization is the effect it will have on your trading; if you are trading because you need the money, then you are trading scared and you’re almost certainly going to lose. You cannot distance yourself from the money-aspect of the trade if you are relying on the money.

Living expenses are only one part of the economic equation. Next you must consider how much trading capital you need. This is the money actually facilitate trading, in other words your account balance for trading margin, and the money you will be spending on data feeds, software, and internet access. You must account for this discretely; you cannot start eating into your daily living expenses money just because you took a bad trade and need some more margins.

The amount of trading capital you require will depend very much on your trading style. To day trade the US Stock Markets for example, you must have at least $25,000 in your account, so budget for $30,000 to allow for positions moving against you (if you fall below the $25k minimum even briefly, your account can be frozen for up to three months). If you are holding positions overnight you may manage with a lower balance but bear in mind your buying power and consequently returns will be reduced.

If all this is starting to sound exclusive, well it is. There’s no two ways about it, you simply cannot survive long term as a trader if you are under funded.

Again the conditions for both hardware and ISP will depend largely on your trading style, but if you’re relying on a 100 MHz Pentium II and a dial up service, you’re setting yourself up for failure. So budget for quality equipment, budget to keep it up to spec, and budget for some repairs too – expect the unexpected.

A few weeks really aren’t enough time to know if you’re going to succeed though. An ideal next step then is to cut your day job hours to part time and trade maybe two or three days a week. This way you know you have some money coming in, you get to trade for real, and if it all goes horribly wrong you are probably better placed to get back into full time employment than someone who quit the working world completely.

The option of part time work is a luxury many of us don’t have however. So does it have to be all or nothing – trade or work? Why not keep the day job and trade outside your working hours as well. If you are trading and end of day strategy, then this is easily achieved by doing your research in the evening and placing the appropriate combinations of Stop and Limit orders with your broker. For day traders, certainly practicing is easier if your intended market is not your home market, for example if you want to trade the US and you live in the UK where you can come home and paper trade in the evening. There are other try before you buy options open to the day traders who want to practice trading their home market outside of normal hours though. eSignal allows you to download tick data for any symbol and play it back in real time or speeded up so you could trade the whole day in an hour.

There are a few non-financial aspects to believe before going full time with your trading. If you have a family, how will the change impact them? Make sure from the start that everybody knows the ground rules and that you can separate you’re working time from your free time effectively.

Trading full time can give you huge amounts of free time, but if you have nothing to fill that time with you can quickly lose the plot – I’ve seen it happen and it’s not pretty.

Nobody can tell you if trading for a living is for you, it’s something you have to find out for yourself.

By TradingMentor | Posted in Articles, Professional Investing | Tagged , | Comments (0)

Surge in Life Insurance Buying Sparked by Financial Crisis

June 24, 2009 – 6:03 pm

Financial crisis is probably one of the obvious impact makers on our life these recent years. We know that it has been affected us in all sort of ways that we could imagine and it is not getting any better. With it a lot has been affected, if you look at it in with a keen eye, we can see that from food, shelter, gas and clothing, financial crisis can affect it with big points. And with that being an issue, life insurance companies are having a ball on getting their number achieve high quotas. They are probably the biggest winners when there is economic turmoil, as they are benefiting from the financial crisis and recession in which people wants to secure and better protect their assets when that time comes.

According to The Business Review Article written by Fiona Robertson, there has been a 9.5% increase in total premiums over the past year up until September 30. That number is relatively high and if you try and analyze it, the Life insurers are really benefiting from the financial crisis and it has been a major impact nonetheless. You want numbers? Well, let me give you some. How about 1.512 billion dollars? You want you want to know the significance of it? It is the total premiums for life insurance policies, it is a big number compared from 1.381 billion that they have over that time. An estimated 21% increase in numbers for premiums with new individual risks has been seen. It is approximately at 51.78 million dollars in total. That is a high number for new policies sales, mind you.

With much of these numbers being crunched as the quarter draws to a close. The logical conclusion to this is that the big increase of people losing their jobs. Of course people wants to better protect their business and loved ones by getting them secured and protected through the use of life insurance. The overwhelming financial crisis has hit hard and with it, people suffer. When that happens, the people who are affected try to do what they can to secure their investment or business. Life insurance companies of course tries to benefit from this by offering premiums to people in need of it and from there a large number will skyrocket as more and more people realizes the situation.

Another thing to really point out is the health issues of people, with a lot of stress being pointed towards a lot of people, health can be an issue that they want to address. Therefore the use of life insurance comes to a role, in which to secure the future of these people. From stress and health anything can happen and with that problems occur, mortgages and bills won’t be paid and some more problems will start to stem from that. And if you look at it, it would really be smart to get life insurance to get secured. Health risk, stress, economic turmoil all of which can point and lead to financial crisis and with it being a national issue, the surge of people getting policy coverage are hitting a high mark thus getting into what many experts believe a boom in life insurance. The stats don’t lie.

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How to Take a Loss

June 24, 2009 – 5:01 pm

There are quite a few books written on how to make money in the market.  Some of them are even written by people who have made money as traders!  What you don’t see often, however, are books or articles written on how to lose money.  “Cut your losers and let your winners run” is commonsensical advice, but how do you determine when a position is a loser?  Interestingly, most traders I have seen don’t formulate an answer to this question when they put on a position.  They focus on the entry, but then don’t have a clear sense of exit—especially if that exit is going to put them into the red.

One of the real culprits, I have to believe, is in the difficulty traders have in separating the reality of a losing trade from the psychological sense of feeling like a loser.  At some level, many traders equate losing with being a loser.  This frustrates them, depresses them, makes them anxious—in short, it interferes with their future decision-making, because their P & L is a blank check written against their self-esteem.  Once a trader is self-focused and not market focused, distortions in decision-making are inevitable.

A particularly valuable section of the classic book Reminiscences of a Stock Operator describes Livermore’s approach to buying stock.  He would sell a quantity and see how the stock responded.  Then he would do that again and again, testing the underlying demand for the issue.  When his sales could not push the market down, then he would move aggressively to the buy side and make his money.

What I loved about this methodology is that Livermore’s losses were part of a grander plan.  He wasn’t just losing money; he was paying for information.  If my maximum position size is ten contracts in the ES and I buy the highs of a range with a one-lot, expecting a breakout, I am testing the waters.  While I am not potentially moving the market in the way that Livermore might have, I still have begun a test of my breakout hypothesis.  I then watch carefully.  How are the other averages behaving at the top ends of their range?  How is the market absorbing the activity of sellers?  Like any good scientist, I am gathering data to determine whether or not my hypothesis is supported.

Suppose the breakout does not materialize and the initial move above the range falls back into the range on some increased selling pressure.  I take the loss on my one-lot, but then what happens from there?

The unsuccessful trader will respond with frustration:  “Why do I always get caught buying the highs?   I can’t believe “they” ran the market against me!  This market is impossible to trade.”  Because of that frustration—and the associated self-focus—the unsuccessful trader does not take any information away from that trade.

In the Livermore mode, however, the successful trader will see the losing one-lot as part of a greater plan.  Had the market broken nicely to the upside, he would have scaled into the long trade and likely made money.  If the one-lot was a loser, he paid for the information that this is, at the very least, a range-bound market, and he might try to find a spot to reverse and go short in order to capitalize on a return to the bottom end of that range.

Look at it this way:  If you put on a high probability trade and the trade fails to make you money, you have just paid for an important piece of information:  The market is not behaving as it normally, historically does.  If a robust piece of economic news that normally sends the dollar screaming higher fails to budge the currency and thwarts your purchase, you have just acquired a useful bit of information: There is an underlying lack of demand for dollars.  That information might hold far more profit potential than the money lost in the initial trade.

I recently received a copy of an article from Futures Magazine on the retired trader Everett Klipp, who was dubbed the “Babe Ruth of the CBOT”.  Klipp distinguished himself not only by his fifty-year track record of trading success on the floor, but also by his mentorship of over 100 traders.  Speaking of his system of short-term trading, Klipp observed, “You have to love to lose money and hate to make money to be successful…It’s against human nature what I teach and practice.  You have to overcome your humanness.”

Klipp’s system was quick to take profits (hence the idea of hating to make money), but even quicker to take losses (loving to lose money).  Instead of viewing losses as a threat, Klipp treated them as an essential part of trading.  Taking a small loss reinforces a trader’s sense of discipline and control, he believed.  Losses are not failures.

So here’s a question I propose to all those who enter a high-probability trade:  “What will tell me that my trade is wrong, and how could I use that information to subsequently profit?”  If you’re trading well, there are no losing trades: only trades that make money and trades that give you the information to make money later.

Brett N. Steenbarger, Ph.D. is Director of Trader Development for Kingstree Trading, LLC in Chicago and Clinical Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY. He is also an active trader and writes occasional feature articles on market psychology for a variety of publications. The author of The Psychology of Trading (Wiley; January, 2003), Dr. Steenbarger has published over 50 peer-reviewed articles and book chapters on short-term approaches to behavioral change. His new, co-edited book The Art and Science of Brief Therapy is a core curricular text in psychiatry training programs. Many of Dr. Steenbarger’s articles and trading strategies are archived on his website, www.brettsteenbarger.com

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Trade price analysis

June 24, 2009 – 4:13 pm

Trade price analysis involves monitoring price action, in order to gain an insight into the short term sentiment of the market. Determining who is in control at that time – the bulls or the bears. And assessing how they’re likely to respond to changes in the market. Price analysis is much more than just watching for your favorite candlestick patterns.

Trade price analysis is essentially a top down approach, working from the macro level of Market Structure such that we analyze the big picture first and then go down to the current trend within that structure. Finally take a look at the current price pattern through candlestick analysis or other method that works.

Market structure

The higher timeframe chart is opened and any areas of major support or resistance are identified. Support & Resistance are areas of past price congestion. Trade is a higher probability of price stalling or reversing at these areas of major support or resistance. Then narrow focus to the shorter trading timeframe and add to the market structure framework, by identifying areas of minor support or resistance. Thus Market Structure is simply identifying a support and resistance framework within which price moves.

Having defined the market structure an analysis on the trend to identify its strength is conducted. If the trend moves strongly, anticipate it being more likely to break through the next support or resistance levels. If it is weakening, a greater probability of the support or resistance levels forming a barrier to further price movement can be declared. We determine the strength of the trend by looking at its closeness to the support and resistance barriers within the framework.

Conduct further price analysis regarding the trend and how it moves within the support and resistance framework. The price may have just meandered slowly up to a major resistance level. The current price swing may clearly show less momentum than both the previous upswing and downswing. And the price bar range may be narrowing. This gives a reduced likelihood of the commitment required from the bulls to break through the area of increased supply. The shooting star pattern provides evidence of a clear rejection of prices at that resistance level. This provides a lower risk or higher probability trade in the short direction.

Instead of entering long on a cross reversal pattern, just because it matches the cross on candlestick patterns, conduct further analysis to see where this pattern occurs within the bigger picture of market structure. The trend may show a strong and accelerating move downward, on greatly increased volume, extending price rapidly to great distances below its average. This is an area where I expect increased demand. The cross shows a clear halting of the rapid move down, and allows me an opportunity to enter a low risk trade close to an area of major price support.

The end result might be the same. Over a lifetime of trading this approach will produce more favorable results than just entering because the pattern matched.

The market structure defines where we trade. The trigger, whether a candlestick pattern or some other form of entry trigger, tells you when to get in, only when you’ve first met the requirements of the market structure rule.

Think about where the current price movement is within a structure of support and resistance. Think about the changing strength of the current trend, or price swing, as it approaches this area of support or resistance. Watch for signs of strength or weakness in the trend, through the clues obvious in changes of drive and instability.

And don’t forget – always use stops, because there are no guarantees. This is a game of chance.

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History of Spread Betting – A Brief History of the Financial Markets

June 24, 2009 – 3:43 pm

In the past hundreds of years, companies and wealthy derived the asset values of other sources only to invest and mange their risks. They exist for everything from sugar, rice and wheat to the price of gold or the level of rainfall. Spread betting and CFD (Contracts for Difference) are intense relatives of the most derivatives. These retail derivatives make international markets accessible to normal investors and can reduce their tax liabilities for spread betting. To flourish it must expand its community to include ethnic minority and older customers while considering product development and how best to market the products to all its customers.

Introduction

American comedian Ambrose Bierce, in the late 19th century wrote that, “gambling known as commerce looks with ascetic disfavor upon the business known as gambling”. It’s been the same till recent years. It provides the spread betting business with perhaps one of its most noteworthy challenges – how to induce the consumer that essentially there is no distinction between conventional trading and spread betting. With the probable exception of those who spend in companies for the sake of the business itself, and leave their capital with that company, the definition sufficiently covers most spread betting.

Thoughtful that it is not the invention that carries intrinsically more or less risk but the person and attitude using that product would help not only the individual purchaser but also industry, legislators and the regulators. Such an accepting would, for example, have produced an entirely different declaration by the House of Lords in the Hammersmith & Fulham `swaps’ case of the late 80s. In 1991 the Hol lined that local power interest rate swaps were illegal. Their lordships ruled in this way not because the swaps were used as prevarication instruments but because they were used illegally in this particular instance. The authenticity was that it was the performance of the councilors that was at fault and not the monetary products or the concept of hedging. Covering risk on behalf of the rates-payers seems an eminently rational activity. The real issue that led to such a poor ruling by their lordships was that the process smacked of making a bet in the traditional usage of word and was, therefore, considered as being overly risky. In fact, the informed proficient gambler is the same animal as the fund manager, someone who is paid to be more knowledgeable about investment/betting than the individual placing money with that expert.

Almost any agreement can be habituated to suit the particular risk uniqueness of the individual consumer. And, in fact, products can start with one purpose and are utilized for another. Indeed, financial derivatives originally appeared in the early 1970s as offset to the precariousness introduced into the markets by the collapse of the Bretton Woods system of fixed swap rates. Example for spread betting is the expansion of credit derivatives that were originally intended to reduce the risk and experience of organizational finances by building in firmness and preventability and consequently insuring against volatility.

However, gamblers instantaneously documented that you did not really need to own a product in order to be able to trade its derivatives, you could very simply bet on how the market would move or spread betting. Thus a product projected to increase firmness could be used in a approach that would actually act as a instability vigor multiplier. One of the JP Morgan team that originally developed the credit derivative remarked, when asked how she got into the business, “I had read Liar’s Poker and thought that trading derivatives sounded sexy and fun”. That’s gambler-speak.

Conditions

Traditionally, financial institutions had a benefit over person traders. The institutional traders had immediate access to global markets, commodities and currencies from their desks in the City. They could poise a mass of risks and grasp opportunities not easily available to individual investors or even to their brokers. Apparent economic threats from abroad, such as the rise of the Japanese economy posed less of a dilemma for institutions because they could easily diversify into foreign stock markets. Similarly, the gathering rivalry from emerging economies today has provided a similar opportunity, rather than a danger.

The cutting edge of globalization and knowledge gave banks easier access to very traditional financial products. Ironically, despite all the new technology, the instruments used by the banks were the same familiar products. Possessions such as commodities or entire national stock markets were traded through old-fashioned futures contracts.

A futures contract is the simplest outline of a derivative product, a safety where the price is derived from the price of something else. The earliest examples of futures contracts date back 3,800 years to Babylonian farmers’ sales of grain. The farmer and his client could manage their risks because they know how to do spread betting. Both parties could serenely plan ahead, safe in the knowledge that the price they agreed many months before would be adhered to. Unanticipated events such as price slumps from buffer harvests or profiteering during droughts could be avoided.

Moderately than the individual deals of the antique world, modern futures contracts are usually traded on relations. Nevertheless, this particular aspect of spread betting modernity probably started back in Japan in the 1600s. During the initial 3,500 year period of futures contracts every contract tended to be different. Each contract would be based on the quantity of grain that a specific farmer was selling to their customer. By 1865 the fifteen year old Chicago Board of Trade (CBOT) was serving the needs of most Midwestern grain farmers and buyers. They decided to regulate their contracts’ excellence, amount, liberation times and position – price was, therefore, resolute by market forces within the exchange. For example, the CBOT contract size for wheat is 5,000 bushels and the liberation months are March, May, July, September and December. Each contract is for the same corporeal amount of grain and you would trade as many contracts as required. Rather than a bespoke 50,000 bushel wheat contract to be delivered in September, the executed trade would be for ten September wheat contracts.

Former to this standardization, spread betting is complicated to contrast deals. By making pricing more translucent traders are able to see clearly what the market price is for the wheat that will be delivered in September. By the late 1960s the exchanges began rendering futures contracts on non-agricultural merchandise. For the first time there was a market for trading gold and silver futures – the right to receive or deliver the metals at a later date. Over the last century swap trading in futures contracts has unmitigated to many of the commodities we take for approved in our daily lives like corn, soybeans, cattle, pork, cocoa, sugar, coffee, copper and platinum to name but a few. Trading in futures also dominates how we view the power markets. The oil and natural gas rates we read about in the news are determined by trading in the energy futures markets of London and New York. If evidence were needed of the significance of this to the average inhabitant it can be found in the recent 20%-plus rises in domestic gas prices which were directly linked to the futures purchasing model.

The jeopardy organization tools initially used by farmers were so simple they were functional to other markets. It was realized that the product itself is actually immaterial; it is insignificant as to whether the underlying asset is wheat, cattle or gold. It was only a matter of time before the simplicity of futures would lead to a whole new breed of financial products for banks and investment funds – traded financial derivatives. Exchange traded futures contracts on fiscal instruments had not existed prior to this.

The American markets were not alone in taking up financial futures but competition between the international future exchanges has led to futures contracts on wide range of financial goods since the 1970s. Single stock futures exist for most of popular shares in Britain and the continent and there are even futures contracts on macroeconomic production, inflation and GDP in spreads betting.

The Present

The uncomplicated idea behind future contracts is so helpful that they are now used in a spectacular number of areas. Futures contracts are also traded on the right to spread betting. The industrialization that fuels this deal also drives contamination fears and international parameter of emissions from companies. Now companies can trade their emissions quotas. The increasingly volatile weather of recent years has become an increased risk to companies. As a consequence those companies are increasingly turning to futures contracts on rainfall, snowfall, frost and the temperature.

The present day farmers would be astonished at how accepted derivatives have become by spread betting. The number of markets and benefit classes they now coat are imposing and their commercial usage is commonplace. Everyday corporations use them to manage the risks affecting their businesses, such as foreign exchange or interest rate risks.

Novelty is, of course, never-ending. The banks have urbanized more complicated “exotic” derivatives from plain vanilla derivatives such as futures contracts through spread betting. The value of an exotic derivative could be based on any number of conditions and often using more than one fundamental asset, perhaps a mix or container of stocks or possessions.

An example of spread betting might be a security that pays interest, similar to a bond; however, this interest imbursement is instead dogged by returns on an index of traded commodities; this interest payment will continue until the expiry of the contract unless one of five specified stocks rises 10% above its price at the start of the contact.

Financial products have become multifaceted and derivative in a recursive in spread betting. More affluent investors might have enough capital to open their own futures trading accounts but even they would still face several limitations. Constrained to their domestic market only, they would still be isolated from trading or managing the risks from international stock markets. Notwithstanding this, however they manage to trade foreign markets, their overseas investments would still be vulnerable to a plunge in value of the foreign currency of their investment while spread betting. And these are the problems that just the richer investors face.

Contracts For Difference (CFD)  and Spread Betting

The unfairness in accessing to the complete range of spread betting opportunities that a new breed of firm sees as an opportunity. They have presented novel ways for investors to trade the markets and manage their risks. Financial spread betting and contracts for difference (CFDs) give standard investors the chance to trade a wide range of assets from a single account. Spread betting permits investors to bet on price movements in the markets, and not just metaphorically. Legally, spread betting is defined as gambling. The investor only bets on moves in promote price without any of the reimbursement, or encumbrances, of ownership or the opportunity to take actual delivery of the real asset.

Spread betting plant by being quoted two rates for a deal that are around the current market price, known as `the spread’. The higher price is what you “buy” at and the lower price is what you can “sell”. An investor would bet a certain amount of money for each unit the price changes from the price traded. The purpose is the same as for conventional asset, making money by predicting how share prices will behave. The spread is parallel to the commission you pay to trade. If you buy and sell before prices change you would lose the value of the spread. The final profit or loss is a multiple of the stake multiplied by the amount that the price has moved in the specified direction.

The explanation of a CFD appears comparable to spread betting. The investor does not own the real asset and benefits from a change in its value. The disparity is that CFDs are intended to duplicate all the financial benefits of share possession bar voting rights. Dividends and rights issues are replicated by crediting the account as if each CFD were an actual share.

Spread betting and contracts for variation are the various tax benefits compared to conventional investments is a major attraction. CFDs and spread bets do not endow ownership of the primary asset or related voting rights and so are not subject to stamp duty. Spread betting falls within gaming laws, it is also exempt from capital gains tax and so spread betting is completely tax free. CFDs have no settlement date, because the intention is replication of share cash-flows.

At the same time, financial spread betting has the tariff profit of gambling, the leading industry players are not part of the traditional gambling industry. They are owned by financial firms whose businesses specialise in currencies, commodities and financial derivative products. This allows instructions in scrupulous to take on forms that would not be possible on an exchange, such as guaranteed stop-loss orders. Some markets can have their stop-losses guaranteed, even if the underlying price moves through your stop-loss level. This eliminates the risk of slippage or market gaps. An additional significant contemplation is that spread betting on foreign securities is based on the numerical value of the traded price rather than the currency value.

Spread betting and CFDs are very analogous to futures contracts. The trades are established in cash like the bulk of financial futures, with your profits or losses accounted for on the balance of your account. This has several benefits. To make capital on the way down you can take “short” positions, and most easy and inexpensive in spot markets such as normal shares. Alternatively, a short spread bet or CFD position could be used to hedge against losses in a real share already owned, locking in a profit without incurring a tax liability. The other appeal of CFDs and spread betting is that they are margin products, giving the investors the option of leveraging up their trades. An example for spread bet is, if an investor may require locking in the current profit from a Vodafone trade but cannot cash in the profit because the shares serve as security for other personal obligations. Instead of selling his Vodafone shares he could ‘short’ a Vodafone CFD to benefit from any fall in price to reimburse for any fall in the share value.

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