Some of the rules were quite pertinent to stock trading, with the substitution of an occasional word. In honor of Sir Seeker, I offer some Rules of Trading:
1- Every takeoff (buy) is optional. Every landing (sell) is mandatory.
2- Flying (trading) isn't dangerous. Crashing is what's dangerous.
3- It's always better to be on the sidelines wishing you had bought the stock that is up there, rather than down there wishing you hadn't bought that stock.
4- A good landing (sell) is one from which you can walk away. A "great" landing (sell) is one after which you can use the plane (money) again.
5-Learn from the mistakes of others. You won't live long enough to make them all yourself.
6- Good judgment comes from experience. Unfortunately, experience usually comes from bad judgment.
7- Keep looking around. There's always something you've missed. (earnings report about to be released? Ex-dividend?)
8- Never let an aircraft (stock) take you somewhere your brain didn't get to five minutes earlier. (Refer to Rule 1: do you know where/why you are going to sell?)
9- There are 3 simple rules for making a smooth landing (good exit). Unfortunately, no one knows what they are.
10- You start with a bag full of luck (money) and an empty bag of experience. The trick is to fill the bag of experience before you empty the bag of luck (money)
Saturday, December 27, 2008
Sunday, December 7, 2008
Friday, November 14, 2008
KEY REVERSAL
Key Reversal requirements:
1. The Open must be below yesterday's Close,
2. The day must make a new Low,
3. The Close must be above yesterday's High.
4. Volume must be significantly higher than the prior day.
5. The signals are most reliable if they occur after a strong trend.
Edwards and Magee (authors of the highly regarded classic text -- Technical Analysis of Stock Trends) state that key reversals are short-term trading patterns only.
Probabilities of Key Reversals continuing the next day.
Note: for Downward Key Reversals The probability that the next day closing price is lower than the downward Key reversal Close has been 49% for Down Key Reversals. No data on upward Key Reversals, but the downside would suggest today a toss up on a positive close.
Key Reversals reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars.
They are normally not suitable as signals for long-term investors unless viewed as monthly bars.
Our third day candle, this next Monday, will be the most important for determining if this turn is powerful. It will need to close over today close and high for yesterday to have meaning.
That begs the question what about tomorrow, that can be either up, or down, as long as we don't take our yesterday's Key Reversal low.
The large change in position of the opening and closing prices signifies that one side of the market has lost complete commitment and control has shifted to the other side of the market.
You can find other key reversal candlestick formations in the Japanese Candlestick literature
Today it is most likely that we get a good pullback from Thursday's close in the morning and a negative close for the day.
The real test of the markets will be on Monday, and can it take out Thursday's high.
A positive Key Reversal Day consists of the following attributes.
1. It must occur as the latest in a decline of at least several days.
2. It must carry into new low ground for that decline.
3. It must then rally to a level higher than the previous close. The higher the better.
4. It must close with an advance for the day.
5. It must close in the upper half of its own range for the day.
6. Volume must increase markedly.
1. The Open must be below yesterday's Close,
2. The day must make a new Low,
3. The Close must be above yesterday's High.
4. Volume must be significantly higher than the prior day.
5. The signals are most reliable if they occur after a strong trend.
Edwards and Magee (authors of the highly regarded classic text -- Technical Analysis of Stock Trends) state that key reversals are short-term trading patterns only.
Probabilities of Key Reversals continuing the next day.
Note: for Downward Key Reversals The probability that the next day closing price is lower than the downward Key reversal Close has been 49% for Down Key Reversals. No data on upward Key Reversals, but the downside would suggest today a toss up on a positive close.
Key Reversals reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars.
They are normally not suitable as signals for long-term investors unless viewed as monthly bars.
Our third day candle, this next Monday, will be the most important for determining if this turn is powerful. It will need to close over today close and high for yesterday to have meaning.
That begs the question what about tomorrow, that can be either up, or down, as long as we don't take our yesterday's Key Reversal low.
The large change in position of the opening and closing prices signifies that one side of the market has lost complete commitment and control has shifted to the other side of the market.
You can find other key reversal candlestick formations in the Japanese Candlestick literature
Today it is most likely that we get a good pullback from Thursday's close in the morning and a negative close for the day.
The real test of the markets will be on Monday, and can it take out Thursday's high.
A positive Key Reversal Day consists of the following attributes.
1. It must occur as the latest in a decline of at least several days.
2. It must carry into new low ground for that decline.
3. It must then rally to a level higher than the previous close. The higher the better.
4. It must close with an advance for the day.
5. It must close in the upper half of its own range for the day.
6. Volume must increase markedly.
Thursday, November 13, 2008
KEY REVERSAL
A positive Key Reversal Day consists of the following attributes.
1. It must occur as the latest in a decline of at least several days.
2. It must carry into new low ground for that decline.
3. It must then rally to a level higher than the previous close. The higher the better.
4. It must close with an advance for the day.
5. It must close in the upper half of its own range for the day.
6. Volume must increase markedly.
1. It must occur as the latest in a decline of at least several days.
2. It must carry into new low ground for that decline.
3. It must then rally to a level higher than the previous close. The higher the better.
4. It must close with an advance for the day.
5. It must close in the upper half of its own range for the day.
6. Volume must increase markedly.
Friday, October 31, 2008
MISTAKES ARE FOR HUMANS
Mistakes Are the Downfall of Most Traders
by
Van K. Tharp, Ph.D.
In my experience, I find that it is very easy to design a system that will produce great returns (even 100% or more). What?s difficult is actually trading the system and getting those returns. In this article, I?ll show you how easy it is to develop a great system, how mistakes can be your downfall, and how to correct the mistakes you make.
Thinking of Your Results in Terms Risk-to-Reward
One of my fundamentals of trading success is that you must have a predetermined exit point before you enter into a trade. This exit point represents your worst-case risk in that trade. Let?s call risk, R, for short, and look at a few examples.
Suppose you decide to by something at $40 and sell it if it drops 10% to $36. Your risk in this case is $4. If you are buying stock, it means your risk is $4 per share. Now suppose you have $100,000 in equity and want to risk 2% or $2000 in this trade. This means that you can afford to buy 500 shares of stock (i.e., divide your total risk of $2000 by your per-share risk of $4 and you get 500 shares). Notice that you would be buying $20,000 worth of stock, but that your initial risk would only be 10% of that (because of your 10% stop) or $2,000. I?m not recommending any of these numbers (i.e., 10% stops or 2% risk); I am merely using them as examples.
Let?s look at some more examples. Suppose you have a $200,000 portfolio. You want to buy 10 stocks, each with a 1% risk and 10% stops. You can do that and you will be fully invested. Now suppose that you have bought those positions and you get the following rules as shown in Table 1. The table shows the profit and loss on each position and then expresses the result as a multiple of the initial $2000 risk. This is an example of presenting your results as R-multiples.
There are several key things you should look at in this system. First is the expectancy of the system, which is the average R-multiple produced by the system. In this instance, the expectancy is 1.47R. When your sample is large enough, and this means 30 to 100 examples, then your expectancy will also tell you what you can expect to make, on the average, over a large number of trades. Half of your results will be above the expectancy and half of your results will be below the expectancy, but on the average over many trades your results should equal the expectancy.
Table 1: Expressing Your Results as R-multiples
Trade Profit/Loss R-Multiple (1R =$2000)
1 -$1825 (0.91)
2 -$600 (0.30)
3 -$1600 (0.80)
4 -$1400 (0.70)
5 +$12,800 6.40
6 -$1280 (0.64)
7 +$9300 4.65
8 +$2350 1.18
9 -$3600 (1.80)
10 $14,200 7.10
Totals $28,345 14.18
Average $2834.50 1.42
Let?s say that your expectancy over 100 trades is 1.5R and that your system produces about 60 trades per year. Under those conditions, you might expect to make about 90R (i.e., 60 times 1.5R = 90R) per year. And if you risked 1% of your total current equity on each trade, then you could easily make 100% per year.
?But wait,? you say, ?this is really stretching things. For example, 90R is the average return you might get, but half the time the return will be better and half the time the return will be worse.? Well, my response to that statement is that 90R per year is a reasonable result for a good system. In fact, I?ve seen many systems results that are much better than the results in this example. A system that could deliver a return of 100% per year is not that difficult to design.
Remember that we are now thinking in terms of R-multiples. A 10R gain now means that you only have to make 10 times your risk, not 10 times your investment. And since your risk was only 10%, it means that if we double our investment, we have a 10R. And in my experience, it is not that difficult to develop a system that has occasional gains of 10R or more. The big problem is that most people, once they have developed such a system, cannot trade it effectively.
Why Isn't Everyone Making These Returns?
Because people make mistakes. The average person will never achieve anywhere near the expected return from their system because they make mistakes. So what is a mistake? My best definition of a mistake is not following your rules. For people who don?t have any written trading rules, everything they do is a mistake. So let?s look at some common mistakes. These are mistakes that I see professional traders make (not just the average person) all the time.
Not taking a trade that is signaled by your system because you are afraid, not automated, or just are not paying attention.
Taking a trade because of emotions or excitement or just not realizing it.
Keeping a mental stop and then letting the price run right through it.
Trading several systems at the same time with conflicting results and doing it in the same account.
Having position sizing that is too large. (2% is pretty risky, but sometimes people risk 5-10% or more).
These mistakes are very costly. Our preliminary research suggests that an average mistake is worth about 4R. I don?t know if that number will stand up over many, many examples, but that?s my current best guess for the value of a mistake. So what if you make two such mistakes each month? That means you are making 8R worth of mistakes every month. Again, I don?t know how many mistakes the average trader will make, but I do know that the more active you are, the more mistakes you will make.
If your mistakes add up to 8R each month, then you are making 96R worth of mistakes each year. And if we apply it to the original example I gave, in which your system makes 90R per year, you have a net result of negative 6R. Thus, you?ve now turned a winning system into a net losing system by your mistakes. And what usually happens is that you decide that your system is broken and stop trading it. But the system is perfectly fine; it is just your mistakes that are the problem.
Notice that you are making 60 trades each year and about 24 mistakes. In terms of mistakes, we might say that you are 60% efficient. But in terms of results, you are in the hole, so we?d have to call you totally inefficient.
Mistake Examples
One of the keys to correcting mistakes is to recognize them. For example, I sometimes play a marble game at talks. Marbles are pulled out of a bag, each representing a different R-multiple of a trading system. Each marble is replaced after it is pulled. The expectancy of the game is 0.8R and usually we do 30 trades. That means that everyone should be up (on the average) 24R at the end of the game. However, when starting with $100,000, I?ll see a third of the room go bankrupt and another third of the room lose money because of position sizing mistakes. For example, if you risk it all on the first trade and you get a 1R loser, then you are bankrupt. You cannot play any more and have no chance to get the 0.8R expectancy.
But what do most of these people say when they play the game? First, we have the justification response: ?This isn?t like real trading; it?s just a stupid game.? Next, we have the guilt response: ?I was a stupid idiot.? And last, we have the most common response, the blame response: ?I lost money because the marble pull was bad and that guy pulled out a losing marble for me. I?m just unlucky.?
In this instance, most people don?t even recognize their mistakes because they are blaming, justifying, or putting themselves through a guilt trip. Yet the mistake, of course, was that they went bankrupt because they bet too much on the marble pull. And if you don?t recognize your mistake, how can you correct it? You cannot. Instead, you?ll probably repeat it until you give up.
Let?s look at another example that represents real life trading. Let?s look at a fictional trader, Morgan Green. She has a system that produces 100R each year, but makes a lot of mistakes that she doesn?t recognize. Let?s look at a few examples of her mistakes.
She hears a stock recommendation on the television, gets excited about the stock and buys 1000 shares. She loses money. What?s her mistake? In this case, she didn?t follow her system. Instead, she bought impulsively based upon her excitement and her ability to be influenced by outside sources.
Morgan blames the guru on television for the mistake and as a result, doesn?t recognize her own mistake. This is an even bigger mistake and as a result there will always be another analyst on the television that she can blame for his bad recommendations. Here is the key principle: When people don?t recognize their mistakes, they are doomed to repeat them until they recognize them.
Morgan subscribes to several newsletters. She reads each of them and then picks several stocks to buy. She spends $20,000 on these stocks and they all sit in her portfolio and slowly go down. After a year, she is down $2000. And Morgan has missed many good trading opportunities because her account has these losers.
Morgan now cancels all of her newsletters, thinking that none of them are any good because she didn?t make money. But one of them had excellent returns if she?d taken all of the recommendations. However, she only decided to take certain recommendations?the ones that excited her. So then she thought it was the newsletter editor?s fault that she lost money.
Notice all the mistakes she made here.
She only picked stocks because of excitement rather than treating each newsletter as a system and taking every trade.
She blamed the newsletters for the mistake.
She held stocks that were doing nothing, missing many opportunities to buy better stocks because her account was fully invested.
And, she didn?t recognize any of her mistakes, so she can easily repeat them (and likely will).
And here is another common mistake that I see all the time.
Morgan?s system produces eight losses in a row, which is quite common even in a system that makes money 50% of the time. However, Morgan becomes afraid and stops taking trades. When she stops trading, she misses a 25R winner.
Later, Morgan starts to study the market again and she notices the big winner she missed. Her reaction is to say, ?Oh, I?m a stupid idiot. My system signaled that trade, why didn?t I take it?? So Morgan is now getting into self-blame and she?s again missing her key mistake. When you recognize your mistakes, you can take the steps that are necessary to correct them. Calling yourself ?a stupid idiot? does nothing to correct the mistake.
I could go on about the types of mistakes that people make. Perhaps you have recognized yourself in some of the examples. The main point is that people make lots of mistakes, which prevent them from doing well and getting great results from good systems. And this is not just the average trader. We are talking about many professional traders as well.
The Solution: One of the 10 Tasks of Trading
I?ve been modeling successful traders over the last 25 years. And out of that research, I?ve developed the 10 Tasks of Trading, which is a part of the Peak Performance Course. Most of those tasks will help you with correcting mistakes, but one of them in particular, the daily debriefing, is designed to help you fix mistakes.
The daily debriefing requires about five minutes at the end of the trading day. Think about what happened during the day and look at your written trading rules first. Also remember that if you don?t have such rules, then you are not ready to trade and everything you do might be considered a mistake.
The next step is to ask yourself one simple question, ?Did I follow my rules?? If the answer is yes, then simply pat yourself on the back and go home (or if you are home do something else). You are done. And if you lost money and followed your rules, then you might pat yourself on the back twice.
But what if you lost money by not following your rules? What you now do is simply make sure that you don?t do it again. This requires looking for the conditions that produced the mistake, figuring out some solution to make sure you don?t repeat the mistake, and then mentally rehearsing that behavior until it becomes second nature to you.
Repeating the same mistake over and over again is what I call self-sabotage and that?s an entirely different issue. But your job as a disciplined trader is to make sure that you continually correct each mistake so that you NEVER repeat it.
So let?s go over the rehearsal process. What you need to do is discover the conditions that lead to the mistake. Next, you want to anticipate how those conditions might occur again. For example, let?s say the mistake is that you listened to some investment advice on television. How can you prevent that from happening again?
First, the conditions that lead to the mistake were the following:
Watching the financial channel during the day.
Not controlling your mental state so that you were excited by the financial advice you heard.
Preventing the mistake might simply amount to avoiding both of those conditions. First, you could resolve not to watch television while you are trading or at least turn off the sound. Second, think about making a checklist that must be filled in before you purchase anything. The checklist will consist of your buying criteria, which will probably not be met by some guru?s recommendation on the television. And your last resolution is to never again take a trade without filling in the checklist and making sure that all your criteria are met.
Your next step is to rehearse your solution. This makes your actions automatic so that you don?t have to think about it. For example, you could imagine yourself filling out numerous checklists in your mind. You could imagine yourself turning off the television or hearing the words ?STOP? very loudly in your mind if you reach to turn on the television during the day. You must do each of these things a number of times in your head until both of them become automatic for you.
Do a regular daily debriefing and pretty soon you?ll find that your number of mistakes drops dramatically. My guess is that you?ll eliminate most of your mistakes within a few months. But if you stop your daily debriefing, you may find that your mistakes again start to occur. But that?s another example of self-sabotage and that?s another story
by
Van K. Tharp, Ph.D.
In my experience, I find that it is very easy to design a system that will produce great returns (even 100% or more). What?s difficult is actually trading the system and getting those returns. In this article, I?ll show you how easy it is to develop a great system, how mistakes can be your downfall, and how to correct the mistakes you make.
Thinking of Your Results in Terms Risk-to-Reward
One of my fundamentals of trading success is that you must have a predetermined exit point before you enter into a trade. This exit point represents your worst-case risk in that trade. Let?s call risk, R, for short, and look at a few examples.
Suppose you decide to by something at $40 and sell it if it drops 10% to $36. Your risk in this case is $4. If you are buying stock, it means your risk is $4 per share. Now suppose you have $100,000 in equity and want to risk 2% or $2000 in this trade. This means that you can afford to buy 500 shares of stock (i.e., divide your total risk of $2000 by your per-share risk of $4 and you get 500 shares). Notice that you would be buying $20,000 worth of stock, but that your initial risk would only be 10% of that (because of your 10% stop) or $2,000. I?m not recommending any of these numbers (i.e., 10% stops or 2% risk); I am merely using them as examples.
Let?s look at some more examples. Suppose you have a $200,000 portfolio. You want to buy 10 stocks, each with a 1% risk and 10% stops. You can do that and you will be fully invested. Now suppose that you have bought those positions and you get the following rules as shown in Table 1. The table shows the profit and loss on each position and then expresses the result as a multiple of the initial $2000 risk. This is an example of presenting your results as R-multiples.
There are several key things you should look at in this system. First is the expectancy of the system, which is the average R-multiple produced by the system. In this instance, the expectancy is 1.47R. When your sample is large enough, and this means 30 to 100 examples, then your expectancy will also tell you what you can expect to make, on the average, over a large number of trades. Half of your results will be above the expectancy and half of your results will be below the expectancy, but on the average over many trades your results should equal the expectancy.
Table 1: Expressing Your Results as R-multiples
Trade Profit/Loss R-Multiple (1R =$2000)
1 -$1825 (0.91)
2 -$600 (0.30)
3 -$1600 (0.80)
4 -$1400 (0.70)
5 +$12,800 6.40
6 -$1280 (0.64)
7 +$9300 4.65
8 +$2350 1.18
9 -$3600 (1.80)
10 $14,200 7.10
Totals $28,345 14.18
Average $2834.50 1.42
Let?s say that your expectancy over 100 trades is 1.5R and that your system produces about 60 trades per year. Under those conditions, you might expect to make about 90R (i.e., 60 times 1.5R = 90R) per year. And if you risked 1% of your total current equity on each trade, then you could easily make 100% per year.
?But wait,? you say, ?this is really stretching things. For example, 90R is the average return you might get, but half the time the return will be better and half the time the return will be worse.? Well, my response to that statement is that 90R per year is a reasonable result for a good system. In fact, I?ve seen many systems results that are much better than the results in this example. A system that could deliver a return of 100% per year is not that difficult to design.
Remember that we are now thinking in terms of R-multiples. A 10R gain now means that you only have to make 10 times your risk, not 10 times your investment. And since your risk was only 10%, it means that if we double our investment, we have a 10R. And in my experience, it is not that difficult to develop a system that has occasional gains of 10R or more. The big problem is that most people, once they have developed such a system, cannot trade it effectively.
Why Isn't Everyone Making These Returns?
Because people make mistakes. The average person will never achieve anywhere near the expected return from their system because they make mistakes. So what is a mistake? My best definition of a mistake is not following your rules. For people who don?t have any written trading rules, everything they do is a mistake. So let?s look at some common mistakes. These are mistakes that I see professional traders make (not just the average person) all the time.
Not taking a trade that is signaled by your system because you are afraid, not automated, or just are not paying attention.
Taking a trade because of emotions or excitement or just not realizing it.
Keeping a mental stop and then letting the price run right through it.
Trading several systems at the same time with conflicting results and doing it in the same account.
Having position sizing that is too large. (2% is pretty risky, but sometimes people risk 5-10% or more).
These mistakes are very costly. Our preliminary research suggests that an average mistake is worth about 4R. I don?t know if that number will stand up over many, many examples, but that?s my current best guess for the value of a mistake. So what if you make two such mistakes each month? That means you are making 8R worth of mistakes every month. Again, I don?t know how many mistakes the average trader will make, but I do know that the more active you are, the more mistakes you will make.
If your mistakes add up to 8R each month, then you are making 96R worth of mistakes each year. And if we apply it to the original example I gave, in which your system makes 90R per year, you have a net result of negative 6R. Thus, you?ve now turned a winning system into a net losing system by your mistakes. And what usually happens is that you decide that your system is broken and stop trading it. But the system is perfectly fine; it is just your mistakes that are the problem.
Notice that you are making 60 trades each year and about 24 mistakes. In terms of mistakes, we might say that you are 60% efficient. But in terms of results, you are in the hole, so we?d have to call you totally inefficient.
Mistake Examples
One of the keys to correcting mistakes is to recognize them. For example, I sometimes play a marble game at talks. Marbles are pulled out of a bag, each representing a different R-multiple of a trading system. Each marble is replaced after it is pulled. The expectancy of the game is 0.8R and usually we do 30 trades. That means that everyone should be up (on the average) 24R at the end of the game. However, when starting with $100,000, I?ll see a third of the room go bankrupt and another third of the room lose money because of position sizing mistakes. For example, if you risk it all on the first trade and you get a 1R loser, then you are bankrupt. You cannot play any more and have no chance to get the 0.8R expectancy.
But what do most of these people say when they play the game? First, we have the justification response: ?This isn?t like real trading; it?s just a stupid game.? Next, we have the guilt response: ?I was a stupid idiot.? And last, we have the most common response, the blame response: ?I lost money because the marble pull was bad and that guy pulled out a losing marble for me. I?m just unlucky.?
In this instance, most people don?t even recognize their mistakes because they are blaming, justifying, or putting themselves through a guilt trip. Yet the mistake, of course, was that they went bankrupt because they bet too much on the marble pull. And if you don?t recognize your mistake, how can you correct it? You cannot. Instead, you?ll probably repeat it until you give up.
Let?s look at another example that represents real life trading. Let?s look at a fictional trader, Morgan Green. She has a system that produces 100R each year, but makes a lot of mistakes that she doesn?t recognize. Let?s look at a few examples of her mistakes.
She hears a stock recommendation on the television, gets excited about the stock and buys 1000 shares. She loses money. What?s her mistake? In this case, she didn?t follow her system. Instead, she bought impulsively based upon her excitement and her ability to be influenced by outside sources.
Morgan blames the guru on television for the mistake and as a result, doesn?t recognize her own mistake. This is an even bigger mistake and as a result there will always be another analyst on the television that she can blame for his bad recommendations. Here is the key principle: When people don?t recognize their mistakes, they are doomed to repeat them until they recognize them.
Morgan subscribes to several newsletters. She reads each of them and then picks several stocks to buy. She spends $20,000 on these stocks and they all sit in her portfolio and slowly go down. After a year, she is down $2000. And Morgan has missed many good trading opportunities because her account has these losers.
Morgan now cancels all of her newsletters, thinking that none of them are any good because she didn?t make money. But one of them had excellent returns if she?d taken all of the recommendations. However, she only decided to take certain recommendations?the ones that excited her. So then she thought it was the newsletter editor?s fault that she lost money.
Notice all the mistakes she made here.
She only picked stocks because of excitement rather than treating each newsletter as a system and taking every trade.
She blamed the newsletters for the mistake.
She held stocks that were doing nothing, missing many opportunities to buy better stocks because her account was fully invested.
And, she didn?t recognize any of her mistakes, so she can easily repeat them (and likely will).
And here is another common mistake that I see all the time.
Morgan?s system produces eight losses in a row, which is quite common even in a system that makes money 50% of the time. However, Morgan becomes afraid and stops taking trades. When she stops trading, she misses a 25R winner.
Later, Morgan starts to study the market again and she notices the big winner she missed. Her reaction is to say, ?Oh, I?m a stupid idiot. My system signaled that trade, why didn?t I take it?? So Morgan is now getting into self-blame and she?s again missing her key mistake. When you recognize your mistakes, you can take the steps that are necessary to correct them. Calling yourself ?a stupid idiot? does nothing to correct the mistake.
I could go on about the types of mistakes that people make. Perhaps you have recognized yourself in some of the examples. The main point is that people make lots of mistakes, which prevent them from doing well and getting great results from good systems. And this is not just the average trader. We are talking about many professional traders as well.
The Solution: One of the 10 Tasks of Trading
I?ve been modeling successful traders over the last 25 years. And out of that research, I?ve developed the 10 Tasks of Trading, which is a part of the Peak Performance Course. Most of those tasks will help you with correcting mistakes, but one of them in particular, the daily debriefing, is designed to help you fix mistakes.
The daily debriefing requires about five minutes at the end of the trading day. Think about what happened during the day and look at your written trading rules first. Also remember that if you don?t have such rules, then you are not ready to trade and everything you do might be considered a mistake.
The next step is to ask yourself one simple question, ?Did I follow my rules?? If the answer is yes, then simply pat yourself on the back and go home (or if you are home do something else). You are done. And if you lost money and followed your rules, then you might pat yourself on the back twice.
But what if you lost money by not following your rules? What you now do is simply make sure that you don?t do it again. This requires looking for the conditions that produced the mistake, figuring out some solution to make sure you don?t repeat the mistake, and then mentally rehearsing that behavior until it becomes second nature to you.
Repeating the same mistake over and over again is what I call self-sabotage and that?s an entirely different issue. But your job as a disciplined trader is to make sure that you continually correct each mistake so that you NEVER repeat it.
So let?s go over the rehearsal process. What you need to do is discover the conditions that lead to the mistake. Next, you want to anticipate how those conditions might occur again. For example, let?s say the mistake is that you listened to some investment advice on television. How can you prevent that from happening again?
First, the conditions that lead to the mistake were the following:
Watching the financial channel during the day.
Not controlling your mental state so that you were excited by the financial advice you heard.
Preventing the mistake might simply amount to avoiding both of those conditions. First, you could resolve not to watch television while you are trading or at least turn off the sound. Second, think about making a checklist that must be filled in before you purchase anything. The checklist will consist of your buying criteria, which will probably not be met by some guru?s recommendation on the television. And your last resolution is to never again take a trade without filling in the checklist and making sure that all your criteria are met.
Your next step is to rehearse your solution. This makes your actions automatic so that you don?t have to think about it. For example, you could imagine yourself filling out numerous checklists in your mind. You could imagine yourself turning off the television or hearing the words ?STOP? very loudly in your mind if you reach to turn on the television during the day. You must do each of these things a number of times in your head until both of them become automatic for you.
Do a regular daily debriefing and pretty soon you?ll find that your number of mistakes drops dramatically. My guess is that you?ll eliminate most of your mistakes within a few months. But if you stop your daily debriefing, you may find that your mistakes again start to occur. But that?s another example of self-sabotage and that?s another story
Wednesday, October 29, 2008
EVIL WALL STREET EXPORTS
Evil Wall Street Exports Boomed With `Fools' Born to Buy Debt
Oct. 27 (Bloomberg) -- Tom Bosh lowered the telephone receiver into its cradle, making a decision on the way down. ``We're not buying any more,'' he told his traders at Bank of New York Co. ``Nothing.''
It was May 2007, and Bosh, who managed $25 billion from the bank's 13th-floor trading room above Times Square, had just hung up on Ralph Cioffi at Bear Stearns Cos. a dozen blocks away. Bosh had invested $50 million in notes from an issuer Cioffi controlled, and he was ready to pull the plug.
``I had a bad feeling,'' Bosh, 45, recalled. ``Cioffi was just bulldogging everyone. He was saying, `These assets are good, the collateral is paying down, and I know more than you.' That type of attitude.''
Bosh's premonition, a month before two of Cioffi's funds blew up, struck a death knell for structured finance, the system Wall Street banks devised to fuel more than two decades of unprecedented borrowing. The system allowed financial companies to lend beyond their capacity and outside the reach of regulators -- until it crashed this year.
While the collapse was most visible in the stock markets, the cause was the loss of confidence in the world's biggest bond market, structured finance. So far, it has led to the worst financial crisis since the Great Depression, the disappearance or takeover of more than a dozen banks, including three storied Wall Street firms, and almost $3 trillion in government expenditures and guarantees to contain the contagion.
Biggest U.S. Export
The bundling of consumer loans and home mortgages into packages of securities -- a process known as securitization -- was the biggest U.S. export business of the 21st century. More than $27 trillion of these securities have been sold since 2001, according to the Securities Industry Financial Markets Association, an industry trade group. That's almost twice last year's U.S. gross domestic product of $13.8 trillion.
The growth over the past decade was made possible by overseas banks, which saw the profits U.S. financial institutions were making and coveted the made-in-America technology, much as consumers around the world craved other emblems of American ingenuity from Coca-Cola to Hollywood movies. Wall Street obliged, with disastrous results: two-thirds of a trillion dollars in bank losses, about 40 percent of them outside the U.S.
``Securitization was based on the premise that a fool was born every minute,'' Joseph Stiglitz, a professor of economics at Columbia University in New York, told a congressional committee on Oct. 21. ``Globalization meant that there was a global landscape on which they could search for those fools -- and they found them everywhere.''
Eager Adopters
European banks, in particular, were eager adopters. Securitizations in Europe increased almost sixfold between 2000 and 2007, from 78 billion euros ($98 billion) to 453 billion euros, according to the European Securitization Forum, a trade organization.
Three Icelandic banks borrowed enough to buy $228 billion of assets, most of them securitizations, turning the country's financial system into a hedge fund. All three banks have been nationalized by the government, leading Prime Minister Geir Haarde to advise citizens to switch from finance to fishing.
In Germany, one bank, Landesbank Sachsen Girozentrale, bought $26 billion worth of subprime-backed investments, putting the state of Saxony on the hook for $4.1 billion.
In Japan, Mizuho Financial Group Inc., the nation's third- largest bank, acquired an entire structured-finance team, which proceeded to lose $6 billion issuing mortgage-backed securities.
Shadow Banking
The damage reaches all the way to Australia, where the town council of Wingecarribee, a municipality outside Sydney with a population of 42,000, bought $20 million of securities from Lehman Brothers Holdings Inc. Now, Lehman is in bankruptcy, the town council is in court and the securities are worth about 15 cents on the dollar.
Securitization is a shadow banking system that funds most of the world's credit cards, car purchases, leveraged buyouts and, for a while, subprime mortgages. The system, which pools loans and slices up the risk of default, made borrowing cheaper for everyone, creating a debt culture that put credit cards in wallets from Seoul to Sao Paolo and enabled people to buy luxury cars and homes. It also pumped out record profits for banks, accounting for as much as one-fifth of their revenue over the last decade.
Beginning about three years ago, investment banks revved the system's engine to boost earnings. They raised revenue by funding more subprime mortgages and cut costs by relying increasingly on the $4.2 trillion sitting in U.S. money-market funds. As it turned out, those decisions would prove fatal.
`Powerful Technology'
``It's a powerful technology that has been driven beyond the speed limit,'' said Juan Ocampo, a former consultant at New York-based advisory firm McKinsey %26 Co. who wrote a 1988 book popularizing structured finance. ``For the last five years, instead of going 65 mph, they've been gunning it to 140 mph, 150 mph.''
Before the invention of securitization, banks loaned money, received payments and profited from the difference between what the borrower paid and the bank's funding cost.
During the mid-1980s, mortgage-bond traders at Salomon Brothers devised a method of lending without using capital, a technique at the heart of securitization. It works by taking anything that has regular payments -- mortgages, car loans, aircraft leases, music royalties -- and channeling the money to a trust that pays bondholders principal and interest.
Off-Balance-Sheet
The word ``securitization'' implies safety. Investors with less appetite for risk buy higher-rated securities and get paid first at lower interest rates. Those with a bigger appetite get paid later and receive more interest.
Securitization's biggest innovation was the use of off-balance-sheet accounting. If a bank couldn't sell a bond or didn't want to, the asset could be sold to a trust within a so-called special-purpose entity, incorporated in a place such as the Cayman Islands or Dublin, and shifted off the books. Lending expanded, and banks still booked profits.
With this new technology, a bank could originate $100 million in loans, sell off some to investors, transfer the rest to a special-purpose entity and not have to hold any capital. The profit could be as much as 1.25 percentage points of the amount loaned, or $1.25 million for every $100 million issued.
``The banks could turn a low return-on-equity business into one that doesn't use any equity, which was the motivation for this,'' said Brad Hintz, a Sanford C. Bernstein %26 Co. analyst and former chief financial officer at Lehman. ``It becomes almost like a fee business because it requires no capital.''
`Capture the Prize'
Like most new products, securitization found a market at home before going abroad. Bankers at Salomon and First Boston Inc. raced from bank to bank to convince issuers it was the wave of the future.
William Haley remembers a 10 a.m. meeting in 1987 at Imperial Thrift %26 Loan Association in Glendale, California. As Haley, at the time a 33-year-old Salomon banker, and his team walked into the conference room to make a pitch, the First Boston team was walking out.
``We exchanged some knowing looks and then tried to beat the pants off them,'' said Haley, who now works at RBS Greenwich Capital Markets Inc., a firm specializing in mortgage-backed securities that is owned by Royal Bank of Scotland Group Plc. ``There was a fierce desire to capture the prize.''
First Boston
First Boston, housed in the same New York office tower as McKinsey, was first out of the gate in March 1985 with a $192 million computer-lease securitization for Sperry Corp., a predecessor of Unisys Corp. The bank then oversaw a series of auto-loan securitizations, including a $4 billion issue by General Motors Acceptance Corp. in October 1986, the biggest corporate debt issue at the time.
Haley's project was a $50 million deal for Banc One Corp. called Certificates for Amortizing Revolving Debts, or CARDs. It was the first credit-card securitization and a blueprint for the $358 billion of such securities now outstanding. The transaction also gave the banks a way to securitize their own assets and get them off their balance sheets, which allowed the money to be lent all over again.
The strategy was detailed in Ocampo's 282-page book ``Securitization of Credit: Inside the New Technology of Finance,'' which he co-wrote with McKinsey consultant James Rosenthal. Ocampo, who received an MBA from Harvard after graduating from the Massachusetts Institute of Technology, and Rosenthal, a Harvard Law School graduate, argued that banks could be more profitable if they used securitization.
McKinsey Book
The authors examined six of the first asset-backed transactions and gave readers a step-by-step guide for how to repeat them. They said that banks that didn't embrace the new technology would be at a disadvantage, and they predicted it would become the dominant form of financing.
``The McKinsey book helped with credibility with issuers,'' said Haley. ``It wasn't that easy in the beginning. Conferences now have thousands of people, but I remember once in Beverly Hills, I gave a speech and there were maybe 25 people in the audience. They were furiously taking notes, however.''
The new technology was spread around the world by the people who worked on the First Boston and Salomon teams. Salomon's group was led by Patricia Jehle, who later founded Bear Stearns's asset-backed unit. Another member, Michael Hutchins, started the first team at a European bank when he went to Zurich-based UBS AG in 1996. A third, Michael Normile, moved to Merrill Lynch %26 Co., where he ran its securities business, then switched to London-based HSBC Holdings Plc in 2004. Haley built similar teams at Lehman, Chase Manhattan Bank and Amsterdam-based ABN Amro Bank NV.
Hard Sell
First Boston's team included Walid Chammah, 54, who went on to head debt and equity capital markets at Morgan Stanley and is now co-president of that firm. Joseph Donovan, the banker responsible for the GMAC relationship, went to Smith Barney in 1995, to Prudential Securities in 1998 and two years later took over the asset-backed group at Credit Suisse First Boston after Zurich-based Credit Suisse bought First Boston.
Donovan remembers traveling to Europe for First Boston in the early 1990s, trying to convince Volkswagen AG in Wolfsburg, Germany, and Renault SA outside Paris of the benefits of securitization. It was a hard sell. Europeans, he said, didn't take out auto loans.
``We tried over and over,'' Donovan recalled. ``We were trying to get more issuers, and there weren't any.''
`50-Year Pedigree'
By the time Donovan went to work for Credit Suisse in 2000, European attitudes had changed. Home-mortgage securitizations were especially appealing, he said, because European banks didn't need a ``50-year pedigree to compete.''
``You don't need a whole equity-research department and relationships with CEOs and CFOs,'' Donovan said. ``You basically needed good computers and distribution. You can always buy a Fannie, Freddie or Ginnie Mae pool. You just go online and buy it. You can't buy a Ford Motor Credit deal, because you have to know people.''
CSFB went from third in underwriting structured finance in 2000, behind Lehman and Salomon Smith Barney, to first in 2001, when it issued $96.3 billion in securities. Its market share increased 50 percent to 12.7 percent. The bank fell to fourth place in 2005, although its volume soared to $144.5 billion.
Exporting Debt
As securitization caught on, borrowing increased. U.S. consumer debt tripled in the two decades after 1988 to $2.6 trillion, according to the Federal Reserve. Foreign banks used the new technology to expand lending, seeking borrowers on their home turf.
``One of the things the United States exported overseas was a debt culture,'' Haley said.
While consumers were snapping up credit cards, Nicholas Sossidis and Stephen Partridge-Hicks at Citibank in London were figuring out a way to sell the new bonds. Their solution: Alpha Finance Corp., the first off-balance-sheet structured investment vehicle, or SIV.
Alpha was created in 1988 as a way for Citibank, and later Citigroup Inc., to vertically integrate its business like an oil company. The raw material was found in a loan, refined into a security, then sold to a SIV at a profit.
Citigroup, formed in a merger of Citicorp and Travelers Group Inc., which owned asset-backed pioneer Salomon, also got a new product to sell: capital notes that boast returns of more than 20 percent a year. Owners of these notes receive all the excess return when borrowers pay their bills on time, though they are the last to be paid when times get hard.
Citi SIVs
In the beginning, SIVs were small and cautious. Alpha was capitalized with $100 million of equity that supported $500 million of commercial paper and medium-term notes. The SIV could hold only debt rated A- or higher and didn't take any currency or interest-rate risk, according to a 1993 Fitch Ratings report.
Alpha was followed by a slew of SIVs with names such as Beta Corp. and Five Finance. By 2007, Citigroup's SIVs had $90 billion of assets, equal to the stock market value of PepsiCo Inc., making up about one-fourth of the entire SIV industry.
In 2003, the bank was sued by creditors of Enron Corp. for its role in setting up entities that enabled the Houston-based company to move assets off the balance sheet for Chief Executive Officer Jeffrey Skilling. Citigroup paid $1.66 billion in March to settle the lawsuit. Skilling, a former McKinsey consultant, was convicted of accounting fraud and is serving a 24-year prison sentence.
Mismatched Funding
Starting around 2005, securitization began to rely more on short-term money-market funds for financing. This was especially true for securities made by pooling other bonds, known as collateralized debt obligations, or CDOs. Investors were loath to buy long-term debt of issuers that didn't have a track record, so new issuers sold asset-backed commercial paper that matured in less than a year. While money markets are the cheapest way to finance, they can also be the most dangerous for borrowers because they can mature as soon as the next day.
``What happened in 2005 was that because of subprime and some other changes, commercial paper and asset-backed securities offered a bigger spread than anything that had ever been in the market before,'' said Deborah Cunningham, chief investment officer of Federated Investors in Pittsburgh, who oversees $235 billion in commercial paper. ``It was hundreds of basis points, as opposed to 10 or 20 basis points before.''
SIVs, banks and CDOs sold trillions of dollars of asset- backed commercial paper between 2005 and 2007 in maturities ranging from nine months to overnight. In the U.S., the amount outstanding marched higher almost every week beginning in April 2005, peaking at $1.2 trillion for the week ending Aug. 8, 2007.
`Huge Appetite'
Once money-market funds began to be tapped for financing, Ocampo said, ``it created a huge appetite for high-yield assets, far more than could be originated on a sound basis.''
To accommodate the demand, banks funded more subprime mortgages, with an average life of seven years, replacing car loans with an average life of three years and credit-card bonds paid off within 18 months.
Among conservative lenders, that rang an alarm: Bankers are taught to avoid such mismatched funding, in which a lender has to pay back money before the borrower has to pay the principal.
``Most of the terrible things happening now are because of the presence of money-market assets, taking what used to be long-term funding and making it short-term,'' Bruce Bent, 71, who started the first money-market fund in 1970, said in an interview in July.
Reserve Funds
Bent, chairman of New York-based Reserve Funds, said he didn't buy any asset-backed commercial paper until 2007, when the market froze in the wake of the collapse of the Bear Stearns hedge funds. That's when his Reserve Primary Fund began buying castoffs of asset-backed commercial paper at cut-rate prices from other funds.
Yet asset-backed securities weren't Bent's undoing. His fund also owned $785 million in Lehman debt, bought before the firm filed for bankruptcy Sept. 15. In the two days following the bankruptcy, Reserve clients asked to pull about $40 billion from the $62.5 billion fund, and its net asset value fell to 97 cents. It was the first time that a money fund ``broke the buck,'' or fell below $1, in 14 years. The fund is now being liquidated, and Bent hasn't given an interview since.
Reserve Primary Fund's implosion, and the subsequent seizing up of two Commonfund portfolios used by universities and endowments to hold cash, triggered a panic in U.S. money markets, cutting off this form of credit to industrial companies and banks. No one could be sure whether the banks held securitizations that had dropped in value, making them insolvent. That set off a series of bank takeovers and bailouts around the world, including a $64 billion capital injection by the U.K. government into that nation's financial institutions and 400 billion euros in loan guarantees pledged by Germany.
`Absolute Disaster'
``We've created an absolute disaster,'' said Nouriel Roubini, a New York University professor of economics, who predicted the failure of investment banks in a paper he wrote in February titled ``Twelve Steps to Financial Disaster.'' ``The reputation of the United States as a financial center and a leader has been tarnished significantly.''
Also tarnished, if not blackened, is the securitization business itself. Sales of European asset-backed securities, including bonds for car loans and credit cards, fell by 40 percent to 12.7 billion euros in the second quarter, and CDO sales fell by two-thirds to 10 billion euros. In the U.S., mortgage bonds issued by entities not affiliated with the government plummeted to $10.8 billion in the first half of the year, one-twentieth of the $241 billion sold in the same period in 2007.
Cioffi, Bosh
The authors of the 1988 McKinsey handbook on securitization have moved on. Rosenthal, who declined to be interviewed, became a managing director at Lehman and is now in charge of information technology at Morgan Stanley. Ocampo received a patent for risk-controlled investing and founded an institutional fund-management firm, Trajectory Asset Management. The firm doesn't have any structured-finance obligations.
Bear Stearns's Cioffi, 52, was indicted on charges of misleading investors by assuring them that his hedge funds were healthy when he knew they weren't. Cioffi, who now works out of his home in Tenafly, New Jersey, has pleaded not guilty. He declined to comment.
The Bank of New York's Bosh lost his job when his company was merged with Mellon Corp. in June 2007. He's still looking for work.
``You try to do the right thing,'' Bosh said in an interview this month. ``And this is what happens.''
Oct. 27 (Bloomberg) -- Tom Bosh lowered the telephone receiver into its cradle, making a decision on the way down. ``We're not buying any more,'' he told his traders at Bank of New York Co. ``Nothing.''
It was May 2007, and Bosh, who managed $25 billion from the bank's 13th-floor trading room above Times Square, had just hung up on Ralph Cioffi at Bear Stearns Cos. a dozen blocks away. Bosh had invested $50 million in notes from an issuer Cioffi controlled, and he was ready to pull the plug.
``I had a bad feeling,'' Bosh, 45, recalled. ``Cioffi was just bulldogging everyone. He was saying, `These assets are good, the collateral is paying down, and I know more than you.' That type of attitude.''
Bosh's premonition, a month before two of Cioffi's funds blew up, struck a death knell for structured finance, the system Wall Street banks devised to fuel more than two decades of unprecedented borrowing. The system allowed financial companies to lend beyond their capacity and outside the reach of regulators -- until it crashed this year.
While the collapse was most visible in the stock markets, the cause was the loss of confidence in the world's biggest bond market, structured finance. So far, it has led to the worst financial crisis since the Great Depression, the disappearance or takeover of more than a dozen banks, including three storied Wall Street firms, and almost $3 trillion in government expenditures and guarantees to contain the contagion.
Biggest U.S. Export
The bundling of consumer loans and home mortgages into packages of securities -- a process known as securitization -- was the biggest U.S. export business of the 21st century. More than $27 trillion of these securities have been sold since 2001, according to the Securities Industry Financial Markets Association, an industry trade group. That's almost twice last year's U.S. gross domestic product of $13.8 trillion.
The growth over the past decade was made possible by overseas banks, which saw the profits U.S. financial institutions were making and coveted the made-in-America technology, much as consumers around the world craved other emblems of American ingenuity from Coca-Cola to Hollywood movies. Wall Street obliged, with disastrous results: two-thirds of a trillion dollars in bank losses, about 40 percent of them outside the U.S.
``Securitization was based on the premise that a fool was born every minute,'' Joseph Stiglitz, a professor of economics at Columbia University in New York, told a congressional committee on Oct. 21. ``Globalization meant that there was a global landscape on which they could search for those fools -- and they found them everywhere.''
Eager Adopters
European banks, in particular, were eager adopters. Securitizations in Europe increased almost sixfold between 2000 and 2007, from 78 billion euros ($98 billion) to 453 billion euros, according to the European Securitization Forum, a trade organization.
Three Icelandic banks borrowed enough to buy $228 billion of assets, most of them securitizations, turning the country's financial system into a hedge fund. All three banks have been nationalized by the government, leading Prime Minister Geir Haarde to advise citizens to switch from finance to fishing.
In Germany, one bank, Landesbank Sachsen Girozentrale, bought $26 billion worth of subprime-backed investments, putting the state of Saxony on the hook for $4.1 billion.
In Japan, Mizuho Financial Group Inc., the nation's third- largest bank, acquired an entire structured-finance team, which proceeded to lose $6 billion issuing mortgage-backed securities.
Shadow Banking
The damage reaches all the way to Australia, where the town council of Wingecarribee, a municipality outside Sydney with a population of 42,000, bought $20 million of securities from Lehman Brothers Holdings Inc. Now, Lehman is in bankruptcy, the town council is in court and the securities are worth about 15 cents on the dollar.
Securitization is a shadow banking system that funds most of the world's credit cards, car purchases, leveraged buyouts and, for a while, subprime mortgages. The system, which pools loans and slices up the risk of default, made borrowing cheaper for everyone, creating a debt culture that put credit cards in wallets from Seoul to Sao Paolo and enabled people to buy luxury cars and homes. It also pumped out record profits for banks, accounting for as much as one-fifth of their revenue over the last decade.
Beginning about three years ago, investment banks revved the system's engine to boost earnings. They raised revenue by funding more subprime mortgages and cut costs by relying increasingly on the $4.2 trillion sitting in U.S. money-market funds. As it turned out, those decisions would prove fatal.
`Powerful Technology'
``It's a powerful technology that has been driven beyond the speed limit,'' said Juan Ocampo, a former consultant at New York-based advisory firm McKinsey %26 Co. who wrote a 1988 book popularizing structured finance. ``For the last five years, instead of going 65 mph, they've been gunning it to 140 mph, 150 mph.''
Before the invention of securitization, banks loaned money, received payments and profited from the difference between what the borrower paid and the bank's funding cost.
During the mid-1980s, mortgage-bond traders at Salomon Brothers devised a method of lending without using capital, a technique at the heart of securitization. It works by taking anything that has regular payments -- mortgages, car loans, aircraft leases, music royalties -- and channeling the money to a trust that pays bondholders principal and interest.
Off-Balance-Sheet
The word ``securitization'' implies safety. Investors with less appetite for risk buy higher-rated securities and get paid first at lower interest rates. Those with a bigger appetite get paid later and receive more interest.
Securitization's biggest innovation was the use of off-balance-sheet accounting. If a bank couldn't sell a bond or didn't want to, the asset could be sold to a trust within a so-called special-purpose entity, incorporated in a place such as the Cayman Islands or Dublin, and shifted off the books. Lending expanded, and banks still booked profits.
With this new technology, a bank could originate $100 million in loans, sell off some to investors, transfer the rest to a special-purpose entity and not have to hold any capital. The profit could be as much as 1.25 percentage points of the amount loaned, or $1.25 million for every $100 million issued.
``The banks could turn a low return-on-equity business into one that doesn't use any equity, which was the motivation for this,'' said Brad Hintz, a Sanford C. Bernstein %26 Co. analyst and former chief financial officer at Lehman. ``It becomes almost like a fee business because it requires no capital.''
`Capture the Prize'
Like most new products, securitization found a market at home before going abroad. Bankers at Salomon and First Boston Inc. raced from bank to bank to convince issuers it was the wave of the future.
William Haley remembers a 10 a.m. meeting in 1987 at Imperial Thrift %26 Loan Association in Glendale, California. As Haley, at the time a 33-year-old Salomon banker, and his team walked into the conference room to make a pitch, the First Boston team was walking out.
``We exchanged some knowing looks and then tried to beat the pants off them,'' said Haley, who now works at RBS Greenwich Capital Markets Inc., a firm specializing in mortgage-backed securities that is owned by Royal Bank of Scotland Group Plc. ``There was a fierce desire to capture the prize.''
First Boston
First Boston, housed in the same New York office tower as McKinsey, was first out of the gate in March 1985 with a $192 million computer-lease securitization for Sperry Corp., a predecessor of Unisys Corp. The bank then oversaw a series of auto-loan securitizations, including a $4 billion issue by General Motors Acceptance Corp. in October 1986, the biggest corporate debt issue at the time.
Haley's project was a $50 million deal for Banc One Corp. called Certificates for Amortizing Revolving Debts, or CARDs. It was the first credit-card securitization and a blueprint for the $358 billion of such securities now outstanding. The transaction also gave the banks a way to securitize their own assets and get them off their balance sheets, which allowed the money to be lent all over again.
The strategy was detailed in Ocampo's 282-page book ``Securitization of Credit: Inside the New Technology of Finance,'' which he co-wrote with McKinsey consultant James Rosenthal. Ocampo, who received an MBA from Harvard after graduating from the Massachusetts Institute of Technology, and Rosenthal, a Harvard Law School graduate, argued that banks could be more profitable if they used securitization.
McKinsey Book
The authors examined six of the first asset-backed transactions and gave readers a step-by-step guide for how to repeat them. They said that banks that didn't embrace the new technology would be at a disadvantage, and they predicted it would become the dominant form of financing.
``The McKinsey book helped with credibility with issuers,'' said Haley. ``It wasn't that easy in the beginning. Conferences now have thousands of people, but I remember once in Beverly Hills, I gave a speech and there were maybe 25 people in the audience. They were furiously taking notes, however.''
The new technology was spread around the world by the people who worked on the First Boston and Salomon teams. Salomon's group was led by Patricia Jehle, who later founded Bear Stearns's asset-backed unit. Another member, Michael Hutchins, started the first team at a European bank when he went to Zurich-based UBS AG in 1996. A third, Michael Normile, moved to Merrill Lynch %26 Co., where he ran its securities business, then switched to London-based HSBC Holdings Plc in 2004. Haley built similar teams at Lehman, Chase Manhattan Bank and Amsterdam-based ABN Amro Bank NV.
Hard Sell
First Boston's team included Walid Chammah, 54, who went on to head debt and equity capital markets at Morgan Stanley and is now co-president of that firm. Joseph Donovan, the banker responsible for the GMAC relationship, went to Smith Barney in 1995, to Prudential Securities in 1998 and two years later took over the asset-backed group at Credit Suisse First Boston after Zurich-based Credit Suisse bought First Boston.
Donovan remembers traveling to Europe for First Boston in the early 1990s, trying to convince Volkswagen AG in Wolfsburg, Germany, and Renault SA outside Paris of the benefits of securitization. It was a hard sell. Europeans, he said, didn't take out auto loans.
``We tried over and over,'' Donovan recalled. ``We were trying to get more issuers, and there weren't any.''
`50-Year Pedigree'
By the time Donovan went to work for Credit Suisse in 2000, European attitudes had changed. Home-mortgage securitizations were especially appealing, he said, because European banks didn't need a ``50-year pedigree to compete.''
``You don't need a whole equity-research department and relationships with CEOs and CFOs,'' Donovan said. ``You basically needed good computers and distribution. You can always buy a Fannie, Freddie or Ginnie Mae pool. You just go online and buy it. You can't buy a Ford Motor Credit deal, because you have to know people.''
CSFB went from third in underwriting structured finance in 2000, behind Lehman and Salomon Smith Barney, to first in 2001, when it issued $96.3 billion in securities. Its market share increased 50 percent to 12.7 percent. The bank fell to fourth place in 2005, although its volume soared to $144.5 billion.
Exporting Debt
As securitization caught on, borrowing increased. U.S. consumer debt tripled in the two decades after 1988 to $2.6 trillion, according to the Federal Reserve. Foreign banks used the new technology to expand lending, seeking borrowers on their home turf.
``One of the things the United States exported overseas was a debt culture,'' Haley said.
While consumers were snapping up credit cards, Nicholas Sossidis and Stephen Partridge-Hicks at Citibank in London were figuring out a way to sell the new bonds. Their solution: Alpha Finance Corp., the first off-balance-sheet structured investment vehicle, or SIV.
Alpha was created in 1988 as a way for Citibank, and later Citigroup Inc., to vertically integrate its business like an oil company. The raw material was found in a loan, refined into a security, then sold to a SIV at a profit.
Citigroup, formed in a merger of Citicorp and Travelers Group Inc., which owned asset-backed pioneer Salomon, also got a new product to sell: capital notes that boast returns of more than 20 percent a year. Owners of these notes receive all the excess return when borrowers pay their bills on time, though they are the last to be paid when times get hard.
Citi SIVs
In the beginning, SIVs were small and cautious. Alpha was capitalized with $100 million of equity that supported $500 million of commercial paper and medium-term notes. The SIV could hold only debt rated A- or higher and didn't take any currency or interest-rate risk, according to a 1993 Fitch Ratings report.
Alpha was followed by a slew of SIVs with names such as Beta Corp. and Five Finance. By 2007, Citigroup's SIVs had $90 billion of assets, equal to the stock market value of PepsiCo Inc., making up about one-fourth of the entire SIV industry.
In 2003, the bank was sued by creditors of Enron Corp. for its role in setting up entities that enabled the Houston-based company to move assets off the balance sheet for Chief Executive Officer Jeffrey Skilling. Citigroup paid $1.66 billion in March to settle the lawsuit. Skilling, a former McKinsey consultant, was convicted of accounting fraud and is serving a 24-year prison sentence.
Mismatched Funding
Starting around 2005, securitization began to rely more on short-term money-market funds for financing. This was especially true for securities made by pooling other bonds, known as collateralized debt obligations, or CDOs. Investors were loath to buy long-term debt of issuers that didn't have a track record, so new issuers sold asset-backed commercial paper that matured in less than a year. While money markets are the cheapest way to finance, they can also be the most dangerous for borrowers because they can mature as soon as the next day.
``What happened in 2005 was that because of subprime and some other changes, commercial paper and asset-backed securities offered a bigger spread than anything that had ever been in the market before,'' said Deborah Cunningham, chief investment officer of Federated Investors in Pittsburgh, who oversees $235 billion in commercial paper. ``It was hundreds of basis points, as opposed to 10 or 20 basis points before.''
SIVs, banks and CDOs sold trillions of dollars of asset- backed commercial paper between 2005 and 2007 in maturities ranging from nine months to overnight. In the U.S., the amount outstanding marched higher almost every week beginning in April 2005, peaking at $1.2 trillion for the week ending Aug. 8, 2007.
`Huge Appetite'
Once money-market funds began to be tapped for financing, Ocampo said, ``it created a huge appetite for high-yield assets, far more than could be originated on a sound basis.''
To accommodate the demand, banks funded more subprime mortgages, with an average life of seven years, replacing car loans with an average life of three years and credit-card bonds paid off within 18 months.
Among conservative lenders, that rang an alarm: Bankers are taught to avoid such mismatched funding, in which a lender has to pay back money before the borrower has to pay the principal.
``Most of the terrible things happening now are because of the presence of money-market assets, taking what used to be long-term funding and making it short-term,'' Bruce Bent, 71, who started the first money-market fund in 1970, said in an interview in July.
Reserve Funds
Bent, chairman of New York-based Reserve Funds, said he didn't buy any asset-backed commercial paper until 2007, when the market froze in the wake of the collapse of the Bear Stearns hedge funds. That's when his Reserve Primary Fund began buying castoffs of asset-backed commercial paper at cut-rate prices from other funds.
Yet asset-backed securities weren't Bent's undoing. His fund also owned $785 million in Lehman debt, bought before the firm filed for bankruptcy Sept. 15. In the two days following the bankruptcy, Reserve clients asked to pull about $40 billion from the $62.5 billion fund, and its net asset value fell to 97 cents. It was the first time that a money fund ``broke the buck,'' or fell below $1, in 14 years. The fund is now being liquidated, and Bent hasn't given an interview since.
Reserve Primary Fund's implosion, and the subsequent seizing up of two Commonfund portfolios used by universities and endowments to hold cash, triggered a panic in U.S. money markets, cutting off this form of credit to industrial companies and banks. No one could be sure whether the banks held securitizations that had dropped in value, making them insolvent. That set off a series of bank takeovers and bailouts around the world, including a $64 billion capital injection by the U.K. government into that nation's financial institutions and 400 billion euros in loan guarantees pledged by Germany.
`Absolute Disaster'
``We've created an absolute disaster,'' said Nouriel Roubini, a New York University professor of economics, who predicted the failure of investment banks in a paper he wrote in February titled ``Twelve Steps to Financial Disaster.'' ``The reputation of the United States as a financial center and a leader has been tarnished significantly.''
Also tarnished, if not blackened, is the securitization business itself. Sales of European asset-backed securities, including bonds for car loans and credit cards, fell by 40 percent to 12.7 billion euros in the second quarter, and CDO sales fell by two-thirds to 10 billion euros. In the U.S., mortgage bonds issued by entities not affiliated with the government plummeted to $10.8 billion in the first half of the year, one-twentieth of the $241 billion sold in the same period in 2007.
Cioffi, Bosh
The authors of the 1988 McKinsey handbook on securitization have moved on. Rosenthal, who declined to be interviewed, became a managing director at Lehman and is now in charge of information technology at Morgan Stanley. Ocampo received a patent for risk-controlled investing and founded an institutional fund-management firm, Trajectory Asset Management. The firm doesn't have any structured-finance obligations.
Bear Stearns's Cioffi, 52, was indicted on charges of misleading investors by assuring them that his hedge funds were healthy when he knew they weren't. Cioffi, who now works out of his home in Tenafly, New Jersey, has pleaded not guilty. He declined to comment.
The Bank of New York's Bosh lost his job when his company was merged with Mellon Corp. in June 2007. He's still looking for work.
``You try to do the right thing,'' Bosh said in an interview this month. ``And this is what happens.''
Sunday, October 19, 2008
Saturday, October 18, 2008
Friday, October 17, 2008
Thursday, October 16, 2008
RECESSION
Tuesday, October 14, 2008
Monday, October 13, 2008
Friday, October 10, 2008
CRASH
Crash!?
Human nature is a wonderful unfolding drama. In 1929, the time from the last chance to get out to the crash was 55 days. In 1987, 55 days was the Saturday before Black Monday. Now in 2008, the last top was Aug 11 and the first crash was last Monday, Oct 6 - 55 days to the Sunday before. Does it just take about that long for the point of recognition to sink in? Amazing that each time the next trading day after 55 days would be the crash (which can unfold over several days, as in 1929, and 2008).
Who woulda thunk we would relive 1987? I remember being in London, and hearing that the US market was down 200 odd pints, then was coming back; and at the end was down "5 0 8". We thought he meant 5.08. and it had come back. We found out later he meant the incomprehensible drop of 500 points off Dow2200. This would be a 2000 point drop tomorrow. It now seems thinkable. Could it happen?
Look at this chart. Wanna catch the bottom tomorrow? Ever caught a falling knife?
Neely's service has vigorously kept us posted on his thinking, and he has a cell phone alert tomorrow if need be. He put put a crash warning tonight. Obligatory disclaimers: crashes are rare events, impossible to predict, blah blah. The STU merely stated that "third wave declines could go anywhere." Let me make this simple: we already have crashed. Question is how low will it go? Let's explore stopping points below the fold.
Some optimistics on the Street were floating "Dow 8500" as a support level. When the market rose from Mar03 to Jan04, it didn't stop much anywhere, including at 8500, and never got back to that level until now. Hard to see why this is anything but wishful thinking. We hover at that level, albeit futures have already gone below it in the aftermarket (Dow8344). So I guess we shall test 8500 in the first few minutes of trading. Swooosh! On to the next level.
The most logical support level is the triple bottom on Jul02 / Oct02 / Mar03 around DOW7400 and SP777. Intraday, the Dow got down close to 7100. So a range of 7100-7400, or SP 777-800, really is a support level. And a very important one. Prechter first opined that the ~16 year period of correction from 1998/2000 to 2014/2017 would break as a triangle. Neely also shares this view, and I too have been expecting a triangle. The bottom of that triangle would be this 7200 +/- level, and we would expect to hit it three times: in 2002, 2010, and in the final downtick in 2014-17.
If we break it significantly, the triangle is out. Neely thinks we *may* breach it temporarily by as far down as SP650 (an irrational exuberance to the downside) before continuing on the triangle. I had thought we would end above Dow7200, closer to 9500; have a huge Election Rally into May 2009 that could run up as far as SP1325 and Dow14K before the Summer of Disillusionment sets in, and then crumble back down to Dow7200 in 2010. This would constitute wave C of the 14-year ABCDE triangle, and would break as a flat with A = C. While that specific scenario is now out, if we hold above Dow7200, the Election Rally and subsequent end of C in 2010 is still a probable scenario.
But if we break through, the pattern shifts off the triangle to a flat: a three-wave down into Mar03, followed by a three-wave up to Oct07 (it being ok for a B wave of a flat to go to new highs), and now a five-way down to complete the correction. As a flat, C often = A, but we have already had a deeper and faster C than the A. Next most likely is C = 1.6 x A. The A wave fell 4500 Dow points and 750 SP points, not even; the SP had more tech stocks. So perhaps the C wave will even the two indicies out, with the Dow falling 1.6x A and the SP 1x A, pointing to Dow falling 7200 pts (ending at around Dow7200) and the SP dropping 750 pts (ending around 800). Ok, again a confluence around the expected level, not lower.
If we go a lot lower, both the flat and the trinagle would fail, and the pattern would look like a zigzag. Let us hope not! We had a double zig zag from 1966-1982, and we should not have one again under the rule of alternation, at least not if we we count the 66-82 period as 50W2 and our current period as 50W4. We would still have the audacity in the middle of fear and despair to expect a 50W5 robust bull market ahead after the end of 50W4 in 2014-2017. But if this breaks as a zig zag, then we have to reconsider whether Prechter has been right all along to say this is not a mere 14 year correction before another bull run, but a much deeper correction off the whole rise from 1789. Whew! End of the American Century and all that. Let's hope not.
For a variety of reason I expect us to bottom around Dow7200 / SP800. It might be tomorrow, after an historic drop of over 1000 Dow pts, but more likely it is a drama that unfolds over a week or so, touching the eventual bottom several times. Zoran Gayer used to say that in these circumstances expect a triple bottom. And that is what happened in 1987, with the first two happening quickly and the third over the next month or so. Also happened in 2002, with the bottom stretching over 9 months.
At the first bottom expect to see (a) huge volume, at least 3 Bn shares traded that day; (b) a churning just at the bottom, as shares rotate from bears to bulls with no apparent motion; and finally (c) a very sharp and fairly high rally. Much like 1987. And Oct02.
If we crush through Dow7200/SP777, no telling where this stops. On the way up, we had a number of pauses, most notably at Dow3600, where Prechter first thought we would peak (way back in the '80s); Dow4000, where the dot-com fever first broke out in 1995; Dow 5440; and Dow6000 / SP650, numbers bantied about due to Fibonacci relationships.
These are only some of Prechter's many way stations on the way up, but they end around Dow6k, as he stopped calling the top, after having lost credibility for too many Wolf! Wolf! calls. I dare say his credibility is back.
Human nature is a wonderful unfolding drama. In 1929, the time from the last chance to get out to the crash was 55 days. In 1987, 55 days was the Saturday before Black Monday. Now in 2008, the last top was Aug 11 and the first crash was last Monday, Oct 6 - 55 days to the Sunday before. Does it just take about that long for the point of recognition to sink in? Amazing that each time the next trading day after 55 days would be the crash (which can unfold over several days, as in 1929, and 2008).
Who woulda thunk we would relive 1987? I remember being in London, and hearing that the US market was down 200 odd pints, then was coming back; and at the end was down "5 0 8". We thought he meant 5.08. and it had come back. We found out later he meant the incomprehensible drop of 500 points off Dow2200. This would be a 2000 point drop tomorrow. It now seems thinkable. Could it happen?
Look at this chart. Wanna catch the bottom tomorrow? Ever caught a falling knife?
Neely's service has vigorously kept us posted on his thinking, and he has a cell phone alert tomorrow if need be. He put put a crash warning tonight. Obligatory disclaimers: crashes are rare events, impossible to predict, blah blah. The STU merely stated that "third wave declines could go anywhere." Let me make this simple: we already have crashed. Question is how low will it go? Let's explore stopping points below the fold.
Some optimistics on the Street were floating "Dow 8500" as a support level. When the market rose from Mar03 to Jan04, it didn't stop much anywhere, including at 8500, and never got back to that level until now. Hard to see why this is anything but wishful thinking. We hover at that level, albeit futures have already gone below it in the aftermarket (Dow8344). So I guess we shall test 8500 in the first few minutes of trading. Swooosh! On to the next level.
The most logical support level is the triple bottom on Jul02 / Oct02 / Mar03 around DOW7400 and SP777. Intraday, the Dow got down close to 7100. So a range of 7100-7400, or SP 777-800, really is a support level. And a very important one. Prechter first opined that the ~16 year period of correction from 1998/2000 to 2014/2017 would break as a triangle. Neely also shares this view, and I too have been expecting a triangle. The bottom of that triangle would be this 7200 +/- level, and we would expect to hit it three times: in 2002, 2010, and in the final downtick in 2014-17.
If we break it significantly, the triangle is out. Neely thinks we *may* breach it temporarily by as far down as SP650 (an irrational exuberance to the downside) before continuing on the triangle. I had thought we would end above Dow7200, closer to 9500; have a huge Election Rally into May 2009 that could run up as far as SP1325 and Dow14K before the Summer of Disillusionment sets in, and then crumble back down to Dow7200 in 2010. This would constitute wave C of the 14-year ABCDE triangle, and would break as a flat with A = C. While that specific scenario is now out, if we hold above Dow7200, the Election Rally and subsequent end of C in 2010 is still a probable scenario.
But if we break through, the pattern shifts off the triangle to a flat: a three-wave down into Mar03, followed by a three-wave up to Oct07 (it being ok for a B wave of a flat to go to new highs), and now a five-way down to complete the correction. As a flat, C often = A, but we have already had a deeper and faster C than the A. Next most likely is C = 1.6 x A. The A wave fell 4500 Dow points and 750 SP points, not even; the SP had more tech stocks. So perhaps the C wave will even the two indicies out, with the Dow falling 1.6x A and the SP 1x A, pointing to Dow falling 7200 pts (ending at around Dow7200) and the SP dropping 750 pts (ending around 800). Ok, again a confluence around the expected level, not lower.
If we go a lot lower, both the flat and the trinagle would fail, and the pattern would look like a zigzag. Let us hope not! We had a double zig zag from 1966-1982, and we should not have one again under the rule of alternation, at least not if we we count the 66-82 period as 50W2 and our current period as 50W4. We would still have the audacity in the middle of fear and despair to expect a 50W5 robust bull market ahead after the end of 50W4 in 2014-2017. But if this breaks as a zig zag, then we have to reconsider whether Prechter has been right all along to say this is not a mere 14 year correction before another bull run, but a much deeper correction off the whole rise from 1789. Whew! End of the American Century and all that. Let's hope not.
For a variety of reason I expect us to bottom around Dow7200 / SP800. It might be tomorrow, after an historic drop of over 1000 Dow pts, but more likely it is a drama that unfolds over a week or so, touching the eventual bottom several times. Zoran Gayer used to say that in these circumstances expect a triple bottom. And that is what happened in 1987, with the first two happening quickly and the third over the next month or so. Also happened in 2002, with the bottom stretching over 9 months.
At the first bottom expect to see (a) huge volume, at least 3 Bn shares traded that day; (b) a churning just at the bottom, as shares rotate from bears to bulls with no apparent motion; and finally (c) a very sharp and fairly high rally. Much like 1987. And Oct02.
If we crush through Dow7200/SP777, no telling where this stops. On the way up, we had a number of pauses, most notably at Dow3600, where Prechter first thought we would peak (way back in the '80s); Dow4000, where the dot-com fever first broke out in 1995; Dow 5440; and Dow6000 / SP650, numbers bantied about due to Fibonacci relationships.
These are only some of Prechter's many way stations on the way up, but they end around Dow6k, as he stopped calling the top, after having lost credibility for too many Wolf! Wolf! calls. I dare say his credibility is back.
Monday, June 16, 2008
OPTIONS EXPIRATION WEEK
1) Generally after a large move during op x week which is Tues.-Fri. (Mon. Is not factored in) which is usually on a Wed. The market tends to flatten out after. There is a ton of churning going on after this large move because of imbedded manipulation. This is not planned it is just the market place readjusting for ex. If the move was a rally then the longs are taking profits and shorts are covering. There will also be a contraction of volatility the following days.
2) There tends to be a continuation of the trend following that large move. Use pullbacks for buying opportunities and rallies to sell depending on the direction of the move. Everything is not done so you will see a exaggeration of the trend be it shorts who have not covered yet and/or new money coming in if the large move was a rally. The opposite is true if the large move was a sell off.
3) Wed-Fri of op x week historically are weighted towards the buy side up to 70% of the time. There tends to be a lot of buy pressure because during the course of the month what sets up the most is sell programs. So for the large institutions and funds have to close out those positions so buy programs set up the most Wed-Fri. It happens to be one of the most bullish times of the month. Most professional traders want to be flat their cash held indexes because they do not want to have exposure to an opening bullish print Friday morning.
4)You want to try to be out of your front month options by the close of business Wed. If you were expecting a certain move and it has not happened yet it is best to be out of that position unless you have a specific strategy you are employing specifically for those last 2 days of trading the front month options. It is best not to take a chance on delta or gamma deterioration.
5) the Monday following Friday expiration is one of the most liquid trading days of the cycle. It is a day that everybody is at work. You can put positions on wrapped relatively close to theoretical value. It is one of the most intense days to trade because most professionals traders are flattening out and they are not looking for as much as an edge.
6) Stocks that are reporting during op x week do not lie. Stocks that are strong stay strong and stocks that are weak stay weak. It has to do with the smart money. Stocks do not want to disappoint during this week so if they are going to miss they will have pre-announced most of the time. (Which make me think of last month and GOOG everybody was expecting them to miss because of their comscore numbers and we all know what happened.)
7) April expirations historically tend to be bullish. Professional traders are very nervous about going into April expirations short.
8) Be strike price aware during this week. Options will tend to get pinned a price that hurts the most people.
9) TOS believes traders have a small edge during this week to put on new positions for next month Wed-Fri of op x week. Because other then the upcoming Monday the next week's trading is very competitive pricing wise. During op x week hedge funds, liquidity providers, those that take the order flow are more focused on their near term positions and they may be more likely to facilitate trades in the next month at slightly better prices then you will get next week.
10 on op x week there is a reason to watch the relationship between the different broad based indices. Rarely will you have divergence. If you are not watching the futures markets you should be because they push the market.
2) There tends to be a continuation of the trend following that large move. Use pullbacks for buying opportunities and rallies to sell depending on the direction of the move. Everything is not done so you will see a exaggeration of the trend be it shorts who have not covered yet and/or new money coming in if the large move was a rally. The opposite is true if the large move was a sell off.
3) Wed-Fri of op x week historically are weighted towards the buy side up to 70% of the time. There tends to be a lot of buy pressure because during the course of the month what sets up the most is sell programs. So for the large institutions and funds have to close out those positions so buy programs set up the most Wed-Fri. It happens to be one of the most bullish times of the month. Most professional traders want to be flat their cash held indexes because they do not want to have exposure to an opening bullish print Friday morning.
4)You want to try to be out of your front month options by the close of business Wed. If you were expecting a certain move and it has not happened yet it is best to be out of that position unless you have a specific strategy you are employing specifically for those last 2 days of trading the front month options. It is best not to take a chance on delta or gamma deterioration.
5) the Monday following Friday expiration is one of the most liquid trading days of the cycle. It is a day that everybody is at work. You can put positions on wrapped relatively close to theoretical value. It is one of the most intense days to trade because most professionals traders are flattening out and they are not looking for as much as an edge.
6) Stocks that are reporting during op x week do not lie. Stocks that are strong stay strong and stocks that are weak stay weak. It has to do with the smart money. Stocks do not want to disappoint during this week so if they are going to miss they will have pre-announced most of the time. (Which make me think of last month and GOOG everybody was expecting them to miss because of their comscore numbers and we all know what happened.)
7) April expirations historically tend to be bullish. Professional traders are very nervous about going into April expirations short.
8) Be strike price aware during this week. Options will tend to get pinned a price that hurts the most people.
9) TOS believes traders have a small edge during this week to put on new positions for next month Wed-Fri of op x week. Because other then the upcoming Monday the next week's trading is very competitive pricing wise. During op x week hedge funds, liquidity providers, those that take the order flow are more focused on their near term positions and they may be more likely to facilitate trades in the next month at slightly better prices then you will get next week.
10 on op x week there is a reason to watch the relationship between the different broad based indices. Rarely will you have divergence. If you are not watching the futures markets you should be because they push the market.
Monday, May 5, 2008
CF DRYS POT
This can go either up...or down.
Could be nice opportunity to go long if pullbacks here.
Got stopped out on my May 180 puts. Lesson learned: set $.50 stop once get 50% profit.
Thursday, April 24, 2008
Wednesday, April 23, 2008
Bad Trader v's Successful Trader
BELIEFS
Bad Trader:
Money is important
It's bad to loose in the markets
It a battle, war, sea or animal and serious
No need to mentally rehearse each trade
I've lost before I start
Most people approach trading to make money and that is the primary reason they lose. Because money is so important, they have trouble taking losses and letting profits run.
Successful Trader:
Money is not important
it's ok to loose in the markets
Trading is just a game
Mentally rehearsing each trade is important 4 success
I've won before I start
In contrast, when you think trading is a game and play by certain rules, then it becomes easier to follow the rule of cut losses and run profits. In addition, because of mental rehearsal and extensive planning, top traders have already gone through all the trail and error in their mind before they begin. As a result, they know they are going to win in the long run, and it makes little set backs easier to deal with.
EMOTIONAL CONTROL
Bad Trader: No emotional control
Successful Trader: Strong emotional control
DISCIPLINE
Bad Trader: Lack of discipline
Successful Trader: Strong discipline
PATIENCE
Bad Trader: Lack of patience
Successful Trader: Extremely patient
RISK ATTITUDE
Bad Trader: Run losses Cut profits
Successful Trader: Cut Losses Run Profits
FAILURE ATTITUDE
Bad Trader: You can fail
Successful Trader: No such thing, just leant something
TRADING EMOTION
Bad Trader: Fear and greed
Successful Trader: Calm / confident/ detached from trading/ still
STRESS ATTITUDE
Bad Trader: Because failure exist they burn energy trading on stress = follows crowd mentality & irrational choices
Successful Trader: No such thing as failure own mind rational choices
LOOSING ATTITUDE
Bad Trader: Loosing attitude, anxious about losses, blames others for mistakes so has to get them to change Must win now
Successful Trader: Calm about losses, blames self for mistakes so change behaviour now, can lose now as will win in the future
TRADING MENTAL STATE
Bad Trader: Confused, scared, fear and greed trading state
Successful Trader: Strong peak appropriate trading state
MARKET KNOWLEDGE
Bad Trader: Weak knowledge Weak understanding of how it works
Successful Trader: Strong knowledge Strong understanding of how it works
MODEL OF TRADING
Bad Trader: Not tested model
Successful Trader: Test their model before applying
COMMITMENT TO SUCCESS
Bad Trader: Not committed to being successful
Successful Trader: Committed to being successful
COMMITMENT TO TRADING
Bad Trader: Not committed to trading
Successful Trader: Committed to trading
EXCITEMENT
Bad Trader: Experiences excitement when trades go well
Successful Trader: No excitement from trading, excitement from other areas of life
PERSONAL CONFLICTS
Bad Trader: Many personal internal conflicts with trading
Successful Trader: No personal conflicts with trading. Identities aligned.
DECISIONS
Bad Trader: Bad decisions - long and complicated When they can't decide what to do they follow the crowd
Successful Trader: Good decision - short and quick Calm and decisive
PERSONAL ENERGY
Bad Trader: Tired
Successful Trader: Energised
Bad Trader:
Money is important
It's bad to loose in the markets
It a battle, war, sea or animal and serious
No need to mentally rehearse each trade
I've lost before I start
Most people approach trading to make money and that is the primary reason they lose. Because money is so important, they have trouble taking losses and letting profits run.
Successful Trader:
Money is not important
it's ok to loose in the markets
Trading is just a game
Mentally rehearsing each trade is important 4 success
I've won before I start
In contrast, when you think trading is a game and play by certain rules, then it becomes easier to follow the rule of cut losses and run profits. In addition, because of mental rehearsal and extensive planning, top traders have already gone through all the trail and error in their mind before they begin. As a result, they know they are going to win in the long run, and it makes little set backs easier to deal with.
EMOTIONAL CONTROL
Bad Trader: No emotional control
Successful Trader: Strong emotional control
DISCIPLINE
Bad Trader: Lack of discipline
Successful Trader: Strong discipline
PATIENCE
Bad Trader: Lack of patience
Successful Trader: Extremely patient
RISK ATTITUDE
Bad Trader: Run losses Cut profits
Successful Trader: Cut Losses Run Profits
FAILURE ATTITUDE
Bad Trader: You can fail
Successful Trader: No such thing, just leant something
TRADING EMOTION
Bad Trader: Fear and greed
Successful Trader: Calm / confident/ detached from trading/ still
STRESS ATTITUDE
Bad Trader: Because failure exist they burn energy trading on stress = follows crowd mentality & irrational choices
Successful Trader: No such thing as failure own mind rational choices
LOOSING ATTITUDE
Bad Trader: Loosing attitude, anxious about losses, blames others for mistakes so has to get them to change Must win now
Successful Trader: Calm about losses, blames self for mistakes so change behaviour now, can lose now as will win in the future
TRADING MENTAL STATE
Bad Trader: Confused, scared, fear and greed trading state
Successful Trader: Strong peak appropriate trading state
MARKET KNOWLEDGE
Bad Trader: Weak knowledge Weak understanding of how it works
Successful Trader: Strong knowledge Strong understanding of how it works
MODEL OF TRADING
Bad Trader: Not tested model
Successful Trader: Test their model before applying
COMMITMENT TO SUCCESS
Bad Trader: Not committed to being successful
Successful Trader: Committed to being successful
COMMITMENT TO TRADING
Bad Trader: Not committed to trading
Successful Trader: Committed to trading
EXCITEMENT
Bad Trader: Experiences excitement when trades go well
Successful Trader: No excitement from trading, excitement from other areas of life
PERSONAL CONFLICTS
Bad Trader: Many personal internal conflicts with trading
Successful Trader: No personal conflicts with trading. Identities aligned.
DECISIONS
Bad Trader: Bad decisions - long and complicated When they can't decide what to do they follow the crowd
Successful Trader: Good decision - short and quick Calm and decisive
PERSONAL ENERGY
Bad Trader: Tired
Successful Trader: Energised
Tuesday, April 15, 2008
?????
Have you ever wondered why some traders make money easily, while others consistently make money only to give it back again or can not gain any form or consistency? Is there something that successful traders and investors do that makes them consistently successful? Is the difference found in their trading systems, technical or fundamental approaches, intelligence, skills, timing, luck, or their choice? The answers are to be found in none of these things.
All traders and investors have a blueprint ingrained in their subconscious minds, and it is this blueprint, more than anything, that will determine your trading and investing results. Your financial, trading and investing blueprint is the secret of trading success. 90% of trading success is how you think.
It is well documented, and many studies have shown that regardless of the size of the winnings, 80% of lottery winners lose all their winning and are actual worse off two years later. However, it has also been shown that many self made millionaires who lose all their money will usually regain it back within a few years. Why does this predictable pattern happen?
Two people could grow up in the same neighbourhood, go to the same school, have had the exact same education and yet this is were their similarities end. They could sit side by side at the same trading and investing seminar, learn the same information, but yet one could become wealthy from the information and the other could see their account wiped out. Why is this?
You can know everything about trading and investing, but if your blueprint is not set for trading and investing success, nothing you learn, nothing you know, nothing you do will make any difference in the long run - and if somehow you do make money trading and investing, you will most likely 'donate' it back to the market! You can have the greatest trading methodology, techniques, strategy, system, etc, but if you are not thinking correctly, the by product of a faulty blueprint will be your account will be wiped out. Or, you will give up and think it's impossible to win.
Everything you where told, everything you unconsciously modelled and saw people do, and your emotional experiences all regarding money, trading and investing are pre-determining the results you will experience for the rest of your life. We have all been taught and conditioned when it comes to money, trading and investing and this information is stored in your unconscious mind. Less than 4% of traders and investors have supportive money, trading and investing beliefs. By this, I mean, you will see money go from your account to those who have a blueprint, which enables them to be a successful trader and investor.
You could easily spend a fortune on studying trading and investing, however, if you don't learn to reprogram your thoughts, it will all be for nothing. Unfortunately your current trading and investing blueprint will tend to stay with you for the rest of your life.
By now, you're probably wondering what is your blueprint set for. Is your blueprint set for success or failure? If you want to know what your money, trading and investing blueprint is right now, look at the results you are producing.
What is your account like right now? What is the shape of your equity curve? Are you consistently making or losing money? What is your net worth? Are you experiencing consistent or inconsistent results with your trading and investments? Is making money hard or easy for you? Do you stick with one strategy, a few, or change around all the time? Do you manage or mismanage your money and account? Do you cut your loses and let your profits run, or do you do the opposite? Are you disciplined in your trading? Do you get emotional when trading?
WHERE YOU GAINED YOUR TRADING AND INVESTING BLUEPRINT AND THOUGHTS
As adults, we have all been taught and conditioned when it comes to money, trading and investing. Most of this took place during your childhood and teenage years.
These early influences shaped who you are today. If they were not the right influences, and are left unchanged, they will lead to self defeat and failing to financially succeed in trading and investing.
These influences were processed through 3 of our 5 senses. Things you heard, saw, and felt in relationship to money, trading and investing.
Everything you were told, everything you unconsciously modelled and saw people do, and your emotional experiences all regarding money, trading and investing are pre-determining the results you will experience for the rest of your life.
How The Past Things You Heard Accurately Predict Your Trading And Investing Results For The Rest Of Your Life
All the statements you heard or formed about money, trading and investing remain in your unconscious mind, and they are controlling your results. These statements once accepted by you will go into your unconscious mind, and form a belief, upon which you are automatically acting upon, and no logic will stop you doing otherwise. For example, if you believe money is the root of all evil or rich people are evil, and if you believe you don't want to be evil, then you will unconsciously be guided to get rid of the money you make, or fail at trading and investing. You may have been told to follow your rules, and for example, you may have a rule of getting in when the price is at a 52 week new high. However, if you were told and as a result you now believe that professionals short at 52 week new highs, your belief will stop you from entering the trade. When it comes to choosing between logic and things you heard that created your programming, your behaviour will always be guided by your unconscious mind. Your emotions will win nearly every time. If you were told, or you unconsciously formed the wrong beliefs about trading and investing, you will struggle to be successful. Most people have no idea what their beliefs are. You need a way to change them for good.
How The Past Behaviours You Modelled Accurately Predict Your Trading And Investing Results For The Rest Of Your Life
Whose behaviours did you learn when it comes to money, trading and investing? Unfortunately most people learn trading and investing in seminars or from books from people who make their money from teaching about trading and investing, rather than people that make/made their money in the markets; Successful professional traders and investors. If you leant the behavioural traits from the wrong person, again this will be imprinted on your blueprint. As children we learnt everything from modelling experts. This is exactly how you learnt to walk. You copied people who were doing it successfully, not from people who wrote books about it, or told you about it. You copied what you saw working. If you copied/modelled the wrong behaviours, you will struggle.
How Your Past Emotional Experiences Accurately Predict Your Trading And Investing Results For The Rest Of Your Life
The emotional meaning you associate with money will drive your feelings and behaviour. If you feel or attach nothing but pain or negative feelings with losing money, then taking a loss is hard to do. If you have a built in desire to be right, because it feels wrong not being right, again you will struggle with trading and investing. If you have had nothing but negative emotional experiences with money, trading and investing, again you will struggle with money, trading and investing for the rest of your life, unless you learn how to change this. You need a way to unlearn the wrong emotional meanings that you have unconsciously installed.
Change your programming and you change your results and destiny.
All traders and investors have a blueprint ingrained in their subconscious minds, and it is this blueprint, more than anything, that will determine your trading and investing results. Your financial, trading and investing blueprint is the secret of trading success. 90% of trading success is how you think.
It is well documented, and many studies have shown that regardless of the size of the winnings, 80% of lottery winners lose all their winning and are actual worse off two years later. However, it has also been shown that many self made millionaires who lose all their money will usually regain it back within a few years. Why does this predictable pattern happen?
Two people could grow up in the same neighbourhood, go to the same school, have had the exact same education and yet this is were their similarities end. They could sit side by side at the same trading and investing seminar, learn the same information, but yet one could become wealthy from the information and the other could see their account wiped out. Why is this?
You can know everything about trading and investing, but if your blueprint is not set for trading and investing success, nothing you learn, nothing you know, nothing you do will make any difference in the long run - and if somehow you do make money trading and investing, you will most likely 'donate' it back to the market! You can have the greatest trading methodology, techniques, strategy, system, etc, but if you are not thinking correctly, the by product of a faulty blueprint will be your account will be wiped out. Or, you will give up and think it's impossible to win.
Everything you where told, everything you unconsciously modelled and saw people do, and your emotional experiences all regarding money, trading and investing are pre-determining the results you will experience for the rest of your life. We have all been taught and conditioned when it comes to money, trading and investing and this information is stored in your unconscious mind. Less than 4% of traders and investors have supportive money, trading and investing beliefs. By this, I mean, you will see money go from your account to those who have a blueprint, which enables them to be a successful trader and investor.
You could easily spend a fortune on studying trading and investing, however, if you don't learn to reprogram your thoughts, it will all be for nothing. Unfortunately your current trading and investing blueprint will tend to stay with you for the rest of your life.
By now, you're probably wondering what is your blueprint set for. Is your blueprint set for success or failure? If you want to know what your money, trading and investing blueprint is right now, look at the results you are producing.
What is your account like right now? What is the shape of your equity curve? Are you consistently making or losing money? What is your net worth? Are you experiencing consistent or inconsistent results with your trading and investments? Is making money hard or easy for you? Do you stick with one strategy, a few, or change around all the time? Do you manage or mismanage your money and account? Do you cut your loses and let your profits run, or do you do the opposite? Are you disciplined in your trading? Do you get emotional when trading?
WHERE YOU GAINED YOUR TRADING AND INVESTING BLUEPRINT AND THOUGHTS
As adults, we have all been taught and conditioned when it comes to money, trading and investing. Most of this took place during your childhood and teenage years.
These early influences shaped who you are today. If they were not the right influences, and are left unchanged, they will lead to self defeat and failing to financially succeed in trading and investing.
These influences were processed through 3 of our 5 senses. Things you heard, saw, and felt in relationship to money, trading and investing.
Everything you were told, everything you unconsciously modelled and saw people do, and your emotional experiences all regarding money, trading and investing are pre-determining the results you will experience for the rest of your life.
How The Past Things You Heard Accurately Predict Your Trading And Investing Results For The Rest Of Your Life
All the statements you heard or formed about money, trading and investing remain in your unconscious mind, and they are controlling your results. These statements once accepted by you will go into your unconscious mind, and form a belief, upon which you are automatically acting upon, and no logic will stop you doing otherwise. For example, if you believe money is the root of all evil or rich people are evil, and if you believe you don't want to be evil, then you will unconsciously be guided to get rid of the money you make, or fail at trading and investing. You may have been told to follow your rules, and for example, you may have a rule of getting in when the price is at a 52 week new high. However, if you were told and as a result you now believe that professionals short at 52 week new highs, your belief will stop you from entering the trade. When it comes to choosing between logic and things you heard that created your programming, your behaviour will always be guided by your unconscious mind. Your emotions will win nearly every time. If you were told, or you unconsciously formed the wrong beliefs about trading and investing, you will struggle to be successful. Most people have no idea what their beliefs are. You need a way to change them for good.
How The Past Behaviours You Modelled Accurately Predict Your Trading And Investing Results For The Rest Of Your Life
Whose behaviours did you learn when it comes to money, trading and investing? Unfortunately most people learn trading and investing in seminars or from books from people who make their money from teaching about trading and investing, rather than people that make/made their money in the markets; Successful professional traders and investors. If you leant the behavioural traits from the wrong person, again this will be imprinted on your blueprint. As children we learnt everything from modelling experts. This is exactly how you learnt to walk. You copied people who were doing it successfully, not from people who wrote books about it, or told you about it. You copied what you saw working. If you copied/modelled the wrong behaviours, you will struggle.
How Your Past Emotional Experiences Accurately Predict Your Trading And Investing Results For The Rest Of Your Life
The emotional meaning you associate with money will drive your feelings and behaviour. If you feel or attach nothing but pain or negative feelings with losing money, then taking a loss is hard to do. If you have a built in desire to be right, because it feels wrong not being right, again you will struggle with trading and investing. If you have had nothing but negative emotional experiences with money, trading and investing, again you will struggle with money, trading and investing for the rest of your life, unless you learn how to change this. You need a way to unlearn the wrong emotional meanings that you have unconsciously installed.
Change your programming and you change your results and destiny.
Tuesday, March 25, 2008
BUY SIGNAL
Check at 6:44 for this buy signal. huge volume from support/resistance...followed by a 2 or 3 low volume pullback...big volume taking out the first candle.
Sunday, March 23, 2008
Saturday, March 22, 2008
Friday, March 21, 2008
A BEARISH PERSPECTIVE
Tuesday, March 18, 2008
TURNING POINT
TEchnical Analysis Stock Market Review 3/18/08 from brian shannon on Vimeo.
When BSC dropped to $2 yesterday, it essentially tanked the market. Today, GS and LEH gave good news prior to the open. Later in the day, the Feds cut the rate 75 basis points. Market could be off and running in the short term.
Sunday, March 16, 2008
CHAILKIN BOTTOM
1. Make a First low - 1272.66
2. Bounce 1% or more over the next two days
3. Come back down and close below the First low on the third/fourth/or fifth day
4. Make an hourly close above the First low (this generates a buy signal) 1272.66
The reason this bottom is so effective at leading to a good rally is that the lower low shakes out all but the strongest hands. It will take out stops. The only guys left are strong hands; they aren't sellers at low prices.
1. Make a First low - 155.23 on 3/10
2. Bounce 1% or more over the next two days
3. Come back down and close below the First low on the third/fourth/or fifth day
4. Make an hourly close above the First low (this generates a buy signal)- 155.23
Friday, March 14, 2008
PLACES TO CHECK OUT
Here are graphs of VWAP. Also, a few sites to checkout from Dragaon.
Top 1% Stocks by Signal Direction for Mar 13
http://www2.barchart.com/sigdir.asp
Top 1% Stocks by Signal Strength for Mar 13
http://www2.barchart.com/sigstr.asp
Barchart.com - Signals - Top 100 Stocks
http://www2.barchart.com/sigtop.asp
Thursday, March 13, 2008
PERFORMANCE ANXIETY
There is a tendency for traders to feel baldly about under performing the market averages on a daily or weekly basis, but success as a trader does not come from such short term measurements or comparisons. We all have our cycles of under or out performance, but over time, the true measurement of success in trading is being consistently profitable regardless of how the overall market is performing. At the end of each trading day you shouldn't focus solely on your P/L, instead you should focus on your thought process that day and how well you executed your plan. If you consistently execute your trades according to plan and still lose money then you may need to reevaluate your approach. While there is definitely a cyclical rhythm to the market, no strategy will always work. You need to constantly and objectively review what is working so you can make necessary adjustments to your plan.
You should always ask yourself whether your results are attributable to your ability to see the markets clearly and execute your plan with discipline, or if the market is making it easy to book profitable trades. There are times when the market makes a trader's job much easier and huge profits can be made in short periods of time, unfortunately those times do not last. The trick is to hold onto those profits when the market becomes more difficult. Many traders experience large losses after a string of profitable trades because they succumb to the feeling "that the losses aren't real, they are just giving back profits". This dangerous thinking is borne from complacency as a result of a feeling of infallibility which leaves the trader vulnerable to large losses. You always have to take all losses seriously and minimize them at the first chance without hesitation, doing otherwise is how amateurs trade. You know what an amateur trader is? Amateurs are traders who make big money in a bull market, give it all back when the trend ends and then blames their losses on the market. Professionals listen objectively to the message of the markets and adapt quickly to changing market conditions.
(Excerpt from Brian Shannon)
**Don't trade during the first hour. A gap down can be filled or vice versa.
**Look at daily to set stops. Look intraday to enter positions.
You should always ask yourself whether your results are attributable to your ability to see the markets clearly and execute your plan with discipline, or if the market is making it easy to book profitable trades. There are times when the market makes a trader's job much easier and huge profits can be made in short periods of time, unfortunately those times do not last. The trick is to hold onto those profits when the market becomes more difficult. Many traders experience large losses after a string of profitable trades because they succumb to the feeling "that the losses aren't real, they are just giving back profits". This dangerous thinking is borne from complacency as a result of a feeling of infallibility which leaves the trader vulnerable to large losses. You always have to take all losses seriously and minimize them at the first chance without hesitation, doing otherwise is how amateurs trade. You know what an amateur trader is? Amateurs are traders who make big money in a bull market, give it all back when the trend ends and then blames their losses on the market. Professionals listen objectively to the message of the markets and adapt quickly to changing market conditions.
(Excerpt from Brian Shannon)
**Don't trade during the first hour. A gap down can be filled or vice versa.
**Look at daily to set stops. Look intraday to enter positions.
PERFORMANCE ANXIETY
There is a tendency for traders to feel baldly about under performing the market averages on a daily or weekly basis, but success as a trader does not come from such short term measurements or comparisons. We all have our cycles of under or out performance, but over time, the true measurement of success in trading is being consistently profitable regardless of how the overall market is performing. At the end of each trading day you shouldn't focus solely on your P/L, instead you should focus on your thought process that day and how well you executed your plan. If you consistently execute your trades according to plan and still lose money then you may need to reevaluate your approach. While there is definitely a cyclical rhythm to the market, no strategy will always work. You need to constantly and objectively review what is working so you can make necessary adjustments to your plan.
You should always ask yourself whether your results are attributable to your ability to see the markets clearly and execute your plan with discipline, or if the market is making it easy to book profitable trades. There are times when the market makes a trader's job much easier and huge profits can be made in short periods of time, unfortunately those times do not last. The trick is to hold onto those profits when the market becomes more difficult. Many traders experience large losses after a string of profitable trades because they succumb to the feeling "that the losses aren't real, they are just giving back profits". This dangerous thinking is borne from complacency as a result of a feeling of infallibility which leaves the trader vulnerable to large losses. You always have to take all losses seriously and minimize them at the first chance without hesitation, doing otherwise is how amateurs trade. You know what an amateur trader is? Amateurs are traders who make big money in a bull market, give it all back when the trend ends and then blames their losses on the market. Professionals listen objectively to the message of the markets and adapt quickly to changing market conditions.
(Excerpt from Brian Shannon)
You should always ask yourself whether your results are attributable to your ability to see the markets clearly and execute your plan with discipline, or if the market is making it easy to book profitable trades. There are times when the market makes a trader's job much easier and huge profits can be made in short periods of time, unfortunately those times do not last. The trick is to hold onto those profits when the market becomes more difficult. Many traders experience large losses after a string of profitable trades because they succumb to the feeling "that the losses aren't real, they are just giving back profits". This dangerous thinking is borne from complacency as a result of a feeling of infallibility which leaves the trader vulnerable to large losses. You always have to take all losses seriously and minimize them at the first chance without hesitation, doing otherwise is how amateurs trade. You know what an amateur trader is? Amateurs are traders who make big money in a bull market, give it all back when the trend ends and then blames their losses on the market. Professionals listen objectively to the message of the markets and adapt quickly to changing market conditions.
(Excerpt from Brian Shannon)
Tuesday, March 11, 2008
Sunday, February 24, 2008
SP-500
I agree with this projection. Recent rallies are oversold rallies with really no buyers. This model projects a retest of the Jan lows...with more downside afterwards. The main question is when.
GOOG
GOOG is in a compressing wedge. The top line represents the declining tops while the bottom line is a long term trendline. Which ever way it leaves the wedge, I'm sure the move will be very substantial.
PIVOT POINTS
PROJECTIONS
BIDU
BIDU is also in a compressing wedge ala GOOG. Both are high flyers that have been grounded this month. Volume is a little better in GOOG...but not by much.
PIVOT POINTS
PROJECTIONS
GS
Samething...same story...ala GOOG...ala BIDU...however, it just finished testing the lows succesfully. It needs follow-through on Monday.
PIVOT POINTS
PROJECTIONS
Monday, February 18, 2008
Tuesday, February 12, 2008
TECH ANALYSIS
Shows the move off a bull flag/20ma along with a head and shoulders move...break down off the neckline/50.
Saturday, February 9, 2008
Friday, February 8, 2008
TRADING MISTAKE
Which trading mistake is worse?
a) Taking bad trades
b) Failing to take good trades
Psychologically, these are very different mistakes. Taking bad trades (overtrading) is most often a function of overconfidence, frustration, or sheer impulsivity. It represents a relative absence of control.
Failing to take good trades, on the other hand, can be viewed as an overcontrolled behavior pattern. Anxiety and a lack of confidence are common reasons for not taking trades with an edge.
Many traders cycle between these modes: They become overaggressive, take bad trades, undergo losses, and then become overly risk averse and fail to take good trades. This is a deadly cycle, both emotionally and financially.
So which is worse? Neither: as we can see with those traders that cycle between the two, they're variations of the same trading problem--a loss of rule-governance. When we become emotionally stimulated--whether with anger or anxiety--we are apt to act in flight (don't take the trade) or fight (take any trade) mode. We no longer stay connected to trading rules and sound practices.
Neither mistake need be deadly if it becomes a cue to observe yourself and figure out why you are veering from your rules. Trading mistakes can be opportunities for self-analysis if you're able to catch yourself and enter a reflective mode. That is why I like to take a time out when I'm getting away from my goals and rules. We can't undo mistakes, but we can turn them into learning experiences.
a) Taking bad trades
b) Failing to take good trades
Psychologically, these are very different mistakes. Taking bad trades (overtrading) is most often a function of overconfidence, frustration, or sheer impulsivity. It represents a relative absence of control.
Failing to take good trades, on the other hand, can be viewed as an overcontrolled behavior pattern. Anxiety and a lack of confidence are common reasons for not taking trades with an edge.
Many traders cycle between these modes: They become overaggressive, take bad trades, undergo losses, and then become overly risk averse and fail to take good trades. This is a deadly cycle, both emotionally and financially.
So which is worse? Neither: as we can see with those traders that cycle between the two, they're variations of the same trading problem--a loss of rule-governance. When we become emotionally stimulated--whether with anger or anxiety--we are apt to act in flight (don't take the trade) or fight (take any trade) mode. We no longer stay connected to trading rules and sound practices.
Neither mistake need be deadly if it becomes a cue to observe yourself and figure out why you are veering from your rules. Trading mistakes can be opportunities for self-analysis if you're able to catch yourself and enter a reflective mode. That is why I like to take a time out when I'm getting away from my goals and rules. We can't undo mistakes, but we can turn them into learning experiences.
Thursday, February 7, 2008
Tuesday, February 5, 2008
HOTTO SPEAKS
First I'll repeat my story of March - July 2003.. There's a point : ) I was working on an engineering consulting job in early March, 2003. Details are in past chat logs. So.. I missed the Impulse rally from 3/12/03 to 3/21/03 .. 7 days.. 1100 points. I took that rally to be an Impulse Rally to start a new Intermediate Term rally.. 5 weeks to 13 weeks. But.. it had become Overbought.. so I waited for a PB... maybe to sma50.. about half the rally. We got the PB to sma50.. And OBV held most of the gains of the Impulse rally. I started buying on April 1 or 2.. after Missing the wonderful Impulse rally completely. During the whole month of April, 2003.. the DJIA did Not make highs Over the top of the Impulse rally in March. But.. we (in Hotto Club).. made big gains in SWGC during April.. as small stocks played catch up with the Blue Chips.. as the Blue Chips Consolidated the Impulse rally gains. By July, 2003.. I was up about 140% from April.. I forget exactly.. It's in the old Logs. Again.. That all came After missing the Impulse rally completely. During April May June, 2003.. there were lots of doubters.. thinking it had been just another Bear market Rally. It was not until August.. on the BO.. that I was sure we were in a new Bull Mark et.
Key points...
It's not disastrous to miss out on the Impulse Rally.
If Intermediate Term signals are given... it's possible to make good gains beginning After the Impulse Rally is over.
Same old thing.. When the market gives important Signals.. it often uses up a lot of energy to give the signal.. and next needs to retrace part of the move that produced the signal... Or at least Consolidate for a while.
Friday we got the new ZBT.. first true complete one in over 20 years. ZBT is "Zweig Breadth Thrust" signal. I discussed the Zweig Indicator over the weekend.. T2103 is the ticker on TCNet. I'll go over ZBT more now. Marty Zweig did his research back in the days before PCs could be used to help trading. Zweig did a lot of work on Momentum indicators.. adding to other earlier research by others. The ZBT takes a lot of buying to achieve the buy signal. Zweig's signal needs a surge.. within 10 days to go from Oversold to Overbought.. in the A/D measures. He was not interested in very Short term trading.. but in longer term Trends that would support gains over time. So... the ZBT signal - in my words - Looks for a solid Impulse Rally.. with Breadth support.. that makes it very likely that a LT Rally is under way.. even Longer than My "IT Rally" of 5 weeks to 13 weeks. The ZBT forecasts a higher market .. months ahead. Average gains have been 24.6% in average 11 months.. After the ZBT is given. I'm used to trading in much shorter time frames. My goal has been to discover the start of Intermediate Term Rallies.. 5 weeks to 13 weeks. Then.. often.. I trade 3 day to 5 day swings within that Intermediate Term trend. But.. the ZBT can be helpful to us.. in a high probability Big gain over the next 11 months.
Theoretically, I take the ZBT to be a show of urgent Short Covering.. And Buying by big investors. As discussed in the PR31b discussions and related.. we expect to see the Tigers "Pounce" more than once before the larger trend emerges. The 2003 example I discussed earlier shows how it may evolve. Impulse Rally.. then 5 weeks of sideways Consolidation.. Then the Uptrend emerged. But.. during the Consolidation in the Blue Chips.. the small stocks were playing catch up. T2100 shows what happened.. away from the Blue Chips during April May of 2003. T2100 continued higher during April 2003.. while Blue chips consolidated. T2100 is the A/D line.
I'll go over some cases of the ZBT signal
First some more detail...
Zweig defined the ZBT using a 10 day Exp Average of the ratio.. ( A / (A+D)). Again.. that had to do with few investors having Computers. It's much easier to compute Exp Average by hand.. than Simple MA. In the years since Zweig defined the ZBT.. the PC took over. Other market researchers began using Simple MA on the ratio to create the Zweig Index. Using sma gives different results from Exp Average. So.. if you dig into the topic on the Internet.. be aware of the differences. There are other variations out there. Zweig "Continuation" has been defined - not by Marty Zweig.. but by others. Others have used an 8 day window.. or 12 day or 15 day. So.. be careful in comparing results from various sources.
In May, 2004 there is a Near-ZBT showing. 5/10/04 T2103=31.31... then 11 days later.. 5/25/04 .. T2103=61.62. That was 11 days.. Just outside the Zweig window of 10 days. If you start from 5/11/04 , T2103=40.48.. That gets it down to 10 days up to 5/25.. But.. 40.48 is Just Over the lower limit of 40. So.. it's tempting to call it a ZBT on 5/25.. and go on with life. : )
Now.. look at DJ-30.. from 5/25/04 .. forward. The DJIA closed at 10,117 on 5/25/04 .. ..paused the next day.. Down 7; then moved up for 8 days.. to 6/8/04 .. to 10,432. So.. it was Not useful to wait after the signal on 5/25/04 .. at least not ST. But.. after market moved a bit higher.. it then moved back Down in August, 2004.. to just Under the May, 2004 lows. That proved to be an important "double bottom".. and DJIA moved much higher into December, 2004. Interesting.. it was the May, July, August period in 2004 that led me to invent PR31b and PRN 31b. My discussions about that may be in the Hotto Club logs from then.. Or in Hottoworks Club Logs. PR63b came after KR63.. for Intermediate Term lows during Bull markets. PR31b was needed to help with double bottoms or Consolidation periods After Intermediate Term bottoms.
Back to the Near-ZBT of May, 2004..
So.. After the ZBT on May 25, 2004 ... it took 5 months to Consolidate to a final low.. in October, 2004.. before Q4 Rally into December 2004. That December high was 7 months after the May ZBT. Then came a PB in early 2005.. and another pop to new highs in March , 2005. That was 10 months after the May, 2004 ZBT. Some features during the Consolidation period were that the market did not make Much lower lows.. we have the benefit of hindsight with Charts.. to see the overall Consolidation. During that period.. trading SWGC off ST lows was profitable. Then.. in October , 2004.. we came into the Seasonal rally period.. and that worked well for us. I showed this example to get across the longer term nature of the ZBT. In this case.. there was an immediate move up.. over 2%.. but then back down to slightly lower lows.
One more comment on the May, 2004 ZBT case.
May, 2004 came just 2 months after the March, 2004 top... which was After the Huge Bull Mark et Leg up from March, 2003. So.. looking for another big Intermediate Term rally from the May, 2004 lows was asking a lot. What did happen.. was the Correction continued to the October, 2004 Low.. 7 months of Consolidation/Correction off the March , 2004 High. So.. I take the May, 2004 ZBT as a First "Pounce" of Tigers.. And first Short Covering after the two month decline. It was strong enough to suggest there would be More upside to come. It paid off within 7 months.. and more in 10 months. Meanwhile.. it was good to buy the dips.. and sell rallies.
Question: These signals mean the tide is changing? High tide in a few months ahead? If so, we buy on pullbacks....sell on rallies. right?
Answer: Well said. : )
Next... I'll go to another case.. with different conditions coming into the ZBT.
There was a ZBT on 1/8/1987 .. after only a Six day pop from 39.73 on 12/30/86 .. to 63.25 on 1/8/87 .
Now the DJIA chart..
DJIA closed at 2002 on 1/8/87 .. then just kept on Going up.. No pause at all. The DJIA reached new ATH of 2746 on 8/25/87 .. 7 months later.. one of the great Bull Runs ever.. over 35% After the ZBT.. and over 40% overall. Of course.. it was very overbot.. and Breadth deteriorated during the runup.. and then the Fed hiked Rates .. and Inflation popped up.. And then the market gave back the whole rally.. into the "1987 crash".. back to January lows. But.. meanwhile.. the ZBT paid off Big time... according to Marty Zweig's core idea. He wanted to fine those sudden surges.. that would lead to more gains over the next year or so. He noted that most investors are frightened after the First big surges.. and they stand back.. awaiting a big correction.. that may never come... and they get left standing on the sidelines. Zweig's goal was to find signals that would give investors confidence of a longer uptrend ahead... so if they bought stocks on the signal.. they could stay in for a longer time.
Now.. the setup conditions in January , 1987.
There had been the great Bull market move from August 1982.. to July, 1986.. more than Double in 4 years. Then.. the DJIA Consolidated for the rest of 1986.. did not Correct badly.. but no new highs.. just Consolidation pattern... into December, 1986. So.. in January, 1987.. there had been a 5 to 8 month Consolidation Before the ZBT in January 1987. And.. the up move that gave the ZBT.. was a BTBO.. over the Consolidation base of 1986. So.. we have a suggestion.. about what may come Immediately after a ZBT.. based on the Setup conditions when they occur.
Another ZBT occurred on 8/6/1984 . That was after a 7 month Correction.. After the huge Bull Mark et Leg of August, 1982 to January, 1984. After 8/6/84 .. the DJIA Consolidated for 5 months.. into December, 1984.. before moving higher into January/February 1985. Then Consolidation again for 3 months.. before moving up into July, 1985. July, 1985.. that was 11 months after the ZBT in August, 1984. DJIA was Not done yet... it kept moving up.. over 30% into 1986.
It's always hard looking at the period just after 1982.. Interest rates were falling.. Inflation was falling... the USA was growing fast.. after big unemployment in 1980-81. So.. the stock market kept moving up and up.. with the better conditions. Still.. the ZBT did it's job.. kept investors in stocks to benefit from coming gains. There was a ZBT on 8/20/1982 .. The market moved higher.. paused a week.. then marched higher into June, 1983.
Key points...
It's not disastrous to miss out on the Impulse Rally.
If Intermediate Term signals are given... it's possible to make good gains beginning After the Impulse Rally is over.
Same old thing.. When the market gives important Signals.. it often uses up a lot of energy to give the signal.. and next needs to retrace part of the move that produced the signal... Or at least Consolidate for a while.
Friday we got the new ZBT.. first true complete one in over 20 years. ZBT is "Zweig Breadth Thrust" signal. I discussed the Zweig Indicator over the weekend.. T2103 is the ticker on TCNet. I'll go over ZBT more now. Marty Zweig did his research back in the days before PCs could be used to help trading. Zweig did a lot of work on Momentum indicators.. adding to other earlier research by others. The ZBT takes a lot of buying to achieve the buy signal. Zweig's signal needs a surge.. within 10 days to go from Oversold to Overbought.. in the A/D measures. He was not interested in very Short term trading.. but in longer term Trends that would support gains over time. So... the ZBT signal - in my words - Looks for a solid Impulse Rally.. with Breadth support.. that makes it very likely that a LT Rally is under way.. even Longer than My "IT Rally" of 5 weeks to 13 weeks. The ZBT forecasts a higher market .. months ahead. Average gains have been 24.6% in average 11 months.. After the ZBT is given. I'm used to trading in much shorter time frames. My goal has been to discover the start of Intermediate Term Rallies.. 5 weeks to 13 weeks. Then.. often.. I trade 3 day to 5 day swings within that Intermediate Term trend. But.. the ZBT can be helpful to us.. in a high probability Big gain over the next 11 months.
Theoretically, I take the ZBT to be a show of urgent Short Covering.. And Buying by big investors. As discussed in the PR31b discussions and related.. we expect to see the Tigers "Pounce" more than once before the larger trend emerges. The 2003 example I discussed earlier shows how it may evolve. Impulse Rally.. then 5 weeks of sideways Consolidation.. Then the Uptrend emerged. But.. during the Consolidation in the Blue Chips.. the small stocks were playing catch up. T2100 shows what happened.. away from the Blue Chips during April May of 2003. T2100 continued higher during April 2003.. while Blue chips consolidated. T2100 is the A/D line.
I'll go over some cases of the ZBT signal
First some more detail...
Zweig defined the ZBT using a 10 day Exp Average of the ratio.. ( A / (A+D)). Again.. that had to do with few investors having Computers. It's much easier to compute Exp Average by hand.. than Simple MA. In the years since Zweig defined the ZBT.. the PC took over. Other market researchers began using Simple MA on the ratio to create the Zweig Index. Using sma gives different results from Exp Average. So.. if you dig into the topic on the Internet.. be aware of the differences. There are other variations out there. Zweig "Continuation" has been defined - not by Marty Zweig.. but by others. Others have used an 8 day window.. or 12 day or 15 day. So.. be careful in comparing results from various sources.
In May, 2004 there is a Near-ZBT showing. 5/10/04 T2103=31.31... then 11 days later.. 5/25/04 .. T2103=61.62. That was 11 days.. Just outside the Zweig window of 10 days. If you start from 5/11/04 , T2103=40.48.. That gets it down to 10 days up to 5/25.. But.. 40.48 is Just Over the lower limit of 40. So.. it's tempting to call it a ZBT on 5/25.. and go on with life. : )
Now.. look at DJ-30.. from 5/25/04 .. forward. The DJIA closed at 10,117 on 5/25/04 .. ..paused the next day.. Down 7; then moved up for 8 days.. to 6/8/04 .. to 10,432. So.. it was Not useful to wait after the signal on 5/25/04 .. at least not ST. But.. after market moved a bit higher.. it then moved back Down in August, 2004.. to just Under the May, 2004 lows. That proved to be an important "double bottom".. and DJIA moved much higher into December, 2004. Interesting.. it was the May, July, August period in 2004 that led me to invent PR31b and PRN 31b. My discussions about that may be in the Hotto Club logs from then.. Or in Hottoworks Club Logs. PR63b came after KR63.. for Intermediate Term lows during Bull markets. PR31b was needed to help with double bottoms or Consolidation periods After Intermediate Term bottoms.
Back to the Near-ZBT of May, 2004..
So.. After the ZBT on May 25, 2004 ... it took 5 months to Consolidate to a final low.. in October, 2004.. before Q4 Rally into December 2004. That December high was 7 months after the May ZBT. Then came a PB in early 2005.. and another pop to new highs in March , 2005. That was 10 months after the May, 2004 ZBT. Some features during the Consolidation period were that the market did not make Much lower lows.. we have the benefit of hindsight with Charts.. to see the overall Consolidation. During that period.. trading SWGC off ST lows was profitable. Then.. in October , 2004.. we came into the Seasonal rally period.. and that worked well for us. I showed this example to get across the longer term nature of the ZBT. In this case.. there was an immediate move up.. over 2%.. but then back down to slightly lower lows.
One more comment on the May, 2004 ZBT case.
May, 2004 came just 2 months after the March, 2004 top... which was After the Huge Bull Mark et Leg up from March, 2003. So.. looking for another big Intermediate Term rally from the May, 2004 lows was asking a lot. What did happen.. was the Correction continued to the October, 2004 Low.. 7 months of Consolidation/Correction off the March , 2004 High. So.. I take the May, 2004 ZBT as a First "Pounce" of Tigers.. And first Short Covering after the two month decline. It was strong enough to suggest there would be More upside to come. It paid off within 7 months.. and more in 10 months. Meanwhile.. it was good to buy the dips.. and sell rallies.
Question: These signals mean the tide is changing? High tide in a few months ahead? If so, we buy on pullbacks....sell on rallies. right?
Answer: Well said. : )
Next... I'll go to another case.. with different conditions coming into the ZBT.
There was a ZBT on 1/8/1987 .. after only a Six day pop from 39.73 on 12/30/86 .. to 63.25 on 1/8/87 .
Now the DJIA chart..
DJIA closed at 2002 on 1/8/87 .. then just kept on Going up.. No pause at all. The DJIA reached new ATH of 2746 on 8/25/87 .. 7 months later.. one of the great Bull Runs ever.. over 35% After the ZBT.. and over 40% overall. Of course.. it was very overbot.. and Breadth deteriorated during the runup.. and then the Fed hiked Rates .. and Inflation popped up.. And then the market gave back the whole rally.. into the "1987 crash".. back to January lows. But.. meanwhile.. the ZBT paid off Big time... according to Marty Zweig's core idea. He wanted to fine those sudden surges.. that would lead to more gains over the next year or so. He noted that most investors are frightened after the First big surges.. and they stand back.. awaiting a big correction.. that may never come... and they get left standing on the sidelines. Zweig's goal was to find signals that would give investors confidence of a longer uptrend ahead... so if they bought stocks on the signal.. they could stay in for a longer time.
Now.. the setup conditions in January , 1987.
There had been the great Bull market move from August 1982.. to July, 1986.. more than Double in 4 years. Then.. the DJIA Consolidated for the rest of 1986.. did not Correct badly.. but no new highs.. just Consolidation pattern... into December, 1986. So.. in January, 1987.. there had been a 5 to 8 month Consolidation Before the ZBT in January 1987. And.. the up move that gave the ZBT.. was a BTBO.. over the Consolidation base of 1986. So.. we have a suggestion.. about what may come Immediately after a ZBT.. based on the Setup conditions when they occur.
Another ZBT occurred on 8/6/1984 . That was after a 7 month Correction.. After the huge Bull Mark et Leg of August, 1982 to January, 1984. After 8/6/84 .. the DJIA Consolidated for 5 months.. into December, 1984.. before moving higher into January/February 1985. Then Consolidation again for 3 months.. before moving up into July, 1985. July, 1985.. that was 11 months after the ZBT in August, 1984. DJIA was Not done yet... it kept moving up.. over 30% into 1986.
It's always hard looking at the period just after 1982.. Interest rates were falling.. Inflation was falling... the USA was growing fast.. after big unemployment in 1980-81. So.. the stock market kept moving up and up.. with the better conditions. Still.. the ZBT did it's job.. kept investors in stocks to benefit from coming gains. There was a ZBT on 8/20/1982 .. The market moved higher.. paused a week.. then marched higher into June, 1983.
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