Trade Management, psychology, sentiments

Been in contacts with clients, friends, been asking me to teach them a little about TA blah blah..

thinking through, I guess I will touch on a topic more unique as above.
for TA wise, I guess i leave to my friends. Cheers

It's coming

One of the best posts

By Brett Steenbarger

2) No One Strategy Always Wins - Go back to the idealized chart of cyclical price change from the prior post. During the market moves between price lows and momentum highs and between price highs and momentum lows, trend following strategies will tend to work. During periods between momentum highs and price highs and between momentum lows and price lows, we will tend to see countertrend (reversal) strategies working. During the period between price highs and momentum lows, we'll tend to see volatility expand; during the period between momentum highs and price highs, we'll tend to see volatility dry up. Using the same strategy across all phases of market cycles will result in periods of uneven performance.

Reading mkt - Brett Steenbarger

Think about reading a market like reading a person: you'll listen for the communications of the market--what it's doing--but also for the metacommunications: how it's expressing itself. Let's take yesterday's market as an example. *

How did markets in Asia and then Europe open? How might a trader have picked up on overnight underperformance by U.S. stock index futures and weak performance by individual stocks in their pre-opening trade to anticipate weakness during the regular trading day?*

What news came out early in the morning trade? How did stocks respond to the housing news? How could the failure of stocks to rally on the news have helped a trader anticipate a retest of the prior day's low price?*

How did sentiment unfold during the morning trade? How could traders note that institutional participants in the market were dominantly hitting bids across the universe of stocks (negative NYSE TICK) and hitting bids in the S&P 500 futures (negative Market Delta) to identify a weak trading day?*

How was volume behaving during the day? How could traders have noted the increase in volume on downward moves early in the day relative to bounces? What does that tell a trader about the participation of large traders and institutions?*

What were support and resistance areas from the overnight session? The previous day? How did the market behave as it approached these? How can traders anticipate that the failure to break one end of a trading range will lead to efforts to test the other end? How can traders distinguish valid breakouts from such a range from unsuccessful retests by noting sentiment and volume at those price levels?* What were interest rates doing during the day? How were leading stock sectors, such as financial stocks and consumer cyclicals, behaving? How might that have been linked to the housing news earlier in the day? How could a trader have noted risk-aversion evolving over the day's session from such themes?*

What were market indicators, such as the new highs/lows noted in my indicator review and the money flows noted in my recent post, noting about longer-term market strength? How might a look at such measures help a trader anticipate weakness from day to day?

It's not about imposing your views of what markets *should* be doing; it's about reading what they *are* doing by placing price action into a broader context and reading how that price action is evolving. These are performance skills that are developed over time; they're like the expertise of a physician who learns to piece together signs to arrive at diagnoses. The skill is in the ability to connect new, unfolding information with the information you've already gathered to constantly update your views of market activity. That skill serves you well over any time frame..Note: The topic of market communications and metacommunications is a major theme of my first book, The Psychology of Trading. I personally find it interesting that traders who lack social skills--who don't read people well--also seem to struggle with markets. I listen carefully to the market views of defensive, abrasive, or socially inept people; they're uncommonly wrong, which makes their opinions useful in unintended ways.

Money Managment

The Expectancy Formula :
(Avg$Win x Win Rate) - (Avg $Loss x Loss Rate) = Expectancy

Been thinking about discretionary accounts with 100k,

• Average Dollar Win
• Win Rate
• Average Dollar Loss
• Loss Rate
• Maximum Drawdown
• Maximum Positive Return
• Maximum Consecutive Wins
• Maximum Consecutive Losses
• Average Number of Consecutive Wins
• Average Number of Consecutive Losses
• Standard Deviation of Monthly Returns.
• Average annual return

So taking Ray Barros principle,

I accept a 3% as my maximum risk. If my avg number of consecutive losses is 3 and the average loss is 1%. I can now estimate that the objective maximum percentage loss.
I multiply my maximum number of consecutive losses by 3. So now the number is 9. So my possible worst case drawdown on average would be a 9 x 1% = 9%. I then multiply the standard deviation of monthly returns by 3. Let’s say that comes out at 27%. I now have the boundaries for my worst case scenario: 9% to 27%.

Major selldown from 1998 onwards

The below is by counting, so don't quote me if wrong:

9323- HIGH - 30days (1998)
7544 - LOW - 19%
1st rebound - 21days
========================================
11720 - HIGH - 40days (2000)
9800 - LOW - 16%
1st rebound - 9days, 2nd - 20th days, 3rd rebound- 28days
recovery: 11420 (14%) - 15days

2427 - High - 45days (18Jan00)
2020 - Low - 17% (25Feb00)
recovery: 221 (9%) - 7days
========================================
STI sell in between these 2 selldowns
==================================
11223 - HIGH - 26days (2000)
9974 - LOW -11.1%
1st rebound - 6days, 2nd - 21st days
recovery: 10928 (9%) - 9days

2190 - High - 26days (05Sep00)
1800 - Low - 18% (18Oct00)
recovery: 2068 (13%) - 12days
========================================
10860 - HIGH - 10days (2001)
9397 - LOW - 13.5%

1910 - High - 29days (09Mar00)
1562 - Low - 18% (19Apr00)
========================================
10361 - HIGH - 41days (2002) - 55 days - retest and lower
7688 - LOW - 25.8%
1st rebound - 28days recovery: 9086 - 12% (20days)

9059 - HIGH - 33days (2002)
7290 -LOW - 19.5%
1st rebound - 10days, 2nd - 22th days

1724 - High - 96 days (22May02)
1340 - Low - 22% (14Oct02)
1st rebound - 27days
========================================

Intermediate Selldown

As per previous reviews, a more severe selldown is probably taking place.

We stil have around 2- 10% to go and 4 - 6 days before a reasonable rebound happen. But I notice the % seem to defer to the previous cases for STI compares to the US.

Our percentage down seem to be closer maybe due the fact we did not have a chance to work off our oversold conditions.
1460 - High 22th Feb - 14days 1363 - Low 14th Mar 0.07% low
1557 - High 20th Jul - 20days 1371 - Low 16th Aug 0.12% low
1550 - High 31st Oct - 17days 1404 - Low 26th Nov 0.09%
1404 - High 5th Jun - 10days till now 1334 - low 19thJun 0.05%

Major selldown - 18days 1500 - High 26Dec 1268 - low 23th Jan 0.15%

STI 3316 - High 2920 -Low 0.12%
3687 - High 2977 - Low 0.19%
3843 - High 3311 - low 0.15%
3216 - high 2999- low 0.07%

Trading for a Living - Alexandra Elder

Starting with Psychology which is pretty unique as a trading book but very powerful analysis on psychology

Psychology:
A successful trader must identify his fantasies and get rid of them. A loser is not undercapitalized - his mind is underdeveloped.

Undercapitalization myth
A loser can destory a big account almost as quickly as a small one. He overtrades, and his money management is sloppy. Your trades must be based on clearly defined rules. You have to analyse your feelings as you trade, to make sure that your decisions are intellectually sound. You have to structure your money management so that no string of losses can kick you out of the game


The mental baggage from childhood can prevent from succeeding in the markets. You have to find your weakness in order to change. Keep a trading diary - write down your reason for entering and exiting every trade. Look for repetive patterns of success and failures.

Trading Psychology
There is a stark parallel between an alocholic and a trader whose account is being demolished by losses. He keeps changing trading tactics, acting like an alocholic who tries to solve his problem by switching from hard liquor to beer. A loser denies that he has lost control over his course in the market.

1. When you admit that you have a personal problem that causes you to lose, you can begin building a new trading life. You can start developing the discipline of a winner.

2. Your trading records must show the date and price of every entry and exit, slippage, commissions, stops, all adjustments of stops, reasons for entering, objectives for exiting, maxi paper profit, max paper loss after a stop was hit and other necessary data

3. If you let the market make you feel high or low, you will lose money. Ultimately, the one thing you can control is yourself.

To make money trading, you do not need to forcast the future. You have to extract information from the market and find out whether bulls or bears are in control. You need to measure the strength of the dominant market group and decide how likely the current trend is to continue. You need to practice conservative money management aimed at long-term survival and profit accumulation. You must observe how your mind works and avoid slipping into fear or greed. A trader who does all of this will succeed more than any forecaster.

Chart Analysis:
Trendlines:
1. Longer the timeframe, the more important the trendline
2. Longer the trendline, the more valid it is
3. The more contacts between prices and trendline, the more valid that line.

NYSE Advance-Decline Issues

How I Made 2,000,000 in the Stock Market - Nicolas Darvas

Trading Lessons From Nicolas Darvas:
1. There are no good or bad stocks. There are only stocks that rise in price and stocks that decline in price, and that price is based on the laws of supply and demand in the marketplace
2. “You can never go broke taking a profit” is bad advice that will result in overtrading and cutting winners short. Selling winners and holding losers is to be avoided at all times
3. There is a “follow-the-leader” style in the market. You will find success by selecting the most active and strongest industry group and trading its top leader
4. The combination of price and increased volume is key to stock selection. Focus your time on new leaders emerging with a new market cycle
5. It is the anticipation of growth rather than the growth itself that leads to great profits in growth stocks. “You have to find out what the public wants and go along with it. You can’t fight the tape, or the public.”
6. One of the quickest ways to lose money in the market is to listen to others and all of their so-called expert opinions. To succeed, you must ignore all outside opinions and predictions. Follow your own strategy!
7. Losses are tuition on Wall Street. Learn from them.
8. You should expect to be wrong half of the time. Your goal is to lose as little as possible when you are. “I have no ego in the stock market. If I make a mistake I admit it immediately and get out fast. If you could play roulette with the assurance that whenever you bet $100 you could get out for $98 if you lost your bet, wouldn’t you call that good odds?”
9. Most of your big failures will come from three things: 1) when you abandon your rules, 2) you become overconfident, and 3) trade in despair when unsuccessful
10. The best speculators search only for the very best opportunities. To be truly successful, you must wait for the right opportunities to present themselves and this often means doing nothing for long periods of time
11. The market behaves the way it does due to participants behaving the way they do. No one knows what they will do until they actually do it
12. Long-term investors are the real gamblers in the market due to their eternal hope that losing stocks will come back in price
13. It is difficult to be profitable on the short side of the market versus the long side - trading in rising or bull markets will give you the best chance for success
Most, if not all stocks, will follow the general trend of the market
14. To train your emotions, write down the reasons for making every trade. When you lose, write down what you thought contributed to the loss. Then study and set new rules to avoid making those same mistakes
15. Concentrate your trades. At the peak of his success, Darvas would hold only 5 to 8 stocks at one time which was in contrast to his earlier days when he was overtrading and would hold up to 30 stocks at a time
16. Avoid fallen leaders. Overhead resistance will keep upside potential limited due to supply from previous buyers who had not cut short their losses. 17. According to Darvas, the only sound reason for a stock is one that is rising in price. If that is not happening, then there is “no other reason worth considering.”
17 .Darvas used his “box theory” to trade using boxes to time his entries (on breaking out to a new higher box) and exits (breaking below the current trading box).
18. For new trades, Darvas used “pilot buys” which basically were starter positions in stocks he liked. Only if the stock continued to move higher would he then pyramid and increase his position. He learned never to buy more of a losing position
19. He thought many unsuccessful investors made the mistake of looking at the same familiar names that might have worked well for them in the past instead of focusing on the next stock with the right elements for the new market cycle. “I am only in infant industries where earnings could double or triple. The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality.”
20. Perfection has no role in successful trading. No one can buy at the absolute lowest price and sell at the highest price. No time or effort should be devoted to that goal. “I never bought a stock at the low or sold one at the high in my life. I am satisfied to be along for most of the ride.”
21. Trade only when the environment is in your favor. Darvas’ strategy kept him out of poor and bear markets because he wouldn’t trade stocks that didn’t fit his requirements which were only found in raging bull markets
22. Be aggressive when warranted. Darvas believed in making aggressive trades when his system pointed to a great trade. In fact, sometimes 50% of his capital was devoted to just one stock
23. While his trading approach was very technical, after studying the market’s winners he understood the relevance of finding stocks also with good fundamentals. Namely, Darvas thought that earnings and the future estimate of increased earnings were very important

Calendar Effects and others..

This is an excellent site:



Trading Calendar

http://www.cxoadvisory.com/calendar/



http://www.cxoadvisory.com/blog/internal/blog8-09-06/



A friend mention about BDI related to marine stks, a comeback?



http://investmenttools.com/futures/bdi_baltic_dry_index.htm

Trader Vic II - Principles of professional Speculation

Followup to his book 1, more gems packed:

1. Economic Fundamentals
The market is governed by fundamental economic forces, which are affected by the current state of the political system, which in turn is constantly being changed by politicians.

2: Technical Analysis
The predominant psychology of market participants determines the timing of changes in the direction of price movements

- Dow Theory Confirmation date: The date on which the second of Dow industrials breaks below a previous intermediate low in a bull market or vice versa

Change of Trend
iii. 1-2-3 Rule (Change of trend) & 2B Rule
1. Trendline must be broken - prices must cross trendline drawn on chart
2. Prices must stop making higher highs in an uptrend or vice-versa
2B. In an uptrend, if prices penetrate the previous high, fail to carry though and then immediately drop below previous high, trend is apt to reverse. Converse true for downtrends.
3. Prices must go above previous short term minor rally high in a downtrend or vice versa

iv. Volume Relationships
1. Vol move with the trend, in a bull mkt, vol tends to be heavier during rallies and converse is true. Exception is when mkt is approaching a correction, covered in the next observation
2. In an intermediate rally, mkt that is overbought tends to lose vol on rallies and gain vol on declines, conversely is true
3. Bull mkts usually end in a period of extraordinarily high vol and begin in light volume. Stated differently, bear markets usually begin in high vol and end on light vol.

Breath indicators or advance-decline line (A/D line) when they don't follow the general direction of broader averages, discrepancy signals a coming change in trend

v. Four-day Rule
When the market has a reversal, in the form of a 4-day up or down sequence from a high or a low, after an intermediate move has taken place, the odds of the trend has changed is very high.

vi. High-low 3-days rule
When a reversal occurs, to the extent that it goes above or below a three-day high or low, you go long or short. You use the high or low of the third day as ur stop, and if that stop is hit, you then reverse your position.

Conclude: Evaluate the mkt indexes in terms of 1-2-3, 2B and market life-expectancy. Following on, vol relationships, MA, breath and momentum oscillators.

3: Options Trading
Keep trades small: 2 to 3 % of risk capital
Trade only when odds are in ur favour
Trade only when payout is at least 5 to 1
Never buy just because price is low; never sell just because price is high
High premiums always indicate impending news

Day trading:
Psychological Requirements: Able to take loses and be wrong
Knowledge requirements: predicting the pattern of the market of the day
- Knowledge of longterm, intermediate, short
- Feel for economic news
- Knowledge of the seasonals(Stock Trader's Almanac)
- Grasp of technical considerations (option expirations, program trading, end of quarter markup, earnings reports)
- Awareness of pending political changes
- Interpret Fed policy meetings
- Well read in Barron & WSJ (editorials in both), NY Times & Washington post (skip editorials)

His rule:
1. Do not overtrade
2. Do not take a loss home
3. Never add to a bad trade
4. Never let a profit become a loss
5. Always figure ur stop loss before initate a trade
6. Don't be a one-way trader, be flexible
7. Add to a profitable trades when appropriate. Best time to buy or sell is after consolidation and a break above or below range prices
8. Be cautious when you buy or sell breaks while initating a new trade
9. Cut your losses and let winner run
10. If you are unsure, dont trade.

Day's trade:
1. Opening range, direction prices take immediately, whether is higher than yesterday's high or lower
S&P futures have 4 distinct moves:
- Opening and contraopening move
- Choppy one-direction move from 10am -12pm
- Choppy move in opposite direction from 12pm - 2.30pm
- Close from 3.10pm usually in one direction

Reminiscences of a stock operator

Book review again: one of the most-read of trading books but kinds of hard to review due to narrative writing

Fav quote: No one can ever beat the markets
From his bucket boy of reading the tap (time of sales nowadays of upbreak) - daytrading, to wallstreet trading of nagging execution where he lost all he got (trading restrictions) and longterm speculation. (business evaluation)

When a stock breakdown, not because of primarily shortists but due to changes in business evaulations changes.

Thoughts

Ray once says trading success = psychology X plan with an edge X money management, and he ranked psychology highest of all. (note multipication sign and not a plus)

psychology is the hardest subject of the three. and i shall not cover it since i am not gd in it but i guess that cover in the character. Money management is the next important factor of the three

Money management:
= Expectacy + Position sizing
= Winning Gains must exceed losing ones (Let winner run, cut loses) + risk/reward ratio should b 3:1.

Plan with an edge:
= conceptual analysis + technical analysis

1) Reversal Trades - The market moves to or just beyond the edges of a trading range (a consolidation area, the value area from the prior day), cannot sustain buying/selling interest, and falls back into that range
- Extreme outliner of bollinger band, most on

2) Breakout Trades - Here we have a situation in which the market is range bound and surges out of the range.Very often, there will be a catalyst for the breakout (economic news; earnings) and the move will be reflected by other trading instruments and/or asset classes.
- Enter limit order on consolidation date

3) Continuation Trades - Here we have a trend in place, the idea is to wait for a pull back to enter the trend. A good continuation trade can be thought of as a trade that has already broken above or below its recent pivot level, hit its resistance or support level relatively quickly, and now is positioned for possible moves to resistance2/support2
- Buy or sell on confirmation of reversal, continuation or breakout and not anticipation

Trade Management
- Buy or sell on consolidation pt or channel borders

Rules
1. Have a cutloss plan
2. Never trade with no plan

Victor Sperando - Trader Vic

Been reading his book, some principles to look up for, will publish on as I read along

Business Philosophy: Preservation of Capital to consistent profits to pursuits of Superior returns

Since we are in bear market, some interesting facts about it

There are 3 principal phases of bear market: the first represents the abandonment of hopes upon which stocks were purhcased at inflated prices; 2nd reflects selling due to decreased business and earnings, and the third is caused by selling of sound securities

Median extent of bear markets is 29.4% from 20.4% - 47.1%
Judging from Dow high of 14,160 on Oct11, median will be 10,000 from 7,490 - 11,328
Our Silly STI wil be from high of 3,900 on on Oct 11, median will be from 2,753 from 2,063 - 3,120

Hmm. of course, i believe our STI will be much weaker in terms of mkt cap and business functions, thefore the median wil be much skewed.

Median duration of bear markets is 1.1 yrs from 0.8 -2.8years
Juding from Dow break of 12,500 on 16thJan08, median will be Feb09 from Aug08 to Oct10

After extended bear swing, sec reactions are marked by sudden and rapid advances followed by decreasing activity and line formation to new lows

And about the bull for next time
Median extent of primary bull mkt is 77.5% increase in prices from the previous bear market low pt

Median duration of primary bul mkts is 2.33 yrs. 75% of all bull mkts in history have lasted more than 657 days (1.8 yrs), and 67% have lasted between 1.8 yrs and 4.1 yrs

Beginnings of bull mkts are virtually indistinguishable from the last secondary reaction in the bear mkt until passage of time

2. Secondary corrections retrace from 1/3 to 2/3 of the primary swing and last 3 weeks to 3mths and swifter and sharper than the movements of the primary trend

If 200MA flattens out followinga previous decline or is advancing and prices penetrate the moving average line on the upside, comprises a major buying signal

If 200MA flattens out followinga previous rise or is declining and prices penetrate the moving average line on the upside, comprises a major buying signal

When playing the short side near market tops, dun't short the strong relative strength stks nor weakest stks. Short mid-range relative strength, Time to short is after intermediate-term and long-term top.

Trading Rules:
1. Trade with a plan and stick with it
2. Trade with the trend
3. Use stop loss
4. When in doubt, get out
5. Be patient, never overtrade
6. Let ur profits run, cut your losses short
7. Never let a profit run into a loss
8. Buy weakness and sell strength
9. Be an investor in early stages of bull mkt, speculator in latter stages of bull mkts and bear mkts
10. Never avg a loss
11. Dont trade on the basis of "tips"
12. Always analyse your mistakes