Applying the "Rules of War" to the Market

Jay's market outlook for 24th Aug : European and US markets both declined, and Asian markets are also down this morning. The global short-term trend is clearly down now. we can expect stocks to fall here as well in keeping with the global trend.



Applying the "Rules of War" to the Market, from David Baccile

Bevin Alexander's "How Wars Are Won" details 13 rules for waging war. I'm just beginning the book and hope to provide a review when done. If it is anything like the short 10-page introduction, it will be a rewarding read. I will provide some quotes from the introduction and add some of my thoughts on how these rules of war may apply to the markets.

Both countries (France and the U.S.) tried to fight a conventional, or traditional war against the Vietnamese Communist forces, but the Communists insisted on fighting a guerrilla war. That is to say the Vietnamese used different weapons, and with those weapons they were superior. They, like the September 11 terrorists, eluded strength and struck at weakness.
The rule "eluding strength and striking weakness" is an old rule that all great warriors and commanders such as Napoleon have used to gain advantage.

How may such a rule apply to the markets? In the markets we are not matched against one great commander but many, many great commanders. Large Wall Street dealers with unmatched capital and sophisticated hedge funds both attract the brightest minds in the world to employ technology and methodologies to their advantage. In addition to this group, we are up against large money managers with teams of trained analysts and traders.

How do we, as smaller traders / investors, then elude their strengths and strike at weakness? First, we must identify the weaknesses and they - let's identify "them" as the Chair's "Market Mistress" - do not all share the same weaknesses.

Areas of Weaknesses for the Market :

1. Tied to a benchmark. Perhaps the second worst concept ever created was that of comparing performance to a benchmark (the first being CAPM). Most money managers are pleased if they can beat a benchmark every year by 100 - 200 basis points every year. They adopt rigid styles to keep them invested in a similar fashion to their chosen benchmark.

2. Short-term orientation. With some notable exceptions, Money managers, hedge funds and dealers focus on short-term success. When this short-term orientation is combined with a rigid style, the result is a flocking, or herding of managers within similar styles into the sectors and stocks that are "working" and out of those that aren't.

3. Success get punished. A money manager or hedge fund that performs well is then "rewarded" with a flood of new money as investors seek to garner their share of any prospective success of this talented manager. The additional funds, reduce the managers ability to capitalize on his advantage and the alpha is diluted. This leads to a fourth weakness.

4. Size matters. Successful money managers typically manage large sums which often limits their universe of potential investments. Liquidity constraints may keep a manager from investing in potentially fruitful areas.

Top 10 Ways To Lose All The Money In Your Trading Account In 30 Days Or Less

Jay's market outlook for 21st Aug, 2006: European stocks slipped on Friday, while US stocks improved. However, Asian markets are down quite heavily this morning, and the global short-term trend is down now. This could result in a fall here today, even though stocks did not finish badly here on Friday

The market remains in the intermediate uptrend which started on July 24. The levels below which a downtrend would be signalled are still 10,780 for the sensex, 3,143 for the nifty, and 3,889 for the CNX Midcap.

Most world markets are also in intermediate uptrends, and a global rally is on. The uptrends do not seem vulnerable now that most markets have rallied strongly over the last few days.

Top 10 Ways To Lose All The Money In Your Trading Account In 30 Days Or Less


Top 10 Ways To Lose All The Money In Your Trading Account In 30 Days Or Less - Guaranteed!
#10 - Put all of your efforts into finding the perfect technical indicator. Once you find this magical indicator, it will be like turning on a water faucet. Go all in. The money will just flow into your account!

#9 - When your technical indicator says that the stock is oversold, BUY IT RIGHT THEN. Always do what your technical indicator says to do. It takes precedence over price action.

#8 - Make sure to visit a lot of stock trading forums and ask them for hot stock tips. Also, ask all your friends and family for stock tips. They are usually right, and acting on these tips can make you very rich.

#7 - Watch what other traders do and be sure to follow the crowd. After all, they have been trading a lot longer than you so naturally they are smarter.

#6 - Pay very close attention to the fundamentals of a company. You MUST know the P/E ratio, book value, profit margins, etc. Once you find a "good company", consider going on margin to pay for shares in their stock.

#5 - Forget about developing a trading plan. If you see a good stock just buy it. Don't worry about when your going to sell. No need to get caught up in the details. Besides, you'll probably get rich the first year of trading anyway.

#4 - Buy expensive computers and trading software. While your at it, buy a couple more TV's so that you can watch CNBC on multiple screens! You NEED all of these gadgets in order to trade stocks successfully. Then watch the money roll in!

#3 - Always follow your emotions. They are there for a reason. If you feel nervous, sell the stock! If you are excited, buy more shares. This is the best way to trade stocks and fatten up your trading account.

#2 - Don't worry about using stop loss orders. When the time comes, you will be able to sell your shares and take a loss. Your emotions won't even come into play. Besides, stop loss orders are for sissies!

#1 - Absolutely, without a doubt, FORGET about managing your money. Don't worry about how much you can lose on a trade. Only think about how much loot your gonna make. Then start planning that trip to Fiji!

Trading and Betting the Horses

Jay's Market outlook for 14th Aug : Europe ended mixed and little changed on Friday, after a good start. US stocks fell. Asia is mixed this morning, with the Hang Seng down marginally, while the Nikkei has made a strong move. The global short-term trend is mixed once again, and will therefore not influence our market today. We may see two-way moves as we did on Friday


Trading and Betting the Horses

While some people question how easy it is to make a consistent living TRADING, how about making a consistent, comfortable living betting on horse races? Here is a story about Ernest Dahlman - someone who has experienced amazing success at betting on horses for the past 35 years. Some of the principles that have contributed to E.D.'s success are the very same applied by top, professional traders. The following includes excerpts from a June 3, 2001 article titled THE WIZARD OF ODDS, published by the New York Times and written by William Grimes. We recommend that before you read our story you read the original article in its entirety. It is necessary to register first on the NY times website. They will have the article freely available only until June 10.
This Wizard of Odds, "Ernest Dahlman, may be the world's most successful horse bettor. The reason he's so good is that he doesn't gamble." But, according the article, "in a busy year, Dahlman might bet as much as $18 million." Let's look at some of the main principles that contribute to Dahlman's success and see how they are transferable to trading.
1. Dahlman narrows his playing field. He specializes primarily "with races at tracks in New York and California" where he perceives himself to have a larger edge. This way, he can become familiar with the subtle nuances such as local trainers (in whose hands a horse can experience a "religious conversion") and track conditions. A trader will do best to concentrate on a select "stable" of markets and learn their individual personalities, than to jump into markets or individual stocks that have not been thoroughly researched.

2. Dahlman specializes in a very specific type of bet - the exacta, his "bread and butter." A trader will do best if he specializes in just one style or pattern or trading methodology. Know the risk/reward characteristics of your individual technique. Dahlman chooses what would at first glance appear to be a high risk technique, but one which offers good rewards.

3. Dahlman pays more money to minimize his risk. He hedges his bet by creating a box ("twice as expensive as a straight exacta" but which "lets Dahlman have things both ways"). Successful top traders are far more interested in strategies by which to minimize risk than those that go for the big gains. Stops, protective options, or spread strategies are just some of the ways to minimize risk.

4. Be a "plodder," a nickel and dimer. "On average, (Dahlman) says, he earns 3 or 4 percent on his investment." He never bets serious money on long odds. Stick with the high probability setups. Don't try to hit home runs. "The point is, there's no such thing as a sure thing. Favorites win only a third of the time, an immutable racing statistic. Even successful bettors tear up more tickets than they cash. The trick is to cash enough tickets, at the right odds, to offset the losses and turn a profit. That's where addition and subtraction come in."

5. Know the seasonalities of your game. "'Winter is my favorite time of year,' he said cheerfully. 'It's more predictable. The horses tend to be older, and you know what they're going to do. And out in Northern California it rains, and you get a lot of grass races switched to the main track, resulting in complete mismatches.'" If you are a grain trader, there are distinct times of year when volatility increases. If you trade options, there has historically been a strong tendency for volatility to contract going into the summer - good if you are a short premium player, bad if your game favors a momentum style. Do you do best at the beginning of the year or the end of the year? Know the cycles in both your game and yourself.

6. Do your daily homework. "Most horseplayers love a contentious 12-horse race with the promise of three-figure exactas and monster trifectas. Not Dahlman. 'Anyone who knows anything about gambling will tell you I'm not a great gambler,' he says. 'What I'm good at is arithmetic. I can add and subtract.'" "Like many other professional horseplayers, Dahlman relies in part on the work of others. The Daily Racing Form gives him a compressed description of the last dozen races run by each horse entered in a race. That merits a quick glance. The more serious numbers come from 'the sheet'" ... which analyze and quantify... "a variety of factors, ranging from track resiliency to wind direction to the distance actually traveled by each horse." He considers his detailed record keeping to be his biggest edge. What type of detailed record keeping do you maintain with your own trading?

7. Specialize, Specialize, Specialize! Who would have ever thought of specializing in Dahlman's "overriding preoccupation, horseshoes? Years ago, Dahlman began noticing something funny about horses equipped with mud calks, cleats that some trainers use for extra traction when rain turns dirt into mud. Dahlman noted that even when rain failed to materialize, a lot of horses seemed to improve several lengths when wearing mud calks for the first time" It's also another "reason he loves Golden Gate Fields, near San Francisco. It rains a lot there, so plenty of mediocre-seeming horses are switching to mud calks for the first time and then sneaking into exactas at good prices. A second reason for loving Golden Gate is that the track posts very detailed shoe information before each race." Find your niche!

8. Believe in your own game and don't listen to anyone else! Although "Dahlman accepts as highly accurate ... the raw speed numbers," he rejects "other assumptions in the sheets." Others dismiss Dahlman's horseshoe theory. It does not matter who thinks your style is right or wrong ... all that matters is that you believe in it yourself and follow it consistently.

9. Keep your losses at the sleeping level. In the best quote from the article, "If I keep my losses at $7,000, I can sleep easily," Dahlman says. "I can get that back in one race." Your sleeping level may be different from anyone else's.

Here is a person who has managed to keep a balanced life and raise 6 children while still maintaining his passion for the horse racing. As the game changed, from trotters to thoroughbreds, he was able to adapt with the times. We have seen many games come and go in the markets, from equity options arbitrage to the disappearance of SOES traders. We have seen markets change from a momentum environment to a trading-range game. A trader must specialize in one thing yet be ready to recognize when it is time to learn a brand new game. Recognize that Dahlman built up a lifetime of racing knowledge. He relies on that experience to interpret the incredible amount of information he gathers. For newer traders just learning to make their way in this business, recognize that, ultimately, experience is the best teacher. Every day that you trade, you gain experience. Keep the discipline, keep the faith. To repeat one last quote: "It's an art with just enough science to make it possible for a very tiny percentage of bettors to take money away from the herd of less disciplined bettors."

Why Traders Lose

Jays Market Outlook for 3rd Aug, 2006 : European markets rallied last night, and the US indices followed suit.Asian markets are also up this morning but had started slipping from their highs. However, the global short-term trend is up for the moment. Stocks should improve here as well, provided there is no global reversal during the day.


Why Traders Lose

Brett Steenbarger put together a list of "common reasons why traders (and most other human beings!) fall short of being fully intentional":

1. Environmental distractions and boredom cause a lack of focus - All of us have limits to our attention span and these are easily taxed during quiet times in the market;

2. Fatigue and mental overload create a loss of concentration - The demands of watching the screen hour after hour make it difficult to be sharp, creating fatigue effects that are well-known to pilots, car drivers, and soldiers;

3. Overconfidence follows a string of successes - It is common for traders to attribute success to skill and failure to situational, external factors. As a result, a string of even random wins can lead traders to become overconfident and veer from trading plans--especially by trading too frequently and/or trading excessive size;

4. Unwillingness to accept losses - This leads traders to alter their trade plans after trades have gone into the red, turning what were meant to be short-term trades into longer-term holds and transforming trades with small size into large trades by adding to losers;

5. Loss of confidence in one's trading plan/strategy because it has not been adequately tested and battle-tested - It is difficult to tolerate even normal drawdowns unless you have confidence in your methods. This confidence does not come from mere positive self-talk. Rather, it is a function of testing your methods (historically and in real-time) and seeing in your own experience that they truly work;

6. Personality traits that lead to impulsivity and low frustration tolerance in stressful situations - Psychological research suggests that some individuals are more impulsive than others and less conscientious about adhering to plans and intentions. These personality traits often are accompanied by stimulation-seeking and a high degree of risk tolerance: a deadly combination.

7. Situational performance pressures - These include trading slumps and increased personal expenses that change how traders trade and lead them to place P/L ahead of making good trades. By worrying too much about how much money they make, traders can no longer follow markets with a clear head;

8. Trading positions that are excessive for the account size - This is much more common than is usually acknowledged. It creates exaggerated P/L swings and emotional reactions that interfere with cool, calm planful behavior;

9. Not having a clearly defined trading plan/strategy in the first place - Interestingly, many traders do not consider themselves to be discretionary traders, but in fact do not have a firm, explicit set of trading rules that they follow. It is difficult to be consistent with a plan (and to evaluate your consistency), if you don't have the plan clearly laid out;

10. Trading a time frame, style, or market that does not match your talents, skills, risk tolerance, and personality - All too often, traders veer from their plans because those plans are ones that they feel they *should* follow, but that don't truly come naturally to them. These departures from discipline are actually unconscious attempts to trade in a style that is more in tune with the trader's skills and talents.