Trader's Thread 01 (May 08 - Dec 08)

[kennynah]

i most certainly cannot handle 30 positions...even with 5-6 positions, it can be taxing watching them...

[millionairemind]

Should You Trade With a Style or a System?
By Rob Davenport | TradingMarkets.com

Traders often classify themselves as stock traders, or e-mini traders, or ETF traders, or Forex traders. But my experience as a professional trader for the past 7 years has convinced me that at a more basic level there are really just two types of traders - discretionary and mechanical.

The discretionary trader uses his or her experience and judgment to make trading decisions. The discretionary trader will usually have a documented trading plan with rules to guide or bound their trading decisions. But when it comes time to actually pull the trigger on an entry or an exit to a trade, they will evaluate the current market situation and apply the intuition they've developed over years of experience.

Conversely, systematic or mechanical traders have a rigid set of rules that precisely dictate their entry point, when they will exit the trade, and the size of the position. Systematic traders do not take into account anything in the market environment that is not explicitly covered in their rules. They take every trade. Period. Intuition, judgment, and experience do not enter into the equation. Systematic traders will also have a documented trading plan, but their rules will be so specific that they can be, and usually have been, programmed and back-tested. (Back-testing is the process of modeling a trading concept in a computer program and testing to see how it performed in past market environments).

Systematic trading may not be as fun, but it's much more consistent

Anyone who has traded in a discretionary manner knows the exhilaration of making a decision - of using your personal skills - and seeing the trade pay off big. Likewise, everyone who has traded discretionally - and I do mean everyone - has known the depressing lows of seeing 3, 4, or 5 trades in a row go against you even though you thought they were great setups. In the discretionary world, the highs are higher and the lows are lower. By comparison, the systematic style of trading is "boring." But, mechanical trading is usually much more consistent.

I spent the first half of my trading career as a discretionary day trader of stocks and e-minis. A little over three years ago I made the switch from discretionary to systematic trading. I loved trading with discretion. But, at the end of the day, my month-to-month performance was too inconsistent. At the same time my monthly bills and living expenses were very consistent. I had to do something to improve my consistency. I chose to become a systematic trader. Of course I still have good months and not-so-good months, but overall, my trading is much more reliable now.

Systematic trading is relatively new. The great traders we all read about from years past were all discretionary. But over the last decade mechanical trading has become the style-of-choice for an ever increasing number of traders. And, not only with individual traders. Today, seven of the top ten hedge funds trade systematically.

Emotion is a demon to trading

So which method is best? Which method should you choose? The answer is, of course, that it depends. Discretionary trading has the advantage of tapping the world's best computer - your brain. But the downside is that the computer supported by our necks is very susceptible to the virus of emotion. Whether you've been trading 1 week or multiple decades, emotion is a demon that must always be neutralized (it can never be eliminated). Mechanical trading offers a means to neutralize emotion.

If you are a consistently successful discretionary trader you should not change a thing. You have made it. The only reason for a successful discretionary trader to move to systematic trading would be so that they can automate or semi-automate their trading to free up time for other things.

If you are a new trader or a discretionary trader who is not consistently successful, then you may want to consider systematic trading. We all battle our emotions. Trading a system can provide the emotional stability needed to be successful.

Again, a trading system will not eliminate emotion. The goal is simply to neutralize emotions. In fact I guarantee that you will, at times, feel an over-whelming desire to do things that are completely outside your trading plan. But, if you are trading a mechanical system and you know that it has performed well historically and you trust that the historical backtested performance is accurate, you should have the ability to overcome your emotions.

For those of you that think you may be interested in mechanical trading there are many critical decisions to be made. Again, you need to take your time, understand your own personality, assess your risk tolerance, and explore the various options available in the world of systematic trading.

[winston]

Dear All,

I'm still trying to perfect the following trading strategy:-
1) Take note of the dominant Market Direction
2) When the market is behaving contrary to the dominant Market Direction, then get ready to bet against the market that day
3) Wait for the right time to execute. Normally, I wait for the second or third "bounce" before buying
4) The goal is to get a 50% retracement ( so you need a fairly big swing to make it worthwhile )
5) Take profit by end of day
6) Some traders prefer to wait for the 50% retracement to bet on the direction of the day

Example:-
1) The dominant Market Direction in HK for the past few weeks is down
2) But today, HK had a very strong opening ( +520 points ). So I got ready to bet that it will go downwards.
3) It went up and then down and then up again. On the second upward bounce, I bought a put
4) The goal was to take a 300 point drop ( 50% retracement ) and get out by the end of the day
a) keping in mind that the market is normally weak before lunch due to profit-taking
b) keeping in mind that there is normally further profit-taking after lunch
5) I got my 50% retracement, took my profit
6) Today, I could also have bet on the direction of the day after the 50% retracement. However, I diid not as I did not feel comfortable betting against the dominant Market Direction

What is wrong with the above strategy ? I would like to hear your views on it.

Thanks and take care,
Winston

[helios]

dear winston,

Q1: is your strategy wrong, if your goal is solely for profit-taking purposes??
Was retracing your steps. a lot of steps were involved, e monitoring must be v tight & time-consum'g.

Q2: in theory, we know that retracements within corrections [phases] are much more difficult to determine, even e earlier waves could be wrong (if there's strong reversal) ... for all your v large move, where r e calculated price levels & stop-loss levels? 75% or 78%?

Q3: is this trading strategy tested, b4 perfecting it?

Q4: do u read day-charts to det. e retracements?

Q5: what abt SSE & Europe markets? r these affect'g your macro-view & decisions?

[golden88]

our views may be wrong ...... sigh......

[winston]

Q5: what abt SSE & Europe markets? r these affect'g your macro-view & decisions?

When there is a big drop or rise in the US, it will definitely affect the local markets. However, if the rise or fall in the US is not too great ( <75 points on the Dow ), the local markets will then be affected by local conditions.

SSE affects the direction of HK market.

I have not seen Europe affecting the afternoon sessions in Asia..

[winston]

Perceptions -- by Bill Kraft

Suppose you were watching the TV news last week and learned:
- Personal income jumped 1.9% last month
- Disposable income was up 5.7%, the sharpest gain in 33 years
- In the last 20 years, the average lifespan has increased by 3 full years
- As a nation we have never been healthier
- Real pre-tax income per worker hit an all-time record and was up 11% since the current president took office
- Americans net worth is $15.3 trillion more than it was seven years ago
- Since 2000 nonfarm business productivity has expanded 21%
- 9.2 million jobs have been created since 2001
- 80% of poor households have air conditioning and 97% own color TV sets

Those facts certainly would paint a pretty rosy picture, certainly nothing like the economy we have really been hearing about on the news. No wonder the markets have made it to official bear territory and no wonder the indexes saw one of the very worst June's. What a different world it would be if those were the facts. While this setting may be a far cry from today's reality, it would be interesting to see how those factors might influence market direction.

Oh wait, according to two articles on the front page of Investors Business Daily on Monday, June 30, 2008, respectively entitled "Do Foreboding Headlines Reflect Real Trends or Media Mind-Set?" by Terry Jones and "Rebates Fuel Spending, But Consumer Outlook Tough" by Scott Stoddard, those are the true facts. The list above represents selected facts that help describe current conditions, but though quite positive, are having little apparent effect on market conditions and movement.

The answer, at least in part, is people's perception as opposed to actuality. In listening to the news on network TV and in reading various publications, the perception seems to be that the sky is falling. Clearly, oil prices are heading out of sight and many of the financial institutions are in trouble as a result of their relationship to the sub-prime mortgage crisis, and many people may lose homes for the same reasons. As far as most of the network news I watch goes, that's the whole story. The perception is that things are in terrible shape.

As is often the case, the markets at least in the shorter term react or overreact with emotion to perceptions. Here, I would suggest, the perception is that the economy is in the tank, almost doomed; the outlook is bleak. The reality, I would suggest, is not quite so bad as the perception.

Just look at the positive facts listed above, and things seem a little more balanced at least. I don't mean that high oil prices are good for our economy nor do I think that the sub-prime crisis shouldn't have a significant affect, I only mean to say that on the whole things are better than they are portrayed day to day. If the perception (whether right or wrong) is that things are bad then market action is not only likely to be bearish, it is likely to be more bearish than the facts actually warrant.

All this is to say that if we can gauge the perception of traders, their current psychological bent, we are more likely to be able to give ourselves an edge in our trading. In general, and in the short to mid-term, it is the psychological, not necessarily the logical, that moves markets. The psychological reactions in the market are, in many cases, driven by perception rather than reality.

[winston]

Become a Trading Mercenary
By Rick Pendergraft

In The Last Samurai, Tom Cruise plays a mercenary with no allegiance to one side or the other. His only allegiance is to money and whichever side pays him the most.

That made me think about how traders are mercenaries. They have no allegiance to the bullish side or the bearish side, only to the side that will pay the most money. This is the only way to be successful as a trader. Some of the more famous mercenary traders who played both sides of the market include Jesse Livermore, Bernard Baruch, and Joe Kennedy.

Sure, it would be nice if the stock market only went up and everyone got rich just by buying stocks and holding them for a while. But that isn't how it works. The market goes up and the market goes down. And during rough economic periods, like the one we are currently in, the market is going to move down.

Yes, you should stick to what you know. But if the companies you love or the system you're using isn't working, don't worry about being loyal. Instead, become a trading mercenary. Your only allegiance should be to growing or protecting your own wealth.

[kennynah]

the market wont care, if u or i made or lost money....only u and i care about our bank accounts....hahaha...

"buy and hold until coffin time"...madness!!. dont know what kinds of books are out there teaching people all the wrong principals...

[millionairemind]

Turning panic into opportunity
Jul 17th 2008
From The Economist print edition

How to tell when markets may have hit bottom

WHEN all around are panicking, smart investors should be cooly asking whether it is time to buy. What signals should they be looking for?

One of the first measures is the VIX, or volatility index, which measures the variability of the American stockmarket. It is trading around the 30 level, or near its peak in March when Bear Stearns had to be rescued.

The theory is that, when volatility is high, markets are usually falling. That is because there is rarely such a thing as a “forced buyer” of shares. But there can be forced sellers, when investors need to dump their holdings to meet margin calls or repay debts. Faced with such selling, marketmakers adjust their prices sharply and that is what creates spikes in the VIX.

The VIX is well above its post-1990 average, according to the Chicago Board Options Exchange, which trades futures and options on the index. But it has yet to reach the heights seen in 2002, or when Long-Term Capital Management, a hedge fund, was being rescued in 1998. Both incidents, which pushed the VIX above 40, proved to be good moments to buy shares on a 12-month view.

A second signal may seem a bit parochial to international readers. It is when the dividend yield on the FTSE All-Share (the broad-based British index) is higher than the yield on ten-year gilts, or government bonds. In other words, investors get paid more to hold equities (with all their growth prospects) than stodgy government bonds. The market passed this threshold on March 12th 2003 for the first time since the late 1950s. To the day, it marked the end of the 2000-2003 global bear market. At the time some commentators said this signal did not matter, since dividends would probably be cut. In fact, the dividend income on the index has almost doubled in the five years since.

As of July 16th, the yield on the All-Share was 4.46% and the ten-year gilt yielded 4.95%. That suggests that a further 10% fall in the stockmarket would do the trick. There is, of course, the risk that dividends will be cut if Britain, or indeed the world, goes into recession. But this crossover is a signal of long-term value. It is highly likely that dividend income will increase by 2018. But it is certain, if you buy a ten-year gilt, that you will get the same nominal income in 2018 as you do now.

Another measure that could make shares attractive is a single-digit price/earnings ratio. Higher inflation tends to drive down p/es, because it leads to more volatile economic conditions. Investors may also be worried that profits are high, relative to GDP, and are thus due for a fall.

But single-digit p/es would compensate investors for those risks. Flip the ratio around and you have the earnings yield, the percentage of the share price that is represented by profits. If the p/e is in single digits, the earnings yield is above 10%. On the latest data, a number of European markets, including Belgium, France, Ireland, Italy, the Netherlands, Spain and Sweden fall into this category; with the DAX on a p/e of 10.6, Germany is not that far away. (Wall Street, by contrast, has still a fair amount to fall on this measure.)

On valuation grounds, therefore, investors should at least be thinking about opening their wallets. Of course, valuation is not the only factor that drives markets, as became clear during the dotcom bubble. Just as prices can be driven far above fair value in periods of euphoria, so they can be driven far below it in periods of fear.

And sentiment is pretty depressed. The latest Merrill Lynch survey of global fund managers, released on July 16th, found that a record number were overweight in their holdings of cash and underweight in shares, and most thought that profit forecasts were far too high. That poll suggests investors are already braced for a good deal of bad news.

What is needed to get markets out of their funk is a catalyst. It would help if the uncertainty cleared. In both 1991 and 2003, markets rallied as wars against Iraq began. That was not because the wars were good news, but because investors had been made so uncertain by the pre-war tensions.

The fundamental problem this time is economic and financial, rather than geopolitical. As well as the credit crunch, investors are worried by the combination of higher-than-expected inflation and slower growth, and the fear that central banks will be seduced into setting monetary policies that are too loose or too tight. So the best news of the week, buried under all the headlines about falling bank share prices, was the sharp drop in the price of oil. A belief that oil could soon be in double, not triple, digits really would be the catalyst for a rally.