Are you a Trained Fireman?

In response to a thread on a Singapore Value Investing forum, i posted this piece:

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Trading is akin to fighting fire. How are firemen different from the rest of us folks? They are highly-trained, well-protected & well-equipped. They have a strategy - a map of the building - even before they head in, and an exit plan. And perhaps most importantly, they are very brave. Even then, some perish. They know who they are, and they chose this path in life. They take calculated risks to save other peoples lives.

I will not bore you with the comparison to trading, it is pretty obvious. Now consider a civilian in his silk suit rushing into a smouldering building with no idea & no game plan? The only trait he shares with the fireman is... he is very brave, and some might say foolish. He may get lucky, but chances are he may add to the evening news count.

Contra/Margin or any leveraged trading is akin to a civilian(with the silk suit) dousing oneself with a bit of petrol, and running into that building. I exaggerate, but you get the idea!

However, before we paint trading as a mortal sin & as someone who trades frequently, allow me to share my philosophy. I consider all investing a form of trading , and thus a risk/gamble(no risk/no gain). What separates them all is the duration. Some use Fundamental data, others Technical. Both have their pluses and minuses. And then, there're also the valued techniques of gut-feel and rumours, among others.

But it takes real hard work and patience to pick solid fundamental companies in the right growth areas at the right price, just as it takes effort to pick the best chart setups, and formulate an entry and exit.

1. Do you know who you are in a crisis? Did you liquidate during the recent crash, when you thought you were a long lerm investor?
2. Have you trained yourself? Have you researched enough? Studied the risks involved?
3. Have you protected yourself? Holding power, Spare cash, Insurance, etc
4. Have you a plan before the trigger? What's a good price, a good setup? When do i stop-loss/take profits?

In short: There is a serious blaze in there. Are you a trained fireman?
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Comments?

"Market Manipulation" Is Not Why Most Traders Lose
A look at EWI president Robert Prechter's requirements for successful trading
November 2, 2010 By Elliott Wave International

How often have you heard analysts refer to a down day on Wall Street as "traders taking profits"? Sounds great, butthe sobering fact is that most traders -- in futures, commodities, or forex -- lose money. Any book on trading will list for you the many reasons why most traders lose. Yet some traders do win; some even set records. In 1984, Elliott Wave International's founder and president Robert Prechter won the U.S. Trading Championship, setting a new all-time profit record of 444.4% in a monitored real-money options account. Later in his monthly Elliott Wave Theorist, Prechter published a Special Report "What A Trader Really needs To Be Successful" with 5 important insights for would-be market speculators (including the explanation of why "market manipulation" is not why most traders lose.)

Here's a quick excerpt -- and to read Prechter's Special Report in full, free, look below.

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"What A Trader Really Needs To Be Successful" (excerpt)

By Robert Prechter
Ever since winning the United States Trading Championship in 1984 (see footnotes, p.4), subscribers have asked for a list of "tips" on trading, or even a play-by-play of the  approximately 200 short term trades I made while following hourly market data over a four month period. Neither of these would do anyone any good. What successful trading requires is both more and less than most people think. In watching the reports of each new Championship over the past three years, it has been a joy to see what a large percentage of the top winners have been Elliott Wave Theorist subscribers and telephone consultation customers. (In fact, in the latest "standings" report from the USTC, of the top three producers in each of four categories, half are EWT subscribers!) However, while good traders may want the input from EWT, not all EWT subscribers are good traders. Obviously the winners know something the losers don't. What is it? What are the guidelines you really need to meet in order to trade the markets successfully?

When I first began trading, I did what many others who start out in the markets do: I developed a list of trading rules. The list was created piecemeal, with each new rule added, usually, following the conclusion of an unsuccessful trade. I continually asked myself, what would I do differently next time to make sure that this mistake would not recur? The resulting list of "do's" and "don'ts" ultimately comprised about 16 statements. Approximately six months following the completion of my carved-in-stone list of trading rules, I balled up the paper and threw it in the trash. What was the problem with my list, a list typical of so many novices who think they are learning something? After several months of attempting to apply the "rules," it became clear that I made not merely a mistake here and there in the list, but a fundamental error in compiling the list in the first place. The error was in taking aim at the last trade each time, as if the next trading situation would present a similar problem. By the time 16 rules are created, all situations are covered and the trader is back to square one. Let me give you an example of the ironies that result from the typical method of generating a list of trading rules. One of the most popular trading maxims is, "You can't go broke taking a profit." (The brokers invented that one, of course, which is one reason that new traders always hear of it!) This trading maxim appears to make wonderful sense, but only when viewed in the context of a recent trade with a specific outcome.

When you have entered a trade at a good price, watched it go your way for a while, then watched it go against you and turn into a loss, the maxim sounds like a pronouncement of divine
wisdom. What you are really saying, however, is that in the context of the last trade "I should have sold when I had a small profit."

Now let's see what happens on the next trade. You enter a trade, and after just a few days of watching it go your way, you sell out, only to stare in amazement as it continues to go in the direction you had expected, racking up paper gains of several hundred percent. You ask a more experienced trader what your error was, and he advises you sagely while peering over his glasses, "Remember this forever: Cut losses short; let profits run." So you reach for your list of trading rules and write this maxim, which means only, of course "I should NOT have sold when I had a small profit." So trading rules #2 and #14 are in direct conflict. Is this an isolated incident? What about rule #3, which reads, "Stay cool; never let emotions rule your trading," and #8, which reads, "If a trade is obviously going against you, get out of the way before it turns into a disaster." Stripped of their fancy attire, #3 says, "Don't panic during trading" and #8 says, "Go ahead and panic!" Such formulations are, in the final analysis, utterly useless. What I finally desired to create was a description not of each of the trees, but of the forest. After several years of trading, I came up with -- guess what -- another list! But this is not a list of "trading rules"; it's a list of requirements for successful trading. Most worthwhile truths are simple, and this list contains only five items. ...

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Read the rest of Prechter's report now, free! Here's what you'll learn:

• Why a trading method is a "must" for your success
• What part discipline plays in your trading success
• Why "market manipulation" is not why most traders lose
• How to gain trading experience
• More

This article was syndicated by Elliott Wave International and was originally published under the headline "Market Manipulation" Is Not Why Most Traders Lose. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Karl Denninger's Half-Year Checkup

One of the most vocal in the financial blogging world is Karl Denninger, who runs tickerforum.org. He is pretty bearish on the US economy, and has posted his half-year checkup on the markets. Karl makes very interesting points, especially in the last part about money management. Here're some excerpts:

"...For most, if not nearly all, people who are in the market they have absolutely no business trading actively. This is particularly true in markets like this, where 2, 3 even 4% swings on a daily basis have become commonplace. While the last year has seen these be nearly all upward, the last few weeks and months has seen it be nearly all down.

For the long term investor the point is to wind up with more money than you started with - in purchasing power - over a 10, 20 or 30 year horizon. You cannot afford big mistakes as they will force you to take big risks in order to recover, and if you're wrong on the latter you will wind up with a destroyed account... "

"...The key to making a true fortune in anything folks is to buy smart - not sell smart. This is something I've learned through my entrepreneurial affairs... If you buy smart, making money is easy. If you have to sell smart you're always one mistake away from massive losses and potential bankruptcy. Nobody is good enough to bat 1,000. 600, 700, sure. 1,000? Nope. Not unless you're God - or are cheating...."

"There is no reason in a deflationary environment, which we are now in, to add beta to your long-term funds. The cowboys who want to do that with their entire net worth are welcome to it - you'll still have a place to live when they blow up and are under a freeway overpass. Most of them will - indeed, while there is always someone who claims to have "nailed it" ex-post-facto for each big market move, you'll note if you bother to view things through an objective lens that 100 people had opinions prior to the move and only one of them still has an account with a positive balance in it. Worse, that person's prognostications for what's to come next are almost-certain to be dead wrong."

Here's the link to the entire post. Enjoy :)

"What A Trader Really Needs To Be Successful"

A great article on the psychology of trading.

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In 1984, Elliott Wave International's founder and president Robert Prechter won the U.S. Trading Championship, setting a new all-time profit record of 444.4% in a monitored real-money options account in 4 months. In the average 4-month contest, over 75% of contestants, mostly professionals, fail to report profits.

Later in his monthly Elliott Wave Theorist, Prechter published a Special Report "What A Trader Really Needs To Be Successful" with 5 important tips to would-be market speculators. Here's a quick excerpt. (To read Special Report in full, free, look below.)

"What A Trader Really Needs To Be Successful" (excerpt)

By Robert Prechter

There are many denials of reality which automatically disqualify millions of people from joining the ranks of successful speculators. For instance, to moan that "pools," "manipulators," "insiders," "they," "the big boys" or "program trading" (known today as "high-frequency trading" -- Ed.) are to blame for one's losses is a common fault.

Anyone who utters such a conviction is doomed before he starts. [My] observation, after eleven years "in the business," is that the biggest obstacle to successful speculation is the failure merely even to recognize and accept the simple fact that losses are part of the game, and that they must be accommodated.

The perfect trading system does not exist. Expecting, or even hoping for, perfection is a guarantee of failure. Speculation is akin to batting in baseball. A player hitting .300 is good. A player hitting .400 is great. But even the great player fails to hit 60% of the time! He even strikes out often. But he still earns six figures a year, because although not perfect, he has approached the best that can be achieved. You don't have to be perfect to win in the markets, either; you "merely" have to be better than almost everybody else, and that's hard enough.

Practically speaking, you must include an objective money management system when formulating your trading method in the first place. There are many ways to do it. Some methods use stops. If stops are impractical (such as with options), you may decide to risk only small amounts of total capital at a time. After all is said and done, learning to handle losses will be your greatest triumph.

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Read the rest of Prechter's 5 tips to would-be market speculators now, free! All you need is to create a free Club EWI profile. Here's what else you'll learn:

• Why a trading method is a must for your success
• What part discipline plays in your trading success
• How to gain trading experience

(Already a free Club EWI member? Finish reading the report here.)

News moves Markets... Right?

While we're waiting for a good trade setup, here's a free article, copied wholesale from Elliott Wave International, that you'll find very interesting. Involves one of my favourite topics - Does news move markets? Example: Greece default, and troubles in US and europe should be sending stocks & euro crashing right, but hey are they? I'd appreciate your views on this after you finish reading. Thanks! I'll be posting an SPX update later today.
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What Does NOT Move Markets? Examining 8 Claims of Market Efficiency

March 2, 2010
By Susan Walker

If everyone says that shocks from outside the financial system -- so-called exogenous shocks -- can affect it for better or worse, they must be right.

It just sounds so darned logical, right? Economists believe this trope to be true, mainly because they believe that investors are rational thinkers who re-evaluate their positions after every new bit of relevant information turns up.

Beginning to sound slightly impossible? Well, yes.

It turns out that logic is exactly what's missing from this it-feels-so-right idea of rational reaction to exogenous shocks. Read an excerpt from Robert Prechter's February 2010 Elliott Wave Theorist to see how Prechter deals with this widely held belief.

Find out what really moves markets -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.

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Excerpted from Prechter's February 2010 Elliott Wave Theorist, published Feb. 19, 2010

The Efficient Market Hypothesis (EMH) argues that as new information enters the marketplace, investors revalue stocks accordingly. … In such a world, the market would fluctuate narrowly around equilibrium as minor bits of news about individual companies mostly canceled each other out. Then important events, which would affect the valuation of the market as a whole, would serve as “shocks” causing investors to adjust prices to a new level, reflecting that new information. One would see these reactions in real time, and investigators of market history would face no difficulties in identifying precisely what new information caused the change in prices. …

This is a simple idea and simple to test. But almost no one ever bothers to test it. According to the mindset of conventional economists, no one needs to test it; it just feels right; it must be right. It’s the only model anyone can think of. But socionomists [those who use the Wave Principle to make social predictions] have tested this idea multiple ways. And the result is not pretty for the theories that rely upon it.

The tests that we will examine are not rigorous or statistical. Our time and resources are limited. But in refuting a theory, extreme rigor is unnecessary. If someone says, “All leaves are green,” all one need do is show him a red one to refute the claim. I hope when we are done with our brief survey, you will see that the ubiquitous claim we challenge is more akin to economists saying “All leaves are made of iron.” We will be unable to find a single example from nature that fits.

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In his February 2010 Elliott Wave Theorist, Prechter then goes on to show charts that examine each of these claims that encompass both economic and political events:

Claim #1: “Interest rates drive stock prices.”
Claim #2: “Rising oil prices are bearish for stocks.”
Claim #3: “An expanding trade deficit is bad for a nation’s economy and therefore bearish for stock prices.”
Claim #4: “Earnings drive stock prices.”
Claim #5: “GDP drives stock prices.”
Claim #6: “Wars are bullish/bearish for stock prices.”
Claim #7: “Peace is bullish for stocks.”
Claim #8: “Terrorist attacks would cause the stock market to drop.”

To protect your personal finances, it's important to think independently from the crowd, particularly when the crowd buys into what economists say.

Find out what really moves markets -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.


Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company.

EWI offers FREE Global Market Perspective!

Dear Readers,

It's that time of the year! For a limited time - until march 2 - Elliott Wave International is offering FREE access to its latest Global Market Perspective. It's like a 100-page pdf file with analysis of all major world markets, currencies, interest rates, etc - basically it's almost all of their services condensed together.

As an avid e-waver, i'd strongly recommend that you check it out, whatever markets you trade in. Click here to access it for free.

All the best folks! I'll be posting my outlook for next week during this weekend.

Trendlines

Note: I may get a small credit if you use my link above & sign up for any of their paid services, but i'd strongly recommend it even otherwise :)

Elliott Wave - TRIANGLE explained

Markets are closed and its a nice long weekend, especially here in Asia. After the fun and games, its time to polish up some basic concepts.

Today i'm gonna describe the Elliot Triangle. From Elliott Wave Theory, we know that Triangles are corrective structures, and usually happen just prior to the final wave of a sequence. Typically they are found at: wave 4 of an impulse or wave B (or X) of a correction. So this implies that they do warn of an impending REVERSAL of direction at one degree above.

Here's what they look like in idealized form: (Image courtesy of elliotwave.com)

Features

1. It's a continuation pattern in the short-term, meaning the subsequent wave(the thrust) takes the same direction as the wave before the triangle.
2. After the thrust, there is usually an equally quick reversal.
3. Each small wave A-B-C-D-E subdivides into three smaller waves.
4. The target of the triangle(starting from end of E) is typically equal to the height of the widest part of the triangle.
5. Wave E is sometimes known to do a head-fake before reversing.

Thursday's Triangle

Here's another look at Thurday's triangle - a real life example identified in real-time.

Notice the whole B wave was a triangle, and C was an upthrust whose target was only slightly short of the ideal height. And we all know what happened on Friday - quick reversal!

So what's ahead?

As mentioned above, Triangles typically indicate an impending reversal in the trend. So we should be heading down in some kind of wave iii down, right? Highly likely.

So why is the 'C?' label up there? Something else also happened on Thursday - we broke through the downtrendline from January. And on Friday, we managed to stay above it end of the day. This might have some implications. I will be posting an update tomorrow with the different scenarios and trendlines.

Stay tuned!

Technical Analysis: Why high volume markets?

While the markets are figuring out this correction, i thought i should take this time to explain why i analyse only high volume markets:

Technical Analysis

If you have seen technical analysis in action, you probably understand support and resistance lines, trendlines, channels, breakouts, retracements etc. What we draw and identify on charts are really the patterns of group human emotions of hope, fear, greed and denial to name a few.




National Geographic

If you've watched NG for any length of time, you are bound to have come across a wild cat hunting session. A large herd of deer initially at random motion peacefully grazing is disturbed by the detection of an intruder. Once the cat makes its charge, you'd expect the deer to scatter away in all possible directions depending on where they were facing. But they don't! They all run in a group in a direction determined by a critical mass, each trying to get to the centre of the pack. It's almost as if they are all of one mind and body. This is the classic behaviour of Herding. And this, is what Elliot Wave Theory defines as the basis of mass human behaviour too. In the modern age, we dont see each other on the trading floor, but use other cues such as price and volume, big buyer actions, insider trades, etc etc. Human behaviour suprisingly involves a lot of subconscious instinct - a lot more than we imagine. A football match in England in the stands, or a mass procession in thailand would be great places to study mass human behaviour.

Volume & Velocity

In physics, we learn that Momentum = mass x velocity. Well in the markets, its Volume x Velocity!

Velocity: It is easier to follow and trade Impulse waves which have a high Velocity. They are waves of Instinct - hence quick and clear, whereas a Corrective wave is a wave of Second Thoughts, conscious reflection - hence slow & muddled.

Volume: The bigger the group, the greater the momentum and the greater the predictive power. Fibonacci retracements which exist in nature's design (and hence in human design), show up beautifully in charts where there is a high volume of trade. I will probably cover this amazing concept(fibonacci) during another correction!

Market Manipulation

A word on market manipulation. There's been lots of talk in the markets recently about conspiracy theories - Bernanke crashed the markets in '08, Goldman pulled the rug in Jan'10 to get Obama to reverse the anti-banking policies. My humble opinion - humans love conspiracy theories! Market manipulation is a remote possibility in low volume markets and that too over very short time-frames. But everywhere else, it is just drowned by the deafening noise of the crowd! I do believe markets react to triggers(news), but only when they are ready to do so. A very overbought market will take any excuse to correct down, and vice versa.

Conclusion

Technical analysis works best in high volume markets, where no one single player is big enough to dictate the direction. If you've seen the trendlines on my charts so far, that is proof enough of the existence of mass human patterns - as these indexes are made up of thousands of stocks from many sectors. Trendlines are generally harder to draw on low volume indexes or stocks.

Now whether we are able to discern these patterns and apply them for successful outcomes is a whole different ball game!

Comments? Questions?

US Markets: Almost due for a rebound

Unlike previous trend based analysis, this call is based purely on sentiment. And in my experience, sentiment is THE factor that rules the markets, causes waves, patterns and trendlines.

Here i attach a chart of the Bull/Bear Ratio, courtesy of Investors Intelligence:





Notice the plunge in sentiment off the highs, caused by the rapid selling in such a short span(a surge of FEAR). Generally, the more bullish ordinary folks are, the higher chances of a bear market. With the ratio plunging to almost half its value, it is hard to forsee a precipitious drop from here. It might be scary tonight at the open, but i suspect it wont get any worse over the week(low probability). To add to that SPX500 seems to be completing 5 small waves very shortly.

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As an aside, note the previous high for this indicator was around Nov07, just after the peak of the bull market. And guess where was the lowest of lows? We could be forgiven for assuming it would be at the March09 lows! It was in fact sometime in Nov08. As is well known in Elliot Wave Theory, the peak of the pessimism actually happens in Wave 3, thus causing a divergence between sentiment and prices in wave 5.

Now for the exciting part. Let us assume this Jan10 top was the top of the current bear market rally from last March(if that is what it is). If we extrapolate the above logic to the current drop: In the rebound to come, the BBR ratio should reach close to the Jan highs if not exceed it while the price stays below. However, do note that this may only happen at the rebound at one higher degree. Meaning, a rebound off a 5 wave decline below SPX 1000 range. That would be a beautiful divergence to confirm the medium term top.

Before we get excited and start using this ratio as the 'ultimate' trading tool, let me conclude that sentiment does not share a linear relationship with stock prices. Different extremes can be reached at differing degrees of market waves, and one needs a close examination of previous market cycles in order to use this ratio as a predictive tool with any degree of success.

I will, of course update the blog with sentiment analysis if we do get sub-1000 on the SPX in 5 waves and rebound. Meanwhile, hang in there amigo!