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Oct 122014
 

As it’s weekend, I analyze and compare edges available in different sectors of “real” (let’s name it such for the sake of simplicity) economics and financial markets.

Take my business: we buy auto parts large wholesale knowing there’s market to sell them for smaller wholesale parties in our store or retail in our shop. What is this? MARKET MAKING. Buy bid, sell ask. It’s a bet on existing liquidity/demand, NOT on price changes in the future. Edge depends on efficiency available according to liquidity and is different for different products. Some wholesale parties of largely available (and high competition) products are sold with just 5% margin, while other products, especially retail, being sold with 100% profit margin are not uncommon.

Take production of goods or services: they produce something using certain amount of human or tangible resources and sell it for more than it took to produce. Again, basically it’s making the market through spread available depending on market efficiency. The more efficient the market is, the smaller profit margin is (see Samsung’s plummeting profits in smartphones niche where it once was a leader).

How many businesses exist in the “real” sector, which make a living trying to PREDICT the FUTURE PRICES? Probably there are some, but most likely those have access to some “insider” information, such as coming shortages in supplies etc. In other words, FUNDAMENTALS.

All these thoughts lead to conclusion that everything be it real economics or trading comes down to the same principles.
Is technical analysis using chart patterns largely used in “real” businesses? Why not? There should be a reason, right?

Discuss the post on the forum: http://www.cornixtrading.com/forum/viewtopic.php?f=3&t=216

Oct 062014
 

I want to clarify a few points about when psychology is applicable for traders and when it is not, because realized I never mentioned it before.

Psychology will NOT help if a trader doesn’t have solid, well developed and tested “edge” (a trading system, methodology). No way attitude and mindset can substitute the statistical advantage. It can even be dangerous if one relies on psychology without having a profitable system in place first.

So any trader who thinks s(he) needs psychological advice must first ask oneself: “do I really have a profitable method at my hands?” The answer must be absolute “yes”, which includes every detail of the tactics described in the form of rules applicable for any situation happening in the market, thorough back- and forward tests on simulated and live account with sample size, which is statistically significant and covers wide range of market conditions.

If you can objectively answer “yes” to the question above, but still are unable to consistently extract profits out of markets, then indeed you need professional advice, because the reasons for your problem might be the following:

a) past trauma of losing experience. Before finding a profitable method people often experience many defeats. I personally experienced dozens of defeats when newly developed or adopted system showed it’s flaws in real trading and had to be dismissed. This creates strong negative associations in our subconsciousness, which may paralyze our ability to make decisions and execute them properly. Psychologist may change that negative attitude in subconscious mind and correct the process of applying a trading method.

b) Discipline problems. People may have emotional traits, which are not very compatible with successful trading. Here we have the following possibilities:

1) train oneself so that emotional discipline and attitude changes towards which suits the successful trading routine well, or…

2) accept the fact one’s emotional constitution is incompatible with trading or investment activity and altogether drop this business. Which is perfectly fine, too. If one person is a great football player and another is talented artist it doesn’t make one of them better than the other despite the fast artist unlikely could compete for a ball or athlete could write divine poem.

c) Self-sabotage. Some people lose money in the markets, because subconsciously they think they don’t deserve winning. It is more common than many think (especially considering typical public image of Wall St. and it’s “sharks”) and is almost always very subliminal, far from “the surface” of our mind. We find those cases of self-sabotage due to one or another reason, correct them, which usually leads to dramatic changes in one’s professional growth (be it trading or any other activity).

Those are not the only, but the most popular areas where psychology is highly applicable and very useful to traders and investors.

Discuss on the forum: http://www.cornixtrading.com/forum/viewtopic.php?f=8&t=215

Feb 162014
 

On one traders resource I read the following material was posted:

At the Singularity Summit a few days ago, both Ray Kurzweil and Eliezer Yudkowsky made the point that progress measured by exponential advances may actually seem very slow for a long time. The early years of the graph will show a nearly flat line, and then all of a sudden — boom!

http://crnano.typepad.com/crnblog/2006/05/all_of_a_sudden.html

What is interesting here (in addition to the possibility of artificial intellect becoming more powerful than human intellect) is that similar progress curve seems to take place in almost every area of activity, where exponential growth is expected to take place.

This is good news for struggling traders, cause the absence of visible and immediate effect doesn’t mean there’s no progress and may actually mean just the opposite: base being formed for the exponential “boom” once a trader or investor “gets there”…

Feb 142014
 

The difference between trading not to lose and trading to win was recently discussed on our forum. I decided to write a bit on this matter here from NLP point of view.

When we set the goal for whatever activity starting with “not” and then followed by something we’d like to avoid, our brain tends to quickly “forget” the “not” bit of the phrase and almost automatically focus on the “keyword”. When we try not to do something, end result is exactly the opposite to what we desire to achieve: we again and again put our main focus on the negative experience, thus reinforcing it’s role in our life. Say when you try “not to gain weight” you basically meditate and put focus on the “gain weight” idea. Outcome is usually corresponding, cause we basically program ourselves for what’s included in the key phrase, while that little “not” part remains almost completely ignored by our subconsciousness.

That’s why I always recommend my patients with any problems, not necessarily just trading or investing psychological barriers, to always focus on “WHAT I WANT” vs. “WHAT I DON’T WANT”.

If you want to trade well, TRADE TO MAKE MONEY. Losses should be controlled of course, but that should be done automatically via setting appropriate stop-losses or applying any other loss limit technique and not much time should be spent on thinking over the idea of keeping losses small. Stop-losses should be set and forgotten, period.

But all your mental and emotional energy should be as much as possible put towards looking for WINNERS. Being a WINNING trader, making good, winning trades.

Try that and you’ll likely be surprised with the results after some practice. ;)

Dec 092013
 

In this short post I just want to remind everyone the following simple mathematical truth:

if each of your trades has positive expectancy and you execute statistically significant series of such trades, then despite outcome of each individual trade is uncertain, there is 100% probability you will be overall profitable.

Think about it: if you develop a positive expectancy system and trade it without mistakes then you are GUARANTEED to make money.

So there IS certainty in this tough trading business. It’s just not in the area of single individual trades, but in the area of long-term result of profitable strategy application.

Have a good trading week! :)

Dec 072013
 

Recently I read on some site, that psychology is not too important for trader’s success, because what matters is having a positive expectancy system.

I’d like to elaborate what I think about it. Indeed, having a positive expectancy system is a must prerequisite for successful trading or investing. But let’s imagine newbie trader, who has developed and successfully tested new system, it shows solid profitability, fine.

She starts to trade it live. Takes a signal, oops a loser. Second one… a loser too. Market “looks bad” so she passes on the 3rd trade which turns out to be a great winner… if only it was actually taken! Sounds familiar doesn’t it?

How often traders drop even good systems only because they get emotional trauma when first go live and it starts with a series of losers? How often lapses in discipline turn the process of trading even a profitable system in consistent losing or at least much worse actual result than theoretically it should be? All those issues are purely psychological.

And even having a profitable system trader must learn to operate in the “grey zone” of uncertainty, deal with probabilities, treat his trading as a long-term business and not pay too much attention to outcome of individual trades etc. Otherwise it simply won’t work!

That’s why having a positive expectancy system is #1 goal for a new trader to reach. But #2 is always the skill, mind you, psychological skill to trade your system exactly the same way it should be traded!

Dec 052013
 

Yesterday we talked about overconfidence. Today I’d like to talk about how to achieve the state of confidence.

As you probably remember from my previous post, people are most confident and accurate in their decisions when they deal with tasks they are familiar with. What exactly does it mean? That recipe of confident trading is very simple: make yourself truly familiar with your trading.

Most people start live trading too soon. Much sooner than they should. Result is usually sad. Not only newborn trader is unprofitable, she also gets negative experience of consistent losing and psychological condition similar to post-traumatic syndrome, which causes fear when placing new trades and serious problems with confidence, discipline etc.

Sometimes this condition is so severe that one is unlikely able to ever trade at all, let alone successful trading!

That’s why I always say: don’t hurry! If you slowly learn to invest or trade, watch the markets long enough to understand what’s  going on there, thoroughly develop strategy and tactics, carefully test it in a simulated environment then trade it live with the smallest risk possible until you are truly sure it works (some day we’ll talk about statistically significant samples of data), don’t feel the slightest stress pulling the trigger and managing trades and result of your trades is consistent profitability… act this way and chances are you will be successful and it will happen much sooner than if you try and trade since day one, going through endless painful experience of losing, failing again and again.

Trying to force natural processes usually leads to slower progress. Wish to make good things happen sooner can be understood, but result is often irrational behavior (which is not optimal of course, we have evolved into logically thinking creatures for a reason).

Number one cause why business start-ups fail is lack of necessary skills. Don’t make it happen with you! Money lost is not the worst thing in this case, psyche damage can be much more difficult to cope with.

Let’s remember wise Japanese saying: “fast is slow, but without pauses”.

Make your learning to trade logically, reasonably, truly fast! :)

Dec 042013
 

I decided to post the definition of overconfidence, cause it’s one of the most frequent causes of poor trading/investing decisions (actually a lot of mistakes and even tragedies in life too).

Overconfidence – total certainty or greater certainty than circumstances warrant”.  For example, people often tend to rate their quiz answers as “99% certain” while actually being right only 60% of the time.

In short, people believe they are somehow better at doing something than they actually are and act against realistic odds.

Let’s think about this: would we call a trader who places a trade against the odds good trader? Rhetoric question isn’t it? :)

But then why do we act contrary to the obvious? Cause naturally, confidence improves accuracy of our decision making compared to the state of not being confident. This is the case with the tasks we are familiar with. Did I just say “certainty”? Right!

Trading/investing and many other occupations assume high level of uncertainty in the process of decision making. Especially for newbies who are usually uncertain even about which system or instrument to choose. Somehow evolution of our specie is not yet at the stage of ideal adaptation to uncertainty and tasks we are unfamiliar with. This is the fact of life and I would be overconfident if I say it can be avoided. :)

But what can we do about it? First, get more familiar with our occupation. Most rookie traders are usually too much in a rush to try new method, new instrument and even live trading in general. Too much action and way not enough learning! Result is loss of confidence (which as we noted above, can also hurt performance).

Second, we as traders should remember that we play an odds game and stay within boundaries of realistic perception. This is best achieved by applying strict rules to your trading to make decision making process more automatic and shift focus from “I think ES is going…. hmmm… where?” to “my system tells me to buy, LIMIT BUY @ 1,800.25, stop-loss 1,799.25“. It makes our mind pretend that we just follow orders and are not fully responsible for the decisions. Some time in the future we will talk more about this particular matter of “cheating” our mind to get better results, but now it’s enough to know that shifting your focus from “myself” to “system” helps to see things more objectively and commit trades with more confidence, but less chance of overconfidence.

Which is our goal. Trade well and be overconfident! :)

Nov 302013
 

The now famous Bitcoin cryptocurrency being such a volatile and relatively new financial instrument demonstrates beautiful classic relationship between public interest and strong price swings. Obviously we all know that markets are driven by supply/demand. But I performed little quick research and compared number of search engine queries for the word “bitcoin” with it’s price. Both charts are since the beginning of 2013 up to date.

Daily Bitcoin Price Chart

 

 

 

 

 

 

Search Engine Queries for Bitcoin

 

 

 

 

 

 

Obviously price of Bitcoin is not only dictated by pure public supply/demand, but also by it’s built-in algorithm. Nevertheless correlation between price and interest of public is pretty clear from the charts shown. It is interesting though, that interest of public percentage wise did not grow much during the latest huge rally up and beyond $1000 mark. Most likely it’s an indication that price of an instrument is not only affected by the number of participants, but also by their agreement about the future price. Notice how volume during the peak and decline in April is much higher than volume of the current rally. It may mean less Bitcoins changing speculative hands now and more interest to this cryptocurrency as investment.

If the current price is “fair” or reflects classic overreaction (in Soros terms), time will show. I will keep analyzing this instrument as an interesting phenomenon, which allows to research behavior of the markets faster than world’s most important “traditional” financial instruments for the same reason scientists use drosophila in experiments: everything happens much faster in the world of bitcoins.

Nov 272013
 

Let’s continue our psychological analysis of price action and how traders can be trapped by their own minds when they read markets and make conclusions based on their reading.

Here is an example of entry (marked with arrow):

Price Action Entry Sample

 

 

 

 

 

 

 

 

 

Looks like ideal place to enter, right? Right. Looks like trader should hold trades longer cause what happened here after the entry happens regularly, right? Wrong, if typical price action of the market you trade looks like this:

Price Action Sample

 

 

 

 

My point here is: we are emotionally attracted to unusual events. They are imprinted in our minds much stronger than endless streaks of average events. Sudden lucky trade may create so strong emotional response that you will start chasing for those “jack pots”. But we all know what happens to gamblers who rely on luck. Professional gamblers and speculators rely on STATISTICS.

If typical price action you trade is choppy and your stats show that you make more in the long run by scalping for small targets, then do just that! Of course if the market is typically volatile and regularly offers good runs, if your stats tell you holding trades longer works better, then go for it!

There is no single “good” trade management approach. It depends on many factors derived from trader’s personality traits, market characteristics etc. Just don’t be emotional in your trading, rely on truly objective information and watch yourself not to fall in the trap of wishful thinking, betting on market events, which statistically don’t produce you optimal profit.

That alone (choosing your trade management style based on realistic stats) can make a whole difference between a struggling trader and a winner (provided you already have good entry technique in place).

Trade well and good… stats. That’s what you need, not luck. ;)