Double Whammy

We are nearing the finale of the Jackson Hole Symposium and anyone who wasn’t invited (i.e. the 99.99999%) is standing by with bated breath to receive the latest economic doctrines conceived by our two venerable high priests of modern finance (Draghi & Yellen). I personally couldn’t care less about what they cooked up for us as the real song and dance always happens behind the scenes. So as long as it doesn’t involve virgins*, goat blood, or a temporary suspension of algebra we ought to be fine. My suggestion would be to sit it out and make better use of your time.

2014-08-22_events

They are going to drag this out all the way and I’m afraid markets won’t really have absorbed the full impact of the two statements until Sunday night. So we advance our stops and stand by for new instructions.

2014-08-22_spoos_update

On the spoos (and implicitly on my NQ chart) I am of course looking for support levels as we are invariably going to see some wild swings. Markets are skittish up here and any wrong intonation of a single word can drop equities by double digits. On the hourly ES I see 1980 as a soft support zone – but more realistically 1968 should hold a first stab lower (should it happen).

2014-08-22_SPX

IF we drop lower than that I’m afraid there would be more momentum than we can anticipate right now and the 100-day at SPX 1920 would be my next pick. On the upside of course I see little holding this thing back – we are so overbought that it’s impossible to find resistance clusters here.

2014-08-22_DX_LT

Scott asked me about my DX campaign yesterday – here’s where we are on the long term panels. Clearly we have room to run until 83.5 where I would expect heavy resistance as the upper 100-week and 25-month Bollingers correlate there. Of course we may resolve lower and if we drop hard 81 makes for good support right now.

2014-08-22_events_nextweek

Obviously I won’t be taking any more setups ahead of today’s big announcements. If anything significant transpires later this afternoon I may chime in quickly. But frankly I’m looking forward to my normal routine starting next week – see a schedule with the most crucial events above. We do have a few marketquakes© on the roster but they happen before the open and thus we may actually get a chance to have some fun in between. I see you then.

Cheers,

Let ‘Er Run

I’ll be quick today as there isn’t much to be said until the boyz at Jackson Hole are done laughing in their gold plated seats. Just about now they should be getting frisky and inaugurate the entertaining part of the conference by throwing darts at an IMAX size map of the world. As good ole’ George once said – it’s a big club and you ain’t in it. Console yourself by the fact that at least you’re here, which means you saw the light and learned how to focus on the few parameters you have control over. The rest is just noise – it’s entertaining here and there but mostly it’s just noise. Focus on yourself and your loved ones and you’re going to be fine.

Anyway, I do not recommend taking on any positions at the moment, the exception being your automated systems and even there I would suggest reduced position sizing.

2014-08-21_NQ_update

On the equities side it’s turned into a squeeze from hell, but as you can see the candle ranges are getting shorter and that means we’ll most likely are going to see either a fast blow off top or a correction by the EOW. As I’m managing this campaign Heisenberg style I’m now trailing it (manually) at 25% of 5R. Which means that spot below the daily NLSL is perfect for riding out any shallow reversals. If we get more than that it’ll probably dip much deeper, perhaps up to 50%. It’s been a brilliant campaign so far and at this point we just watch and let it play out.

2014-08-21_DX_update

 

Ditto on the Dollar side – it spiked to 6R today and I intend to hold this one as long as possible. Remember, let those winners run. Sorry the chart is wrong – I was blinded by all that green apparently. It should say 6R but my stop is in the right place, trailing at 1.5R (~25% Maximum Favorable Excursion). I never thought this one would run this far but I’m not one to look a gift horse in the mouth – some of those mares have a bad temper!

So, no setups until Monday – I’m actually keeping myself busy with some pretty advanced quant project. Nothing like giving that ole’ noggin’ a little kick every once in a while. BTW, how’s everyone enjoying DarthMole?

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

Cheers,

Irrational Escalation

This is the first article in a series on cognitive biases. As human beings we seem to have access to an almost inexhaustible supply of them. So let’s cover some the biggest culprits here, in particular the ones who stand in the way of us acquiring our ill-gotten gains in the financial markets.

sunk-cost

Today’s topic is the sunk cost fallacy, also known as ‘irrational escalation’ – no it’s not a term coined by Greenspan. This precious gem happens to be hard wired into our human psyche and it will haunt us to the end of our brief existence on this mortal coil (your mileage may vary given your consumption of donuts or Hefeweizen). So what does it do? Well, imagine yourself investing in your best friend’s company and he runs through all the funds without making any major progress. A few months later he’s back desperately asking for a reload. Your brain kicks in and whatever is left of your cerebrum (again, your mileage may vary) mutters that he’ll probably blow the next round on fancy office chairs and strippers as well. However almost immediately there’s this nagging thought in the back of your mind: Unless you give the guy more cash to get the job done and launch the product/service/prototype etc. the money already invested prior has been for naught. What to do?

Well, I leave that particular decision in your capable hands. I personally would invite him for a swim in my custom designed shark tank (yes, they have freaking laser beams) and make sure he finds a way to pay me back. But the topic at hand is that cognitive dissonance developing in your cerebral cortex: Damn it, I should have never gotten myself into this! Which is exactly what you’re thinking as you find yourself writing him another check. Why? Because the sunk cost effect is closely related to another cognitive bias we’ll cover in the future called ‘loss aversion’. Basically it’s the tendency for people to have a strong preference for avoiding losses over acquiring gains.

Yes, that one is a mind bender in its own right but it’s basic human psychology. Most people would rather take action to protect themselves from losing a Dollar than to spend the same energy earning that Dollar. And given the situation our plucky investor friend here finds that he’s more worried about losing his existing investment than to lose even more. I know that sounds strange – but if you mix in a potent cocktail of hope, self delusion, and guilt for doubting the vision of his good friend then odds are that he’ll convince himself that this new round of funds somehow will render his existing loss non-existent. And right here is the rub. It’s all about avoiding the feelings generally associated with loss, disappointment, failure, wasting time, etc. It’s all such a downer, so let’s just avoid it altogether and pretend it didn’t happen. And so you somehow wind up throwing good money after bad money.

And this doesn’t just apply to the financial arena. Back in the days, when I was working for the man as a software consultant (i.e. coding monkey for hire), I saw my share of failed projects. And most of them wind up as a furry mess of code exactly because of the sunk cost effect. Perhaps they hired some crew in India to wire up a solution for them (i.e. website, API, CC processing system, etc.) and it was full of bugs, security holes, and performance problems. The guys who inherited that mess spent months if not years fixing it with scotch tape and a mix of blood and tears. Of course they kind of got it working but as soon as some product manager brought up the topic of adding new features all kinds of alarms started to go off in the dev department. And so they wound up patching it up a bit more – adding more bad code to existing bad code.

Of course we all know what the right decision would have been. Scrap the entire thing and write it from scratch again – this time with a crew of people who knew what they hell they are doing. But that rarely happens – it’s simply against human nature and I dare you to propose to anyone to let go of a pet project they have nursed along for who knows since when without anything to show for. If you would have asked them today if they would take on an endeavor of such a magnitude without reward they’d tell you to stick that idea where the sun don’t shine. But human beings are strange creatures and we just love to watch those frogs boil.

In the trading arena I see this all the time. Someone drops by the blog and asked about a shitty campaign they are obviously trapped in. They should have never gotten to that point to begin with and the only thing left to to do is to close it out and take the loss. Knowing what we know that is the only logical solution and perhaps it’ll serve as a learning experience for the future. But people get trapped in bad decisions all the time and spend a lot of energy pretending to themselves that it didn’t happen. So they stay in bad trades (while cutting winners short – a.k.a. the disposition effect – topic for another day) and mentally contort themselves into impossible positions hoping to find a way out.

Ve careful criticizing those people because I guarantee you that it takes only one bad decision to find yourself in the very same spot. None of us are immune and that includes yours truly. The only remedy is to know ahead of time when your campaign needs to be closed out. Even better – expect to lose every time you take a new entry. This should be your default mind set when trading – expecting to be wrong and most importantly – actively preparing for that eventuality. Because statistically you will be proven right (about being wrong) the majority of the time. Unless you can embrace a bushido mind set during trading you will most likely be driven by fear and therefore are doomed to fail. Expect to lose each battle – fortunately, if you do it right (and that’s what we do) then it’s only a paper-cut and not a flesh wound.

Lesson learned: Treat trading just like dating on POF.com. There is always always another campaign out there, so don’t get married to any of them. If one turns out to be a loser, don’t sweat it and simply cut your losses. And if nothing else (while we’re on the topic) – photoshop your picture, deduct 10 pounds, add one inch, skip five years, and always wear a condom ;-)

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

Cheers,





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    1. Forex Plays
    2. Long Term Perspectives
    3. How To Let Your Winners Run
    4. Double Whammy
    5. Let ‘Er Run
    6. Irrational Escalation
    7. Squeeze-A-Licious
    8. Tuesday Morning Briefing
    9. Welcome To The Wood Chipper (Again)
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