Chasing The Market’s Tail

Judging by the measly comment count it seems most of you guys are ready to call it a week. Plus the market seems to be in shake out mode and my E-Mini campaign met its maker, fortunately at the break/even point. Heck,  it was worth a shot but the odds were low to be begin with. Just one out of 10,000 campaigns  - moving on. So I won’t bore you with more short term setups this morning  - instead let’s talk about a cognitive bias of sorts that many of us have fallen prey to but which I don’t see being addressed very often.

2015-04-17_spoos_briefing

Today’s events are actually a prime example of what I call ‘chasing the market’s tail’. In a nutshell this rather common behavior is triggered by a series of events that cleverly draw you into taking repeated entries despite diminishing probabilities of success. You may start out with getting out clean – meaning at break even or with a little win. But after being stopped out you look at your chart and you think to yourself – hey, I got swiped just by [one handle, one tick, just below that SMA, etc.]. And you just know that after shaking out those weak hands it’ll reverse and continue higher [or lower] again.

What’s happening here is that your ego has been bruised. You got stopped out – be this for a loss or perhaps at break even or a little gain. But you really really liked this campaign, especially as you got a great entry, grabbed it right off the lows, who knows what. And you want it back – plus remember your ego is a bit bruised – and there’s that little voice in your head that keeps telling you that you’re smarter than the market and that your supreme charting skills or your unique ability to predict the future will surely overcome this temporary setback.

Yes, of course you’re never going to say all this out loud – sounds quite ridiculous after all. But we all have been there – we all have felt that temptation to go right back in, haven’t we? I mean look at that E-Mini chart above – such a juicy bounce off that lower 100-hour BB and who’s to say we’re not going to run up from here after having shaken out all those weak hands?

Of course none of us really know – especially on a Friday with only a few hours left to go. All that stuff going through your head is mental masturbation and needs to get cut at the root. That is exactly how you wind up getting drawn into bad entries – and never forget, that in fact is the main function of the market – to suck you in when the odds are aligned against you. Or maybe there are no odds – it may look that way to you now but is this entry really in line with your system rules? That’s right – I didn’t think so.

Of course Dr. Mole has the right remedy – just watch the above. Whenever I find myself after a ‘regrettable’ stop out I habitually ask myself if a new entry is justified. I also monitor my own emotions and if there are any vestiges of regret or disappointment – if so, then I simply repeat the following mantra:

Homey Don’t Play That!

That’s clear enough and it usually fixes the problem. Look guys – we’ve had a great ride recently despite equities running around in circles. Let’s not test our luck, shall we? I’m fine with letting this one go – perhaps it’ll jump higher from here and perhaps it’ll drop like a rock and we test the lower border of this sideways range again. I really don’t know and my crystal ball is still in the shop. But what I do know is that this is not a good spot for taking entries and so I’ll graciously decline and wait for a better opportunity. Which will come – believe me – if nothing else we have proven that over the past seven years ;-)

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Cheers,

Evil Speculator 101

So I found myself waking up last night and habitually reached for my iPad to catch up on emails and check my systems. Of course I wound up peeking at the blog as well and then for some reason decided to head over to the Slope to see what those bears were up to these days. I have to concede that I don’t visit there often as I truly have my hands full with running my own blog, maintaining various automated systems, coding and bug fixing, attending customer support duties – and then there of course are my own trading activities. Not a weekend goes by where I do not spend a minimum of five hours working on various projects behind the scenes or am preparing for the week to come.

That doesn’t leave much time for virtual socializing as I barely manage to catch up with the comment stream over here at the lair. But I always had a soft spot for the Slopers as I used to be one way back in the early days. And for some reason that sentiment appears to be mutual as much to my surprise Tim actually mentioned me in the very post I was reading. And yes in case you wonder, it was a positive plug – deservedly so or not.

However more importantly - some of the various points Tim was highlighting as part of a rather candid self analysis really chimed with me as they outlined the very challenges we have worked very hard to address here at Evil Speculator. And I dare say issues we eventually managed to overcome in time with a lot of effort. So if I may be so bold to offer some assistance here – by offering solutions that you hopefully will not wind up ignoring. To quote Winston Churchill’s commentary on man: “Man will occasionally stumble over the truth, but most of the time he just picks himself up and stumbles on.”

I have been a financial blogger for over six years now and believe me – I know how how most of you guys think and operate as I have literally seen thousands of people come and go. Personally I myself have walked through the shadow of the valley of death on several occasions – not only in the course of my own trading endeavors but also in my interactions with my readers, critics, and followers. Because it turns out that the pursuit of what actually works, i.e. what makes you a consistently profitable trader, is not just one of the most difficult personal challenges you may face in your life, but also happens to be very unpopular. Which really is an interesting contradiction if you happen to run a trading blog as a side business. Of course you want to turn retail rats into winning traders but while readers may expect excitement and get rich quick systems, you offer nothing but hard work, sacrifice, and the discipline to show up every day and do the same boring thing over and over again. Not exactly a tantalizing recipe in the face of an audience with the average attention span shorter than that of a goldfish.

The sad truth that has to precede the remainder of this article is that most of you will fail in becoming successful traders on a long term basis. Yes, I just said that, and if you disagree with that, well then please stop reading right now and just move on, because I cannot help you. Now Tim is way too kind and jovial to be telling you this but fortunately for you I am not. There is a reason why I’m operating as Evil Speculator and it’s not just due to an admittedly dark sense of humor. Which helps but the real challenge lies in overcoming your personal daemons and implementing positive habits whilst at the same time suppressing a large portion of your most deep rooted human instincts.

Now telling all this will accomplish exactly nothing as most of you will simply move on to the next post and forget all about it within a matter of days. So instead I am offering to work together with Tim Knight and the rest of the Slopers to produce your own system. One that has a long term edge – and most importantly you are comfortable trading on a daily basis. But first things first – let’s take it from the top – I am going to compile a list of the personal hurdles that Tim has presented and will address them one by one:

  1. Inability to implement knowledge into action and personal change.
  2. Personal beliefs.
  3. Directional bias.
  4. System and/or market hopping.
  5. Overcoming emotions.
  6. Quantitative vs. qualitative aspects of trading.

Inability to implement knowledge into action and personal change.

How many of you have more than three trading books in your bookshelf? How many own more than 10? How many have more than 20? Have you read them all? Why aren’t you trading any of those systems? Because they don’t work or because you are unable to follow them? Are you attending trading seminars? How much have you invested into all that? $500 – $1000 – $10,000 – more? I think you get where I’m going with all this. Unless you are new to the trading game odds have it that you have already absorbed a mountain of knowledge and trading related information and most likely that learning curve will continue as long as you follow the markets.

So the problem is not the quantity of information really – it’s being able to absorb useful information and to apply that to making successful trading decisions. In most cases less is actually more – back in 2012 I wrote a post on maintaining a strict information diet and I invite you all to read it. However whatever information you choose to absorb on a daily basis – ask yourself: Is this information useful to making successful trading decisions? If that answer is not a resounding yes then it’s nothing but noise that will distract you from your core mission (i.e. banking coin). So don’t make the mistake of equating information with knowledge.

Once you have found statistically verifiable information that you believe will lead to successful trading activities then you must take steps to implement them into your personal life. The fact is that over time you will come across many excellent systems that have a clear long term edge but which you are unable to pursue due to a variety of personal reasons. Perhaps the drawdown periods are too deep for you, maybe the entries happen too frequently during the day, the system doesn’t take enough trades for your taste (lack of opportunity), it works best in markets you are not comfortable trading (e.g. futures, forex, bonds), your account size does not permit proper position sizing. The list is long and it’s one only you can answer for yourself. Don’t expect to abide by even the best system in the world if the qualitative aspects of that system are incompatible with your personal beliefs, dispositions, and life style.

Personal beliefs.

You probably expect me to say that your personal beliefs do not matter but actually it’s the other way around. They matter the most as you will not be able to pursue a system that is not in line with your personal beliefs about the market and how to take advantage of opportunities on an ongoing basis. And I’m not talking about drawing lines on charts either. Look, I really don’t care about what anyone paints on any chart – if I am not able to turn that information into winning trades it’s just noise to me.

Most retail traders are focused on market analysis while professional traders are focused on developing a low risk idea.  To quote Van Tharp on the subject: Market analysis for most traders amounts to building a straw house. They collect data about the markets; they look at different patterns of charts and specific market indicators; and they even make predictions about the future direction of the market and then focus on trying to help those predictions come true. However they consider the probabilities of winning and losing or the amount that may be won or lost. In other words, what most traders do in terms of market analysis has nothing to do with making low risk trades. Hunters build straw houses, but that activity has nothing to do with catching prey.

So instead of ‘charting’ or ‘market analysis’ I simply think about developing low risk ideas. I start out with various ‘beliefs’ that I have developed over the years and then put them into context with the market. For instance I personally enjoy using Net-Lines, a price pattern technique I stole from Chris Carolan a few years ago. They work very well for me but they don’t mean zip to Scott – a fellow from Australia who I have been collaborating with over the past few years on automating various trading systems. Even if trading Net-Lines turns out to be a promising idea for taking entries Scott would never be able to trade them as the concept doesn’t chime with his particular market lens. We all have one by the way – a lens that is – a way of observing and processing information given to us on a chart. It’s all a matter of how we are wired mentally.

Some of us share a similar lens while others use one very alien to us. For instance 2sweeties from Italy (a contributor on the Slope) uses a sophisticated blend of statistics and fibbonaci retracements. Works very well for some – others will find it difficult to build a system around it. Most of you Slopers seem to enjoy bearish markets – I expect maybe also for a number of reasons beyond the scope of your trading activities, but also perhaps due to the inherent characteristics of bear markets. Meaning high volatility combined with directional trending tape. They are actually a lot more difficult to traverse then you would expect but that’s a different story. Bottom line is that you need to sit down and write down your personal beliefs about the market – where you believe opportunities can be found and how you plan to take advantage. Here’s an example using Net-Lines really quick off the cuff:

  1. I believe that Net-Lines produce statistically valid support and resistance levels.
  2. I believe that these levels grow exponentially weaker as time progresses.
  3. I believe that inverse entries prior to a breach and directional entries post breach should be taken.
  4. I believe that exits should be set at the opposing end of the trigger candle.
  5. I believe that entries should resolve into producing 1R within the following two candles or the odds for a reversal increase significantly.
  6. I believe that an accumulation of several Net-Lines of equal direction (i.e. sell or buy) increases significance.

And so on – I could probably list five six more and you may agree with some or none of them. But that’s not today’s exercise and it’s just an example and a first step in developing your own system. Once you have produced a set of beliefs about the market you start develop a system around it, which unfortunately is beyond the scope of today’s article. I merely attempted to demonstrate that personal beliefs are important and can actually be leveraged in developing a system that works for you personally. If there is any interest I would be happy to produce a pertinent series which covers this step by step. The offer stands Tim! ;-)

Directional bias.

You would be right in saying that it’s probably a bad thing. However it seems that many traders are unable to look in both directions and see the same amount of opportunities. Perhaps it’s because their mind is wired in a particular way – or it’s based on past experience. You can either fight it (my approach) or perhaps you can simply take advantage of it. Fine – you only like to take short trades – I bite! Then develop a system that only goes short – problem solved! What you should NOT ever do however is project your own directional biases onto any particular market. You want equities to crash and burn? That’s a rather perky disposition you got there tough guy – now see what happens over in reality. Mrs. Market is not kind to opinionated people – usually instant punishment is generously lavished.

System And/Or Market Hopping

Tim mentioned that he recently started trading binary options in collaboration with Dutch. Now there’s nothing wrong with exposing yourself to other markets and I encourage you look at all of them. However don’t expect any of them to be the answer to your personal limitations. They are not better or worse – simply different – that’s all. Forex trades differently than the futures – stocks are loosely tied to various market segment ETFs but the latter trade completely differently and have their advantages and disadvantages. Binary options sound like fun but require a win rate of over 50% for you to reach break/even. Futures offer leverage and require overnight margin – stock options are also highly leveraged but are what they call a wasting asset. All these different type of markets requires a different trading approach and it’s up to you to figure out which may work best for you. I personally like forex and the futures – but that’s me – I like things simple and I also enjoy trading 24×5.

The same applies to systems – many retail traders move from one system to the next – like nomads. They try their ‘luck’ with a promising one and at the first drawdown pull out and move on to the next system. Which is inherently the worst approach one could take as you keep taking drawdowns and then move on to another system, most likely during its earning period, which statistically speaking is prone to experience a drawdown in the near future.

Overcoming Emotions & Cognitive Biases

I have written about this subject in much detail in the past and if you’re familiar with my work you know that it’s an uphill battle. No matter how well you know yourself and how hard you work on it – you’re only one or two trades away from turning into an sobbing emotional wreck. It never ends and it’s a battle you will wage until the end of your days – and don’t believe for a minute that you are immune. The best thing you can do is to produce a system with iron clad rules and take yourself out of the equation as much as possible. Tim mentioned that he kept looking at gold and was happy that he ‘had dodged a bullet’.

That’s exactly the opposite of what you should be doing – sorry Tim. If you have a system then your entry happens in a very specific fashion and once you take that entry you already know when you will exit. I actually decided to not talk about stops anymore as they are an emotionally laden term. People equal them to ‘stop the bleeding’ or ‘stop the pain’. Which is another reason why I don’t talk about money or percentage even – I simply refer to ‘risk’ which is referred to as R – some trend traders call it N. You devote R (usually between 1% – 2% of your assets) to a position, set your stop (ahem) and then you walk away. Either it gets to target or it’ll exit at the point you require the campaign to end. If that sounds too complicated I can help – here’s a risk calculator for the futures and here’s one for you forex aficionados.

The rules are there to protect you from yourself. And that includes, me, you, Scott, Tim, Bill Dunn, Richard Dennis, William Eckhard, Ed Seykota, everyone. We are all flawed human beings and the less we are involved the better our systems are able to perform. In essence – give it enough time and we just mock it up.

Quantitative vs. Qualitative Aspects of Trading.

Nick Rage produced a great video that demonstrates how most people focus merely on the quantitative aspects of trading, meaning system development, campaign management, risk management, etc. As a matter of fact many of the views I present here are covered and I strongly suggest you watch it in its entirety. It also makes a point about trading systems on a long term basis which is another Achille’s heel of most retail traders.

This has turned into a rather lengthy post but believe me that I’ve only scratched the surface. Developing your system is actually the tiniest aspect of it all – the majority of your trading activities should actually revolve around managing yourself. Trading involves human performance and that performance can be objectively measured in terms of profit and loss. You cannot hide from your performance record, no matter how much you may want to mentally rationalize your losses. And since you are the most important factor in your performance, doesn’t it make sense to spend time analyzing yourself? The best traders do it constantly but subconsciously. So be one step ahead of everyone else and do it on a conscious level.

Let me conclude this with another Van Tharp quote (clearly I’m standing on the shoulders of giants today): Successful trading is 40% risk control and 60% self control. In turn the risk control portion is one half money management and one half market analysis (i.e. developing low risk ideas). Thus market analysis is only about 20% of successful trading. Yet most traders emphasize market analysis while avoiding self control and de-emphasizing risk control. To become successful, traders need to invert their priorities.

Happy hunting.

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.

Dirty Trading Words – Part 1

The late George Carlin used to have a great routine on the hypocrisy of the seven unspeakable dirty words not permitted on radio or television. We all know them and there’s no need to repeat them here. As I’ve had one crappy day today I’ve probably been using all of them several times over – but that’s a different story.

There are however is a list of dirty words I myself have been adding to my trading vocabulary over the years. All of them share a common theme – either they are essentially meaningless or they are aimed at manipulating retail traders into making bad trading decisions. And in that respect what we are dealing with is Neuro Linguistic Programming at its finest. Let’s cover two of them today – actually it’s really just one with a downside variation:

Overbought and it’s bearish cousin oversold.

Every time I hear or read either of those two words my brain lights up and I’m ready to tar and feather the culprit who uttered it. Yes, I have been guilty myself once in a while – here I’ll admit it. But to my defense it’s always been in the context of keeping you guys from picking tops or bottoms, e.g. this tape is overbought by any definition but don’t assume it can’t run even higher. But in the future I’ll make sure to add an appropriate disclaimer as I should not contribute to the propagation of harebrained definitions/concepts.

2014-11-10_spoos_update

So what’s so bad about using these two words, you ask? What’s the harm? Because they have absolutely no meaning – that’s why. Just think about it: OVER BOUGHT. What does that mean? Too much has been bought and there are no buyers left? Fine – but if that’s the case when and how do short squeezes happen? That’s right – in so called ‘overbought’ conditions – that’s when. As a matter of fact buying high and selling low is a favorite past time of trend traders and although they are wrong most of the time – when they are right they are very very right and hell hath no fury like a short or long squeeze on steroids.

Just look at the current situation in equities? When exactly do you think the tape here was ‘overbought’? At 1950? At 1970? At 2000? Yes, yes, and yes. So we can derive the following – the word is meaningless as it offers absolutely no value to our trading activities. It’s a cognitive bias with the underlying assumption that buying can not continue just because a lot of buying has preceded it. There are no rules and there is no script as to how tape ‘is supposed to be’ behaving. As a matter of fact markets across the board have a knack for punishing the majority of participants every single day. And usually it’s the ones who share a common belief. Remember one of our prime directives – what everyone knows is not worth knowing.

So why are these two words continue to be used? Because just like any old superstition people have a tendency to believe in things that they have never spent one second investigating. Which is wonderful news for institutional traders as they always need more meat for the grinder – and guess what – you are it. So keep using these words and, despite all evidence to the contrary, keep believing in whatever you are being told about how the financial markets are ‘supposed to’ work. Because actually sitting down and collecting your own statistics would be hard work – and nobody really is interested in that part. I mean banking fortunes by trading the market should be easy right? I can just download some fancy trading app like TOS, open an account, and then let the fortunes flow in!

Moral of the story: Challenge everything you ever hear or read, especially when it comes to trading or making money.

2014-11-10_USDJPY_setup

USD/JPY – that hammer is looking pretty nice here and I am willing to enter at today’s highs (which may still change) in tomorrow’s session. Put your stop either below the NLSL or the low of the hammer.


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If you have collected your own list of dirty trading words then please submit them here. I’ll make sure to add them to mine and cover them all over the next few weeks. It should be fun and hopefully it’ll serve to prepare you once (and not if) you come across any of them the next time around.

Cheers,




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