The Star Global Malaysians Forum - Posted: 05 May 2006 at 8:23pm
A quick coffee break.
1) TIPS ON HOW TO BECOME RICH INVESTING IN THE STOCK MARKET
http://www.visoracle.com/market/stocks.html
Millions of people are lured into buying stocks, based on promises by the - what it likes to call itself - financial industry. These promises are disguised as only a few outstanding success strategies. Let us start with what everyone considers to be the more dumb ones:
Watch TV or read the newspaper and simply go with the flow, do what other do, buy some arbitrary stocks and wait for the big money.
Have a friend who recommends something or whose gains makes oneself jealous, and be eventually talked into investing or trading.
Here are the ones, which seem to be much smarter:
Use charts, find patterns and calculate precise entry points to have an edge.
React to news and price changes quicker than quicksilver and have a speed advantage.
Be a fundamentalist, analyse and examine every data that comes out of a company, and then buy only cheap at a reasonable price.
Make global judgements about the economy and hit the right turning point for a general entry into the market to elegantly avoid analysing details of pea size.
Buy the broader market with index funds, based on the idea that overall the stock market reflects the ongoing advance in the world and thus stock indices are doing well longterm.
Delegate the work of making investment decisions to a professional, who, because being a professional, should outsmart the market.
Most people adhere not only to a single pure form of these strategies. They rotate between them, they try different flavors of them, they mix things up, they even start an investment with one strategy and close it with another. Or they start trading and end up with an investment. But important here is, that the latter behaviors seem to have all good arguments. The former types of "investors" are in one sense rare - if conducting a statistical inquiry, most participants would think of themselves belonging to the smarter group and would find their reasons and reasoning of why and what they are doing among the latter strategies. That is why it is generally believed that investing in the stock market will make people wealthy.
Now let's consider a different view of the stock market, a table with six players.
In the middle we have Mr. Doe, the private investor, left to him sits Mr. Clever who is a professional fund manager and at the right of him is Mr. Smart, a professional money manager for individual clients. On the other side of the table we have Mr. Broker, Mr. Market-Maker and Mr. Company. They all are doing what the market does - they are exchanging stock shares and bank notes, putting them on the table and taking them away at times. Let us concentrate on the money only, after all the money is the only thing that counts. Neither has the table a hole through which money could vanish, nor does money rain onto it. All money put onto or withdrawn from the table has to go through the player's hands. Let's have a look at Mr. Broker first
Busy Mr. Broker only sells and always wins
He charges a fee for simply forwarding an order from Mr. Doe, Mr. Smart and Mr. Clever to someone else. All that without risk and pain, and after doing so he pockets the fee - he takes it from the table. He can't make a loss, so with a bunch of marketing tricks he animates everyone to give him as fast as possible a new order. Important here is, what he does with regard to the table. He never puts money onto it, he only takes money away.
Mr. Market-Maker is known to be in a good trading position
He is the one who takes the other side of a trade and makes a mostly riskless business with the spread, a difference between buy and sell price. Furthermore he has state of the art equipment, which he watches like a hawk all day in a big room with other's doing the same, hoping that many hawkish eyeballs are seeing more than single prey's ones. But that's not all, he is known to be in a strong trading position, too. He works for a big company with much money, which other traders fear, so he is able to drive prices up and down, enticing euphoric Doe into high prices and shaking out trembling Doe with a loss at low prices. He initiates breakouts, which Doe falsely interprets as signals. Doing so he himself buys low and sells high. Some badmouthing tongues even argue that Mr. Market-Maker makes money with illegal insider information, front running or stock pumping. Not enough with that, he is supposed to create up- and downgrades, something like home made news, just to influence supply and demand of a stock to force its price to a level where he can sell or buy with more profit or a smaller loss. Overall Mr. Market-Maker seldom makes a loss, on average, he always wins. To make it short, he too takes only away money from the table.
For Mr. Company the stock market is a real gold mine
He has a special seat, with a big sign above it, on which is written - on his side so that especially Mr. Doe can't see it - "capital source". The other side of this sign could be labelled "capital drain", but that would lower the mood, so it only says "welcome". Mr. Company comes to the table right away from the printing press, with a big chunk of newly created stock certificates - paper, which he dumps on the table while cashing in tons of money. Will he ever give this money back? Hehe, stupid question, no he won't. The alternative for him is to borrow money by emitting bonds, which he obviously thinks of being more expensive in this case than selling paper. After all in the bond market he would have to give back what he borrowed after paying interest for it.
In very few cases his company survives and prospers. Then - in the far distant future - it is expected to pay back something to the table. Mr. Company can ignore such an expectation for a long time or even for the whole lifetime of the company, there is no law requiring him to fulfil it. But he can do so by paying a marginal dividend or by buying directly back some shares from the table, preferably when stock prices are low. That looks good and may cost him no money at all, because there are some nice ways to offset such payments.
First, while making these payments, he can do a secondary offering. Mr. Company simply comes back to the table and dumps again a chunk of paper on it. Sounds primitive? No problem, he can mask the operation a bit.
He does it just a bit before or after the phase of payments, preferably when stock prices are high. Buying back low and dumping high is a profitable business on its own.
Or he creates sort of options by printing the additional word "warrant" or "convertible" on the paper. That means that he starts two dumping actions, one now for the option paper and one later in the future for exchanging the option paper for the original paper, cashing in twice.
Even better he splits off a part of his company, declares it being a new one and sells paper with a new company name printed on it.
If he is lazy, he simply distributes paper with the old name to the employees of his company. He can pay smaller salaries this way. Employees get shares proportional to their importance, meaning that he gets the biggest share, because he considers himself of being most important. Instead of one big, many smaller chunks are now dumped on the table.
There is another rare and very special case how money comes back from Mr. Company, a cash paid take over. Another Mr. C arrives at the table and buys with real cash all paper of Mr. Company from Doe, Smart and Clever back. But usually this other Mr. C got the whole money from the table firsthand, so this way nothing really comes back.
Actually Mr. Company is supported by two other persons behind the scenes. Mr. Investment-Banker helps carrying Mr. Company's paper chunk to the table. With much trumpeting he praises its quality as an investment. If Doe, Clever and Smart are nonetheless skeptical, Mr. Market-Maker, with his many tricks, makes the new stock's price going up. Then Mr. Doe loses all doubts and shoves the tons of money over the table to Mr. Company. Mr. Investment-Banker's risk is that he projects too big a chunk of paper for the table, so that he has to push the missing tons of money to Mr. Company, but that happens rarely. Mostly Mr. Investment-Banker just gets his fixed percentage of the tons of money from Mr. Company. Seen as an entity both will of course always drain money from the table during the paper dumping action.
Mr. Company's second supporter, Mr. Venture-Capitalist, got beforehand his own chunk privately from Mr. Company in exchange for money, hoping that Mr. Company raises the seed and is invited by Mr. Investment-Banker to the table eventually. He may even get a chunk from Mr. Company later when the stock is already on stage, typically for a better than the price at the table. In both cases he hopes that he can sell his chunk for a profit, which may or may not come true, but at the table he will never do anything else than dumping his paper and raking in money.
So we have three gentleman at the table taking away money. Some do it gently but constantly, some more raid-like.
Finally Mr. TaxMan appears every now and then, grabbing some money from the table and out of the trouser pockets of the participants and grins. Of course he never puts money onto the table either.
What about Doe, Smart and Clever? Well, they are fighting for who has to put the least amount of money on the table to feed the other side. We know that Clever and Smart are acting on behalf of Doe. They get a riskless payment from Doe for this fight, so it is not really that important for them whether they lose more or less.
It looks as if poor Mr. Doe is the real loser in this game. Interestingly Mr. Doe has a different perception of this.
But I already made a nice gain in the stock market !?
This seems to be a paradox. Yet it is none. The table view of the stock market is a totalized one, a view which cares only for averages. Of course there can be many individual Does having made their profit in the market, but on average Doe is the big loser. There can be a market maker, who suffered a big loss, which he never recovered, because he went broke. Yes, there even can be a company caring for its shareholders buying back stock shares and paying dividends with every free cash it earns doing its business, not offsetting these payments with tricks Mr. Doe is not aware of.
A second point of confusion is what happens away from the table. Mr. Market-Maker or Mr. Broker may have to pay a hefty monthly bill for their equipment, salaries and rent, so that they only break even. Mr. Venture-Capitalist may enthusiastically invest in any nonsense idea he hears of, so that he overall makes a loss. Mr. Company may have the wrong concept, not enough talent or too much competition, causing him to burn all money and go broke. He may be a genius, resulting in ever growing earnings of his company. All that is not important for the table model of the stock market. Even a rising price of a paper on the table doesn't matter. It looks like Doe, Smart and Clever are winning in this case, but alas, high prices are only tempting Mr. Company to dump the next chunk of paper. The only question that counts, is
Does the money flow through a player's hand from or to the table ?
The futures market is called by many a zero-sum game, because for every contract traded, there is a buyer and a seller and what one wins must be paid by the other. There is the proposition that the stock market is a positive-sum game, because over a long term, let's say some decades, stock market indices went up. Well, the table model suggests that the opposite is true. For Doe, Smart and Clever it is a negative-sum game. How can that be? Over time problematic index stocks get replaced by fresh ones with brighter future perspectives, so indices are distorted. But the main reason is simply, that all the owners of stock own paper but not money. If they all wanted to exchange their paper into money to get what the ever rising indices promise, these indices would drop to zero immediately. The stock market is basically a pyramid scheme, which implodes eventually, sometimes self induced, sometimes triggered by external events. More often it implodes only partly for some stocks or temporarily and so that not all stocks recover. That may be one reason why all this is so hard to believe.
Back to the beginning to the more smarter strategies how to beat the market. Will they not allow you to make money in the stock market? Doe, Smart and Clever are essentially fighting for a positive piece of a negative cake. So you nearly have to be a wizard to succeed. At least you have to be very good in your niche. This innocent little sentence contains what I consider to be
The first and most important secret to make money in the stock market
You are destined to lose. If you aim to be a wizard and turn your fate around, you have to have a niche, a specific system in which every part fits to every other. Every particle which doesn't fit, drastically lowers your chance of success. Amazingly you are yourself one particle of the system, your strategy must fit to your personal psychology, you must feel comfortable to follow it. It is possible to combine and refine above mentioned smart strategies, but never stop searching for the grain of sand that blocks the gear. Think about the tricks of Mr. Market-Maker, Mr. Broker and Mr. Company and design your private investment or trading system around their traps. You have to trade or invest not only wisely, you have to do it differently.
The red hot trading system and the proven safe investment strategy
for which you may have been searching so long, are exactly the wrong way. You have to avoid everything prefabricated or you are perfect food for the sharks out there. Using a published system out of the box will always put you in a predictable crowd. You may even be riding a Trojan horse, originally designed by one of your enemies. Moreover it will not really fit to you, and it probably has other grains of sand in the gear. But beware, just mixing popular trading or investment system elements crudely into another system, disregarding the traps, will only add some big stones to the grains of sand. A better idea is to let existing strategies inspire you. Have a look at their elements from the perspective of the sharks, combine fitting ones and think through the whole. Before I wish you good luck, which you will need for surviving in the stock market, let me emphasize here again: If playing a negative-sum game against sharks and random, you at least must not be predictable, as the mathematics of game theory shows. You have to create your own very personal and specific system.
2) TRADING THE COMMODITIES AND FUTURES MARKETS
http://www.visoracle.com/market/futures.html
Trading the commodities and futures markets:
A survival game Markets
Everyone who plays with the idea to speculate with commodities or futures, should step back now, take a deep breather and reevaluate this plan. These markets are a game of professionals - and I am inclined to add here - for the likes of them. Numerous studies have shown, that for most private traders (more than 90%) this is a losing game. Being a classic zero sum game overall, there must be someone who wins, and that someone is a minority of professionals.
The slippery churning of brokers, dealers and floor traders. Fees and spreads have to be paid in all financial markets to buy or sell something, but open outcry markets have a tendency to make prices run away in the wrong direction for orders from outsiders that seek to be filled. It remains an unanswered question whether the pure specialist system of listed stocks like the old NYSE, the competing market maker system of NASDAQ, either one combined with a competing electronic order book or the open outcry market is the fairest market. Pit traders like to accuse specialists of having too much power to manipulate their prices. They conceal that specialists have the obligation to make an orderly market with guarantees for reasonable fills. Taking into account that open outcry traders tend to behave coherently, there is no big difference to the specialist's power. Both, but even more the pit traders, resist to compete against a computerized market like an ECN or outright refuse to trade off-floor through a computer system, which would put them on par with other market participants.
Contrarian trading - the advantage of the producer
Price movements especially of futures markets are noisy. There are random fluctuations and self-induced starts or breakouts, which later prove to be non-substantial. This is the fundament for an anti cyclical trading strategy - buy low and sell high, or the other way round. As studies have shown, hedgers, companies or entities which sell what they produce or buy what they need for producing, are the big winners of the commodities and more general the futures markets. They often have a better insider knowledge about what is going on in their market than anyone else. Adding to that, they have the advantage that they are hedging - they actually only need to conduct one side of the trade, either they buy or they sell. This gives them the ability to calculate their trade in the light of their main business, which essentially caps their risk. Also, being better capitalized, they can afford to be longer term oriented.
For the private trader or speculator the contrarian system could prove disastrous. What if the price move turns out to be substantial and results in a trend or at least a new level of price? Combine the counter cyclical market entry with a stop loss? This would be a self contradicting system. A trading strategy which is incoherent is most likely invalid as a system. Having no stop loss is of course even worse. That's how amateurs go broke even in the stock market, which lacks (short or margin operations aside) the infinite risk practically created by leverage in the futures market.
Sometimes producers choose to go with what they see as an emerging trend or what they anticipate to become an enduring new supply and demand situation, so of course they are not bound to the countertrend method, but the long term contrarian trading strategy is only appropriate for them. To emphasize it again, as studies show, they are the big winners.
Following the trend - holy grail or well known secret of trading futures?
The third group of winners in the futures markets are so called commodity trade advisors (CTA), hedge fund managers and some well capitalized and experienced individual speculators. They are primary - as long as they make money - procyclical. They try to buy high and sell higher or vice versa. Is it this easy? No, even the most successful traders of this group suffer severe setbacks, they just won't tell it you. However, they have some advantages over the ordinary speculator. They are bigger in size, they use sophisticated statistical methods to create mechanical trading systems that actually do make money, they know about the importance of good money management and they are generally more experienced.
Creating breakouts of ranges or starts and turns of a trend
The naive way to start trading trends might go like this: Take a chart book, spot some trends and get the impression, that one just had to enter the market here and leave it there to become rich. Well, that's hindsight! To get early on a trend and to ride it as long as possible is easy in hindsight, but hard in reality. First, you have to enter a trend. You are looking for a starting point. That's where the malaise begins. There are strong market players, who produce breakouts of ranges, restarts and turns of trends, because they know many will stumble after them in expectation of a new forming or ongoing trend. If the "trend" turns out to be short lived, they can get out with a profit, because they entered the market at the best levels. Guess what, who pays the bill? Mostly the small private trader, but often enough the professional trend followers, too. That's why the rate of failure among them is much higher than these professionals are ready to admit. Who plays this pattern of buying low, pushing the price through a resistance or turning a trend around in order to hopefully initiating the next round of directional movement? Probably both - producers and trend followers, they just have to have enough capital. The futures markets are exceptionally prone to false breakouts and trends have wilder swings, tempting speculators to leave early or enter late - possibly with a loss. Just have a look at charts, and compare them with the stock market. But be cautious, this is easier said than done - the human mind is a pattern recognizing machine - it will always find the patterns it is looking for.
Using statistics to develop a mechanical trading system
One way to circumvent this problem of an optimistic mind finding occasions not only occasionally is to compile a trading system into an algorithm, which is then followed by a computer without being distorted by sentiments and psychological effects and without making mistakes by lacking discipline. But first one has to identify an edge, which is statistical sound. This means that you can use statistics to crystallize a system, which - so to speak metaphorically - meanders around all pitfalls, all the edges winning players have. Of course there is not much space for winners left, and that's why even professional system traders often lose, too.
The typical private trader has really a disadvantage in this area, he is just not sophisticated enough. He might buy complete systems or programs, which can evaluate trading systems, test them and optimize them, but mostly he is not aware of the mathematics, which are behind all this. Over-optimization or curve fitting is one cardinal sin, second guessing of trading signals another one. The typical trader tends to mix up signals of his system with discretionary decisions or tries to change the system every next time. Emotions have discipline in headlock and chaotic behavior is the result - the opposite of a trading system.
Summary of a zero sum game
Brokers charge a fee and have a riskless income. Floor traders slip away and cut out small but constant gains. Producers milk the markets big with contrarian trading. Deep pockets initiate false movements and let others stumble into their losses. The only chance are trends, but they are rare, and they are carved out by statistically sophisticated system traders or producers with better fundamental foresight. The private trader has to make the sum of the zero sum game become zero. He is there to feed the sharks.
Making things worse: Bad money management
An additional reason why so many novices are losing in this game is the lack of proper money management. To put it simple, they are overtrading. Newcomers intuitively often misinterpret the margin they have to pay as their bet size, and that's why they are overtrading grossly. Usually they are out of the game very soon. But even making bet sizes only slightly too big will make your losses overcompensating your gains on average and your capital will decline over time. This holds true even if you have an edge. Bad money management destroys your advantage - if you have one at all. The reason is mathematics. To make a simple example assume that you have no edge, but put on trades with a very big bet size. A typical gain of 50% of your capital has statistically the same probability as a typical loss of 50%. But to recoup the loss you must win 100%! Even optimistic advantages will get converted into their negative counterpart by what I call the relative-absolute effect.
3) OPTIONS
http://www.visoracle.com/market/options.html
The biggest piece of the cake and options trading
Real life will often give you only a tiny piece of the cake, while you know of others, who got a much bigger one. Are you hungry and want to know, why your piece is so small? A good example for studying this phenomenon is the attempt to become rich by trading the options market. An option is something which you can buy and sell, thus it is possible to trade it, and which gives you the right to do something later in the future. In case of the stock options market, an option gives you the right to buy or sell a stock at a specific price on a specific date in the future. Important is, that this specific price is fixed, it doesn't depend on the stock's price at that future date. The price you have to pay to buy an option is determined by the market - people who are trying to figure what it could be worth to possess this option and who are bidding or asking for a price to buy or sell it.
Trading options is like buying a ticket in a lottery
Let's say there is a stock which trades at 50$, and an option to buy this stock in 3 month for 100$. Why should one want to buy the stock for 100$ when it sells now for 50$ you might ask. Well, because there is a small chance that in 3 month it is worth e.g. 150$, which would cause a value of 50$ for the buy option then. Of course it is much more likely that the stock will be trading for fewer than 100$ in 3 month, and that would make the option worthless - it would expire and simply vanish. Because of this asymmetry of chances the price of the option now is small, for instance 1$. If the stock really tripled from $50 to $150 in 3 month, the option would increase its value from $1 to $50 following the price ups and downs of its master. In a nutshell, options are things whose prices are fluctuating wildly and which have the potential to soar to a multiple of what one paid for them, but mostly they expire worthless. Options are speculating vehicles par excellence.
The zero sum game
It is not only possible to buy an option, you can sell one, too. Imagine you have some stocks in your account, and you are betting that the price will not go from 50 to 100$ in the next three month. Then you can sell the buy option to some speculator and pocket 1$. In this case you literally have created the buy option. If you are wrong with your bet, you will have to hand over your stocks in 3 month for 100$ each, less than what you would have earned in the market then. The interesting point here is, that for every option buyer there is a seller, every amount one wins has to be paid by some other market participant who loses. This is what ivory tower theoreticians of the financial industry like to call a zero sum game.
The winner takes it all
Prices go up and down, the arithmetic balance of gains and losses is zero and the media tell us mostly about winners and only sometimes about losers. All this leads many to think of a game with chances of at least 50:50 for their personal success or failure. But, let's remember, most options expire worthless and only few are gaining hugely. Simply spoken, it is very likely that you are a loser at the end of the game. Let's assume 10000 people are playing this zero sum game in an option market set up only for them. No one can outsmart the other, all have the same information and skills, so effectively everything is driven by random. Adding all their losses and gains together will always show a balance of zero. But, the longer this game is played, the more the capital is concentrated on very few of the 10000 people. Who the lucky ones are may change, but the concentration increases all the time, statistically. In other words, the probability that a single individual is a loser steadily moves towards 100 percent. This effect works the stronger, the more speculative one operates. So, buying options "out of the money" (like the example described above) makes you very quickly poor, but trading them or buying options "in the money" and even the opposite, selling them, is ruled by this effect, too.
Beyond the financial markets
In fact, in many other areas of life the, what I call it, relative-absolute-effect converts dreams of becoming rich or successful into their oppositional materializations. Relative dynamics are perceived and treated as being absolute. The option market is just a very good example for this fallacy. Whenever there is a jackpot to win, you can be sure that chances are good, that you walk home from the casino as a loser. If you start playing with a given capital, it is likely that you end up with nothing. The mere effect of concentration will cause this, so it is not necessary that the game or system itself is unfair, which it nonetheless mostly is. But not only the world of roulette, lotteries and trading is affected - the effect of concentration is universal. Life itself is sort of a game, some become rich during playing it. Earning interest and leaving the inheritance to the heirs, would make in a few generations most people poor as a church mouse and very few super rich, if there were no taxes. Our daily struggle to make a living presents itself quite similar. Most people get only a fraction of the huge salaries few others earn, which extends from individual employees to whole countries. Growth processes happen on logarithmic scales. If a manager gets a salary increase, the difference could be alternatively used to pay 10 new employees. In the third world you could probably employ a whole village with the money. Will the manager work equivalently harder after the salary increase? Evolution is another example. Small advantages of a species over other ones in the same niche, are considered to cause the others to die out after several generations. This is an increase to the maximal possible concentration of the winner - the best adapted species, as biologists would put it.
Mixing up maximum, mean and median
If you want to succeed or have to survive in some area, look at the mechanisms that are at work and try to find out whether relative or absolute changes take place. If the system is closed and no resources can flow in from the outside - the cake has to be divided as it is, and the law of logarithmic growth rules - there is some sort of jackpot, be careful, don't be too speculative. Furthermore you shouldn't have to rely on such a system as a substantial investment. It doesn't help you that you theoretically could win the jackpot, when you realistically get near to nothing. You are a human being, you need an absolute amount of energy and resources to live - not a theoretical chance for something relative big. Look at what most people in that system get - the median, and keep in mind that not only the biggest piece of the cake, but also the arithmetic mean - the zero sum in the example of trading options, is an illusion.
The best system for trading options - don't do it
To complete this article for option traders let me mention shortly another aspect of the market. In theory the option markets, be it stock or future options, are really a zero sum game, but real life is far from that. The modern hunter of our financial world is the market maker, and he will assure with all sorts of tricks that the zero is greatly negative. Characteristic of the options market is a very high spread, the difference between buy and sell price at the same time, which the market maker cashes in. Really outstanding is the ability of a market maker to raise the price of an option more than proportionally, when everyone wants to buy it, i.e. when the underlying stock gives a trade signal. You think you will work with a stop loss? In the moment of an adverse price movement of the stock, when you want to sell your option, these legal criminals now exaggerate the option's price drop! All in all these tricks are the second reason to keep your money and mind away from this hunting ground of the sharks.
4) SWINGTREND
http://www.visoracle.com/swingtrend
Swingtrend - trading system elements for your personal market strategy
Why a personal system? One conclusion of the Stock Market article is that every prefabricated trading system is doomed to fail. Almost every trading system you can buy as a book, course or software guides you either directly into the pitfalls of financial sharks or not enough degrees of freedom are pinpointing a too specific system. Used by too many traders the sense of the market will adapt to it and exploit their naive followers. Instead the smart trader should consider to assemble his very personal trading system. Always have in mind what trading edge other market participants have, what methods and techniques they use, and build your trading system around their traps.
Build your own trading or investing system by putting together elements of existing ones! Important is, that all pieces of the puzzle fit together and fit to you, because you are part of the puzzle. Trading is psychology! You have to feel comfortable executing your strategy. Otherwise you will be overriding your system, change it often and let your confusion dissipate almost working system rules to chaos. Browse through this collection of trading systems and ideas that have at least a grain of truth in them, but don't expect to find the complete money machine.
5) TRADING SECRETS UNLEASHED!! <--- my favourite -
a) Arbitrage Virtual
http://www.visoracle.com/swingtrend/arbitrage.html
Virtual arbitrage trading system
BUY RULE
Buy the futures when they are trading at a 0.5% discount to the cash market.
SELL RULE
Sell the futures when they are trading at a 0.5% premium to the cash market.
If the futures are at a premium to the cash, they can be considered expensive and should be sold. If they are at a discount, they are cheap and can be bought.
The choice of 0.5% as a measure of excessive premium or discount is arbitrary, the system works just as well if you use 0.1% or 1%.
It is not necessary, to put on a directly hedging trade in the opposite direction at the same time. The invisible hand, the magician of all stochastic outcome, makes this trading method work.
b) Automatic Exit
http://www.visoracle.com/swingtrend/automatic.html
The automatic 2.5 percent trading system is about an automatical exit when the stock hits either a 2.5% gain or a 2.5% loss. The entry signal can be a breakout of a trading range, a swing back after a downturn, a news event, a crossing of moving averages, the break of a line of resistance or support or whatever cyclical signal you may imagine. But it can be a counter cyclical entry signal too, like a line of support or resistance which seems to hold.
After entering the market in what seems to be an asymmetrical chance which skews the ubiquitous symmetry of chances of 50:50 in your favor, you simply would enter 2 sell orders 2.5% above and below the entry price. The exact percentage can be adjusted to the particular stock or market.
Interestingly the offset hasn't necessarily to be the same in both directions. E.g. 4% above and 5% below may work too. This way the higher sell point can be adjusted to match a line of resistance and the lower sell point can equal a new signal for breaking the next line of support, which otherwise would be a sell signal triggering a short trade itself.
c) Buy Bargain Stop Hold Long
http://www.visoracle.com/swingtrend/buy-bargain.html
The key to investment success is:
- To buy when share prices are at bargain levels when some catalysator for a possible starting trend like fundamental news shows up
- To take losses quickly when it becomes clear a purchase will not be a winner IMMEDIATELY.
- To hold profitable positions as long as possible.
d) Coiled Spring Range Breakout Stop
http://www.visoracle.com/swingtrend/coiled-spring.html
Taking advantage of the big event and exploding volatility
This trade is put on before some big event known beforehand like economic or FED news, earnings reports etc by placing two orders into the market before the open, one to buy and one to sell. The buy is placed above the sell so when one is filled, the other is left in place to become the stop loss.
The basis behind this range technique is to take advantage of contractions in market volatility to create ideal entry points, which act as coiled springs when the market regains its volatility and breaks out. These contractions frequently are referred to as a volatility squeeze, markets are strongly volatile but experience a day with a small trading range in anticipation of the following day's report or event.
This trade depends upon volatility contractions to execute entries and expansions to execute exits. The contracted volatility, the trading range, acts as a shield against randomly triggering one of your stop orders.
e) Concentration
http://www.visoracle.com/swingtrend/concentration.html
For day trading you have to concentrate on very few stocks, for instance 5 to 10. Of course that does not mean that you can't change this set from day to day. Some day traders have there standard set, some others like to watch the current hot momentum stocks.
On the other hand there are traders who scan all day long the whole
market with watching late breaking news or following daytrading room chat. There are even scanner programs sifting through thousands of stocks trying to catch entry signals all over the board minute for minute.
To take the idea of concentration to an extreme, select only one stock, which has a decent trend and fundamental growth potential and try to get on a long term trend with daytrading techniques, meaning apply a hard entry stop loss and try repeatedly.
f) Concentration And Exchange
http://www.visoracle.com/swingtrend/concentration-0.html
Nobel laureate Paul Samuelson noted that John Maynard Keynes once came up with a similar insight: "Really, you should buy one stock at any one time. The best one going. And when it's no longer that, replace it by the new best."
g) Cut Losses Ride Winners
http://www.visoracle.com/swingtrend/cut-losses.html
"You are working too hard trying to EARN money trading. It doesn't work that way. You STEAL it. You place a bet, and renege on it when you don't like the outcome. When you do like the outcome, you say self-righteously I WANT SOME MORE"
This is probably the best explanation I have heard of "cutting losses and
letting profits ride"
h) Enter Automatically Feel Good
http://www.visoracle.com/swingtrend/enter-automatically.html
When I do a lot of trades I am experiencing minimal adrenaline rush. It is when I only do a few trades that I get really tense, heart pumping etc. One book I read advised the following system:
1. Identify opportunity
2. Take action automatically
3. Feel good about the trade
This is what I do. By trading a lot I am teaching myself to execute automatically. I feel this is critical because I have lost way more money on trades that I identified but failed to enter than on ones I entered and had to stop out
i) Enter High Eckhardt
http://www.visoracle.com/swingtrend/enter-high.html
If you make a bad trade and you have money management you are really not in much trouble. However, if you miss a good trade there is nowhere to turn. If you miss good trades with any regularity you're finished. For example, let's say the market moves rapidly through your buying zone and you miss it, you miss your buy signal and instead wait for a retracement to maybe buy cheaper. But, the market just keeps going higher and higher and never retraces. Now what do you do? There's a great temptation to reason that now it's too high to buy. If you buy it now you'll have an initiation price that's too high? No, the initiation price simply won't have the kind of significance you suppose it will have after the trade is made. You can't miss these trades. Trading systems force discipline to make sure these trades are not missed.
Suppose two traders, A and B, who are alike in most respects except the amount of money they have. Suppose A has 10% less money but he initiates a trade first. He gets in earlier than B. By the time B puts the trade on, the two traders have exactly the same equity. The best course of action has to be the same for both of these traders now. Mind you, these traders have very different entry prices. What this means is that once an initiation is made, it does not matter at all for subsequent decisions what the entry price was. It does not matter. Once you have made an initiation, what your initiation price was has no relevance. The trader must literally trade as though he doesn't know what his initiation price is.
William Eckhardt
j) Longterm Leaps
http://www.visoracle.com/swingtrend/longterm.html
Our long term investing strategy is simple. Find the stocks that will dominate their markets and invest for the long term.
The Hager System is simplicity in action. Buy the long term portfolio stocks we select and combine those selections with he LEAPS portfolios we feature.
The best part of all is that all the leverage comes without resorting to the risk of using margin. Whether you want to add a little or a lot of this supercharged LEAPS performance is really up to you.
While the Hager System itself is simplicity in action, it's knowing which stocks to put into the system that is key to it's success.
Fred Hager
fredhager.com
k) Long Time Switching
http://www.visoracle.com/swingtrend/long-time.html
Investors who held the Nasdaq Composite for just the second six months of each year since the Index's inception have outperformed investors who just bought and hold the index by more than 40 times.
l) Low PE
http://www.visoracle.com/swingtrend/low-pe.html
GeneM: I ran a number of portfolios designed off Graham's simple low p/e and high dividend approach for years. It proved to out perform all the indices year after year. Still the best way to go for the long term equity money IMHO.
m) Moving Average Day Trading
http://www.visoracle.com/swingtrend/moving-average.html
You can make an excellent living trading 300 AMAT or any other high volume highly volatile technology stock in a daytrading account. Just set up moving averages on the 2 min chart and follow them long and short
n) One Pattern For a Living
http://www.visoracle.com/swingtrend/one-pattern.html
Focus
All you need is one pattern to make a living! Learn first to specialize in
doing one thing well.
Linda Bradford Raschke
o) Rebalancing
http://www.visoracle.com/swingtrend/rebalancing.html
There is a simple strategy that has averaged more than 30% annually for more than ten years. No hype, no options or commodities. Just buying 5 large cap stocks and rebalancing your portfolio on a quarterly basis. Can you imagine that?
You can booster this strategy with choosing growth stocks which are leaders in their industries and industries with long term trends. At its best such a secular trend is a fresh one, so that you expect it to last many years to come.
p) Relative Strength
http://www.visoracle.com/swingtrend/relative.html
Buy only a stock that is relatively strong compared to the broader market. Sell when it becomes weaker. Even better, replace it with the strongest one then. What timeframe to use? One month!
q) Risk Chance Gain Loss Asymmetric Behavior
http://www.visoracle.com/swingtrend/risk-chance.html
Traders tend to fall prey to their wish to win. They overestimate the value of having this time a winning trade vs hitting sometimes big.
George Soros: It doesn't matter how often you are right or wrong - it only matters how much you make when you are right, versus how much you lose when you are wrong.
Someone else called this the Babe Ruth Effect. Few home runs can compensate for many strikouts. His lifetime batting average was only 0.342.
Psychologists Tversky and Kahneman: People choose a sure gain over a lottery with an expected better gain, but shun a sure loss over a lottery with a worse expectation.
William Eckhardt: People take profits, but gamble with their losses. Amateurs go broke by taking large losses, professionals by taking small
profits.
Old market wisdom which directly results in only a few big winning trades and many small losses: Ride your winners, cut your losers
Trend Followers who run automated trading systems win only on average 40% of the time.
r) Simple Strong Stock Strategy
http://www.visoracle.com/swingtrend/simple-strong.html
The simple things are always what work best, look for a trend and a pullback, or look for the strongest stock when the market pulls back.
s) Stoploss Trade Management
http://www.visoracle.com/swingtrend/stoploss-0.html
It's so easy to not become a bagholder when you start practicing trade management and limit loss through the use of stops. If you get stopped out, you were on the wrong side of the trade anyway.
You don't want to use stops because you think market makers grab your stops? Wrong, it's just all in your head! The market doesn't care where you want it to be, you have to go with the market.
t) Support Resistance Pivot Swing Break
http://www.visoracle.com/swingtrend/support-resistance.html
Negated swing trading system or entering the break of a wave after a pivot point.
A highly successful trading pattern is to find situations where price is violating a pivot point convincingly, as there are professional traders and automated trading systems out there watching the markets like hawks to find exactly these hot spots of price action. If the price breaks through the line of a just successfully confirmed support or resistance after having started going the other way, serious traders become active. This is one of the big trading signals for said professionals. All experienced traders, be they trading for themselves or for banks, financial institutions or funds, adhere to the concept of support and resistance. If this concept is violated it signals them strongly to do the opposite.
This price violation can come as a breakout after a false breakout at the other side of a trading range or as a disruption of a turning of the wave. You have to do sort of negative swing trading. The moment ordinary swing traders move in, the wave breaks and the trade begins to look not only bad but catastrophic for them, is the signal for the successful trader to bet on the opposite direction. In such situations even market makers, the ones who normally increase market oscillations by driving prices artificially up and then suddenly turn the tides by selling at top prices and ride the wave down and vice versa - all in all a counter cyclic behavior - jump with market orders into such a wave disruption.
One special trick of market makers to get out of a position is to initiate the swing not to ride it up, but to dump a wrongheaded position into its very beginnings. Chances are good that there is some more fundamental reason for them to do so. A disrupted swing can have of course any other cause like e.g. breaking news or a market which has simply more potential for the other direction. The power of this trading pattern lies in the combination of strong thrust and further potential.
There are these scenarios of a safe trade, a trade with a very good win to loss probability ratio. But you need to have discipline in order to enter only the market when price action looks good, when there is a real trading signal, a high probability pattern with an expected gain much bigger than the possible loss and not when you think you need the next trading chance.
u) Technology Trend
http://www.visoracle.com/swingtrend/technology.html
Find the next major technology trend and then find the best company in this trend.
The most successful technology stock investments all have one thing in common:
the companies became big players as the markets they were in became big.
Would Microsoft have been so successful if PCs had cost $10,000 each?What really made Microsoft so successful was the marketplace they came to dominate.
They rode the market's extraordinary growth curve, and exploited their position along the way. Mr. Gates and Mr. Ballmer are great executives, but make no mistake: it was the PC market explosion that made Microsoft the giant it is.
To find the next Microsoft, and that is what it is all about, you should first try to find the next major trend. By thinking on the highest level about where technology is going, and how an individual company will fit in that trend, you stand the best chance of reaping the highest rewards.
v) Warren Buffet Long Term
http://www.visoracle.com/swingtrend/warren-buffet-0.html
Warren Buffet, "In the short term the market acts as a voting machine. In the long term as a weighing machine". More is made in the sitting than in the thinking.
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EXTRA! EXTRA! READ ALL ABOUT IT!
A quick coffee break.
1) TIPS ON HOW TO BECOME RICH INVESTING IN THE STOCK MARKET
http://www.visoracle.com/market/stocks.html
How to become rich in the stock market?
Don't be the Investor!
Don't be the Investor!
Millions of people are lured into buying stocks, based on promises by the - what it likes to call itself - financial industry. These promises are disguised as only a few outstanding success strategies. Let us start with what everyone considers to be the more dumb ones:
Watch TV or read the newspaper and simply go with the flow, do what other do, buy some arbitrary stocks and wait for the big money.
Have a friend who recommends something or whose gains makes oneself jealous, and be eventually talked into investing or trading.
Here are the ones, which seem to be much smarter:
Use charts, find patterns and calculate precise entry points to have an edge.
React to news and price changes quicker than quicksilver and have a speed advantage.
Be a fundamentalist, analyse and examine every data that comes out of a company, and then buy only cheap at a reasonable price.
Make global judgements about the economy and hit the right turning point for a general entry into the market to elegantly avoid analysing details of pea size.
Buy the broader market with index funds, based on the idea that overall the stock market reflects the ongoing advance in the world and thus stock indices are doing well longterm.
Delegate the work of making investment decisions to a professional, who, because being a professional, should outsmart the market.
Most people adhere not only to a single pure form of these strategies. They rotate between them, they try different flavors of them, they mix things up, they even start an investment with one strategy and close it with another. Or they start trading and end up with an investment. But important here is, that the latter behaviors seem to have all good arguments. The former types of "investors" are in one sense rare - if conducting a statistical inquiry, most participants would think of themselves belonging to the smarter group and would find their reasons and reasoning of why and what they are doing among the latter strategies. That is why it is generally believed that investing in the stock market will make people wealthy.
Now let's consider a different view of the stock market, a table with six players.
In the middle we have Mr. Doe, the private investor, left to him sits Mr. Clever who is a professional fund manager and at the right of him is Mr. Smart, a professional money manager for individual clients. On the other side of the table we have Mr. Broker, Mr. Market-Maker and Mr. Company. They all are doing what the market does - they are exchanging stock shares and bank notes, putting them on the table and taking them away at times. Let us concentrate on the money only, after all the money is the only thing that counts. Neither has the table a hole through which money could vanish, nor does money rain onto it. All money put onto or withdrawn from the table has to go through the player's hands. Let's have a look at Mr. Broker first
Busy Mr. Broker only sells and always wins
He charges a fee for simply forwarding an order from Mr. Doe, Mr. Smart and Mr. Clever to someone else. All that without risk and pain, and after doing so he pockets the fee - he takes it from the table. He can't make a loss, so with a bunch of marketing tricks he animates everyone to give him as fast as possible a new order. Important here is, what he does with regard to the table. He never puts money onto it, he only takes money away.
Mr. Market-Maker is known to be in a good trading position
He is the one who takes the other side of a trade and makes a mostly riskless business with the spread, a difference between buy and sell price. Furthermore he has state of the art equipment, which he watches like a hawk all day in a big room with other's doing the same, hoping that many hawkish eyeballs are seeing more than single prey's ones. But that's not all, he is known to be in a strong trading position, too. He works for a big company with much money, which other traders fear, so he is able to drive prices up and down, enticing euphoric Doe into high prices and shaking out trembling Doe with a loss at low prices. He initiates breakouts, which Doe falsely interprets as signals. Doing so he himself buys low and sells high. Some badmouthing tongues even argue that Mr. Market-Maker makes money with illegal insider information, front running or stock pumping. Not enough with that, he is supposed to create up- and downgrades, something like home made news, just to influence supply and demand of a stock to force its price to a level where he can sell or buy with more profit or a smaller loss. Overall Mr. Market-Maker seldom makes a loss, on average, he always wins. To make it short, he too takes only away money from the table.
For Mr. Company the stock market is a real gold mine
He has a special seat, with a big sign above it, on which is written - on his side so that especially Mr. Doe can't see it - "capital source". The other side of this sign could be labelled "capital drain", but that would lower the mood, so it only says "welcome". Mr. Company comes to the table right away from the printing press, with a big chunk of newly created stock certificates - paper, which he dumps on the table while cashing in tons of money. Will he ever give this money back? Hehe, stupid question, no he won't. The alternative for him is to borrow money by emitting bonds, which he obviously thinks of being more expensive in this case than selling paper. After all in the bond market he would have to give back what he borrowed after paying interest for it.
In very few cases his company survives and prospers. Then - in the far distant future - it is expected to pay back something to the table. Mr. Company can ignore such an expectation for a long time or even for the whole lifetime of the company, there is no law requiring him to fulfil it. But he can do so by paying a marginal dividend or by buying directly back some shares from the table, preferably when stock prices are low. That looks good and may cost him no money at all, because there are some nice ways to offset such payments.
First, while making these payments, he can do a secondary offering. Mr. Company simply comes back to the table and dumps again a chunk of paper on it. Sounds primitive? No problem, he can mask the operation a bit.
He does it just a bit before or after the phase of payments, preferably when stock prices are high. Buying back low and dumping high is a profitable business on its own.
Or he creates sort of options by printing the additional word "warrant" or "convertible" on the paper. That means that he starts two dumping actions, one now for the option paper and one later in the future for exchanging the option paper for the original paper, cashing in twice.
Even better he splits off a part of his company, declares it being a new one and sells paper with a new company name printed on it.
If he is lazy, he simply distributes paper with the old name to the employees of his company. He can pay smaller salaries this way. Employees get shares proportional to their importance, meaning that he gets the biggest share, because he considers himself of being most important. Instead of one big, many smaller chunks are now dumped on the table.
There is another rare and very special case how money comes back from Mr. Company, a cash paid take over. Another Mr. C arrives at the table and buys with real cash all paper of Mr. Company from Doe, Smart and Clever back. But usually this other Mr. C got the whole money from the table firsthand, so this way nothing really comes back.
Actually Mr. Company is supported by two other persons behind the scenes. Mr. Investment-Banker helps carrying Mr. Company's paper chunk to the table. With much trumpeting he praises its quality as an investment. If Doe, Clever and Smart are nonetheless skeptical, Mr. Market-Maker, with his many tricks, makes the new stock's price going up. Then Mr. Doe loses all doubts and shoves the tons of money over the table to Mr. Company. Mr. Investment-Banker's risk is that he projects too big a chunk of paper for the table, so that he has to push the missing tons of money to Mr. Company, but that happens rarely. Mostly Mr. Investment-Banker just gets his fixed percentage of the tons of money from Mr. Company. Seen as an entity both will of course always drain money from the table during the paper dumping action.
Mr. Company's second supporter, Mr. Venture-Capitalist, got beforehand his own chunk privately from Mr. Company in exchange for money, hoping that Mr. Company raises the seed and is invited by Mr. Investment-Banker to the table eventually. He may even get a chunk from Mr. Company later when the stock is already on stage, typically for a better than the price at the table. In both cases he hopes that he can sell his chunk for a profit, which may or may not come true, but at the table he will never do anything else than dumping his paper and raking in money.
So we have three gentleman at the table taking away money. Some do it gently but constantly, some more raid-like.
Finally Mr. TaxMan appears every now and then, grabbing some money from the table and out of the trouser pockets of the participants and grins. Of course he never puts money onto the table either.
What about Doe, Smart and Clever? Well, they are fighting for who has to put the least amount of money on the table to feed the other side. We know that Clever and Smart are acting on behalf of Doe. They get a riskless payment from Doe for this fight, so it is not really that important for them whether they lose more or less.
It looks as if poor Mr. Doe is the real loser in this game. Interestingly Mr. Doe has a different perception of this.
But I already made a nice gain in the stock market !?
This seems to be a paradox. Yet it is none. The table view of the stock market is a totalized one, a view which cares only for averages. Of course there can be many individual Does having made their profit in the market, but on average Doe is the big loser. There can be a market maker, who suffered a big loss, which he never recovered, because he went broke. Yes, there even can be a company caring for its shareholders buying back stock shares and paying dividends with every free cash it earns doing its business, not offsetting these payments with tricks Mr. Doe is not aware of.
A second point of confusion is what happens away from the table. Mr. Market-Maker or Mr. Broker may have to pay a hefty monthly bill for their equipment, salaries and rent, so that they only break even. Mr. Venture-Capitalist may enthusiastically invest in any nonsense idea he hears of, so that he overall makes a loss. Mr. Company may have the wrong concept, not enough talent or too much competition, causing him to burn all money and go broke. He may be a genius, resulting in ever growing earnings of his company. All that is not important for the table model of the stock market. Even a rising price of a paper on the table doesn't matter. It looks like Doe, Smart and Clever are winning in this case, but alas, high prices are only tempting Mr. Company to dump the next chunk of paper. The only question that counts, is
Does the money flow through a player's hand from or to the table ?
The futures market is called by many a zero-sum game, because for every contract traded, there is a buyer and a seller and what one wins must be paid by the other. There is the proposition that the stock market is a positive-sum game, because over a long term, let's say some decades, stock market indices went up. Well, the table model suggests that the opposite is true. For Doe, Smart and Clever it is a negative-sum game. How can that be? Over time problematic index stocks get replaced by fresh ones with brighter future perspectives, so indices are distorted. But the main reason is simply, that all the owners of stock own paper but not money. If they all wanted to exchange their paper into money to get what the ever rising indices promise, these indices would drop to zero immediately. The stock market is basically a pyramid scheme, which implodes eventually, sometimes self induced, sometimes triggered by external events. More often it implodes only partly for some stocks or temporarily and so that not all stocks recover. That may be one reason why all this is so hard to believe.
Back to the beginning to the more smarter strategies how to beat the market. Will they not allow you to make money in the stock market? Doe, Smart and Clever are essentially fighting for a positive piece of a negative cake. So you nearly have to be a wizard to succeed. At least you have to be very good in your niche. This innocent little sentence contains what I consider to be
The first and most important secret to make money in the stock market
You are destined to lose. If you aim to be a wizard and turn your fate around, you have to have a niche, a specific system in which every part fits to every other. Every particle which doesn't fit, drastically lowers your chance of success. Amazingly you are yourself one particle of the system, your strategy must fit to your personal psychology, you must feel comfortable to follow it. It is possible to combine and refine above mentioned smart strategies, but never stop searching for the grain of sand that blocks the gear. Think about the tricks of Mr. Market-Maker, Mr. Broker and Mr. Company and design your private investment or trading system around their traps. You have to trade or invest not only wisely, you have to do it differently.
The red hot trading system and the proven safe investment strategy
for which you may have been searching so long, are exactly the wrong way. You have to avoid everything prefabricated or you are perfect food for the sharks out there. Using a published system out of the box will always put you in a predictable crowd. You may even be riding a Trojan horse, originally designed by one of your enemies. Moreover it will not really fit to you, and it probably has other grains of sand in the gear. But beware, just mixing popular trading or investment system elements crudely into another system, disregarding the traps, will only add some big stones to the grains of sand. A better idea is to let existing strategies inspire you. Have a look at their elements from the perspective of the sharks, combine fitting ones and think through the whole. Before I wish you good luck, which you will need for surviving in the stock market, let me emphasize here again: If playing a negative-sum game against sharks and random, you at least must not be predictable, as the mathematics of game theory shows. You have to create your own very personal and specific system.
2) TRADING THE COMMODITIES AND FUTURES MARKETS
http://www.visoracle.com/market/futures.html
Trading the commodities and futures markets:
A survival game Markets
Everyone who plays with the idea to speculate with commodities or futures, should step back now, take a deep breather and reevaluate this plan. These markets are a game of professionals - and I am inclined to add here - for the likes of them. Numerous studies have shown, that for most private traders (more than 90%) this is a losing game. Being a classic zero sum game overall, there must be someone who wins, and that someone is a minority of professionals.
The slippery churning of brokers, dealers and floor traders. Fees and spreads have to be paid in all financial markets to buy or sell something, but open outcry markets have a tendency to make prices run away in the wrong direction for orders from outsiders that seek to be filled. It remains an unanswered question whether the pure specialist system of listed stocks like the old NYSE, the competing market maker system of NASDAQ, either one combined with a competing electronic order book or the open outcry market is the fairest market. Pit traders like to accuse specialists of having too much power to manipulate their prices. They conceal that specialists have the obligation to make an orderly market with guarantees for reasonable fills. Taking into account that open outcry traders tend to behave coherently, there is no big difference to the specialist's power. Both, but even more the pit traders, resist to compete against a computerized market like an ECN or outright refuse to trade off-floor through a computer system, which would put them on par with other market participants.
Contrarian trading - the advantage of the producer
Price movements especially of futures markets are noisy. There are random fluctuations and self-induced starts or breakouts, which later prove to be non-substantial. This is the fundament for an anti cyclical trading strategy - buy low and sell high, or the other way round. As studies have shown, hedgers, companies or entities which sell what they produce or buy what they need for producing, are the big winners of the commodities and more general the futures markets. They often have a better insider knowledge about what is going on in their market than anyone else. Adding to that, they have the advantage that they are hedging - they actually only need to conduct one side of the trade, either they buy or they sell. This gives them the ability to calculate their trade in the light of their main business, which essentially caps their risk. Also, being better capitalized, they can afford to be longer term oriented.
For the private trader or speculator the contrarian system could prove disastrous. What if the price move turns out to be substantial and results in a trend or at least a new level of price? Combine the counter cyclical market entry with a stop loss? This would be a self contradicting system. A trading strategy which is incoherent is most likely invalid as a system. Having no stop loss is of course even worse. That's how amateurs go broke even in the stock market, which lacks (short or margin operations aside) the infinite risk practically created by leverage in the futures market.
Sometimes producers choose to go with what they see as an emerging trend or what they anticipate to become an enduring new supply and demand situation, so of course they are not bound to the countertrend method, but the long term contrarian trading strategy is only appropriate for them. To emphasize it again, as studies show, they are the big winners.
Following the trend - holy grail or well known secret of trading futures?
The third group of winners in the futures markets are so called commodity trade advisors (CTA), hedge fund managers and some well capitalized and experienced individual speculators. They are primary - as long as they make money - procyclical. They try to buy high and sell higher or vice versa. Is it this easy? No, even the most successful traders of this group suffer severe setbacks, they just won't tell it you. However, they have some advantages over the ordinary speculator. They are bigger in size, they use sophisticated statistical methods to create mechanical trading systems that actually do make money, they know about the importance of good money management and they are generally more experienced.
Creating breakouts of ranges or starts and turns of a trend
The naive way to start trading trends might go like this: Take a chart book, spot some trends and get the impression, that one just had to enter the market here and leave it there to become rich. Well, that's hindsight! To get early on a trend and to ride it as long as possible is easy in hindsight, but hard in reality. First, you have to enter a trend. You are looking for a starting point. That's where the malaise begins. There are strong market players, who produce breakouts of ranges, restarts and turns of trends, because they know many will stumble after them in expectation of a new forming or ongoing trend. If the "trend" turns out to be short lived, they can get out with a profit, because they entered the market at the best levels. Guess what, who pays the bill? Mostly the small private trader, but often enough the professional trend followers, too. That's why the rate of failure among them is much higher than these professionals are ready to admit. Who plays this pattern of buying low, pushing the price through a resistance or turning a trend around in order to hopefully initiating the next round of directional movement? Probably both - producers and trend followers, they just have to have enough capital. The futures markets are exceptionally prone to false breakouts and trends have wilder swings, tempting speculators to leave early or enter late - possibly with a loss. Just have a look at charts, and compare them with the stock market. But be cautious, this is easier said than done - the human mind is a pattern recognizing machine - it will always find the patterns it is looking for.
Using statistics to develop a mechanical trading system
One way to circumvent this problem of an optimistic mind finding occasions not only occasionally is to compile a trading system into an algorithm, which is then followed by a computer without being distorted by sentiments and psychological effects and without making mistakes by lacking discipline. But first one has to identify an edge, which is statistical sound. This means that you can use statistics to crystallize a system, which - so to speak metaphorically - meanders around all pitfalls, all the edges winning players have. Of course there is not much space for winners left, and that's why even professional system traders often lose, too.
The typical private trader has really a disadvantage in this area, he is just not sophisticated enough. He might buy complete systems or programs, which can evaluate trading systems, test them and optimize them, but mostly he is not aware of the mathematics, which are behind all this. Over-optimization or curve fitting is one cardinal sin, second guessing of trading signals another one. The typical trader tends to mix up signals of his system with discretionary decisions or tries to change the system every next time. Emotions have discipline in headlock and chaotic behavior is the result - the opposite of a trading system.
Summary of a zero sum game
Brokers charge a fee and have a riskless income. Floor traders slip away and cut out small but constant gains. Producers milk the markets big with contrarian trading. Deep pockets initiate false movements and let others stumble into their losses. The only chance are trends, but they are rare, and they are carved out by statistically sophisticated system traders or producers with better fundamental foresight. The private trader has to make the sum of the zero sum game become zero. He is there to feed the sharks.
Making things worse: Bad money management
An additional reason why so many novices are losing in this game is the lack of proper money management. To put it simple, they are overtrading. Newcomers intuitively often misinterpret the margin they have to pay as their bet size, and that's why they are overtrading grossly. Usually they are out of the game very soon. But even making bet sizes only slightly too big will make your losses overcompensating your gains on average and your capital will decline over time. This holds true even if you have an edge. Bad money management destroys your advantage - if you have one at all. The reason is mathematics. To make a simple example assume that you have no edge, but put on trades with a very big bet size. A typical gain of 50% of your capital has statistically the same probability as a typical loss of 50%. But to recoup the loss you must win 100%! Even optimistic advantages will get converted into their negative counterpart by what I call the relative-absolute effect.
3) OPTIONS
http://www.visoracle.com/market/options.html
The biggest piece of the cake and options trading
Real life will often give you only a tiny piece of the cake, while you know of others, who got a much bigger one. Are you hungry and want to know, why your piece is so small? A good example for studying this phenomenon is the attempt to become rich by trading the options market. An option is something which you can buy and sell, thus it is possible to trade it, and which gives you the right to do something later in the future. In case of the stock options market, an option gives you the right to buy or sell a stock at a specific price on a specific date in the future. Important is, that this specific price is fixed, it doesn't depend on the stock's price at that future date. The price you have to pay to buy an option is determined by the market - people who are trying to figure what it could be worth to possess this option and who are bidding or asking for a price to buy or sell it.
Trading options is like buying a ticket in a lottery
Let's say there is a stock which trades at 50$, and an option to buy this stock in 3 month for 100$. Why should one want to buy the stock for 100$ when it sells now for 50$ you might ask. Well, because there is a small chance that in 3 month it is worth e.g. 150$, which would cause a value of 50$ for the buy option then. Of course it is much more likely that the stock will be trading for fewer than 100$ in 3 month, and that would make the option worthless - it would expire and simply vanish. Because of this asymmetry of chances the price of the option now is small, for instance 1$. If the stock really tripled from $50 to $150 in 3 month, the option would increase its value from $1 to $50 following the price ups and downs of its master. In a nutshell, options are things whose prices are fluctuating wildly and which have the potential to soar to a multiple of what one paid for them, but mostly they expire worthless. Options are speculating vehicles par excellence.
The zero sum game
It is not only possible to buy an option, you can sell one, too. Imagine you have some stocks in your account, and you are betting that the price will not go from 50 to 100$ in the next three month. Then you can sell the buy option to some speculator and pocket 1$. In this case you literally have created the buy option. If you are wrong with your bet, you will have to hand over your stocks in 3 month for 100$ each, less than what you would have earned in the market then. The interesting point here is, that for every option buyer there is a seller, every amount one wins has to be paid by some other market participant who loses. This is what ivory tower theoreticians of the financial industry like to call a zero sum game.
The winner takes it all
Prices go up and down, the arithmetic balance of gains and losses is zero and the media tell us mostly about winners and only sometimes about losers. All this leads many to think of a game with chances of at least 50:50 for their personal success or failure. But, let's remember, most options expire worthless and only few are gaining hugely. Simply spoken, it is very likely that you are a loser at the end of the game. Let's assume 10000 people are playing this zero sum game in an option market set up only for them. No one can outsmart the other, all have the same information and skills, so effectively everything is driven by random. Adding all their losses and gains together will always show a balance of zero. But, the longer this game is played, the more the capital is concentrated on very few of the 10000 people. Who the lucky ones are may change, but the concentration increases all the time, statistically. In other words, the probability that a single individual is a loser steadily moves towards 100 percent. This effect works the stronger, the more speculative one operates. So, buying options "out of the money" (like the example described above) makes you very quickly poor, but trading them or buying options "in the money" and even the opposite, selling them, is ruled by this effect, too.
Beyond the financial markets
In fact, in many other areas of life the, what I call it, relative-absolute-effect converts dreams of becoming rich or successful into their oppositional materializations. Relative dynamics are perceived and treated as being absolute. The option market is just a very good example for this fallacy. Whenever there is a jackpot to win, you can be sure that chances are good, that you walk home from the casino as a loser. If you start playing with a given capital, it is likely that you end up with nothing. The mere effect of concentration will cause this, so it is not necessary that the game or system itself is unfair, which it nonetheless mostly is. But not only the world of roulette, lotteries and trading is affected - the effect of concentration is universal. Life itself is sort of a game, some become rich during playing it. Earning interest and leaving the inheritance to the heirs, would make in a few generations most people poor as a church mouse and very few super rich, if there were no taxes. Our daily struggle to make a living presents itself quite similar. Most people get only a fraction of the huge salaries few others earn, which extends from individual employees to whole countries. Growth processes happen on logarithmic scales. If a manager gets a salary increase, the difference could be alternatively used to pay 10 new employees. In the third world you could probably employ a whole village with the money. Will the manager work equivalently harder after the salary increase? Evolution is another example. Small advantages of a species over other ones in the same niche, are considered to cause the others to die out after several generations. This is an increase to the maximal possible concentration of the winner - the best adapted species, as biologists would put it.
Mixing up maximum, mean and median
If you want to succeed or have to survive in some area, look at the mechanisms that are at work and try to find out whether relative or absolute changes take place. If the system is closed and no resources can flow in from the outside - the cake has to be divided as it is, and the law of logarithmic growth rules - there is some sort of jackpot, be careful, don't be too speculative. Furthermore you shouldn't have to rely on such a system as a substantial investment. It doesn't help you that you theoretically could win the jackpot, when you realistically get near to nothing. You are a human being, you need an absolute amount of energy and resources to live - not a theoretical chance for something relative big. Look at what most people in that system get - the median, and keep in mind that not only the biggest piece of the cake, but also the arithmetic mean - the zero sum in the example of trading options, is an illusion.
The best system for trading options - don't do it
To complete this article for option traders let me mention shortly another aspect of the market. In theory the option markets, be it stock or future options, are really a zero sum game, but real life is far from that. The modern hunter of our financial world is the market maker, and he will assure with all sorts of tricks that the zero is greatly negative. Characteristic of the options market is a very high spread, the difference between buy and sell price at the same time, which the market maker cashes in. Really outstanding is the ability of a market maker to raise the price of an option more than proportionally, when everyone wants to buy it, i.e. when the underlying stock gives a trade signal. You think you will work with a stop loss? In the moment of an adverse price movement of the stock, when you want to sell your option, these legal criminals now exaggerate the option's price drop! All in all these tricks are the second reason to keep your money and mind away from this hunting ground of the sharks.
4) SWINGTREND
http://www.visoracle.com/swingtrend
Swingtrend - trading system elements for your personal market strategy
Why a personal system? One conclusion of the Stock Market article is that every prefabricated trading system is doomed to fail. Almost every trading system you can buy as a book, course or software guides you either directly into the pitfalls of financial sharks or not enough degrees of freedom are pinpointing a too specific system. Used by too many traders the sense of the market will adapt to it and exploit their naive followers. Instead the smart trader should consider to assemble his very personal trading system. Always have in mind what trading edge other market participants have, what methods and techniques they use, and build your trading system around their traps.
Build your own trading or investing system by putting together elements of existing ones! Important is, that all pieces of the puzzle fit together and fit to you, because you are part of the puzzle. Trading is psychology! You have to feel comfortable executing your strategy. Otherwise you will be overriding your system, change it often and let your confusion dissipate almost working system rules to chaos. Browse through this collection of trading systems and ideas that have at least a grain of truth in them, but don't expect to find the complete money machine.
5) TRADING SECRETS UNLEASHED!! <--- my favourite -
a) Arbitrage Virtual
http://www.visoracle.com/swingtrend/arbitrage.html
Virtual arbitrage trading system
BUY RULE
Buy the futures when they are trading at a 0.5% discount to the cash market.
SELL RULE
Sell the futures when they are trading at a 0.5% premium to the cash market.
If the futures are at a premium to the cash, they can be considered expensive and should be sold. If they are at a discount, they are cheap and can be bought.
The choice of 0.5% as a measure of excessive premium or discount is arbitrary, the system works just as well if you use 0.1% or 1%.
It is not necessary, to put on a directly hedging trade in the opposite direction at the same time. The invisible hand, the magician of all stochastic outcome, makes this trading method work.
b) Automatic Exit
http://www.visoracle.com/swingtrend/automatic.html
The automatic 2.5 percent trading system is about an automatical exit when the stock hits either a 2.5% gain or a 2.5% loss. The entry signal can be a breakout of a trading range, a swing back after a downturn, a news event, a crossing of moving averages, the break of a line of resistance or support or whatever cyclical signal you may imagine. But it can be a counter cyclical entry signal too, like a line of support or resistance which seems to hold.
After entering the market in what seems to be an asymmetrical chance which skews the ubiquitous symmetry of chances of 50:50 in your favor, you simply would enter 2 sell orders 2.5% above and below the entry price. The exact percentage can be adjusted to the particular stock or market.
Interestingly the offset hasn't necessarily to be the same in both directions. E.g. 4% above and 5% below may work too. This way the higher sell point can be adjusted to match a line of resistance and the lower sell point can equal a new signal for breaking the next line of support, which otherwise would be a sell signal triggering a short trade itself.
c) Buy Bargain Stop Hold Long
http://www.visoracle.com/swingtrend/buy-bargain.html
The key to investment success is:
- To buy when share prices are at bargain levels when some catalysator for a possible starting trend like fundamental news shows up
- To take losses quickly when it becomes clear a purchase will not be a winner IMMEDIATELY.
- To hold profitable positions as long as possible.
d) Coiled Spring Range Breakout Stop
http://www.visoracle.com/swingtrend/coiled-spring.html
Taking advantage of the big event and exploding volatility
This trade is put on before some big event known beforehand like economic or FED news, earnings reports etc by placing two orders into the market before the open, one to buy and one to sell. The buy is placed above the sell so when one is filled, the other is left in place to become the stop loss.
The basis behind this range technique is to take advantage of contractions in market volatility to create ideal entry points, which act as coiled springs when the market regains its volatility and breaks out. These contractions frequently are referred to as a volatility squeeze, markets are strongly volatile but experience a day with a small trading range in anticipation of the following day's report or event.
This trade depends upon volatility contractions to execute entries and expansions to execute exits. The contracted volatility, the trading range, acts as a shield against randomly triggering one of your stop orders.
e) Concentration
http://www.visoracle.com/swingtrend/concentration.html
For day trading you have to concentrate on very few stocks, for instance 5 to 10. Of course that does not mean that you can't change this set from day to day. Some day traders have there standard set, some others like to watch the current hot momentum stocks.
On the other hand there are traders who scan all day long the whole
market with watching late breaking news or following daytrading room chat. There are even scanner programs sifting through thousands of stocks trying to catch entry signals all over the board minute for minute.
To take the idea of concentration to an extreme, select only one stock, which has a decent trend and fundamental growth potential and try to get on a long term trend with daytrading techniques, meaning apply a hard entry stop loss and try repeatedly.
f) Concentration And Exchange
http://www.visoracle.com/swingtrend/concentration-0.html
Nobel laureate Paul Samuelson noted that John Maynard Keynes once came up with a similar insight: "Really, you should buy one stock at any one time. The best one going. And when it's no longer that, replace it by the new best."
g) Cut Losses Ride Winners
http://www.visoracle.com/swingtrend/cut-losses.html
"You are working too hard trying to EARN money trading. It doesn't work that way. You STEAL it. You place a bet, and renege on it when you don't like the outcome. When you do like the outcome, you say self-righteously I WANT SOME MORE"
This is probably the best explanation I have heard of "cutting losses and
letting profits ride"
h) Enter Automatically Feel Good
http://www.visoracle.com/swingtrend/enter-automatically.html
When I do a lot of trades I am experiencing minimal adrenaline rush. It is when I only do a few trades that I get really tense, heart pumping etc. One book I read advised the following system:
1. Identify opportunity
2. Take action automatically
3. Feel good about the trade
This is what I do. By trading a lot I am teaching myself to execute automatically. I feel this is critical because I have lost way more money on trades that I identified but failed to enter than on ones I entered and had to stop out
i) Enter High Eckhardt
http://www.visoracle.com/swingtrend/enter-high.html
If you make a bad trade and you have money management you are really not in much trouble. However, if you miss a good trade there is nowhere to turn. If you miss good trades with any regularity you're finished. For example, let's say the market moves rapidly through your buying zone and you miss it, you miss your buy signal and instead wait for a retracement to maybe buy cheaper. But, the market just keeps going higher and higher and never retraces. Now what do you do? There's a great temptation to reason that now it's too high to buy. If you buy it now you'll have an initiation price that's too high? No, the initiation price simply won't have the kind of significance you suppose it will have after the trade is made. You can't miss these trades. Trading systems force discipline to make sure these trades are not missed.
Suppose two traders, A and B, who are alike in most respects except the amount of money they have. Suppose A has 10% less money but he initiates a trade first. He gets in earlier than B. By the time B puts the trade on, the two traders have exactly the same equity. The best course of action has to be the same for both of these traders now. Mind you, these traders have very different entry prices. What this means is that once an initiation is made, it does not matter at all for subsequent decisions what the entry price was. It does not matter. Once you have made an initiation, what your initiation price was has no relevance. The trader must literally trade as though he doesn't know what his initiation price is.
William Eckhardt
j) Longterm Leaps
http://www.visoracle.com/swingtrend/longterm.html
Our long term investing strategy is simple. Find the stocks that will dominate their markets and invest for the long term.
The Hager System is simplicity in action. Buy the long term portfolio stocks we select and combine those selections with he LEAPS portfolios we feature.
The best part of all is that all the leverage comes without resorting to the risk of using margin. Whether you want to add a little or a lot of this supercharged LEAPS performance is really up to you.
While the Hager System itself is simplicity in action, it's knowing which stocks to put into the system that is key to it's success.
Fred Hager
fredhager.com
k) Long Time Switching
http://www.visoracle.com/swingtrend/long-time.html
Investors who held the Nasdaq Composite for just the second six months of each year since the Index's inception have outperformed investors who just bought and hold the index by more than 40 times.
l) Low PE
http://www.visoracle.com/swingtrend/low-pe.html
GeneM: I ran a number of portfolios designed off Graham's simple low p/e and high dividend approach for years. It proved to out perform all the indices year after year. Still the best way to go for the long term equity money IMHO.
m) Moving Average Day Trading
http://www.visoracle.com/swingtrend/moving-average.html
You can make an excellent living trading 300 AMAT or any other high volume highly volatile technology stock in a daytrading account. Just set up moving averages on the 2 min chart and follow them long and short
n) One Pattern For a Living
http://www.visoracle.com/swingtrend/one-pattern.html
Focus
All you need is one pattern to make a living! Learn first to specialize in
doing one thing well.
Linda Bradford Raschke
o) Rebalancing
http://www.visoracle.com/swingtrend/rebalancing.html
There is a simple strategy that has averaged more than 30% annually for more than ten years. No hype, no options or commodities. Just buying 5 large cap stocks and rebalancing your portfolio on a quarterly basis. Can you imagine that?
You can booster this strategy with choosing growth stocks which are leaders in their industries and industries with long term trends. At its best such a secular trend is a fresh one, so that you expect it to last many years to come.
p) Relative Strength
http://www.visoracle.com/swingtrend/relative.html
Buy only a stock that is relatively strong compared to the broader market. Sell when it becomes weaker. Even better, replace it with the strongest one then. What timeframe to use? One month!
q) Risk Chance Gain Loss Asymmetric Behavior
http://www.visoracle.com/swingtrend/risk-chance.html
Traders tend to fall prey to their wish to win. They overestimate the value of having this time a winning trade vs hitting sometimes big.
George Soros: It doesn't matter how often you are right or wrong - it only matters how much you make when you are right, versus how much you lose when you are wrong.
Someone else called this the Babe Ruth Effect. Few home runs can compensate for many strikouts. His lifetime batting average was only 0.342.
Psychologists Tversky and Kahneman: People choose a sure gain over a lottery with an expected better gain, but shun a sure loss over a lottery with a worse expectation.
William Eckhardt: People take profits, but gamble with their losses. Amateurs go broke by taking large losses, professionals by taking small
profits.
Old market wisdom which directly results in only a few big winning trades and many small losses: Ride your winners, cut your losers
Trend Followers who run automated trading systems win only on average 40% of the time.
r) Simple Strong Stock Strategy
http://www.visoracle.com/swingtrend/simple-strong.html
The simple things are always what work best, look for a trend and a pullback, or look for the strongest stock when the market pulls back.
s) Stoploss Trade Management
http://www.visoracle.com/swingtrend/stoploss-0.html
It's so easy to not become a bagholder when you start practicing trade management and limit loss through the use of stops. If you get stopped out, you were on the wrong side of the trade anyway.
You don't want to use stops because you think market makers grab your stops? Wrong, it's just all in your head! The market doesn't care where you want it to be, you have to go with the market.
t) Support Resistance Pivot Swing Break
http://www.visoracle.com/swingtrend/support-resistance.html
Negated swing trading system or entering the break of a wave after a pivot point.
A highly successful trading pattern is to find situations where price is violating a pivot point convincingly, as there are professional traders and automated trading systems out there watching the markets like hawks to find exactly these hot spots of price action. If the price breaks through the line of a just successfully confirmed support or resistance after having started going the other way, serious traders become active. This is one of the big trading signals for said professionals. All experienced traders, be they trading for themselves or for banks, financial institutions or funds, adhere to the concept of support and resistance. If this concept is violated it signals them strongly to do the opposite.
This price violation can come as a breakout after a false breakout at the other side of a trading range or as a disruption of a turning of the wave. You have to do sort of negative swing trading. The moment ordinary swing traders move in, the wave breaks and the trade begins to look not only bad but catastrophic for them, is the signal for the successful trader to bet on the opposite direction. In such situations even market makers, the ones who normally increase market oscillations by driving prices artificially up and then suddenly turn the tides by selling at top prices and ride the wave down and vice versa - all in all a counter cyclic behavior - jump with market orders into such a wave disruption.
One special trick of market makers to get out of a position is to initiate the swing not to ride it up, but to dump a wrongheaded position into its very beginnings. Chances are good that there is some more fundamental reason for them to do so. A disrupted swing can have of course any other cause like e.g. breaking news or a market which has simply more potential for the other direction. The power of this trading pattern lies in the combination of strong thrust and further potential.
There are these scenarios of a safe trade, a trade with a very good win to loss probability ratio. But you need to have discipline in order to enter only the market when price action looks good, when there is a real trading signal, a high probability pattern with an expected gain much bigger than the possible loss and not when you think you need the next trading chance.
u) Technology Trend
http://www.visoracle.com/swingtrend/technology.html
Find the next major technology trend and then find the best company in this trend.
The most successful technology stock investments all have one thing in common:
the companies became big players as the markets they were in became big.
Would Microsoft have been so successful if PCs had cost $10,000 each?What really made Microsoft so successful was the marketplace they came to dominate.
They rode the market's extraordinary growth curve, and exploited their position along the way. Mr. Gates and Mr. Ballmer are great executives, but make no mistake: it was the PC market explosion that made Microsoft the giant it is.
To find the next Microsoft, and that is what it is all about, you should first try to find the next major trend. By thinking on the highest level about where technology is going, and how an individual company will fit in that trend, you stand the best chance of reaping the highest rewards.
v) Warren Buffet Long Term
http://www.visoracle.com/swingtrend/warren-buffet-0.html
Warren Buffet, "In the short term the market acts as a voting machine. In the long term as a weighing machine". More is made in the sitting than in the thinking.
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