Category Archives: Trading

The 5 Fatal Flaws of Trading

Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or even turn a profit — and more importantly, do it consistently. How do they do that?

That’s an age-old question. While there is no magic formula, EWI’s own Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. We don’t claim to have found The Holy Grail of trading here, but sometimes a single idea can change a person’s life. Maybe you’ll find one in Jeffrey’s take on trading. We sincerely hope so.

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection eBook.

Why Do Traders Lose?
If you’ve been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn’t seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can’t seem to prevent that invisible hand from depleting your trading account funds.

Which brings us to the question: Why do traders lose? Or maybe we should ask, “How do you stop the Hand?” Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.

Fatal Flaw No. 1 — Lack of Methodology
If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won’t work over the long run. If you don’t have a defined trading methodology, then you don’t have a way to know what constitutes a buy or sell signal. Moreover, you can’t even consistently correctly identify the trend.

How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn’t matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can’t fit it on the back of a business card, it’s probably too complicated.

Fatal Flaw No. 2 — Lack of Discipline
When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously.

Fatal Flaw No. 3 — Unrealistic Expectations
Between you and me, nothing makes me angrier than those commercials that say something like, “…$5,000 properly positioned in Natural Gas can give you returns of over $40,000…” Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.

Yes, it is possible to experience above-average returns trading your own account. However, it’s difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader — 50%, 100%, 200%? Whoa, let’s rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them — and achieve them — you will fend off the Hand.

Fatal Flaw No. 4 — Lack of Patience
The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.

That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.

All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.

How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month…I promise.

I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: “Aim small, miss small.” I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small.

Fatal Flaw No. 5 — Lack of Money Management
The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.

Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% – 3% of their portfolio. If we apply this rule to ourselves, then for every $5,000 we have in our trading account, we can risk only $50 – $150 on any given trade. Stocks might be a little different, but a $50 stop in Corn, which is one point, is simply too tight a stop, especially when the 10-day average trading range in Corn recently has been more than 10 points. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between $15,000 and $50,000.

Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn’t even address the size that they trade (i.e., multiple contracts).

To overcome this fatal flaw, let me expand on the logic from the “aim small, miss small” movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading e-mini contracts or even stocks. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you’re out all together.

Break the Hand’s Grip
Trading successfully is not easy. It’s hard work…damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless. To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I’ve outlined, you won’t be caught red-handed stealing from your own account.

Traders Talk; Putting on the O’hare Spread – Dreamer, Schemer, In Vain Redeemer –

Anyway, no drug, not even alcohol, causes the fundamental ills of society. If we’re looking for the source of our troubles, we shouldn’t test people for drugs, we should test them for stupidity, ignorance, greed and love of power. P.J. O’rourke

It was rollover and I was standing close to the center of the bond pit so that I would have access to both the spread paper and 2nd month brokers, when Darrell Zimmerman walked up to me. The bond market was experiencing a brief respite from it’s usual frenzied trading activity and Darrell had taken the opportunity to come by and talk to me. He informed me that he was working with some large institutional traders in New York and overseas, and that they were going to be trading some size in the 30 year. He then asked me if I would like to fill their orders, or at least a portion of them. I explained to Darrell that although I occasionally did brokerage, it was only as an accommodation to the floor brokers I stood next to, so that they would be able take a break or have lunch.The majority of the time I functioned as a trader, and I wasn’t interested in being taken out of the market, to fill some orders. Besides, I didn’t know who these customers were. Darrell went on to tell me that there was going to be a considerable amount of business, and that if I did a good job, I could have the deck. I respectfully declined his offer and Darrell walked away. It wasn’t long before I saw Darrell talking to another broker on the other side of the pit, and then another. Little did I know, that I had just made one of the smartest decisions of my life.

I had met Darrell and his wife Lisa, who doubled as his clerk, in the lounge of my clearing firm. He was a very talkative and gregarious guy, but in a used-car-salesman kind of way. He was a perennial bust-out, kicked out of numerous clearing firms at both the Merc and the Board, but now had an account where I cleared my trades. There were a lot of Darrells that hung around the Merc and Board; ego-driven dreamers that chronically blew up their trading accounts, yet always found a way to get back in the game; hanging on a little while longer before justice was inevitably meted out. A lot of them would quietly disappear, while others would get jobs on the floor, evaporating into the milieu of floor clerks never to be seen or heard from again, yet always fantasizing about making it big one day.

Every trader did it; dreamed about the big trade; fantasized about taking a shot. Chicago’s traders had their own mythical way for making this dream come true, the O’hare spread. The idea was to put on an incredibly large position, get in a cab, and head for O’hare airport. If the trade was a winner, you either returned home or got on a plane to Hawaii – if the trade was loser, you bought a one way ticket to a country that did not have an extradition agreement with the U.S. We also had a saying, “If you are going to blow out, blow out big” If your debit was too small, your clearing firm would write off the loss, and then write you off. But in the CBOT’s version of “too big to fail”, if you hurt your clearing firm bad enough, they would arrange a way for you to generate the income necessary, to pay them back. Apparently, Darrell had taken these fantasies to heart having already already planned to put on an O’hare spread, before he approached me in the pit that day. While I had refused his offer, he did manage to enlist 9 unwitting brokers to assist him and his partner, Tony Catalfo, in a scheme that would bring down one of the oldest clearing firms at the CBOT.

The bell rang at 7:20 AM on a Thursday morning and Tony, who had strategically placed himself in the Bond options pit, was buying up every at-the-money put he could get his hands on. Meanwhile, Darrell was putting in huge sell orders in the bonds to the 9 brokers whose help he had enlisted earlier. Tom Baldwin was on the other side of the bulk of these orders, and when the options traders started to lay off the puts they sold to Tony, with short hedges in the bond futures, panic ensued and the market had nowhere to go but down. Darrell then entered the pit himself and began to sell more bonds. In the Bond options pit, the put options were going through the roof, and Tony was beginning to take profits on his long put position. This all took place before 7:30 AM, when an economic release came out which was negative for bond prices. In a stroke of incredible luck, the market broke even more and Tony covered the balance of his position for about a 1.5 million profit, while Darrel was now short about 12,000 bond futures, and up about 5MM on his open position. The feedback loop of selling they had created was working perfectly.

Darrell had been dismissed long ago from my clearing firm, and along with Catalfo, was now clearing Stern & Co., a family run business that was founded by Lee B. Stern. Lee had made his fortune trading grains, and owned the Chicago Sting soccer franchise, a piece of the White Sox, and was one of the most respected members of CBOT. Lee rarely came onto the floor anymore, but when he did make an appearance in one of the grain pits, his actions were highly scrutinized by other traders, as a possible clue to where the market was headed.

Bad news travels fast in the futures industry and virally fast on the floor, so it did not take long for word of Zimmerman’s and Catalfo’s involvement in the bond panic, to reach Stern’s office. Lee’s son and a few of the firm’s employees rushed to the floor and quickly enlisted the help of the security guards. Zimmerman had lost his count and was standing outside of the pit when they grabbed him, while they physically pulled Catalfo out of the Bond options pit. After witnessing this melee, traders in both pits began to piece together what had happened. Tom Baldwin , who had been unsuccessfully taking the opposite side of Zimmerman’s orders, realized the sell-off had been artificially induced, and that traders would have to cover their shorts. He quickly took advantage of the situation and began to bid up the price of bonds. Bond futures and bond options prices reversed on a dime and snapped back with a vengeance.

Meanwhile, Stern’s employees, who had wrestled the trading cards out of Tony and Darrell’s hands, were frantically trying to get a handle on what was now, Stern’s position. In addition to the trades that Tony and Darrell had made, were the fills of the 9 floor brokers, which had to be collected and aggregated in order to get an accurate count. It took them 2 hours before they could figure out the position, and what had been a $5MM winner, had turned into an $8.5MM loser by the time the position was liquidated. Had they been able to figure out Zimmerman’s position quicker, and not tipped off floor to what was going down, Stern could have escaped with anywhere from a small loss to a small gain. Instead, Stern had to make good for Zimmerman’s $8.5MM loss, and as a result, lost it’s clearing status after 25 years in business, and had to lay off 20 employees.

Catalfo tried to collect on his $1.5MM profit on his options position, but received a 42 month prison sentence instead.The proceeds from his trades were awarded to Stern to help offset his losses, while Stern went after the 9 filling brokers for the balance. Zimmerman hopped in a cab to the airport and got on a plane to his parents home in Canada, completing the other leg of the O’hare spread. He was eventually extradited and sentenced to 42 months for his efforts. Darrell Zimmerman came very close to pulling off his insane plan, but he let his ego and his greed get the best of him. Had he executed his plan on a smaller scale, in a more restrained manner, he might not have aroused the suspicion of his clearing firm. He had the market right where he wanted it, and had he not lost his count and tipped his hand, he might have been able to cover his position while it was still a huge winner. Whether they would have let him keep his profits is highly dubious, because Zimmerman’s sole legacy from his lunatic scheme, is the eponymously named rule, that allows clearing firms to seize the profits of any trader that attempts to take a shot at them.

Market Forecasting.

Each time the market falls, our office gets inundated with various calls, inquiring on what to buy or what to sell and we also get calls from concerned clients all the times, who have noticed the differential increase/decrease of the accounts funds performance.

Just at the start of a larger move, these are the first signs for us to usually stand up and pay attention. Which we usually do, infact we are watching the entire world and its developments and use this as our base understanding of fundamentals behind the product commodity asset we are trading. With this information, then we usually begin our next strategic phrase of trading the markets.

Which we refer to as technical analysis. As a market analyst, we invest in charting systems, we develop new algorithmic calculations to identify best probability levels of a trade and then we execute those trades in a systematic manner, remaining true to the system, till either conditions are met. Boom or bust.

 

INDIA NIFTY – Has 5400/5420 in view. This guy is not falling!

The last few sessions in the markets have been breath taking, Just a few days ago on FRIDAY, HOPIUM rose and the markets became once again happy go lucky!. Despite the geo political arena getting hotter, American Ships in the straits of Hormuz, plus IRAN completing their war cry exercise and demonstrating its war capability, and selectively saying, “Don’t mess with me, I have the fire power”, its possible, the USA now discounts the IRANIANS for all their empty threats.

Last year IRAN warned “No ships shall pass my seas” and a US SHIP turned back and headed further away, with that, IRAN said “IF YOU COME THIS WAY AGAIN!, I SHALL TAKE CARE OF U!.  A week later, when the SHIP returned, IRAN did nothing.

A whole lot of empty promises and lack of management displinary skills of IRANs arm forces, indeed raises many doubts, but then again, they have shown more than once, their inefficiencies, an example how they were not able to handle the naughty behavior of STUXNET or when their mililary depots blew up, due to “improperly of storage weapons” techniques.

A whole lot of questions are always raised, when it comes to IRAN, the sabre rattling has started to become boring, this could be the underestimation both parties could make, leading up to the escalation in world war three.

The USA may just push it further and strangle the IRANIAN even more, before the IRANIANS make the first move, due to fear attack.

indeed escalate world war 3, and the IRANIANS will indeed give them a tough fight, which will solve USA’s economic problems and the Industrial War Complex will once again have their way.

 

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Moody’s does it again. Affirms India, Downgrades World

Truly an India Shining update, Moody Affirms India outlook as stable, downgrades world, bank stocks rallied last week, and market participants said rating agencies were irrelevant in the face of global chaos that is underway, does this signal a short on a positive or stable rating, and a long on a downgrade?

NEW DELHI–Moody’s Investors Service said Monday it is maintaining its “stable” outlook on India’s sovereign rating as the growth slowdown and deteriorating business sentiment in the economy are likely to be temporary. The decision would give the Indian government the much-needed respite as it faces heat due to a cut in outlook to “negative” from “stable” by Standard & Poor’s in April and by Fitch last week, reflecting fading investor confidence triggered by worsening conditions in the economy.

http://www.marketwatch.com/story/moodys-affirms-indias-outlook-at-stable-2012-06-25

Moody’s downgrade gives edge to safe-haven banks
Major ratings downgrades by Moody’s will further divide the world’s biggest banks based on their strength and access to cheap customer deposits. The ratings, released Thursday by Moody’s Investors Service, gave a competitive advantage to “safe-haven” banks that fund themselves with stable, low-cost customer deposits, while worsening the outlook for weaker banks that rely more on capital markets for their funding.
http://business.asiaone.com/Business/News/Story/A1Story20120625-355113.html

Bearish forces at work!. Nifty 4500 on the cards?

Last year in Jan, near about 6300 on the Nifty, We advised a short, prior to doing so, our team visited Mumbai, saw the construction all over, saw the folly of the richest man in India with his tall billion dollar building as his home, and witnessed the hope in the AIR, “India Shining”. All this presented a peak for the markets.

Efficiency in India is non present and as the euphoria of cheap money nears its end, Indians slowly realize the days of cheap money is over. In Economics its hard to see, how growth can be delivered by cheaper code writers that India Offers, or how this country could sustain itself on a global scale, from self sufficiency the country today is a net importer, its deficits are evidence on the Indian Rupee.

So after this trip on the day out, at the airport departure terminal, we headed to the smoking room of the airport. In Airports smoking room’s, usually tips can be obtained on how the country looks in the eyes of departing travelers and more often than not, it’s a worthy observation. A gentleman travelling back to the middle east asked us what we did. And we highlighted we made a quick study of the situation on the ground and believe that the up move of India is over, {we were short, a good size at 6000 areas}!.

This gentleman quickly became agitated and highlighted how the whole world was in Shit, including the middle east and how India will rise up to become a super power in the years ahead. We held back and gave him a grin and walked away. If it acts like a duck, quacks like a duck, then it is a duck.

Now if indeed we are right, how will it play out!

The debt exposures of the government and corporate’s, which is hurting, especially those who borrowed FCCB’s and in various foreign instruments will come to roost, devaluing the Indian Rupee even further, technically our charts indicate the region of 62-64 before any meaningful correction on the INR, while on the first phrase of devaluation the noise from government officials and verbal interventions will provide initial level support to the currency, but verbal interventions can only do so much.

Once additional momentum picks up to the downside and political dissents ramp up their voice on inflationary pressures, the stock markets will start to recognize and high frequency bots will be unable to continue providing the fake liquidity that is currently present, propping up markets is a strategy and belief shared by greenspan and bernanke, they believe higher stock valuations, provide a feel good factor and eventually reflect the true extend of the economy, this is indeed false.

India’s RBI governor is also trying to act like them too, which will make Inflation easily accessible.

Their theory is flawed, it doesnt reflect anything near the true extend of the economy, in reality the economy is suffering, real estate values are held up as in stocks, due to the weaker rupee, which effectively makes the nifty trading at 4000 levels in real value terms, since the INR is almost 20% weaker than before.

Does anyone think, The same level of security and safe keeping as in gold, real estate or any other asset class that holds it value, than fiat currencies and shares will be in for a surprise.

The situation on the ground today is amplified ten times than 1991, as growth levels expanded to the upside, similarly their corrections and problems are also amplified. For those, who want to know better, are advised to take a look at Malaysia, Thailand, and Singapore (1997-2002) stock market charts vs Fx devaluations to reach their own conclusions on India.

Nifty M12 – 5193

Nifty June futures are nearing key resistant levels of 5193/5198 region, this level is expected to hold and remain below 5217 region, as outlined on Friday. It’s important to notice that market euphoria seems to be catching up and calls are now been made by MAD TV journalists calling for 5800/5900.

A break and close above 5217 (cash) signals to traders to become sidelined. Below here, prices are still good for those looking for leg 3 of the recent down move.

A move below 5168 is now required to signal the easing of hands. Stay tuned as we report.

TRADE-BLOG: Nifty M12, 5137 is Pivotal

REFRESH

5124/5 to hold. And we will see 5101-5097. 5102 seen, 5090 is next in focus. 5104 keeps on struggling, whoever told them, holding on cheaper INRS and markets go up, is fooling them once again. We may dangle here upto 5120 and see what europe has in store for us.

5098-5100 attempts to make it hold. Note its friday, you don’t want to go home, with a long. Europe could still implode over the weekend, Monti says a week before disaster. Below 5092, 5090 offers hold and a skip towards 5081.30 and 5076 region…stuck in a range till then.

5124/5 topside exhaust. Testing, and back off now, lets play in between.

Follow the EUROZONE. crisis live here

5131 zoomed up. could be the exhaust. view remain bearish or closing here at best. If the key pivotal level holds, then we are indeed going to attempt 5178 once agian.

Lets give it another 5 minutes to mark its mark. I can’T see a higher unchanged closing on a friday.

If this is leg 2 of the downmove 5340-4840 ?, then the max upside potential should remain at 5178-5195 region and not breach 5217 region, in any case, or else the short trade is questioned. We will see 4840 for a minimum once again in the coming month. This upmove could be attributed from some good talk from the eurozone, which will fade away like the rest.

Markets have yet to retrace back a certain portion from the recent peak highs. Goldman sachs calls for SP 1285, a 5% move downwards, puts a contrarian into thought. Do they have whiff of a QE3 before the rest of us and finding another way, to sucker their clients.

We need to close below 5110 region. a gap up still remains or to be filled on monday. Short agianst 5217 region as a stop. We will see 4840 region as a target, putting risk/reward ratio for a min of 1:3.

INR now at 57.21/22 with highs of 57.33 netdania reports.

Bearish news for world markets, with commodities in a slump.

Gold Poised for Worst Week This Year as Silver Drops to 2012 Low

 

Oil Near Nine-Month Low on Economy; Heads for Weekly Drop

5137 is acting pivotal.

5149, bounce.. a 50 point move can deliver a 50K,100K, 1M INR delta..This upmove could provide some understanding of your option trade. Just understood our size exposures.

Investors cast doubt on “end of world” hedge strategies

5137 held up, 5178 gap now in focus. Nifty Cash needs that to be filled as well. A turn down has to begin somewhere around here, an hour closing is coming up on the horizon.

Bank nifty is recovering similar to European Banks, who are also covering their gaps.  EUROzone is drivng prices, EURO sees 1.2518 earlier.

 

REFRESH