Blog for Trading Success

First off, my apologies to readers not in the S-E Asian area - today’s blog is unlikely to hold much interest for you. The reason is I am going to be answering the questions raised on a subject in recent e-mails. Rather than reply individually, I’ll post my answers here.As a background, I am running in Singapore two 2-day seminars: on August 23 & 24 and on September 13 & 14 for a cost of S$400.00 (US$295.00).

The questions raised can be grouped into three categories:

1) Why is the cost so cheap? (One enquiry raised the implicit question: can it be any good?)First off ,the bad news: the cost for the  next series of this seminar will increase. The once-a-year Singapore event had been organised with volunteer labour. But it has proven so popular and the organization so time-consuming, that the other seminars in the series (e.g. Hong Kong November 29 & 30) will be professionally organised. Given my increased costs, I’ll increase the fees to US$730.00.

Let’s turn to the questions raised.Both ideas in question (1) assume that my main outcome for the event is to make money. In fact, it is not. Of course, I want something for my time; but my main outcome is to give something back to the markets by promoting a low cost entry-event to newbies. The statistics show that 80% to 90% of new entrants lose most, if not all, their capital in 9 months or less. Most of these traders have  attended at least one seminar costing on average, US$2,500.00; around 30%  have attended two to four seminars/webinars. But, despite the outlay, 80% to 90% of newbies fail.

I want to change this.I have been doing this by providing a low cost entry vehicle to help newbies determine if trading suits them. You see, my seminars make a difference for those willing to apply the knowledge gained i.e. the seminar ‘works’. Because the seminar works, the success rate will lift for those who work at their success. For those who do not benefit, they will not have spent a great deal for the knowledge that trading may not be for them. Even at US$730.00, the event is well below the price of comparable 2-day seminars. So, even at that price, I am achieving my outcome and reaching more newbies. Do I have something to offer? This blog, my trading results and the results of my students ( one case, in particular,of a public competition) suggest I do. You would need to assess that for yourself.

2) Who should attend?

Any investor/trader who has yet to produce a consistent profitability over a 3-year period (my definition of newbie).

3) How will I benefit from the course?The main benefit is this: you will come away with a realistic and solid foundation for your market success. Success in this area is a function of: Risk Management: Position Sizing and Portfolio Risk management. Learning from your Mistakes – a Written Trading Plan that has an edge i.e. for every $1 invested, the plan, if consistently executed, will return more than $1.00. The greater the edge, the greater the long-term returns. The 2-day event lays the reliable base from which greater improvement is possible.

ACTIONS:

What is the Course content? How do I register?For details, please go to: http://awanginvest.com/?page_id=202

 

In yesterday’s blog, I laid the foundation for today’s analysis of the 30 Year Bonds. I am most comfortable with a trade when the price action for a secular (long-term) trend accords with the economic picture.

I have said this in earlier blogs, but it’s worth repeating: I subscribe to the Austrian School of Economics. Their basis is a simple but profound one: Humans Act; and because it is human action, we’re unlikely to be able to place economics in the same category as the physical sciences - i.e. we won’t be able to reduce economics to a set of formulae. It’s for this reason that I subscribe to the approach.

The assumptions I made in yesterday’s blog were:

1. Because of massive increases in M3 since August 2007, we’ll see higher inflation numbers in 2009. I expect to see double digit inflation threaten as measured by the US CPI.
2. Since the US economy is already weak, this turn of events can best be described as stagflation in the making.
3. Under stagflation conditions, bond prices and stock prices can move in the same direction i.e. there is no flight to quality.

With that under our belt, let’s turn to the charts. Figure 1 shows the 12-Month (yearly trend), CSI Perpetual data.

FIGURE 12-M 30-Year Bonds CSI Perpetual

The 30Yr bottomed in 1981; from 1981 to date, we have seen a 28-Yr bull market. But, the inability of the market to get to the top of the channel since May 2004 suggests that the turn down from January 2008 will mark the beginning of a bear phase. Note that this is an unproven statement. After all, the market could turn north and hit the top of the channel. But given the assumptions yesterday, and the position of the 13-Week (quarterly trend), I rate the move North as an unlikely event.

Figure 2 shows the 13-W position (quarterly trend).

Figure 2 13-W US Bonds, CSI Perpetual

Figures 2 & 3 show a number of behavioural parameters:

In Figure 2, we have acceptance below the top of the Value Area, 118.90. The 80% Rule states we should see the market go to the bottom of value, 109.9 before we see re-acceptance above the top of value. If the down move is to stall, it will most likely stall at the Point of Control, 113.75. So, any shorts instituted above Value, will have exposure i.e. the worst that can happen is a scratch trade.

Figure 3 shows:

The Ray Wave Count on the 18-D (monthly trend). We see a Running Correction at Wave 2. One close above 117.52 would be a warning the move is aborting. So we can center exit strategies around this price.

There are two areas where the move may abort:

1. The confluence of 100% of the H&S and one of the First Wave price zones, 108.34. Note that this is below the bottom of Value. Once we have acceptance below the bottom of value, Market Profile Theory suggests the market should move to the 13-W Primary Buy Zone, 105.82 to 103.36.
2. The confluence of a First Wave Price Zone and the minimum target for Wave 3 where Wave 2 is a running correction, 104.63 to 105.06. Note that this price area is within the 13-W Primary Buy Zone.

FIGURE 3 18-D Ray Wave Count 30-Year Bonds, CSI Perpetual
The statistical targets are not relevant at the moment. The normal 13-W impulse move runs for 26 to 52 weeks and for a move of 25.33% to 17.17%, I’d consider them after (and if) the 30-Year Bonds move to the 13-w Primary Buy Zone.

One last point. Last night’s price action shows that the majority of trades in the 30-Year still seem to be tied to the idea “S&P down, Bond Prices up”. We will need a number of high CPI to break the ‘flight to quality nexus’. So, it’s important to pick your spots to enter under these conditions.

Summarising this blog, I’d like you to notice:

1. I explicitly set out my assumptions. This makes it easier to identify where a trade has gone right or wrong.
2. I treat chart patterns as behavioural parameters i.e.they can fail. So, it’s important to identify the price zones and conditions under which I believe they are failing. These form my exit strategies.
3. I identify my target areas for profitable exit. With the information, I’ll calculate my Risk: Reward. In addition, the targets play a part in my position sizing

From the questions I have been receiving, it’s clear you are using the blog as a trade advisory service. Not a great idea,folks. One of the reasons why 80% to 90% of newbies fail even though there are quite a few great services is because:

• a ) The time frame may not suit the subscriber
• b) The stop risk exposure (stop levels) may not suit
• c) Most importantly in my case, I am not providing position sizing and trade management information - info that is critical to your success.

If this blog is to provide a public service, it is as a coaching tool. It’s best you treat this as that.

First off, thanks, Ana, for helping out on Friday - I was trying to do too much too soon and paid the price.

I was going to examine the 30 Yr Bonds today - but I think a better approach is to lay the foundation for the comments.

In my trading, I look for an idea that places the secular trends in context. Markets have certain relationships that hold true but the relationships differ according to the context in which they occur. The current context is rare and I’d like to examine that next.

The current economic state has brought about bubbles in the stock and housing markets that led to the sub-prime crisis.

What would have been a reasonably short recession now has all the earmarks of a longer term down-term or hyperinflation ; hyperinflation will occur if the Fed fails to act once the results of its actions, since August 2007, filters into the inflation figures. If hyperinflation does not occur, the US, at the very least, will suffer a period of stagflation.

In the meantime, the other economic engine, China, is already suffering rampant inflation, and unless the Chinese authorities take more aggressive actions to cage and curb that tiger, it too will have to deal with hyperinflation.

If both the US and China suffer an economic downturn at the same time, then the rest of the world will catch more than a cold.

In this environment, what can we expect?

• A strong secular uptrend in commodities - Soybeans, Gold, Wheat etc. This does not mean we won’t have corrections e.g. Crude and Soybeans are in the throes of one now. But it does mean that the commodity boom will continue until the threat of hyperinflation is negated.
• The start of a new uptrend in interest rate yields (downtrend in price).
• Global tensions that will add to a strong secular uptrend in Gold and Silver. Again I do not expect a straight line advance. Right now for example, I see Gold forming a sideways market between $1045 and $850.
• A bear market in the stock indices. In the S&P, we are currently forming either a simple correction or a sideways market between 1256 to 1280 and 1200. We’ll have a better idea of the type of correction when we see a retest of the 1200 to 1210 area.
• The bear market in the US$ to continue. We can expect a bear market rally once the CPI starts in earnest to rise; that rally will terminate once it becomes clear that hyperinflation is a real threat to the US economy.

These are rare conditions: a current stagflation with the overhanging threat of hype inflation. In addition, we can expect even greater volatility because of the actions of politicians, who failing to understand the cause of the crisis, will look for scapegoats. What better candidates than ‘greedy’ speculators? In their attempts to ‘fix’ the problem, their actions will further disrupt the markets and will cause even greater volatility in price action.

As traders we can expect:

1. the secular trends in commodities to continue but need to be careful of political action: for example, some sort of bill to restrict the number of contracts we can hold in Crude Oil.
2. the secular trend in gold to continue
3. a particular strong secular trend to begin in 10-Yr Notes and 30-yr Bonds.
4. the stock market bear to begin in earnest.

I am back to the rescue – our mentor has been sitting up a little too long and this has taken a toll on him. I offer to take over whenever he finds it hard to sit up at his pc to write his piece. Today , he is reeling from fatigue, partially from taking a flight too soon, perhaps. So please bear with me with this blog which will appeal to those who are newbies, especially.

Lately, I came across newbies who paper-trade and who seem to think a successful paper trade is the end all . Those of us who have traded with real money know trading is probably one of the hardest professions in the world.

I would like to cover the most common question: “What is the single most important mental or emotional concern you have that is preventing you from being a successful trader?”

The answers could be many but the most common is that we are over-trading or trading too much before we are ready. In other words, we are probably trading at the wrong pace.Most of us start out at paper–trading. There is no actual money on the line, and you practise executing your trades the way your trading plan commands, a mechanical trade. There is no ego at stake. The phantom “equity” seems to rise with ease because there is no risk or stress involved.

So you chomp up the pace to trade with real money. This time you will trade with real emotions, following your trading plans, perhaps initially, with great success. When you experience the excitement of success you are looking for, you feel you are now ready to step up the pace of your trading at full speed!Only this time, the move is against you, and it is a big one which decimates your emotion or ego. So you succumb to the temptation to remove your stops believing the market will rebound and you will recover.Luckily, you recall that you must stick to your trading plan which includes not removing your stops!

The market takes out your stops, and you suffer what you are prepared to lose under your trading plan. Then the market keeps going against you, and you realize you have done the right thing by sticking to your plan. You are so proud of yourself you feel good in spite of losing some money.

This ideal scenario happens to only a minority of traders who are elite traders while the rest of us tend to up the pace too quickly and not emotionally ready to handle our plans.So, the only way we can join this trading elite is to develop our mind to develop our trading plans.

If we scale back, we may yet trade successfully with consistent profits over a period of time of up to three years as novice traders. After all, trading is no rocket science we hear , only we need good discipline with our trading plan, good money management and winning psychology to become successful.

 NUGGET OF WISDOM - TRADER  PAUL TUDOR JONES:

“Don’t focus on making money, focus on protecting what you have.”

ANA AKA IDKIT

AG MODERATOR

I am flying to Singapore today so I am posting Thursday’s blog early morning Hong Kong time.

Yesterday I received two e-mails asking: “since you believe that Crude Oil is going to go down, won’t this mean the S&P will go up?”

The questions imply that there is a negative correlation between Crude and the US Stock Market i.e. if Crude goes down, the Stock Market will go up.

I ran some correlation studies; in fact the correlation between Crude Oil and the S&P is meaningful (90%) only in 2008. The farther back we go, the lower the correlation becomes. For correlations to be robust I like to see 90% over at least 15 years of data. Even in 2007, the correlation was less than robust.

Figure 1 is an example of what I mean.

FIGURE 1 Correlation Crude Oil and S&P

We start at the 13-week (quarterly trend) S&P swing low. (Note I have not shown the Barros Swings for the sake of clarity). The Crude Oil 13-w swing low occurred earlier on January 18 2007.

Both markets went up until the S&P peak on July 16 2007. The S&P corrected down while Crude continued up until August 01 2007. The correction for the S&P ended on August 16 2007, while the correction for Crude ended on August 22. From August 22, both markets turned up until an S&P high occurred on October 11 2007.

The example is meant as an example to illustrate the correlation studies I did; it is not meant as evidence of a lack of correlation - the correlation studies do that.

The point is, be careful of “Wall Street Lore”. Sometimes the story has some merit; at other times, the story has no merit and at still other times, the current situation is an exception to the story. Speaking of exceptions, let’s turn to one.

“Bonds and stocks don’t move down together “.

The reason for this is when the stock market moves down, there is a flight to quality to Bonds that drives prices up (yields down).

Correlation studies show this is generally true. But, there is one exception: in periods of stagflation, Bond prices and the Stock Market can run in the same direction. For example, in 1972 to 1974, Bond prices went down (yields up from 5.73% to 8.70%) and the stock market also went down 38%. The critical question, therefore, is whether the US economy is set for a stagflation period.

I believe it is.

At the very best, the US economy can be said to be in slow-down mode. I say this to avoid getting embroiled in a discussion on whether or not the current state satisfies the technical definition of a recession. As Shadow Stats (http://www.shadowstats.com) points out:

“… real (inflation-adjusted) second quarter retail sales contracted for the fourth consecutive quarter, while the second-quarter industrial production showed a sharp quarterly contraction. In conjunction with consecutive quarterly contractions in payroll employments, these numbers should remove any doubt of the economy being in recession.”

Yesterday (CPI) and Tuesday (PPI), we saw the effects of the recent FED/Treasury bailouts seep into the inflation numbers. Shadow Stats tracks M3 growth and it shows a massive increase since August 2007; M3 peaked at a massive +17%. It currently stands at 16%.

Given what Bernanke said at his testimony on Tuesday and Wednesday, we can expect new liquidity moves - these will increase M3 even further. Based on this, Blind Freddy would see that the CPI will probably be reporting double-digit inflation in 2009.

I write this to lay the foundation for a possible long-term top in the 30-year Bonds. More on this tomorrow.