The Art of Learning and Trading – The Journal

BarroMetrics Views: The Art of Learning and Trading – The Journal
In all the years as a trading coach, one of the most difficult ideas to get across and have the retail client execute is the keeping of trading journals – psych and equity. The second? Getting them to learn from their failures and successes.
Part of the issue was the format I was using – somewhat clunky, and many of the routines had to have separate entries. A new software has some out that does away with these difficulties.
Once setup, the trading journal outputs the stats we need as well as insights into our psychological behaviour. Let’s look at some of these:
  •  Its ‘Emotional Analytics’ function pinpoints the emotion/emotions affecting your trading results.
  • Its ‘Tilt Meter’ identifies the mistakes you are continually repeating.
  • The ‘what if’ (Alternative Strategies) shows you how your trades would face fared using different entry and trade management techniques.
  • It has all the stats we traders need, and the graphical displays are excellent.

That’s just a small sample of what Edgewonk does. The bottom line is you now have no excuse not to keep your journal and no excuse not to learn from it. Doing will improve your profitability.

Certainly, the designers have done all the can to make the software useful and supportive to the trader.  I like it so much that I’ll be bundling it with my courses. By the way, if you have taken any of my courses, and would like a copy, let me know. We managed to secure a 20% discount for bulk purchases.

I like it so much that I’ll be bundling it with my courses. By the way, if you have taken any of my courses, and would like a copy, let me know. We managed to secure a discount for bulk purchases. Note that this offer is available for past and present students only.

Opps I almost forgot. The current cost is USD 169.00 and the URL:

https://www.edgewonk.com/

The Art of Learning and Trading

BarroMetrics Views: The Art of Learning and Trading

“The key to pursuing excellence is to embrace an organic, long-term learning process, and not to live in a shell of static, safe mediocrity. Usually, growth comes at the expense of previous comfort or safety.”

“…..successful people shoot for the stars, put their hearts on the line in every battle, and ultimately discover that the lessons learned from the pursuit of excellence mean much more than the immediate trophies and glory. In the long run, painful losses may prove much more valuable than wins—those who are armed with a healthy attitude and can draw wisdom from every experience, “good” or “bad,” are the ones who make it down the road.” (Josh Waitzin ‘The Art of Learning’)

Two great quotes and both applicable to trading. In essence the first says to succeed, we need to move out of our comfort zones, and the second says success comes from learning from profitable and losing trades.

As my coaching expertise has grown over the years, I have found the truth of both statements prove itself time and again. Those who attain their trading goals are those who exhibit both qualities. Those who fail have usually been reluctant to engage in either.

But, let’s say you are willing, what actions do we need to take in pursuit of the improvement?

Well, my first bit of advice would be to get a trading coach…..

The second, acquire the habit of keeping an equity and psych journal, then acquire the habit of learning from your entries. Again, this is easier said than done; but, technology has come to our rescue.

More tomorrow…….

 

 

The Art Of Learning

BarroMetrics Views: The Art Of Learning

Josh Waitzkin’s bio makes for interesting reading (see http://www.joshwaitzkin.com/josh/): it’s not often Chess aligns with the Martial Arts. I came across him when I saw ‘Searching for Bobby Fisher‘ – great movie.  I’ll leave it to you to read the links.

Here I’d like to shine a light on Josh’s ideas on how to learn. Now, I have to say that I dislike the format of the book: combing through pages of personal anecdotes in search of nuggets of gold is not my idea of fun. Still, the effort was worthwhile.

Josh’s main messages – to learn:

  1. We start by integrating and internalizing the fundamentals seeking to understand the principles of our discipline.
  2. Fueled by our understanding and internalization, we increase our repertoire of techniques, choosing the ones that best suit are personality while maintaining contact with our central core.
  3. What results is a network of deeply internalized, interconnected knowledge.

His techniques:

  • Bite-sized steps and complexity. Start with the simple and move up in complexity as our knowledge grows.
  • Once we attain competence, we look to attain the desired results with less and less effort (what he calls making ‘smaller circles’.
  • We attain mastery through ‘presence in the now’, learning to stress and recover. Mastery he defines as one where our rigidity to the ‘dogmatic interpretation of principles’ is replaced by making decisions defined by current circumstances. We are ‘at peace with and navigating the tensions of competing truths, letting go of any notion of solidity’.
  • Finally, his learning model is akin to Deliberative Practice.

On Monday, I’ll look at Josh’s approach in relation to trading.

Trade The Price Structure

BarroMetrics Views: Trade The Price Structure

A friend of mine trades the markets on fundamental and is a very profitable trader.

Whenever we get together, the conversation invariably leads to the discussion: “all things being equal, which is the better approach”? Of course, the key words are: “all things being equal…”. Clearly, the best approach would be the one that best suits the trader’s personality.  But, putting that question aside?

The short answer is I don’t know.  What I do know is I’d probably be out or losing my shirt if I were using fundamentals.

There were three pieces of news out yesterday:

  • Positive for the stock market at least in the short-term, repeal of Dodd-Frank.
  • Negative:
  1. The report that the Trump team had been in contact with Russia during the elections. Bearing in mind that Russia did attempt to influence the elections in Trump’s favour, this has the potential of becoming a very serious problem for Trump.
  2. The fact that Chinese courts are now beginning to support Trump’s trademarks. This is important because Chinese courts are recognised as being an arm of Chinese policy (i.e. they are not independent). If that is the case, then it could be said that Trump is receiving a benefit from a foreign government – something expressly prohibited by the Consitution.

A case has been brought by some ethics experts and legal scholars, but it is thought the case will not succeed. (See The new lawsuit accusing Donald Trump of violating the Constitution, explained)

So, what did the stock market do? Rallied strongly. If ever we were looking for evidence of a bubble, last night’s price action was it. Repeal of Dodd-Franks opens the door to the sub-prime abuses especially since the repeal includes the Volker Rule (see If Trump repeals Dodd-Frank it would be a monumental mistake).

So for the moment, for US stocks, I’ll be adopting the strategy outlined in yesterday’s blog.

A Rally on a Whiff of a Prayer

BarroMetrics Views: A Rally on a Whiff of a Prayer

I’m long the S&P, but I have cut my position size to half and made sure my stops are in. The current uptrend in all timeframes (from 12-month to 1-day [yearly to daily]) leaves me very nervous.

Why?

First the technical picture. Figure 1 shows the quarterly trend from the sub-prime low in June 2009.  In that period, we saw two 13-week corrections – the price action marked by the green and red rectangles. I have also marked the Trump election win with a red time-price label (11/11/2016).

Figure 2 is a Daily chart starting from just before the Trump win to yesterday. What we see is the congestion period has a larger average range and average volume than the current trending period! Historically the current period has a range and volume that is less than normal. In the past, healthy impulse swings have had higher average ranges and volumes than congestion stages.

So that’s one reason why I am nervous. There’s another.

It seems to me that this rally is fuelled by a belief in the Trump miracle of making Amercian great again: he’s going to create new jobs, cut taxes, attain greater growth and balance the budget.

The problem is the way he is going about it – it looks to me that we’ll have the illusion rather than the reality. Take the current proposed Republican tax bill.

The Financial Times had an excellent piece in today’s paper: Taking Sides in the US Tax War (unfortunately I could not find a link to the piece). Essentially, the bill would cut personal and corporate tax and at the same time impose a 20% tariff on imported goods. In addition, it would end global US tax, taxing only profits and income generated in the US.

The result of the legislation is to pit the “the consumer companies against their industrial peers. Big exporters such as Dow Chemicals, General Electric, Boeing, Caterpillar and Pfizer have formed the American Made coalition to champion the House plan.” In short, its big business against the ‘little guy’ – the voter that swept Trump into office will again by left out in the cold.

Also. the Tax Foundation says the plan would increase the Federal debt over ten years by 2.4 T!!

My fear is when the stock market realizes what a house of cards Trump is selling, it will fold and fold quickly. So why am I long?

Assuming we are in a bubble in the making, one thing I have learned is bubbles tend to last a lot longer than most expect.

So, I’ll reduce position size, allow for a massively poor fill on my stops and hope (on a whiff and a prayer) that I’ll accumulate enough equity in the position so that even a massive drop will not deplete my capital.

FIGURE 1 S&P Weekly

 

FIGURE 2 S&P Daily

Financial Crisis – Lessons?

BarroMetrics Views: Financial Crisis – Lessons?

A few readers have written asking why my US long-term, fundamental, view is so pessimistic. Here’s why.

My view is defined by Austrian economics, the only economics, I believe, that explains the business cycle.

In summary, the Austrian view is when a government inflates the money supply, especially when the increase rises faster than the increases in goods and services, we see malinvestment. In the 21st century, this has taken the shape of a housing bubble that was followed by a stock market rise.  At some point, the malinvestment has to correct. That correction takes the form of a severe recession or depression. The longer the money supply was inflated, the more severe the recession.

The 2016 US deficit came in at USD 19.537B (see The Feds Borrow More than the Deficit; the site also shows the deficits since 2000). What has that brought?

Well, it brought the housing bubble and the 2007 crisis. And since 2007, it has provided a stock market rally that to date is the second longest in history.

But what about the economy?

Figure 1 shows the GDP number from Shadow Stats from 1984 to 2016. You see that since 2004, the US economy has not grown in real terms (it has remained below ‘0’ line). Also, despite the money thrown at it since 2007, both the official and Shadow Stats numbers have remained in a sideways mode.

Now since Trump’s election in Nov, the S&P doubled its increase from the beginning of the year – due perhaps to an increase in bullish sentiment.

But, I see little in Trump’s to suggest he’ll turn around the economy.

Sure, there are some great ideas, reduce Government red tape, adopt policies that will boost jobs, cut tax. On the other hand, we’ll see expenditure on the Wall and other infrastructural spendings; we’ll also see increased spending on the US armed forces. Moreover, the spending will come first, and I have doubts the budget for 2017 and beyond will balance, let alone make up for the accumulated deficits.

So, we will see a stock market crash and at least a severe recession at some point. The problem for the trader, that some point can a long time coming. In the meantime, for US equities and indexes, you need to be long or out of the market.

FIGURE 1 GDP Shadow Stats

Broker Going Under?

BarroMetrics Views: Broker Going Under?

On Monday, Feb 6, the news came out that the CFTC had fined FXCM USD7M and barred the broker from continuing business in the US. The CFTC alleged that FXCM had defrauded its retail FX clients by advertising itself as a ‘No Dealing Desk’.  The has paid the fine and settled charges with the CFTC.

Yesterday Gain Capital announced it had bought FXCM’s US client base.

So what now for FXCM non-US clients?

Finance Magnates provided an excellent analysis of FXCM’s situation in “Analysis: Is Leucadia Willing to save FXCM Again? What’s clear from the article is if I were an FXCM client, I’d be moving my funds to another broker.

Sure Leucadia could come to the rescue or FXCM may find a buyer for its ex-US operations. The average daily volume generated by US clients of FXCM was reported to be around USD 2.4 billion – not exactly chicken feed. Its other operations should at least match that sum.

On the other, if I had money with FXCM why run the risk? Better to be safe than sorry. Cut and run would be my motto.

Accountability 3

BarroMetrics Views: Accountability 3

Great! We’ve finally arrived at Reeder’s equation. The basis is a simple one, the degree to which you are motivated is the extent to which the positives outweigh the negatives.

(Treasures – Troubles) + Contributions – Choices = Commitment (or lack of it).

What are treasures?

Well, here’s my contribution: Our values must form the basis of Treasures. Our goal needs to be based on and formulated in line with,  our top values. Once Values are in place, we can think of Treasures as the rewards we are seeking by our goal achievement.

Troubles are the price we pay for our success. Their impact depends on their severity and acceptability. It’s important to bear in mind that Troubles outweigh Treasures by a factor of five to one.

Within the definition of Treasures and Troubles, we fit Gracia’s model. So, for Treasures and Troubles, we not only consider the Rewards of Success and the Pain of failure; we also consider, the Rewards of Failure and the Pain of Success.

Contributions are the irrevocable investments we make in terms if time, talent and tangibles (money and what money can buy). There are times we need to include ‘tenderness’: the giving of self e.g. caring for another.

Finally Choices. The more choices we have, the more commitment will decline.

The strategy to maximising commitment is to increase positives and reduce the negatives. Both books provide a series of strategies to do this as does Acceptance and Commitment Therapy (ACT).

So, over to you. You now have the means to secure any goal you truly desire. You just need enough willpower to run through the equation.

Accountability 2

BarroMetrics Views: Accountability 2

Yesterday, I raised the possibility that the idea that all we know about ‘willpower’ needs revising. The problem with the current ideas – that willpower is like a muscle that needs to be exercised and like a muscle, tires – is it fails to explain how we can improve it.

Jason Gracia and Heidi Reeder have come up with a better model. One that places motivation squarely on our shoulders. We now have a model that, if applied, will garner all the motivation we need for any goal.

In this entry, I’ll start with Gracia’ model and then show how it fits nicely into Reeder’s.

But first, some context:

  • Humans move away from pain, perceived or actual.
  • Humans depreciate future events and appreciate present ones.
  • Humans, as a rule, prefer the stay within their comfort zones.

The two principles are an important backdrop to the models.

  1. Here’s Gracia’s:

Our motivation is directly linked to Pleasure and Pain. For any activity, the expected Pleasure has to be greater than the Pain. But, the equation is not as simple as it looks because there are four parts to the two quadrants, not two:

Quadrant One:

  • Pleasure of Success
  • Pain of Failure

Quadrant Two:

  • Pleasure of Failure and
  • Pain of Success

Quadrant one is self-explanatory. But, Gracia says we also need to consider the Pleasure of Failure and Pain of Success.

Can success be painful? You’d better believe it! Any trader going through Deliberative Practice will tell you that it’s not a stroll in the park. Or ask any gold medal winner of the effort she had to put in.

OK, then what about the Pleasure of Failure?

Staying within our comfort zone is hard wired. The most extreme example I have encountered was over ten years ago. A broker had invited me to give a talk to their high net worth and active traders.

After the talk, he introduced me to one of his clients, a gentleman who had experienced a high six-figure loss since opening his account. Into the conversation I asked him:

“To change your results, you need to change what you are doing. What will you change first?”

“Nothing!” was his reply.

“Nothing?”

“Look. I can probably make some of the changes you have suggested. But, how do I know they will work? If they don’t, I’d have wasted time, effort and perhaps, even more, money.

If I just keep doing what I’m doing, I’ll be in familiar territory; and who knows, perhaps my luck will change”.

Hmmm. The first sign of insanity keep doing what doesn’t produce the results you want and hope things will change.

Are you paddling that canoe?

Tomorrow we’ll look at Reeder’s model.

 

 

Accountability

BarroMetrics Views:  Accountability 

On the weekend, I watched “Hidden Figures“. It’s a great movie, telling the story the role three women played to break through the colour and gender ceilings at NASA.

What I liked best about the story was the way each lady took responsibility for her life. Identifying what she wanted, dealt with the setbacks and persevered: the key thing is they took ACTION;  no whining, or lip service but consistent action. This is especially true of the character portrayed by Octavia Spenser.

We know that over 90% of newbies fail – I believe because many starters have unrealistic expectations. But, once this group gives up, what accounts for the continual failure of the majority of the survivors? At some point, they must come to realise that what is needed for success. Yet, the numbers among this group remain dismal.

Usually, the fault is laid at the feet of willpower: ‘I don’t have the willpower to be disciplined’. But wait!

There is mounting evidence to suggest that much of what we thought we knew about willpower is incorrect. See for example: “Against Willpower“.

So, if willpower is not the answer to discipline and commitment, what is?

Over the next few days, I’ll be presenting a model of commitment that bypasses will power. The ideas are taken from Jason Gracia’s ‘Shft the Balance‘,  Heidi Reeder’s ‘Commit to Win‘ and my own experiences and ideas.

Isn’t great to know that discipline is available with only a little willpower; the rest….more tomorrow.