Behavioural Changes

BarroMetrics Views: Behavioural Changes

Yesterday, Bob Mitchell wrote: “Would you be willing to share your top 2-3 takeaways from your self assessment and what specific changes in actions/behaviour you took?”

Sure Bob, but I am not sure how much help they will be. Anyway……

There is context to the steps I took.

I saw that the sub-prime crisis and QE changed intermarket relationships and reduced diversification. For example, in 2011, at the stage of the business cycle the US was in, I expected to see these relationships:

  • S&P up, interest rates down;
  • USD up, S&P up etc,

But,  after QE these relationships reversed.

As far as diversification was concerned, we were seeing much closer direct or indirect correlations with the S&P than historically had been the case.

Following a drawdown (17%), I decided to…..

…… to reduce position size until I saw some of the ‘new’ relationships break down.

Late 2012, we started to see this, first with Gold, then the European crosses, the AUDUSD and finally now, the 30-year Bonds.

While I was waiting for the context to revert, I was working on my plan….and so turning to specific behavioural changes…..

1) I stopped trading the S&P, the instrument I felt was most impacted by QE.

2) Then I had to change the way I viewed timeframes…..

My original plan called for specific functions for different timeframes (see Nature of Trends). The traders timeframe, I selected, and  once I did that, the rest fell into place.

Until 2010, the plan did very well. But after 2010, I had found that the approach did not work as well as it had in the QE environment.

Eventually, I came up with the concept of controlling timeframe. It started as a ‘gut feel’ that a timeframe, say the 3-day swing, was the important one; then I noticed the feeling would change to another timeframe.

When I started to pay attention to  the ‘feelings’, I saw an improvement in my results. I then proceeded to conceptualize the idea.

Nowadays, the controlling timeframe is an important one for me because it allows to define whether we are likely to be in a ‘chop’ or ‘directional’ environment. I then adopt a strategy suited to the environment.

3) The final change was to change the way:

  • I view entries and
  • The way I exit trades.

I am now looking to enter a trade at the start of what I call the Initial Price Movement. In Pete Steidlmayer’s terms ‘the beginning of a distribution’.

Since an IPM has specific characteristics, once a suspected IPM is underway, I can exit a position should those characteristics not be evident.

The upside is my losses are relatively small – many trades are scratched. This results in a massive difference in the avg$win compared to the avg$loss:  whereas my average loss used to be 1.83% to 2.2% per trade, it is now down to 0.32%. It would be lower but for four mistakes.

There are a number of downsides:

  1. More trades. (Downside because I am basically a lazy trader – looking for more return, less trading effort).
  2. I have to be prepared to re-enter a trade in the same direction sometimes at a less attractive entry price (found this to be my greatest initial challenge).
  3. There is less room for my bruised ego to hide. If I make a mistake i.e. enter and/or exit against the method, the resultant loss stands out like a beacon.

Hope this helps. All the best

2 thoughts on “Behavioural Changes”

  1. Ray,

    Thanks for the post. Yes it is helpful. One of the reasons I like to follow you is not just your trading process but the fact that you integrate macro and longer term data and shifts into your approach that I am not very comfortable with (even though I have an MBA). Unfortunately for me, I have only been a trader of derivatives of the S&P and NASDAQ100, so forced to mostly out of the market situations. I should probably try to learn currency exchange and interest rates, but my naivity curve is quite large.

    I know you are out of the S&P, but you do still comment on it from time to time. A question… you have posted that you think the high will come in Sept and that will be the start of a downward progression eventually penetraing 666 (the financial crisis low). Given your comments on the QE impacting the S&P creating an irrational environment, does your analysis pinpointing September include anything other than the key technical thresholds? The problem I have is that the history that predicts this is based on a history without ever having QE, especially on this scale and with these methods. The market would have not rebounded like it did and now reach new highs without it. So, either (1) there is a historical bias to doing something artificial at the extreme bottom of a market and this is built in to the subsequent rise, (2) QE is only accelerating the inevitable market forces creating the top much sooner (your charts from 66-82 actually showed it taking a couple of years longer to get to this point if the “rhyme” was closer to the last time), (3) we are in “no man’s land” and this market could go higher than anyone thinks and potentially even figure a way to “muddle through”, or (4) something else I don’t understand. Probably (4). The markets have put up with irrationality for so long it is incredibly confusing. Love to hear your thoughts. Sorry if this is taking too much of your time to read/reply to.

    Bob

  2. If a trader trades Gold, he trades the price Behavioural Changes of Gold.

    If a trader trades Apple stocks, he trades the price Behavioural Changes of Apple stocks.

    If a trader trades Google stocks, he trades the price Behavioural Changes of Google stocks.

    If we create a Monster Index (MI), where

    MI
    = (Price of X) x A%
    + (Price of Y) x B%

    Currently,
    X = Apple stock
    Y = Google stock

    A% = 20%
    B% = 80%

    Questions to the Professors:

    1. Monster Index respresents what/whose price Behavioural Changes?

    If X, Y,A% & B% keep on changing, is it meaningful to do historical studies and comparison of the Monster Index?

    2. In terms of messiness and meaninglessness, could we say that S&P 500 Index beats the Monster Index comfortably?!

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