Accountability

BarroMetrics Views:  Accountability

Daniel wrote yesterday:

“why is so difficult for us traders to take responsibility of our actions? And as you say also for surgeons are not their physical skills(as for us traders the skills of reading the price action) that make them better surgeons but their ability to take responsibility for the for the consequence of their choice, to accept with responsibility the risk of failure. But again why is so difficult for traders to accept this responsibility and how can we improve this skills?”

I don’t think that as a group, traders are less willing to take responsibility; it’s just that in trading, failure to take responsibility is there for the world to see: you can’t say you didn’t know your trade was blowing up your account when you are receiving daily statements.

So why don’t we, as humans, take responsibility? Because we humans are hired-wired to move away from pain, and to move towards pleasure.  Accountability means we take responsibility for our successes (and failures) – this entails, sometimes, admitting we have been wrong – admitting that we have made mistakes etc – all sources of pain.

We can overcome this human foible by firmly deciding to create habits of accountability and following through on that commitment with the appropriate action.

Nature of Risk

BarroMetrics Views: Nature of Risk

A friend sent me an article from the New Yorker (http://www.newyorker.com/news/news-desk/failure-and-rescue). It’s about surgery and why some surgeons are more successful than others. If we traders substitute the word ‘failure’ in the article for ‘loss’, then all the author says about successful surgeons applies to successful traders.

I have excerpted below the passages that most appealed to me (the bold emphasis is mine). While teamwork probably does not apply to individual traders, the other two qualities, ‘developed judgement’ and ‘acceptance of responsibility’ certainly does.

The whole article is well worth a read.

Excerpt

“When I was nearing the end of medical school, I decided to go into surgery. I had become enthralled by surgeons, especially by their competence. The source of their success, I believed, was their physical skill—their hand-eye coördination and fine-motor control. But it wasn’t, I learned in residency training. Getting the physical skills is important, and they take some time to practice and master, but they turn out to be no more difficult to learn than those that Mrs. C. mastered as a seamstress. Instead, the critical skills of the best surgeons I saw involved the ability to handle complexity and uncertainty. They had developed judgment, mastery of teamwork, and willingness to accept responsibility for the consequences of their choices. In this respect, I realized, surgery turns out to be no different than a life in teaching, public service, business, or almost anything you may decide to pursue. We all face complexity and uncertainty no matter where our path takes us. That means we all face the risk of failure. So along the way, we all are forced to develop these critical capacities—of judgment, teamwork, and acceptance of responsibility.

(why some surgeons are better than others)

Researchers at the University of Michigan discovered the answer recently, and it has a twist I didn’t expect. I thought that the best places simply did a better job at controlling and minimizing risks—that they did a better job of preventing things from going wrong. But, to my surprise, they didn’t. Their complication rates after surgery were almost the same as others. Instead, what they proved to be really great at was rescuing people when they had a complication, preventing failures from becoming a catastrophe.

….. in the end, risk is necessary. Things can and will go wrong. Yet some have a better capacity to prepare for the possibility, to limit the damage, and to sometimes even retrieve success from failure.

…..When things go wrong, there seem to be three main pitfalls to avoid, three ways to fail to rescue. You could choose a wrong plan, an inadequate plan, or no plan at all.

when you refuse to even acknowledge that things aren’t going as expected, failure can become a….disaster. The sooner you’re able to see clearly that your best hopes and intentions have gone awry, the better. You have more room to pivot and adjust. You have more of a chance to rescue”.

Stock Indices, QE and the FED

BarroMetrics Views: Stock Indices, QE and the FED

For subscribers to the free weekly video, this blog will serve as a supplement to this week’s video.

The S&P’s bull run in terms of a QE stimulated trend, is rather long in the tooth – it appears, one way or another (either by FED action or a breach in the belief that the FED and maintain a bull market indefinitely) that it is coming to an end. We are starting to see strong selling come into the S&Ps – something we have not seen for a long time. A bearish conviction close below 2098 (basis e-mini futures continuation) will generate an 18-d swing sell signal (In Fig 1, the green rectangle shows the pattern).

Tomorrow’s FED decision, and more important, its language will be closely watched.

Figure 2 is a snapshot of an excellent article from FT (published 2015-04-27) of what to look for from the meeting. (Click on link to view)

My view is that given the spate of poor data, and given the dovish nature of the current FED, we’ll see a hint that rates won’t be raised till at least Sept, 2015 – ‘it will wait to see data to decide’.

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FIGURE 1 S&P

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FIGURE 2 Financial Times 2015-04-27

Comfort Zone

BarroMetrics Views: Comfort Zone

Daniel’s question dovetails nicely with the topic of today.

Last Saturday and Sunday, I was in Guangzhou and Shenzhen to give presentations for Oanda. Each venue had around 300 attendees, and the attendees at the two locations could not have been more different.

Taken each audience as a whole:

  • at the former, I saw a willingness to change and embrace change in areas that were not working for them;
  • in the latter, there was more a tendency to stick with their comfort zone even though the results they were attaining were less than optimal.
  • At the former, they asked probing questions about change;
  • at the latter, they tended to ask questions seeking answers to confirm their preconceived ideas.

And this brings me to Danie’s question (See comment in Learning Process II).

‘Comfort Zone’ is where we act as a matter of course. In trading this may include ‘trading without trading rules’, or trading ‘too small size’, or ‘refusing to define a “get out strategy” before taking a trade, etc. In short, it can be defined as a ‘habitual process’ that causes us no discomfort. In and of itself, the habitual process is neither ‘good or bad’  – we need only change the process if it is not (or is no longer) serving our needs and goals.

To answer Daniel’s question…….that depends on the sum of your Expectancy Return.

(Average $Win x WinRate) – (Av$Loss x LossRate) = ExpRet

Determine the ExpRet  that defines your long-term goal, slot in your WinRate and LossRate, and you will have the minimum Reward:Risk you will need to generate your ExpRet. If you find you have room to increase, then do so in graduated steps.

Another area where ‘comfort zone’ raises its head is in the area of stop use and stop placement.

Stop use: Too many traders refuse to predefine ‘if wrong, exit strategies’. The unarticulated fear is the market will move exponentially in the direction of the trade (after being stopped out) without giving us the chance to get aboard. What is not envisaged is the market continuing to move against the position until the adverse move wipes out the account.

Stop placement: If you find that you are continually being stopped out only to have the trade then hit your profit target, this means your stop is too tight. You can use Maximum Adverse Excursion to work out what your minimum and maximum stop should be.

‘Getting comfortable with discomfort’ means taking the action we have decided will move us to our goals – even though the new action causes discomfort (usually because it’s an action we have not undertaken previously).

Learning Process II

BarroMetrics Views: Learning Process II

Yesterday, I looked at an effective learning process. Today, I want to look at the biggest barrier to learning – the fact we (humans) by adulthood are unwilling, as a rule, to move outside our comfort zone.

We weren’t always this way. As children, we delighted in trying new things – we learned to walk. Falling down was a daily occurrence, but each time, after a sniffle or two, we got up and tried again, and again, and again until we learned to walk. As adults what happens?

Especially today, adults tend to want to stay in their comfort zone. If you take this to its logical conclusion, we will tend to stagnate as we grow older – and so the studies show. The learning process starts with being comfortable with discomfort. As the new material becomes familiar, our comfort zone grows to accommodate the new knowledge. If we persist with to mastery, we’ll pass through several layers of discomfort, each time the discomfort gives way to an expanding comfort zone.

What does this have to do with trading success?

Success comes from pushing the boundaries of our competence zone.  When we first start trading, all is new, we may even feel as  though we are trying to push our way through a dense, unrelenting fog. Certainly I felt this way when I first learned the Profile. If you have ever heard Pete Steidlmayer lecture, you’ll know why. But, I persevered, and 9 months later, the Profile was as much as part of me as my skin.

In the workshop I gave in Singapore, I struck both types: those who were comfortable being uncomfortable; and those who threw in the towel because it was all too hard. I admire the first and wish I could do more for those who had given up. The one bit of advice I’d give to the latter: keep trying; hopefully you will find that which has been eluding you.

Learning Process I

BarroMetrics Views: Learning Process I

Learning any skill requires two elements:

  1. Knowing what to do, and
  2. Doing what you know. 

In an area like trading, this means first integrating the theoretical knowledge, then acquiring the skill through practice.  Let’s take the recent seminar I gave in Singapore. Its purpose was to provide foundational knowledge in Mind, Money, and Method. So far as Method was concerned,  I created four modules:

  1. Trend identification
  2. Setup
  3. Zone, entry, initial stop, and profit target
  4. Reward:Risk assessment
  5. Trade Management 

The quickest (in the long term) and easiest way to internalise the process is to integrate each element i.e. intellectually get know its components and to practice each component individually. For example, “Trend” has two components – create a checklist, and then go over charts say for 60-min, 2 or 3-days a week until finding the trend becomes second nature.

Then turn to Setups etc…..

Yes, doing it this way can be boring – it’s up to you to make it interesting. But, what the process will do is get you over the barrier staying in your comfort zone. Unless you can push past this barrier, little learning is possible.

Back Again!

BarroMetrics Views: Back Again!

Thanks for the emails. I am fine – just not enough minutes in the day while I was away in Sydney and Singapore. Now that I am back in Hong Kong, I’ll be back to posting five days a week.

The public presentations in Sydney and Singapore drove home the point how important it is to extend our comfort zone if we are to succeed in trading. Time and again I spoke with traders who are losing money (and by their own admission, some bucket loads of money). Despite their losses, they are unwilling to make any changes, preferring to stay with actions that lose money.

On the other side of the fence….I was pleasantly surprised by the class in Singapore – how most in the class did their best to push through their comfort zones.

Acquiring new knowledge and skills is not easy – humans are hardwired to stay with the known. But, if we are to improve, pushing the boundaries of our comfort zone is essential. In the next few blogs, I’ll look at the current state of knowledge in this area, and in the process, show how we can make a new learning much easier.

LiveStreaming and the AUDUSD

BarroMetrics Views: LiveStreaming and the AUDUSD

I am giving a presentation on April 15 for Oanda, and had told a number of readers that I would be livestreaming the event. Unfortunately, the prohibitive venue costs at Suntec make the streaming a ‘no-no’. My apologies for disappointing those who were looking forward to it.

Turning to the AUDUSD.

For those willing to take a position ahead of the RBA decision at 2:30 pm today (AEST), the ‘less than consensus’ Non-Farm Payrolls provided an excellent opportunity to short the AUDUSD.

The consensus is for the RBA to cut the Aussie rate. In this case, I agree – we should see a cut. The economic news from China has been of a slowing economy, particularly copper prices. The Australian economy is heavily dependent on Chinese buying, and as the Chinese economy has slowed, so too has the Australian.

The RBA is caught between fear of creating a housing bubble (at present property prices are in a perpendicular rise), and deflation. But, given the recenet Chinese data, I see it as having little choice but to cut rates.

In addition, the RBA has made no secret that it would like to see the AUDUSD around 0.7500. It may be a case of be careful for what you wish.

So far the 12-M and 13-w support (around .7680 to .7540) has been holding.  There is little by way of support below these levels. So, if we see the zone buckle, 0.6700 in quick time would not surprise.

If not already short, what to do?

I don’t favour placing orders ‘ahead of a number’. For me, I’d rather wait for the ‘number’ to come out, and then look for a spot to take a position. Stops would be above the .7727 with a target around 0.6700.

Standing Aside

BarroMetrics Views: Standing Aside

One of the more difficult concepts to teach is the idea that there are times we need to stand aside. Part of the reason lies with the hard-wired fear of missing out.

The AUDUSD is providing a classic example.

The Aussie is at long-term support. If this support gives way, I’d expect to see 0.67 to 0.70 fairly smartly.  But, the 18-day swing shows that the 18-d swing has retraced greater than any previous retracement. Usually this is at least a warning that we may see an `18-day change in trend.  In addition, the price actions suggests we may be seeing either:

  • some sort of congestion laying the ground to provide the change in trend; or
  • a continuation pattern that has been completed. We are now seeing the start of the directional move to the low 0.70s. 

For me, there are just too many ‘ifs and buts’. I’d prefer to see a clean breakout to the downside or see a downside failure to take a reduced size long position.

FIGURE 1 shows  .7484 as  the Maximum Extension. Acceptance below that would suggest continuation. The monthly chart shows that acceptance below .7700 would trigger a waterfall downside directional move.

I don’t like trading breakouts, but acceptance below 0.7484 would trigger a trade for me, given the context.

It’s worth noting that Friday is Non-Farm Payrolls with the impact of US freezing weather needing to be taken into account. We also have the RBA rate decision on Tuesday. I am in the consensus camp and looking for a rate cut.

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FIGURE 1