Sept 29, 2011 – How To Heal A Portfolio of Drawdowns & Staying Sane in Insane Markets

“If your objective is to sound smart to your audience, just tell them what they want to hear. “- Mike Arrington, TechCrunch CEO

“The market will seek to frustrate the maximum amount of participants at all times.” – Wall Street popular sayings

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If you’ve watched the trader Alessio go on BBC last few days ago trumpeting how he “dreams about recessions”, thinking the guy’s a perfectly huge a*hole.  Your opinion of him doesn’t really matter.

It may sound callous but he was simply telling people to prepare for the down trend.  His choice of words was just bizarre (dreaming of a recession, wtf?).  To me, he’s just another Roubini, Marc Faber (Dr. Gloom Boom Doom) and another talking head squawking and talking his books.  When Warren Buffett talks about buying back his shares, people rejoice.  When a trader talks about a recession, people call him immoral.  Conflict of interests. tada. (wink, wink).

For instance, watch Mr. Marc Faber in this video: http://www.bloomberg.com/video/74324812/

(HIGHLY RECOMMENDED!!!)

If you still think that social media (this blog, their blog, someone’s blog) is not out there to sell an idea (whether a stock recommendation or what not), you’re just lying.  Hence, this blog is biased.  Live with it. Get on with your life.

This reminds me of a Joshua Brown article made last 2010.

A sideways tape with specific winners and losers would indeed frustrate the maximum amount of participants.  So let’s root for it. –  The Reformed Broker.

http://www.forbes.com/sites/streettalk/2010/06/24/what-would-frustrate-the-maximum-amount-of-market-participants-now/

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I’ve listed below some personal trading truths that are at first hard to swallow.

Some I’ve had to pay x amount of losses, just to get the mother load point ingrained in my head.  If you find yourself nursing a portfolio of draw downs, still feeling the pain.  I’m not here to be your superhero to make back those losses.  Olivia Wilde, the hot and beautiful doctor, will most probably be a great trading counselor/psychologist.  Digressions aside,they say, the first step to healing begins with an admission of a problem.  

Fear of the pain blinds us to the goal of healing. Only by seeing our problems clearly and experiencing them can we do something about them. — Bob Hoffman

Below are my personal steps of healing a trading portfolio:

1.)  Understand very well that  you’re just one of the millions of nameless, faceless traders

Don’t take every trade personally. The market frankly doesn’t care what your cost is.  The market doesn’t know you’re a celebrity.  The market doesn’t know you’re hot or not.  The market doesn’t know you’re a rich tycoon, or an average retail trader.

“Hey! Do you know who I am?”  But, alas, such an exclamation falls on deaf ears.  No, the market doesn’t know, nor does it care who I am.  It doesn’t care about the size of my bank account, my voluminous library of trading books, the time and effort I’ve put forth or years of experience.  My shins will get kicked in just as swiftly as the next guy.  The market doesn’t care about my family name, my background, my connections, or my social status.  It simply provides a playing field which rewards or punishes based on skill.

I’m just one of millions of nameless, faceless traders.  – Tyler

Reference Article: Tyler’s Trading

(Yep, Tyler’s the inspiration of this trading blog’s name.)

2.) Trading is a process that focuses on keeping losses small.

Focus on the process, not the outcome.

I got these questions recently from friends –  “Should I take the loss now, or wait for it to come back?”

Jesse Livermore still provides the best answer, despite the fact that he’s probably hundreds of years old today.

A loss never bothers me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does damage to the pocketbook and to the soul.  

For more articles on taking losses, Barry Ritholz provides the best article I’ve read in years …

Take The Loss! http://www.ritholtz.com/blog/2011/09/take-the-loss/

3.) Do not confuse your own and others’ opinions into trading.

Top professional traders do not seek validation from their trades. They don’t need advice from others, and they enjoy a personal discipline that very few have.

In the business of trading, you’ve got to decide if you want to make money or if you want to be right.  To trade what is and not what we think should be, requires us to experience the market as it really is. Successful traders know when to cut losses if necessary. Don’t let your own desire to succeed be the enemy of good judgment.

There is no harm in guessing wrong, the sin is in staying wrong.

Read my full article related to this here : Why Most Traders Fail

4.) Adapt. Be Flexible.  This is life.  It’s just the market.

This is where things start to become a little more difficult.  Now, we have to talk about reconstruction.

If prices are going to breakdown, do not stand in front of the train, and be surprised that you’ll get slammed over.

When the facts change, I change my mind.  How about you? – John Maynard Keynes

In the 2008 recession, a lot of people were unemployed in the United States.  Proactive people didn’t wait for the government to bail them out of their scenario.  They went up starting their businesses.

Unemployment, job dissatisfaction and sheer guts created startup success for these seven entrepreneurs.  

The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the man of inferior emotional balance, or for the get-rich-quick adventurer. They will die poor. – Jesse Livermore

5.) Wake Up.  Start Anew. Re-learn.  Read.  Read. Read.

When the setups on the long side stacks up, you should be going long.  When it stacks up to the short side, you should be going short.  When it’s at a volatile wide trading range, you have the option to stay out, and go fishing for other lucrative opportunities.

6.) Also, Passive Investing Is Not Really Lazy (Especially in difficult climates)

Read more here: http://canadiancouchpotato.com/2011/08/02/why-passive-investors-arent-really-lazy/

I honestly believe that if we’re going to have to re-evaluate our portfolios for multiple scenarios (recession, no recession odds).  Apple a Day system (buying in incremental amounts, focusing on values instead of market timing) is not exactly a lazy proposition.  It’s a system used by many, successful investors for many different market cycles.

Hedging the portfolio by learning about markets that allow shorting (I.e. US Equity markets, futures, currencies) would also do the trick.

In my next series of posts, I’ll try to show what I’m doing in maintaining proactive and how to make money in an admittedly difficult environment.  This market will frustrate everyone (bulls and bears alike).

Follow your own style of trading… This looks like a very good book to read: The Inner Voice of Trading.

Don’t be bearish.  Don’t be bullish.  Don’t have an opinion. Stay nimble. It’s difficult but that is the way to go. 

– Faceless Trader

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MAY 9, 2012- VORACIOUS READERS MAKE GREAT MACRO INVESTORS + BOOK PREVIEW OF BRIAN SHANNON’S “TECHNICAL ANALYSIS IN MULTIPLE TIME FRAMES”

Here’s a link of a great article written by Mr. Barton Biggs : “The Gospel According to Barton Biggs” .  Read it completely.  Lots of nice insights.

Just highlights/ Things to think about:

1.) We must base our asset allocation not on the probabilities of choosing the right allocation but on the consequences of choosing the wrong allocation.” – Jack Bogle

2.) Barton has learned over the years to be disciplined in controlling risk and respectful of Mr. Market.

3.) There are no relationships or equations that always work.  Quantitatively based solutions and asset allocation equations invariably fail as they are designed to capture what would have worked in the previous cycle whereas the next one remains a riddle wrapped in an enigma.  The successful macro investor must be some magical mixture of an acute analyst, an investment scholar, a listener, a historian, a river boat gambler, and be a voracious reader.  Reading is crucial.  Charlie Munger, a great investor and a very sagacious old guy, said it best, “I have said that in my whole life, I have known no wise person, over a broad subject matter who didn’t read all the time — none, zero.  Now I know all kinds of shrewd people who by staying within a narrow area do very well without reading.  But investment is a broad area.  So if you think you’re going to be good at it and not read all the time, you have a different idea than I do. ”

4.) Also, be obsessive in making sure your facts are right and that you haven’t missed or misunderstood something.  Beware of committing to mechanistic investing rules such as stop-loss limits or other formulas.  Work very hard to better understand how you as an investor react to both prosperity and adversity, and particularly to the market’s manic swings, both euphoric and traumatic.  Keep an investment diary and re-read it from time to time but particularly at moments when there is tremendous exuberance and also panic.  We are in a very emotional business, and any wisdom we can extract from our own experience is very valuable.

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Yey, I got my pasalubong from my auntie who recently just got back from the States.  I asked her to buy me Brian Shannon’s “Technical Analysis Using Multiple Time Frames”.  Whee 😀  Okay, it’s just 170 pages, but I haven’t read it all yet.  Plus, I think it’s better to be read slowly, so that I could understand the concepts better and apply it for the markets.

I love Mr. Brian Shannon from watching him in his youtube clips “www.alphatrends.net” , even if I don’t even trade the US markets.  He’s one of the best guys I believe available online that one can look up to, and learn from, whether from twitter, his blogs etc just as so many in the Stocktwits network of course.  Okie, without further ado… let me highlight the favorite lines I found memorable from his learning experiences as well, that he’s written in the book.

Below are some of my favorite timeless wisdom, just found in the introduction of the book.  Really worth the price!

1.) You see, you can have the knowledge and work hard, but in the end success comes down to one word — discipline.  Just like any goal worth pursuing in life, it takes hard work to succeed at trading.  Without the discipline to recognize and control the emotions that creep into your decision making process, all of your hard work will likely be condemned to failure.

2.) The number one job of a trader is that of a risk manager.  Because greed is a typical trait of the casual market participant, he or she either ignores or is unaware of the risks being taken until it’s too late.  This is a key realization with which you’ll need to cope with early on.

3.) The goal is to time the trade so that your account is exposed to minimum financial downside and the greatest potential profit.

4.) To succeed at trading, you need to get in tune with the markets rather than impose your own set of beliefs upon them.  When the market doesn’t provide clear direction, the correct interpretation should be to sit on the sidelines and preserve capital until the low-risk opportunities present themselves.  It has been said thatknowing when to be involved in the markets is just as important as knowing what to be in.

5.) Successful speculation requires a good dose of cynicism.

6.) Your emotions, left unchecked, can often be the catalyst for some very bad decision making.

7.) Being a good stock picker and a successful trader are separate talents, and they require different skills.  You can take a good trader and give him a poor setup, but he will still make money because of his trading skills.  Flipping this on its head, you can take an inexperienced trader and give him the best setups, but he will still find a way to lose money because of poorly developed trading skills.

8.) Do not interpret my words.  I do believe that fundamentals matter, but they are not useful in making short-term trading decisions.  It is important to know when a fundamental event may be due for release because it often becomes a catalyst for price movement.  However, objective analysis should be made of the reaction to the event rather than the formation of an opinion about the company.  The market doesn’t care what you think a stock should do.  Again, only price pays.

9.) To completely dismiss fundamental analysis is to say that the motivations for a large percentage of market participants do not matter.  This close-minded thinking is how technical analysts are often portrayed.  I am not here to defend technical analysis.  I know it works for me, but only because I use it as a framework for my decision making, not as an inflexible system.  I am interested in anything that may serve as a catalyst for price change because understanding human nature leads to unbiased analysis that ultimately should lead to greater profitability.  

10.) We need to understand the motivations of the participants whose opinions are acted upon in the markets and thereby force price change.  

– Faceless Trader hopes those lines above help you in your trading.  See ya .  Have a happy day.

Message me for anything market related. 🙂

*****

https://facelesstrader.wordpress.com/2012/01/21/jan-21-2012-the-fourteen-year-old-boy-who-knew-more-to-trading-than-anyone-ive-known/

JAN. 21, 2012- THE FOURTEEN YEAR OLD BOY WHO KNEW MORE TO TRADING THAN ANYONE I’VE KNOWN

Jesse Livermore, Chapter 1, Reminiscences of a  Stock Operator (1923) 

“I noticed that in advances as well as declines, stock prices were apt to show certain habits, so to speak. There was no end of parallel cases and these made precedents to guide me. I was only fourteen, but after I had taken hundreds of observations in my mind I found myself testing their accuracy, comparing the behavior of stocks to-day with other days. It was not long before I was anticipating movements in prices. My only guide, as I say, was their past performances. I carried the “dope sheets” in my mind. I looked for stock prices to run on form. I had “clocked” them. You know what I mean.”

You can spot, for instance, where the buying is only a trifle better than the selling. A battle goes on in the stock market and the tape is your telescope. You can depend upon it seven out of ten cases.

That is how I first came to take an interest in the message of the tape. The fluctuations were from the first associated in my mind with upward or downward movements. Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore. It doesn’t go into explanations. I didn’t ask the tape why when I was fourteen, and I don’t ask it to-day, at forty. The reason for what a certain stock does to-day may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now-not to-morrow. The reason can wait. But you must act instantly or be left. Time and again I see this happen. You’ll remember that Hollow Tube went down three points the other day while the rest of the market rallied sharply. That was the fact. On the following Monday you saw that the directors passed the dividend. That was the reason. They knew what they were going to do, and even if they didn’t sell the stock themselves they at least didn’t buy it There was no inside buying; no reason why it should not break.

“Speculation is far too exciting. Most people who speculate hound the brokerage offices… the ticker is always on their minds. They are so engrossed with the minor ups and downs, they miss the big movements.”

*****

I was thinking about a few things, and these words helped form the answers I needed to be answered within me.  Jesse Livermore’s book “Reminiscences of a Market Operator” still continues to be the few books I’ll read, re-read every single time I need any advice, particularly with trading.  One valuable section of his book describes Livermore’s approach to buying a stock.  He would sell a quantity and see how the stock responded.  Then he would do that again and again, testing the underlying demand for the issue.  When his sales couldn’t push the market down, he’d move aggressively to the buy side and make his money.  Livermore’s losses were part of a grander plan.  He wasn’t just losing money.  He was paying for information.

“If you’re trading well, there are no losing trades: only trades that make money, and trades that give you the information to make money later.  ” – Brett Steenbarger, “How To Take A Loss

9 Buying and Selling Tests (Wyckoff Methods)

(Read more directly from the Source: Stock Market Operator, Richard Wyckoff )

Wyckoff worked with and studied them all, himself, Jesse LivermoreE. H. HarrimanJames R. KeeneOtto KahnJ.P. Morgan, and many other large operators of the day.   Wyckoff implemented his methods in the financial markets, and grew his account such that he eventually owned nine and a half acres and a mansion next door to the General MotorsIndustrialistAlfred Sloan Estate, in Great Neck, New York (Hamptons). (Wikipedia)

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Buying Tests:

  1. Downside Objective Accomplished – In a down trend you should be looking for the Preliminary Support followed by a Selling Climax.in an up trend you should be looking for the Preliminary Supply followed by a Buying Climax). The objective range does not always work out, so you need to look for other indications. In our approach, we will be putting a number of indications together to form the “Balance of Probabilities” that we will need to initiate a trade. So, when do you know, after doing all this analysis, that the trade is going to be successful? The answer to this is, you never know!
  1. Bullish Price Behavior -As the trading range progresses clear patterns of volume expanding on rallies within the trading range and contracting on reactions within the trading range should be apparent. If you don’t see this in your stock, look elsewhere.
  1. Preliminary Support and Selling climax- The old saying of when in doubt do nothing, is valid in our approach. These principles should be obvious to the trained observer. If they are not obvious, find a stock where it has a history of displaying clear indications.
  1. Stronger than the Market
  1. Trend line Broken – As long as there is a Supply line, the downtrend is intact. It is necessary for the supply line to be totally destroyed before any long positions can be taken.
  1. Higher Bottoms – at some point you should see a lifting of the bottoms within the trading range.
  1. Higher Tops –  at some point, you will see higher tops.
  1. Base Forming – What we want to see (calculate), is that there has been a worthwhile cause build on the chart.
  1. 3:1 Reward / Risk Ratio – We want to put our stops in logical places where they are somewhat protected from being executed, while at the same time limit our risk

Selling Tests

  1. Upside Objective Accomplished – In an up trend, you should be looking for the Preliminary Supply, followed by a buying Climax
  2. Bearish Price Behavior – Early in the trading range if may be difficult to analyze. However, as the trading range progresses patterns of volume expanding on reactions within the trading range and contracting on rallies within the trading range should be apparent. This will be little more difficult than when we are analyzing bearish behavior, because the volume tends to retain much of the bullish influence as it moves through the trading range. If you don’t see a detectable degree of bearish price behavior in your stock, look elsewhere.
  3. Preliminary Supply and Buying Climax – Preliminary Supply is often difficult to detect. Often, you may only be able to identify it after the Buying Climax has occurs.
  4. Weaker than the Market
  5. Trend line Broken – As long as there is a Support line, the up trend is intact. It is necessary for the Support line to be totally destroyed before any short positions can be taken.
  6. Lower Tops
  7. Lower Bottoms
  8. Crown Forming
  9. 3:1 Reward / Risk Ratio

*****

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7 Responses to Sept 29, 2011 – How To Heal A Portfolio of Drawdowns & Staying Sane in Insane Markets

  1. Great advice! From now on, I’d like to be like Jack – nimble and quick! 😉
    Thanks FT for giving me something to read today ^^

    Like

    • The point is not just that journalists are no better forecasters than anyone else; after all, if your blogger was good at forecasting market movements, he would be running a hedge fund. — The Economist.
      Read article here: http://www.economist.com/blogs/buttonwood/2011/09/bad-timing

      Hello Jack! I don’t know what/who I am. As Alessio in BBC just said… traders are heartless a*holes who just make money on every opportunity…

      sad really, but that picture somehow (argh!) sounds…a little true. Didn’t traders buy up pharmaceutical stocks during the SARS crisis? During the Japanese Earthquake, didn’t traders sell down the nuclear related companies? — so yeah. BUT BUT BUT… traders too have been reviving the economy. Paul Tudor Jones for instance actively helps out and has donated over billions of dollars in helping the educational system in America. This world’s just twisted. We do what we can to deliver happiness.

      Today, Jones’ charitable work includes helping raise more than $1 billion to fight poverty in New York, in addition to supporting humanitarian work in Africa and founding a charter school in New York.

      Read article on Tudor Jones here: http://www.memphisdailynews.com/news/2011/sep/26/nyc-investor-jones-recalls-memphis-roots/

      -FT

      Like

  2. Hi FT! unrelated question coming up. Would you know if there are stock options here in the Philippines and how / where you can buy/sell such options? Thanks.

    I’ve heard of put and call options in Bonds …

    Like

  3. Ipit Investor says:

    How about gold.. how do we trade gold? Thanks.

    Like

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