Ray Barros is a professional trader, fund manager, author, and educator.This is place where experienced and novice traders meet to share ideas. experiences, successes and failures. Our mission is to provide traders and investors with a proven learning process that internalizes proven trading and risk management strategies and tactics.
Today, we conclude “How Can Trading Be Made Easier?”. And, in my view, these are the two most important ways.
4. Awareness of our Default Future
What do I mean by “default future”? These are the habitual responses that have been hardwired as a result of childhood experiences. Most of us aren’t even aware of the significant influences that control our behaviour. In trading, these responses tend to show up whenever the fight, flight or freeze is triggered.
The best way to become aware is to observe the results of our behaviour. A very wise man once told me:
“If your pattern of behaviour is producing an unwanted result, focus on the pattern, and not the individual reasons (excuses) for the behaviour. To change the result, you need to change the behaviour.”
So, if your trading results show a pattern of profit, then large losses that decimate and destroy the profit, you need to understand:
How you produce the large losses, and
What you need to do to reduce them.
5. Use the Deliberative Practice to Improve
The model is a simple one:
Form a goal
Break the goal down into component actions
Execute an action
Review the result
If the result is the desired one, continue the action. If not, change the action, review the result etc.
I use the model to form habits of success and to identify the areas where I need to improve. I find my journals invaluable in identifying these areas.
Why do I include Deliberative Practice in the mental mindset?
Because doing it requires a degree of motivation, a degree of will, that most trader’s don’t exhibit. Of all the tools I teach, this one is most honoured by its repeated breach. Yet, those who do practise it, reap the rewards with an improved bottom line.
It would be easier if “there were not so many failed traders pawning their crap as ways to make money.”
If so many did not think that success came as simply and as easily as paying “X-amount of money a month for an email/text alert, to buy something or apply some silly indicator that says buy or sell’.
On reading it, I thought:
“OK, he’s told me what not to look for, and, what not to do. But, he didn’t say a word about what to do!”
Today, I’ll suggest five ways to lay the groundwork for success. And, because I believe that 60% of the success equation lies with the MIND, I’ll be looking to this area for the foundations.
Successful trading ought to be a 50-50 game. After all, on any given trade, a trader has a 50-50 chance of being right (at least over a large sample size). The first reason why so many fail is because we don’t understand the source of our resistance to success.
And that reason? Our hard wiring. So, let’s have a look at the five ways our brain blocks our success.
1. We have an inbuilt desire to move towards pleasure and away from pain. And because we define loses as painful and profits as pleasurable, we avoid learning the lessons we need to learn to become competent.
For example, a student once told he would not maintain his equity and psych journals during drawdown periods because….? Because….they reinforced the picture that he was losing money (??!!).
But, unless he examined the losing periods, how could he hope to improve? Unless he kept his journals, how could he find the nuggets of knowledge hidden among his loses?
2. We have a values conflict. We say we want to succeed when we mean ‘we’d like’ to succeed.
What’s the difference?
When we want something, we do whatever is necessary to succeed. We’re constantly looking for better ways to attain our goal; there is a commitment to success that says:
there is no barrier so high as to bar me from what I want!
When we say we’d like something, we expect it to come easily, to come without too much effort and to come without needing to overcome obstacles. We’re constantly giving ourselves excuses for not doing what needs to be done. You know the reasons we whisper to ourselves for not taking the micro steps we know we ought to take. You know, those steps which, when carried out, inexorably lead to our destination. We expect success to be given to us.
3. “We visualise and fixate rather than envision and create” (Marion Nneubronner).
Here the fault is not entirely ours. What do most of the pundits teach about visualisation?
Visualise the goal (not the process)
Research shows we are better off visualising the process and visualising our overcoming the inevitable barriers. In short, rather than focusing on the result, we focus on the process because the result is merely a by-product of the all-important process.
I don’t normally delve into the realm of politics; but, the Trump vs Mueller confrontation has the potential for roiling the markets. To understand why we need to consider various strands.
Firstly, are Trump’s persuasion techniques – two stand out.
Throw out an outrageous statement, act and then return to a more neutral stance. We saw this approach used with the tariffs issue. He first twittered the universal application of his tariffs policy. He then exempted Mexico and Canada. This he followed by levying his tariffs while announcing exemptions for a quid pro quo.
Twitter an unpopular policy, ‘leak’ that the policy will be enacted, then deny via the WH, or Twitter, and finally carry out the policy. Trump will take the final step only when he assesses his target audience has become disinterested. We saw this approach taken with Tillerson’s sacking.
Secondly, we need to consider the tendency for Trump to overreach. Now, we don’t know if the Presidency will temper him. But, his overreach I see from the 11 times he has gone bankrupt. My approach is to assume he will until proven wrong.
Finally, we need to consider how the Republicans in Congress would react if Trump sacks Mueller. My view is they will not support him. History shows that past attempts to squelch investigations have tended to end badly. Should the dismissal happen, Congress will pass legislation appointing a new special counsel. Trump will refuse to sign the bill which will then pass Congress by the required majority. If the new special prosecutor finds evidence of conspiracy, then the question will arise if Congress will seek to impeach Trump.
Unfortunately, the political events will roil the markets. I’d expect equities, USD and interest rate futures to tank.
The only question in my mind is whether Trump’s legal counsel will be able to restrain him from firing Mueller. Stay tuned! We live in interesting times (said to be a Chinese curse).
Have you read Tony Plummer’s new book, “The Life-Cycle Hypothesis”?
I’m not sure if Tony’s writing is becoming more verbose as he “matures” or whether my reading ability is declining with old age. I found his latest book more difficult to read than any of his previous three.
I’m an admirer and fan of Tony’s previous works, well, at least the first two “Forecasting Financial Markets: The Psychology of Successful Investing”(editions 1 and 2). The books provided me with some of the key ideas for the “Ray Wave”-a wave model that is infinitely more objective than the Elliott Wave -but that’s a story for another day.
This third book, “The Law of Vibrations”, I also found it extremely difficult to read. Moreover, it provided little by way of useful information for my trading.
And this brings me, to “The Life-Cycle Hypothesis”.
I again found the book extremely difficult to read. However, unlike “The Law of Vibrations”, it provided a means to fill a gap in the “Ray Wave” that I have been seeking to fill for some time.
Essentially, Tony suggests that there is a cycle that appears in nature that is predictable and consistent and that can be applied to the financial markets.
Here’s what an Amazon review says:
“… the shock of fresh information creates a new organism whose energy travels along a natural pathway between birth and death. It is this pathway that generates such widely diverse phenomena as personal mid-life crises, the swarming of innovations, recurring patterns in financial markets, and rhythmic oscillations in national economies. It is this pathway that produced the Great Depression of the 1930s, the inflation trauma of the 1970s, and the global financial crisis of 2007–08. The same pathway now suggests that there may be a major global crisis in the early years of the next decade.
The Life Cycle Hypothesis has the potential to change the way that we understand the world. It will therefore have a natural appeal for investors, economists, and social scientists. It will also be of great interest to those who sense a connection between the diverse social and political upheavals that are currently impacting us, and who want to understand the forces at work.”
On Friday, we had a quick overview of Tony Plummer’s Life-Cycle Hypothesis. Today, let’s have a look at its application to the DJIA.
The chart below shows the roadmap from the mid of the present cycle (started 1970) to its end, projected at 2022. Note the divergence that is showing between the DJIA and the momentum indicator. This divergence usually precedes a fall.
The next item to note is:
The high of the present cycle is late.
I put it down to QE and the underlying trading belief that:
when push comes to shove, should US stocks tank, the FED will pump liquidity into the market to ‘save’ it.
That solution will work until it doesn’t.
The underlying sentiment has already shifted from one of certainty that the FED will act to one of uncertainty, “maybe it will raise rates”. What is missing from the equation is the ‘black swan’ event that even if the FED intervenes, this time, the solution will fail.
Anyway, let’s turn back to the Cycle path.
Is there a sign that a cycle high is in?
In “Amber Light Flashing?“, I raised the possibility that, because we were seeing divergences between the four stock indices, there was a possible sell-off in the making. A sell-off occurred the next day.
The chart below shows the current situation.
Not exactly showing the start of a directional move down!
What’s on the horizon that may cause the move South?
On Wednesday, March 22, 14:00 (EST), the FED will announce its March rate decision. Most pundits have the probability of a rate rise (1.5% to 1.75%) above 90%. (Google “March 2018 FMC probability of rate rise” and you’ll see what I mean”).
The surprises can come in two forms:
No rate rise or a rise of less than 1.5%; or
The accompanying comment suggests the possibility of more than four rises in 2018 or rate rises at a greater rate than previously announced.
The former will result in a strong rally; the rally may lead to a decline that marks the start of a sustained decline. We’ll see how this play out.
I don’t normally post on Fridays. But, I received this email from a student (let’s call him John) that I’d like to share with you. I make a few comments below the share.
I thought I would share the experiment I have done on myself.
On the basis of teaching approach I restarted a paper trade account of the 1 hour break out model.
I started re going through books also.
Couple points stick out.
It was suggested a lot of traders don’t validate there results.
There expectations are too high.
Expect the next run of trades will be the worst run in your program history of straight losers.
You make 25% compounded which is amazing.. so why do I expect to make 10 percent per month on capital because I did it one month.Because I had one good month. When I had a bad month I started looking how to tweak the system and improve things.
I started active trading in feb did 35 odd trades and made 14 percent.. when I ran back over Christmas the vol dropped out and it lost 6%. I had an emotional urge to retweek it and make back losses rather then let the system make a natural string of losses.The last week I have been making scratch trades ish. Av win loss about equal with 60 40 split of winners to losers.
To move into top 10% you need to end a year square and I noted you had a year like this.. If you try and tweek it after a bad month u tend to get worst results.. and it was I was too lazy to validate my expectations of the system.
There has been no emotion in the trading I am just working an experiment.”
The key points that stand out for me are:
The impact of a few losses tempted ‘John’ to tweek the system. Why? There is psychological explanation. I’ll review the subject in one of my Thursday blogs.
How his making 10% in one month led ‘John’ to think he could do it every month. Again, another subject worth greater consideration in a Thursday blog.
How about you? Have you fallen prey to either of the two traps? If you have, how did you climb out?
Yep, HR 3708 is a bill that is scheduled to be passed on April 30. And, nope, it has nothing to do with “To direct the FAA to issue…the medical certification of certain aircraft pilots….”.
But, before I continue, a reminder that I look to reserve Thursday’s blog for items of interest not directly related to trading. Monday and Tuesday, I comment on the markets, on Wednesday I limit to content that assists traders and Thursday……..
Back to today’s content.
The supporters of HR 3708 say:
“…..it’s the first sign that the U.S. government will throw its full weight behind cryptos.
And this official approval will give millions of investors, small businesses, and even banks the push they need to take cryptos seriously.
This will lead to a huge surge of interest—and buying—in cryptos, igniting the second mega boom!”
What HR 3708 does is “exempt bitcoin transactions from the IRS’s reporting requirements if they are below $600. That number would then tie to inflation each year……
The bill would apply to all cryptocurrencies...”
To understand the bill’s possible impact we need to know that in 2009, the IRS ruled that bitcoin would be treated as property and not currency. This his ruling may have hampered Bitcoin’s use as a currency because it subjected users to a capital gains tax as soon as they spent Bitcoin.
Once the bill is passed, supporters argue, it will release the untapped potential users; the floodgates will open and Bitcoin’s users will then far exceed the current 13 million to 28.5 million (How Many People Use Bitcoin?)
Bitcoin supporters are urging to invest now!
“...getting in BEFORE April 30th is like raking in government-mandated profits.
The best part about this opportunity is that it hand-delivers you a second chance to get super rich with cryptos.
A word of warning though—if you let this opportunity pass you by, you just might regret it forever.”
I was at Starbucks yesterday – where I struck up a conversation with the person sitting next to me. Let’s call her ‘Joan’.
She told me she had just resigned to become a fulltime trader. My ears pricked up. I am always keen to hear why one would leave the security of a fulltime job to embrace the risks of trading.
So I said: “Wow! That’s very brave of you! I read that over 90% of traders fail to make it”.
“I know that” she scoffed. “But, you see I have a system that wins over 95% of its trades. I’ll make twice my income and more this year!”
“What sort of drawdowns does the system experience?” I asked.
“Did you hear me say that the system made money in 95% of its trades? It doesn’t experience drawdowns!”.
With that parting remark, she up and left.
I thought to myself: “That’s why so many fail. Unrealistic expectations”.
And unrealistic expectations lead to the second cause of massive failure: the refusal to take a loss.
I saw a question in Quora yesterday: “I invested 50K in btc when it was 13k, Im worried but I don’t want to sell at a loss…..Will it go up?”. That approach guarantees that the long-term failure.
The time to ask the question is before we take the trade. It’s critical we define the exit strategy before the entry. Otherwise, we fail victim to the fear that as soon as we exit, prices will turn around and prove us wrong. Not only that, but we also fear that “if only we dared to hold, we’d have made a humongous fortune!”
Over to you….what do you think are the main reasons so many traders fail?
You will recall that in Precipice, I drew attention to the divergence that was appearing in US stock indices:
The NASDAQ moving to new highs,
The Russell 2000 not far behind
While the S&P and the DJIA lagged.
Normal technical analysis tends to focus on divergences where the indices are reversed (DJIA strength, NASDAQ weakness). For example, Google ‘2009 NASDAQ-DJIA divergence and see the hits you get. Compare that to the hits you get by Googling ‘2018 NASDAQ-DJIA divergence)
But, for me, the current divergence is a more serious warning of possible dangers ahead. If the DJIA and S&P head South, the NASDAQ and Russell 2000 will follow. Similarly, if the NASDAQ gives up the ghost and sells off, I expect the others to follow.
And yesterday the Amber warning light that sparked last week started to flash.
Figures 1 to 4 are charts of the four indices. All show the same picture:
A small range, balanced day formed above Friday’s high with volume that was above average!
In trading context is everything.
The strongest warning came from the NASDAQ because on Friday; it broke above the all-time highs. Today’s DOJI bar showed a failure to follow through following a breakout.
The weakest warning came from the DJIA because the bar formed within congestion – it could just be noise.
The Russell 2000 and S&P gave warning of varying degrees of severity between the NASDAQ and the DJIA.
What to do?
Nothing at this point. But, if I see a sell signal intra-day on the NASDAQ or S&P, I’ll short the S&P with a reduced position size. If short, I’ll re-assess the situation tomorrow morning. At the moment, my initial stop will be placed above reaction highs.
The diverging paths sound an amber light on the rally continuing.
Another warning: in the two indices that rallied strongly, the rally was accompanied by declining volume (cash).
Russell Daily Market Volume
NASDAQ Market Volume
Tonight we have Non-Farm Payrolls. The consensus is for a continuation of January’s strength, 205K, with the range being 152K to 230K. The unemployment rate is expected to move down to 4.0% (from 4.1% January) and average hourly earnings coming in at .2% (down from .3% January).
I hold a different view.
I am looking for the number to come in around 150K and possibly less.
The unemployment rate to come in at 4.1% and
The average hourly earnings to remain unchanged.
If my numbers prove correct, the question is how will stocks react?
They could rally on the weaker numbers on the basis the FED is less likely to raise rates or they could tumble on the basis that of disappointing numbers.
Whatever the number and response, my strategy will be to wait until 10:00 am to 10:30 EST. I’ll assess the market structure at that point. If I opt to sell, I’ll sell the S&Ps, and if I buy, I’ll buy the Russell 2000.