Late Breakouts

Posted on July 17, 2011 by Ben

Although this blog has been silent lately, I’ve remained hard at work trying to develop a repeatable edge in markets generally, and in day-trading the $ES in particular. I am learning every day, and my results are improving but I am nowhere near where I need to be. Per Kathryn Schulz’s must-read book, I am taking the fact that I am still making so many mistakes as a sign of encouragement rather than a reason for disappointment or self-flagellation.

If I DO successfully learn to do a better job of scaling out properly, I tell myself, imagine how much better my results will be. I’ve also realized that I will get better entries on my trades on my counter-trend day trades (which I am doing a lot of), if I stop hesitating and truly accept the risk of loss (as Mark Douglas brilliantly advises). I am also trying to learn to focus on the extremes of given trading ranges and to stay out of the middle, as Futurestrader 71 teaches. Instead of looking for range extensions, I am more often betting on mean reversion. My success at doing this has contributed greatly to my improved results, but it is still not unusual for me to have days where I end up rationalizing an entry when I shouldn’t. Imagine how much better my trading will be if I can plug that leak.

As any regular reader would know, a lot of the free time I have is spent following baseball. Like trading, baseball is an endless grind with incredibly high short term variance. A pitcher cursing himself because the batter got a broken bat single will lead to the same detrimental effects as a trader summarily swearing off a certain set up because one trade got stopped out.

As I read stories of baseball player’s successes, I often find myself thinking of trading. When I look for lessons, I am particularly drawn to the late bloomers, the guys who made the same mistake every day for 3 years and then finally woke up one day and decided to stop making it. Jamie Moyer, Cliff Lee, Jayson Werth. (Yes, I am a Phillies fan.) There are many examples of baseball players with this career arc, but newly minted superstar Jose Bautista is undoubtedly one of baseball’s all time breakthrough performers.

An avid reader, and career underachiever, Bautista finally made the leap at the age of 29, not long after he read Malcolm Gladwell’s Outliers. In Jeff Passan’s fantastic article, How Jose Bautista experimented his way to greatness, Bautista explained why change was hard to come to:

Baseball is one of the sports where it’s hardest to make adjustments and trust in changes,” Bautista says. “Your results immediately are affected by making a change, and at least at the beginning, in the short term, it affects them negatively. Your production goes down when you make a change. It might help you in the long run, but it’s really tough to trust in yourself. You feel like your role gets affected, and maybe negatively. I knew I needed to make changes to become successful in the future. But if I did them and didn’t pick it up in one or two months, I might’ve been out of a job anyway. It’s hard for guys to do that, and I know because I went through it.”

There is a similar phenomenon at work in trading. One of the great benefits of markets is the instantaneous feedback they provide, but this feedback can make it harder to focus on the bigger picture, the long con. Over-trading your way to “even” today is not best for your development despite the false feeling of comfort it can provide. Similarly, for a batter, a bloop RBI single may feel better then a line out to the warning track, but which is truly a better result?

Amidst a lackluster career, Bautista finally stepped back and looked at the big picture.  He tried everything and finally broke through to the other side. Joe Posnanski’s illuminating Sports Illustrated article dives deeply into the mechanics of Bautista’s change, as well as providing examples from other sports of late bloomers. I could quote from it ad nauseum, but it would be better for you to go read the whole thing.

Paul Konerko is yet another example of a player who made great improvements by adjusting his process. He was probably too good to begin with to be considered a consummate late bloomer, but at age 34, an age when players with similar skill sets often begin to decline. Konerko went from great to greater and is now a leading MVP candidate. He recently detailed the adjustments he made, which could just as easily be considered parting advice for traders. Enjoy.

“It’s always tempting to not want to do it the right way or not go about it the right way,” he said. “It’s really never-ending. It ends at the end of the season, but it really never ends until you are done playing. “You try to fight the fight the right way. I feel like I’ve been doing that not just last year, but maybe since halfway or so through the ’08 season. I feel like the results weren’t always there, but I was going about it right.

“That doesn’t always mean you get the results. It’s nice when the results come with it. But I think how you show up to play that day is important. That should be the reward, not the results of hitting a home run driving in a run.”

 

 

 

 

Posted in Baseball!, Day Trading, My Background | Leave a comment

Revisiting Day Trading: Making Easy Trading Difficult

Posted on June 1, 2011 by Ben

So I must admit that my recent retirement from day trading has turned out to be rather Brett Favre like, as I have found myself day-trading frequently since I concluded thePreview Changes balance and excess diary. I have still been keeping a trading journal, but I also have been relishing the privacy and free-time afforded by keeping my trades to myself rather then blogging about them every day. Nonetheless, today was a particularly educational and opportunity-laden day, so I decided to share my experiences for old times sake.

Let’s start with today’s profile. (I have shrunk it a little because the market fell so far that it otherwise would not fit on one screen.)

S and P 500 6-1-2011 (click to enlarge)

So the most obvious thing to notice about this profile is how much more stretched out today’s profile was then any recent days. It was a classic trend day. A trend day, is defined in Mind over Markets, as showing, “ a high level of directional conviction throughout the day, all timeframes participating, attracting higher volume.”

My problem with trend days, it is that they are always easier to identify in hindsight then in the present. That was certainly the case with me today, as I kept looking for the stabilization and bounce that never came. Judging by the tweets I read, I was not the only one making this mistake. To illustrate just how overly complicated my trading was today, here is my lengthy trade log:


This is an extreme case, but suffice to say that despite recent incremental improvements, my overtrading problems are not yet behind me. I will spare you the individual blow by blow of today’s trading, but let’s just say I made many mistakes.  I bobbed, I weaved, I caught knives, and I finally caught breakdowns. When all of the smoke cleared a made a few hundred bucks on the day, but I was left with the distinct feeling of missed opportunity.

So in thinking about what went wrong I asked myself a question I should have asked much earlier and repeatedly. “When were we one-timeframing?” One time-framing, as I have mentioned before, is defined as:

A trending situation where in an uptrend, the low of the previous auction in a Market Profile® is not broken to the downside by greater than 2 tics or the low of the previous bar on a bar chart is not broken to the downside. At the same time, the high of the previous auction in a Market Profile® or the high of the previous bar on a bar chart is normally equaled or exceeded. (It is possible that the high is not reached—the determinant is that the low is not taken out to the downside.) As this situation occurs over multiple bars we identify it as “one-timeframing’. The inverse applies in downward trending situation. One timeframing is applicable to all timeframes, from a monthly chart to the shortest timeframe Market Profile® auctions intraday.

And here’s the money quote:

“Recognizing a one-timeframing mode can keep a trader from fading a market at inopportune times while also enabling a trader to employ the most appropriate strategic and tactical plan for the current market conditions.”

So with that question in mind, let’s revisit today’s profile again with each half hour viewed separately. Again, I had to shrink the profile to fit, so it is tough to see the time period letters, but it is unimportant for the lesson of the day.

$ES_F Split Profile (Click to enlarge)

In this profile, I have circled in red those times when the market did not make a higher low (in a given 30 minute period), and I have circled in green when it did. As the profile indicates, there were two periods during the day where the market just barely stopped one-timeframing (making a higher low by two ticks each time). Markets are not exact, so if I had been thinking in this framework these would have been close judgement calls as to whether to cover a short or not. Even if I had covered, I likely would have reentered on a rip after a new low was made.  I likely would have made 7 points or so for each big flush downward.

Today’s trading experience made me recall Jesse Livermore’s famed  quote: “It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!” It is quite unlikely that Livermore was referring to day-trading, but due to the fractal nature of markets his advice is just as applicable to short-duration trades. So on the next trend day that I trade, I hope to focus more on the bigger picture and on the structure of the market, and to think less and sit more.

Posted in Market Minutiae | 1 Comment

Recent Reads

Posted on May 21, 2011 by Ben

In light of my new-found free time, I have been hitting the books pretty hard. I wanted to share some quick reviews, because I have read some great stuff recently.

Why the West Rules- for Now: The Patterns of History and What They Reveal About the Future by Ian Morris

Paul Kedrosky has been beating the drum on this one for a while, and as usual, his recommendation did not disappoint. It’s the history of the world in a mere 600 pages. Morris, a Stanford archaelogist by trade,  gives a balanced, incredibly long-term perspective on topics of the day like the rise of China, climate change, and the threats posed by resource scarcity and peak everything. Among countless other provocative statements of interest, Morris states the next 40 years are the most important in human history. Whether you agree with his conclusions or not, you will be wiser for reading them.

Reading the book is quite an undertaking, so if you don’t have the time do yourself a favor and check out his recent Fora TV talk- he hits all the major themes of the book. If you have not the time for either that here is the two line cliff notes of the book. Contrary to theories based on random luck or innate superiority, the West rules primarily because of geography. Whether it will continue to rule is not especially important, because the world is getting smaller, and depending on what happens in the next few decades we may or may not all be screwed.

Confidence Game by Christine Richard

An incredibly detailed account of Bill Ackman’s excruciating experience shorting MBIA, the troubled and corrupt bond insurer. The most notable thing I took from this book is the STAGGERING amount of work that Ackman does on his investments. He does incredibly detailed research and is totally unafraid to wade into the most complex book of derivatives imaginable. Despite his hundreds of millions in the bank, Ackman cannot help but stay up late at night while on tropical vacations reading financial statements. Correctness ensues.

The most amazing thing about it was that for all of the complexity of MBIA’s balance sheet, for all of the public haranguing he took from Eliot Spitzer and the SEC, the media, MBIA execs, etc., he had ZERO DOUBT what his edge was- it was knowing the company better than anyone in America, including MBIA’s own executives.

Considering the complexity of the subject the book is incredibly readable. Confidence Game is a dual  testament to the power of perseverance and the perils of group think- highly recommended.

Decoded by Jay Z


What do Jay Z and Alexander Solzhenitsyn have in common? Memorization. In order to avoid having his work confiscated while in labor camp, Solzhenitsyn “wrote” most of One Day in the Life of Ivan Denisovich by memorizing the book, line by line. Similarly, Jay Z developed the habit of “writing” his rhymes as a teenager by memorizing them while selling drugs on the streets. Things were often too hectic, he recalls, to take out a pen and paper every time a line occurred to him. As a result, to this day, Jay Z does not write down his rhymes when composing songs.

Apparently all of the memorization paid off, because Jay Z’s recall of distant events in his life is amazing. The reader is better off because of it, because Jay Z has a lot of stories to tell, whether they be reminisces about his childhood, inspirations for various songs or stories of befriending Notorious Big or meeting Michael Jordan.

The other thing I took away from Decoded, was Jay Z’s incredible work ethic- one which probably rivals Bill Ackman’s. Whether it was selling drugs, CD’s, or clothes Jay Z has been relentlessly focused on improving his business since he was a youth. So if anyone thinks a book by a rapper shouldn’t be listed with these business and history books you should check it out- you might be surprised.

Beating the Stock Market by R.W. McNeel

In typically bombastic fashion, Nicholas Nassim Taleb has claimed that he only reads books that are more then 100 years old. Since McNeel’s classic was published in 1921, Taleb can look forward to reading it in another ten years. In the meantime, here are the highlights.

While not quite of the caliber of old school stock market classics like Where are the Customer’s Yachts, or Reminisces of a Stock Operator, Beating the Stock Market is still an enjoyable and worthwhile read. The key takeaway of the book is that psychology trumps all and that in order to have success in the stock market one needs extreme patience and the ability to swim against the tide. I particularly liked this little graphic of an individual trader’s daily emotional vicissitudes,  so I scanned it and will share it here. (Apologies to the McNeel estate if you don’t approve.)

While the book inevitably shows its age when it discusses topics like the danger of stock brokers and the inability of women to trade, it is a quick, worthwhile read.

Sports Illustrated writer Joe Posnanski’s blog post about meeting Bob Costas way back when

Ok, admittedly this one isn’t a book, but its just a fantastic and inspiring story- whether you like sports or not. Enjoy.




Posted in Reviews | 3 Comments

Notes to My Future Self for the Next Blow Off Top ($SLV)

Posted on May 13, 2011 by Ben

As I hinted at in Saturday’s review of Mark Twain’s silver trading, in addition to a strong human interest, I have a had a moderate financial stake in silver during its potential parabolic blow off top. One can read Mania’s, Panics and Crashes until his eyes glaze over, but until you are actually financially involved in a real time investment mania, you cannot know how you will feel, or whether you will actually follow your theoretical risk-management plans. As the famous pugilist, philosopher and Wall Street Journal reader, Mike Tyson, has said, everyone has a plan until they get punched in the face. So what was my plan with silver?

I first bought $SLV in December 2008, and traded it a bit in 2009 before settling on a 1% core $SLV position (with a much bigger $GLD position). I don’t want to get too much into my reasons for owning precious metals, because the topic of the flaws of our fiat monetary system has already been beaten to multiple deaths on the internet and, more importantly, in our history books.  I will say that despite being a reluctant believer in and investor in prescious metals, I more sympathetic to the Federal Reserve than most traders, and I categorically reject all of the insane conspiracy theories that precious metal bulls often pass off as investment theses. So, as I devised my portfolio, I needed a way to participate in the secular bull market that precious metals were in,  while also limiting any potential loss in the entirely possible case that this thesis was disproved by the market. Enter Meb Faber’s market timing study.

I have mentioned this landmark study before. For those not familiar, this multi-decade study shows that if you use some sort of medium duration moving average trailing stop to time your entry and exits to any asset class (i.e. a stock market index or a commodity or bond index) you will lessen drawdowns, dampen volatility, and overall get higher returns than if you just bought and held the index. While I am sure that more experienced traders took this only as statistical validation of what they already knew to be true (limit your downside, duh), to me it was a revelation. Prior to coming across it I had been more focused on value investing so I had struggled with how to manage risk on macroeconomic bets or hedges.

So I bought my $SLV, set a trailing stop in the general vicinity of the 40 week exponential moving average (the green line in the chart) and didn’t give a ton of  thought to this smallish investment until recently. As the chart shows, since 2009, with the exception of early 2010, the stop has been nowhere near triggering.

By the time Silver peaked near 50, my 1% position in SLV had grown to a 3.5% position and it’s swings were starting to have a noticeable impact on my daily P & L. This is a good problem to have, but not something for which I made a concrete plan for back in 2009. In addition, I have to confess that around the time that silver was peaking, my head was still mired in existential angst over poker’s Black Friday, so I wasn’t giving my long term portfolio the attention I otherwise might have. I knew that it was insane that silver was trading 80% above its 200 day moving average, but since I was on the right side of the trade I was not on high alert for the inevitable unwinding of such a move. As a result, I didn’t properly heed the shockingly prescient warnings of many more seasoned market participants. Peter Brandt explicitly warned me in all caps. Steven Place whipped out his playbook and  spelled out a wildly profitable risk averse way to short silver. Eric Janszen, on his subscription macro service at Itulip, wrote a post detailing why he was selling his 10 year old silver position exactly one day before the market peaked.  I am not the swiftest, so after reading all of these warnings, I decided to wait until the weekend (two weekends ago) to think through for myself what to do with my precious silver exchange-traded fund.

Over that weekend, while reading Inside the Investor’s Brain, I came across this classic quote from Warren Buffett. from his 2000 letter to Berkshire Hathaway shareholders. It was written at the height of the tech bubble. I had read it in the past but it really resonated in conjunction with silver’s recent craziness:

“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”

The Silver Clock had no hands! I felt like Chazz Palmientiri realizing that Kevin Spacey was, in fact,  Keyser Soze. So, on that day, Saturday April 30, I resolved that despite it being nowhere near my stop-point, I must sell some silver. It had run too far. The only problem was that many other speculators presumably came to the same conclusion that weekend (the silver margin hikes didn’t help either). Here is the daily chart:

When the silver futures market opened down 8% or so the following  night I just couldn’t bring myself to immediately sell. But common sense has prevailed, so I have been gradually selling my $SLV during it’s recent dead-cat bounce. I am back down to a 1% position and thinking I will probably sell the rest of it any day now. It’s possible this is just a hiccup in Silver’s long term bull run, but personally, I cannot escape the feeling that silver has flown too close to the sun.

While mildly annoyed that I wasn’t more vigilant about selling or hedging,  I suppose I am also glad that I didn’t do anything overtly stupid. In any event, with any luck, this will not my last parabolic blow-off top, (thinking there will one in Gold sooner or later, for example)  so here are some reminders to my future self:

1. Pay close attention, when there is obvious excess in a market- asymmetric bets lurk!

2. Listen to more experienced market observers! (Granted, Steven Place is younger then me, but I am pretty sure he is from another planet where he has been observing markets since the beginning of time.)

3. In long term holdings, have a profit-taking plan in advance for what you will do in the event of manic moves. Calling audibles at the height of market emotion is much harder.

That’s it. Should be easy, right?

 

 

Posted in Macro, Silver!! | Leave a comment

Mark Twain and The Sound of Silver

Posted on May 7, 2011 by Ben

It was no Dutch Tulip Bubble, but I have to say that I have enjoyed observing the action in the silver market the past few weeks- my first crack-up boom.

For those not following the story-silver went up a lot a bunch of days in a row, and then it went down a lot a bunch of days in row.  Mayhem ensued. Conspiracy theories and counter conspiracy theories have been passed around like a hat. Victory laps have now been run by longs and shorts alike.  It has been quite the spectator sport.

Silver

Observing it has been timely for me, because I happen to have been reading Richard Peterson’s excellent book Inside the Investor’s Brain. I will borrow liberally from the book to recount how none other than  American icon and Twitter noob Mark Twain was an ill-fated rider of a silver tidal wave.

As Peterson recounts,  Twain started innocently enough, as a reporter in Virginia City, Nevada, a booming mining town. Twain observed the developing mining craze, and soon enough, he himself became “smitten with the silver fever.”

After some fits and starts, Twain bought a bunch of mining stocks, watched them skyrocket, and became giddy with excitement. He promised himself he would ride them up, but be sure to sell before the mania abated or the regulatory climate changed. As expected, he got filthy rich from the stocks, and decided not to sell after all. Twain traveled to San Francisco to revel in it as only he could.  ”I lived at the best hotel, exhibited my clothes in the most conspicuous places, infested the opera… I had longed to be a butterfly and I was one at last.” Classic.

Financially, the silver boom did not end well for Mark Twain. He did not sell his stocks in time and watched them all collapse in value. He spent the rest of his life in debt, was forced to return to journalism, and ultimately gave a lecture tour just to earn money to repay his creditors. He probably would have washed up on reality tv if it had existed then. On the bright side, decades after his silver blow-up,  Twain did go on to create Huckleberry Finn and Tom Sawyer, two of the greatest fiction works of American history. So to today’s wounded silver speculators I say, take heart, your best days may yet be ahead of you.

By the way, I think James Murphy trades silver, check the lyrics:

Stay tuned for part 2, where I will recount my own trading during this silver ramp. Warning: it’s not nearly as exciting as Mark Twain’s.

Posted in Macro, Reviews, Silver!! | 3 Comments