This has been by far the most challenging blog update I’ve had to write…
Having procrastinated in an olympic fashion for the last three weeks I’ve given myself the deadline (today – Saturday) to get the following out of my brain and into the real world.
Maybe this proceeds an incoming mid-life crisis or is just the symptom of a frustrated trader not taking the opportunities that present themselves.
Not to make light of the facts but really my performance to date does pretty much suck. This has led me to question a number of assumptions about trading (as presented by numerous organisations, books and courses) as well as my own biases and why people take certain paths to try to conquer the mountain.
I apologise in advance for the length of this post. I’d also like to point out in advance that I’m not ‘down on trading’ even though some of what follows might sound slightly negative 😉
It’s been a couple of weeks and of course we’re in the midst of a full on ‘lizard brain’ attack in the financial markets. While I did short the Dow at one point the volatility gave me a significant pain in the neck and I decided to stand on the sidelines 😉
Another reason for doing this has been that I’ve not had the opportunity to watch this type of market before so have very little appreciation or understanding of what’s happening. At the moment I’d reckon that putting my toe in the water could get me my leg bitten off!
Also I’m un-satisfied with how I’ve been approaching trading and have been looking at some ways to improve my overall performance. What’s contributed here is that I’ve been reading the book ‘Thinkertoys’ which outlines some creative and different ways of solving problems.
The main question I’ve been asking myself is: –
How do I become a profitable trader?
Looking at the amount of stuff I’ve already waded through in pursuit of this goal as well as the outlay I’ve begun to wonder if I’m missing a significant piece of the puzzle somewhere?!?!
I’d suggest that 90% of the information about trading, certainly related to technical trading, is pretty much the same or variations on a theme which goes something like this: –
Strategy (entry/exit), Risk:Reward, Money Management, Psychology is all… etc.
Now, maybe I’m being somewhat unrealistic but I still suck at this subject after more than 9 months and a great deal of time, money and emotional investment. I don’t think I’m retarded or particularly slow on the uptake.
Either I’m over-thinking it or my approach is flawed… so I’ve been looking for flaws by asking different questions about what I’ve been doing to see what sort of answers I come up with. Thinking sideways through a problem which encompasses trading but includes some of my own biases and the way I approach life/finances in general.
Let’s take a step back from strategy, entry/exit etc. and the specifics as I try to break this down into easily manageable pieces.
In it’s most basic form a ‘trade’ is an idea. If I’m shorting the FTSE then my ‘idea’ is that confidence is leaving the market, people are moving their money out of stocks into safer havens (cash/bonds) and the index as a whole will fall.
Now, here’s another question… How can I be certain my idea is correct? In other words when I enter a position how do I know what my odds are that the position will come good? What is my percentage chance of being right? If you are a professional card player then you will know the odds. How is it possible to take a trade and decide based on the odds what amount of capitol to risk if you don’t know what your odds are?
Here’s where I believe there’s a significant issue with the information that exists out there in the land of trading education… Very few trading strategies seem to be taught or promoted that include data about their relative level of success (win/loss ratio) in a given market. If we define ‘retail traders’ as people with <£10K in a trading account then it’s no wonder that 80% (average figure I’ve heard quoted) don’t make any money!
They (and me) are tossing a coin in the air.
Now in an earlier post I mentioned that Richard Farley had spent some time looking at ‘trend following’ and calculated the odds are 55/45 in favour of this type of approach. I’d like to have at least an idea of the chances of being right in a given set of circumstances before placing a trade. Am I asking too much?
Back to the idea – again, making it as simple as possible… Shorting the FTSE based on a bunch of technical indicators (moving averages, trend lines, broken support or pick something more esoteric) implies that you believe confidence is lacking and buyers are leaving the market.
Let’s look at it another way… Going short because the 50MA crosses under the 200MA isn’t strictly following an idea. It’s more like following a cue for action based on a number of other ideas which are collected together and the symptoms result a chart on which the price is dropping/EMA cross over.
If you do this then you’re not trading based on the primary idea (cause) but on the effect or result as described on a chart.
Doing anything when you’re one step removed from the primary data means there’s a lot of room for error and miss-interpretation. You’re going to always be playing catch up with the market. It’s certain that more informed parties are acting on information you don’t have access to and your action is happening right at the death of a particular move.
Here’s the leap… Using only technical indicator movements to trade from charts (as most ‘retail’ traders do I think) is hoping that you have the the ability to judge the prevailing wind about a stock/index in the moment when you’re divorced from the idea that is already driving the price in a certain direction.
Now, this is where the argument breaks out between technical traders and fundamental traders and I’m going to attempt to avoid engaging with it too much except to say that if you have an idea you want to base a trade on which is backed up by a good chart then I’d suggest that it’s more than likely your trade will work out.
If you have an idea based only on a technical trade setup without understanding the environment it will be less likely that your trade will work.
Here’s why I think ‘retail’ traders rely so much on and are emotionally attached to technical trading (charts) and indicators… It’s an excuse to trade in a lazy way without having your own ideas about the world and what’s going to happen.
Talking to people about charts, Gann, Elliot waves and Fibonnacci turns something that is rather pedestrian into something different, difficult and challenging. It also means you can hint at a ‘magic’ formula which needs to be understood in order to actually come good as a trader. This makes ‘selling the mystery’ of trading good business 😉
Now, let me emphasise here that I’m not going to suddenly stop looking at charts! I reckon they’re extremely useful to help visualise what’s happening but expecting to make money from a technical system without reference to context is (I think) unlikely to come good.
Here’s an example… I believe that economic and social conflict will escalate in the US during the next decade driven by the disparity between the rich/poor, the failure of the US government to lead, politics moving from debate to fixed faith in ‘fact and sound bytes’, competition for resources and disillusionment fuelled by unmet expectations.
This will be further compounded by China’s expanding sphere of influence driven primarily by having to secure the resources it needs to ensure internal social unrest is kept to a minimum. The communist party will try to maintain control through creating happy citizens who are economically better off.
Ironically they are now pursuing the model that the US has followed in the last 60 years but maybe they can avoid the hangover that the United States is currently experiencing 😉
Now, there are a whole bunch of trading ideas here. Long companies making riot gear, CCTV or providing security services. Find a way to invest in companies specialising in exploration for resources. Invest in sectors engaged in or producing the ‘shiny thing make it all better’ products of the future for a growing Chinese consumer base…
I’ve not looked at a single chart yet but I feel more confident about these ideas because these are backed up by beliefs rather than some technical voodoo (sorry, overstating the technical downer there a little!)
When financial confidence melts down then perfectly good companies also get punished – Google dropped last week and they’re an amazing company (IMHO) so it’s obviously important to pay attention to the environment.
So… Ideas? There are probably millions of them.
I’d not posted anything for two weeks because I was really having a quiet moment to look at what I was doing. As with many things in life you then stumble onto something that helps turn the tiny spark of an idea into something concrete…
When did this change of thinking really come into focus?
See my next post – Ooh! Cliff-hangar!!