Livermore

"The recognition of our own mistakes should not benefit us any

more than the study of our successes. But there is a natural

tendency in all men to avoid punishment. When you associate

certain mistakes with a licking, you do not hanker for a second

dose, and, of course, all stock-market mistakes wound you in two

tender spots -- your pocketbook and your vanity.

But I will tell you something curious: A stock speculator sometimes makes

mistakes and knows that he is making them. And after he makes

them he will ask himself why he made them; and after thinking

over it cold-bloodedly a long time after the pain of punishment

is over he may learn how he came to make them, and when, and at

what particular point of his trade; but not why. And then he

simply calls himself names and lets it go at that.

Of course, if a man is both wise and lucky, he will not

make the same mistake twice. But he will make any one of the ten

thousand brothers or cousins of the original. 

The Mistake family is so large that there is always one of them around when you

want to see what you can do in the fool-play line.

To tell you about the first of my million-dollar mistakes I

shall have to go back to this time when I first became a

millionaire, right after the big break of October, 1907. As far

as my trading went, having a million merely meant more reserves.

Money does not give a trader more comfort, because, rich or

poor, he can make mistakes and it is never comfortable to be

wrong. And when a millionaire is right his money is merely one

of his several servants. Losing money is the least of my

troubles. A loss never bothers me after I take it. I forget it

overnight. But being wrong -- not taking the loss that is what

does the damage to the pocketbook and to the soul. 

You remember Dickson G. Watts' story about the man who was so nervous that a

friend asked him what was the matter.

"I can't sleep," answered the nervous one.

"Why not?" asked the friend.

"I am carrying so much cotton that I can't sleep thinking

about it. It is wearing me out. What can I do?"

"Sell down to the sleeping point," answered the friend.

As a rule a man adapts himself to conditions so quickly

that he loses the perspective. He does not feel the difference

much that is, he does not vividly remember how it felt not to be

a millionaire. He only remembers that there were things he could

not do that he can do now. It does not take a reasonably young

and normal man very long to lose the habit of being poor. It

requires a little longer to forget that he used to be rich. I

suppose that is because money creates needs or encourages their

multiplication. I mean that after a man makes money in the stock

market he very quickly loses the habit of not spending. But

after he loses his money it takes him a long time to lose the

habit of spending."

-Reminiscences

Late Day Reversals

Extremely confused market reverses?  All I know is Late day reversals above top of opening range are more significant than any other market action.

Late day moves above the opening range are rare but when they do happen you just need to buy and close your eyes as I did today.  What happens at this point in time?  It's basically kind of like being in a movie theater and all of a sudden there is a fire and everyone needs to get out.  The end of the day is more significant because you don't have alot of time to get out of harms way.  Shorts cover hard, experienced traders buy.  How long will this last, I would imagine strong follow through tomorrow as well.

Same thing with AAPL:

Beauty Contest

"The stock market is the type of beauty contest in which you choose the girl that most others will find most beautiful, not the girl you find most beautiful."

–Keynes

Is this in essence the difference between trading and investing?  The trader has an ability to see how everyone else will react where the fundamentalist try's to predict how economies will evolve to predict future valuations.  What does both the trader and long term investor have in common?  They both try to predict supply and demand based on current information.  So what has more risk?

 

The Flying Bathrobe Syndrome

"I'm a reasonable guy. But, I've just experienced some very unreasonable things."
-Jack Burton

 

I don't know how to politely say this but, I saw some weird shit.  Have you ever seen a man in a bathrobe fly through the air?  I did last night at 1:30 am eastern time.

There was an interesting mixture last night, Poker, Booze, Women, Brothers, and a man in a bathrobe flying off of a porch.  After coming in second in a poker tournament we talked the winner into taking us out to the local boozer.  Then all hell broke loose.

It's amazing how unemployment and a lack of things to do cause people to create problems and do things they would not normally do.  For instance two unemployed brothers decided to interfere with one of there friends girlfriend of whom there relationship ended.

Now who in their right mind from a male perspective would decide to console a girl whom was just let go.  Granted this girl was attractive, but as most say "bat shit crazy."  Especially if these two brothers are excellent friends with the ex boyfriend and live with him?

Now we all know that this effort should not be reckoned with in fact you must have too much time on your hands to even think about this odd approach.  From my perspective, I just don't have the time nor interest in getting involved with a dissolving relationship that I have never had an interest in.

The end result was one of the brothers being thrown off of a balcony in his bathrobe which I was 5 feet from last night.

Now how does this relate to markets.  I'm not sure.  Maybe the lesson is when things are boring don't look to hard for something to trade let the idiots make the first moves.  Or perhaps don't let the prospects of excitement cause a gamblers ruin.  Maybe don't get involved in something you don't understand and if decide to take the plunge stay in the shallow end of the pool. 

Signs

Have you ever seen this ridiculous sign?  I don't have the foggiest clue what the hell it means.

 

This sign is a green light that basically says you can drive pretty damn fast because there is not a State Trooper for the the next 200 miles.

What signs are out there when you can step on the gas in a trade?  If early in the time period you trade the opening range is broken through a pivot just after the defined opening range.  This is often followed by a strong trend in the direction of the break.

People are consistently incorrect about their conclusions

Assumption:  People and the people that follow others are more often wrong than right.

Conclusion:  Make money alongside the idiots.

 

There is no need to try to figure out if a concept is correct or incorrect.  That stems from our basic understanding of the Scientific Method (http://en.wikipedia.org/wiki/Scientific_method) and is the reason why most people can't consistently make money in markets.

Today, dollar up/crude oil up...bad news good action, what should one do?

Opening Range Analysis

1st indicator: Opening Range green lines (determines supply and demand/bias of market, defined by the first 2 days of the month

2nd indicator: Shadow pivot blue band (information taken from prior month or time period)

shadow pivot band:  (high+low+close)/3 =  A     (high+low)/2 = B      A-B= R=Differential

A+R = Top Band            A-R = Lower band

If this is an assumption:

"The underlying dynamics of market behavior are quite simple.

Only three primary forces exist in any market: traders who believe

the price is low, traders who believe the price is high, and traders who

are watching and waiting to make up their minds about whether the

price is low or high. Technically, the third group constitutes a potential

force."

-Mark Douglas

Then how does one figure out who is in the market?  The answer is using supply and demand analysis or Opening Range Analysis. 

 Broke opening range through prior months pivot.

Same thing.

 

US Dollar Strong

Patience

Patience—the ability to wait for things to develop.

–noun

1.

the quality of being patient, as the bearing of provocation, annoyance, misfortune, or pain, without complaint, loss of temper, irritation, or the like.

2.

an ability or willingness to suppress restlessness or annoyance when confronted with delay: to have patience with a slow learner.

3.

quiet, steady perseverance; even-tempered care; diligence: to work with patience.

4.

Cards (chiefly British ) . solitaire ( def. 1 ) .

5.

Also called patience dock . a European dock, Rumex patientia,  of the buckwheat family, whose leaves are often used as a vegetable.

6.

Obsolete . leave; permission; sufference.

—Synonyms
1.  composure, stability, self-possession; submissiveness, sufferance. Patience, endurance, fortitude, stoicism  imply qualities of calmness, stability, and persistent courage in trying circumstances. Patience  may denote calm, self-possessed, and unrepining bearing of pain, misfortune, annoyance, or delay; or painstaking and untiring industry or (less often) application in the doing of somehing: to bear afflictions with patience. Endurance  denotes the ability to bear exertion, hardship, or suffering (without implication of moral qualities required or shown): Running in a marathon requires great endurance. Fortitude  implies not only patience but courage and strength of character in the midst of pain, affliction, or hardship: to show fortitude in adversity. Stoicism  is calm fortitude, with such repression of emotion as to seem almost like indifference to pleasure or pain: The American Indians were noted for stoicism under torture. 3.  indefatigability, persistence, assiduity.



....This requires awareness of
his underlying thought processes, so that he can change his thinking. If
he can identify this pattern, he can stop it.
 
Part of his problem is that he would like to be a home run hitter.
"I'm trying to reach higher goals by pressing it up," he explained. In
doing this, he has given up his patience, discipline, and well thoughtout
entry points. He has to start with a bigger position, and not hang in
when the stock starts to drop. But deep down he believes he has to
make it on the first try. This pattern is related to his tennis game, too,
where he doesn't have a second serve and so feels he has to serve up
aces all the time. ...

...It's not a simple process. Everybody must face one's demons—
impatience, fear, negative thoughts—when facing a trade. In the trading
business, you can make a fortune and you can lose your shirt.
The better you are, the more you have mastered that internal anxiety
that causes common mistakes.

-Ari Kiev

 

Investing first and investigating later

Specialists often develop a vested interest in their subject; the information they collect is never enough for them.  I was only interested in the information that was sufficient to make a decision; the rest would merely confuse the issues.  I called it “going for the jugular.”

I also developed the practice of “investing first and investigating later.”  It worked very well because if an idea was appealing enough to attract me on first hearing, it was likely to have the same effect on others.  If, on further investigation, I found it to be flawed I could always turn around and liquidate my position with a profit provided I was not the last one to hear it.  If the idea checked out, I was better situated to increase my position because I had already thought at a lower price or sold short at a higher one.

-George Soros


This corresponds with the idea of Bad news good action (bullish) and Good news bad action (bearish).  Markets often determine where they are headed before the average person can draw conclusions. 


If a market goes down on good news how should you invest?

Dickson G. Watts

1. Self-Reliance. A man must think for himself,
must follow his own convictions. George
MacDonald says: “A man cannot have another
man’s ideas any more than he can another
man’s soul or another man’s body.” Self-trust
is the foundation of successful effort.

2. Judgment. That equipoise, that nice
adjustment of the faculties one to the other,
which is called good judgment, is an essential
to the speculator.

3. Courage. That is, confidence to act on the
decisions of the mind. In speculation there is
value in Mirabeau’s dictum: “Be bold, still be
bold; always be bold.”

4. Prudence. The power of measuring the
danger, together with a certain alertness and
watchfulness, is very important. There should be
a balance of these two, Prudence and Courage;
Prudence in contemplation, Courage in execution.
Lord Bacon says: “In meditation all dangers
should be seen; in execution one, unless very formidable.”
Connected with these qualities,
properly an outgrowth of them, is a third, viz:
promptness. The mind convinced, the act should
follow. In the words of Macbeth; “Henceforth the
very firstlings of my heart shall be the firstlings
of my hand.” Think, act, promptly.

5. Pliability. The ability to change an opinion,
the power of revision. “He who observes,”
says Emerson, “and observes again, is always
formidable.”
The qualifications named are necessary to the
makeup of a speculator, but they must be in well-balanced
combination. A deficiency or an overplus of one
quality will destroy the effectiveness of all. The possession
of such faculties, in a proper adjustment is, of
course, uncommon. In speculation, as in life, few succeed,
many fail.

These are his ‘Laws Absolute’:

1. Never Overtrade. To take an interest larger than
the capital justifies is to invite disaster. With such an
interest a fluctuation in the market unnerves the
operator, and his judgment becomes worthless.

2. Never “Double Up”; that is, never completely and
at once reverse a position. Being “long,” for instance,
do not “sell out” and go as much “short.” This may
occasionally succeed, but is very hazardous, for should
the market begin again to advance, the mind reverts
to its original opinion and the speculator “covers up”
and “goes long” again. Should this last change be
wrong, complete demoralization ensues. The change
in the original position should have been made moderately,
cautiously, thus keeping the judgment clear
and preserving the balance of the mind.

3. “Run Quickly,” or not at all; that is to say, act
promptly at the first approach of danger, but failing
to do this until others see the danger, hold on or close
out part of the “interest.”

4. Another rule is, when doubtful, reduce the amount
of the interest; for either the mind is not satisfied with
the position taken, or the interest is too large for
safety. One man told another that he could not sleep
on account of his position in the market; his friend
judiciously and laconically replied: “Sell down to a
sleeping point.”

Characteristics of the Master Trader

Has a rational approach to trading. Does not trade for egotistical

reasons, to feel good, to get high, to work out long-standing

psychological needs.

Is skillful at self-mastery in the setting of high tension and

stress in the marketplace. Is confident of ability to deal with reality

rather than be governed by interpretation and reactivity.

Builds confidence from experience and learns skills from adversity.

Regularly monitors his or her performance so as to enhance

it.

Is able to see low-risk ideas. Can read reality without misinterpreting

it in terms of hidden agendas or unrealistic dreams.

Is able to drop low-risk ideas that don't work, without investing

in failure cycle, or overreacting to own reaction.

Has basic disciplines of hard work and concentration, and

knows about extra effort. 

Has self-monitoring skills and capacity

for visualizing future events and rehearsing them mentally.

Interested in activities and in the processes involved.

Is committed to objectives and able to modify strategy based

on feedback from performance. 

Is able to cut losses and increase

risk appropriately and not hedonistically or foolishly.

Is able to empower others to assist him or her in realizing objectives;

able to identify with others compassionately and to assist

them to stretch and grow; able to rely on others and to

profit from them but not dependent on their approval. 

Takes responsibility for success of efforts. Is humble in recognizing

the necessity for the support of others.

Is adaptable to change and able to modify course as he or she

progresses.

Sees the challenge of the trading game. 

Is not overly invested in money. Is able to enjoy profits but not dominated by them;

able to bounce back from failure; able to recognize that losses

are inherent in die process.

Can handle success and failure without self-destructing.

-Dr. Ari Kiev

Price Persuasion

It's unfortunate but the reality of this game is emblematic to one of the oldest professions.

So the analogy is simple, the brokers are the pimps and the stocks are the whores and this is the way it has always been.  I'm not sure what lens you are looking through however, brokerage firms/institutions know how to market well and at times they can dress things up either through positive information or pure capital infusions that inflate/deflate perceived value/prices.

Does the cost of an escort influence decisions in the street?  If you had endless capital would you purchase the most expensive/popular escort?  I would imagine that you would not purchase something cheap given deep pockets. 

Will the pimp take something cheap and inexpensive and make her look expensive?  Does the perceived cost make something more attractive to the end client?  Absolutely, what's the difference between a Ferrari and a Corvette?  Is one foreign and exotic while the other domestic and common?

This one looks expensive and is also very hot.  I could not resist and I believe the street can't either.  Eventually she will get boring, and the first inclination I see of this I'm out.  And why would I get out quickly once my mind wonders?  There are way too many to have so why marry this one.  I don't feel this way personally about women but the street does.  So then tell me, after explaining this, how does one make money in markets?

Opening Range Example

Broad market as always chose to abide by the law of supply and demand.  What do these lines mean?  Green lines define the opening range, blue lines define prior months support in this case.  I'm a skeptic at this moment, however I would not bet against this, the market has spoken.

Fear and Greed

Everyone has heard this basic concept before that moves markets.  I want to simplify it a little bit.

To simplify the arduous attempt of understanding why markets move focus just on the term of Fear.

Definition:
Fear is an emotional response to a perceived threat. It is a basic survival mechanism occurring in response to a specific stimulus, such as pain or the threat of danger.

 

Think of how institutions think.  They fear not being in the market when it is going up, as well of fearing being in the market when it is going down.

Have a look at an emerging market index and note its negative bias, US markets have not nearly reacted as much:

Look at US Market in comparison:

Notice as well, emerging markets short through blue lines (support) and the SPX chart is about to blast through?

Yesterday I shorted IBB, MMM. 


The major question now is whether institutions fear being in the market?  Two weeks ago they feared being out of it.

Frustrations and Tips

The truth of the matter is, nobody knows what happens next ever.  There is no certainty in any type of investment/trading decision.  I don't care what anyone says there is always a lack of clarity between this moment and the next.

I was positioned correctly shorting the long end of the treasury curve and sure enough someone came to me and said, "the government is buying these bonds why are you betting against this?"  Shortly after I exited the trade with a good profit but half of what I could of made. The fact of the matter is everyone knew the government was buying this and they new it for the past 4 months!  It was already factored and I knew that that is why I was positioned correctly.

Let this be a lesson.

http://theopeningrange.blogspot.com/2010/10/treasuries.html

Objectivism

To deal with men by force is as impractical as to deal with nature by persuasion.

-Ayn Rand

So what in the world went on last week?  I thought the Fed announced they were purchasing 7-10yr Treasuries last week?  Why did the yields go up on those issues?

Higher rates are coming whether the fed likes it or not.  Higher rate bias determined by green lines (broke above and held).  Also above support determined by prior month.  I wish I held onto my treasury short, I would of been up 20% in 1 month. 


Ah, patience.  Mr. Miyagi taught Daniel-san about patience in The Karate Kid.  We all want to see instant results in trading.  We buy stocks, we expect them to immediately move up.  We sell stocks, and we sit on the sidelines expecting the market to tank and prove us to be wise.  Rarely does the market provide such instant gratification.  In fact, I think the market teases us and lets doubt creep in, driving us to second guess our decisions and make emotional decisions.  Wax on, wax off, Mr. Miyagi.

Opening Range Method

Thank god I got out of this position on Thursday.  Not sure why I sold it, in fact after I sold it I said to myself "this position is working why am I getting out?!"  Sometimes you have to take profits and in this case it was well timed.


Tight opening range, early break through support/resistance usually signifies a trend day.  (opening range for intra-day trading is first 20 minutes denoted by green lines.  Blue lines taken from data on thursday)

Gambling vs. Speculation

If you trade in the short run you must not let yourself fall victim to natural tendencies.  These instincts are detrimental to our success.  It's fascinating how people become addicted to to uncertainty in the rush of winning an the pain of losing.  Like any drug the mind just looks for the next fix.

"Is there any difference between speculation and
gambling? The terms are often used interchangeably,
but speculation presupposes intellectual effort; gambling,
blind chance. Accurately to define the two is
difficult; all definitions are difficult. Wit and humor,
for instance, can be defined; but notwithstanding the
most subtle distinction, wit and humor blend, run into
each other. This is true of speculation and gambling.
The former has some of the elements of chance; the
latter some of the elements of reason. We define as
best we can. Speculation is a venture based upon calculation.
Gambling is a venture without calculation. The
law makes this distinction; it sustains speculation and
condemns gambling."

-Dickson G Watts President of the New York Cotton Exchange 1878-1880

Trading issues people have

My largest problem I had when I started to trade was dealing with the concept of Risk.  Now there is always risk in securities the valuation is never known and in my opinion along with there is never equilibrium in any market.  There is always a bias.  Another thought that I have grown to learn is that being that we are human and often shortsighted we are almost always wrong in our thought process.

So in dealing with markets, uncertainty, and risk how does one get comfortable?  Do you do your research and make conclusions?  I have found those conclusions are 3 months late to the party and those ideas were already thought about before they even happened.

If our assumption is that securities are never properly valued how does one know when to buy and when to sell?  This is and continues to be everyone's problem in capital markets.

How do you over come this?  I must say it is difficult and that is why most people don't have a relationship with markets. 

If you believe something is going up, all you have to do is buy a little.  If it then in fact goes up you then add more capital to your idea.  That way you know your thought process is correct because the market is telling you that you are.  If the market goes down, then you can scale back out of the stock with minimum losses (remember there is some risk to this).  But, remember if it went up when you initially purchased the security you are probably correct in your thought process.


This takes the uncertainty and uneasy feeling of how to time the market correctly which is very difficult in nature.  Why is it difficult, people are always wrong, your conclusions have already been thought about, you don't know who is actually in the market, and you have no idea how high or how low a market will go.

Recently my father told me he bought ESI:

I see a downward bias until it holds above the green line at the top (remember opening range of the month determines bias).  I also see resistance determined by the prior month's action.  He came to some fundamental analysis where the p/e ratio was far less than the growth rate.  This can go up or down, it is not something that I would put risk on but, if investing was as easy as doing some analysis on p/e vs. growth rates then every finance professor in America would of retired before they turned 35.  (please note his time frame is different than mine in that I trade more short term)

"Well, you know this is a bull market!"

"I think it was a long step forward in my trading education

when I realized at last that when old Mr. Partridge kept on

telling the other customers, "Well, you know this is a bull

market!" he really meant to tell them that the big money was not

in the individual fluctuations but in the main movements that

is, not in reading the tape but in sizing up the entire market

and its trend."

-Reminiscences

I am not sure when this will end, but I will only bet along the line of least resistance.  That is the single most important idea one can learn in any type of investment.

On another note, I don't like to gamble instead I speculate.  However I place a bet today after hours against what I perceived the Nasdaq over reacting to Cisco negative earnings.  I know it sounds complex but I shorted the ultra short Nasdaq etf SQQQ, in essence betting long.  Why did I do this?

Often times when terrible news comes out after hours trading gets a little nutty, I decided to fade the move.  Pretty low risk trade considering the SQQQ was up 4.5% afterhours, I figure I can get back at least 1.5% within the first half hour of trading tomorrow.  I have done it before and the reason behind it is afterhours trading is often illiquid for large institutions to play in and when they move they move far harder than they would in normal hours. 

The beginning of a major pullback or just a natural reaction?

I'm in the bull camp, but will change if the market tells me too.  Let's look at some macro trades. 

Oil

US Dollar

  

S&P 500

So what conclusion can I draw?  None other than hold onto things that are working even if some of your profit has been taken.  If you are in a winning trade, you should continue to play with the houses' money.

Dynamics of Market Behavior

"The underlying dynamics of market behavior are quite simple.

Only three primary forces exist in any market: traders who believe

the price is low, traders who believe the price is high, and traders who

are watching and waiting to make up their minds about whether the

price is low or high. Technically, the third group constitutes a potential

force."

-Mark Douglas