Rules of Trading

Another week of scant posting: tax season is killing me already, and there’s still six hellish weeks left! Been making the rounds this evening to catch up on all I missed while discussing the market all day (funny thing, that), I came across a reference from Barry Ritholtz over at TBP to Dennis Gartman’s Not-So-Simple Rules of Trading. These lists are usually a-dime-a-dozen full of mind-numbing and painfully obvious bromides, but I quite like Gartman’s.

1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin. Count on it!

2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.

3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.

4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher.Strength tends to beget strength, and weakness, weakness.

5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.

6. “Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent.” These are Keynes’ words, and illogic does often reign, despite what the academics would have us believe.

7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.

8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.

9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In “good times,” even errors turn to profits; in “bad times,” the most well-researched trade will go awry. This is the nature of trading; accept it and move on.

10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here!

11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, “When they are cryin’, you should be buyin’! And when they are yellin’, you should be sellin’!”

12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.

13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow… usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.

14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year… and our profits grow accordingly.

15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a “secret” to trading (and of life), this is it.

16. All Rules Are Meant To Be Broken…. but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.

Words to live and die by….

GBP/JPY: Inverse H&S?

Thinking, that’s all; without a solid fundamental impetus behind such a move, the case for a break of 800+ pips upside is one I choose not to make; nevertheless it appears plausible and my trades have led off in this direction.  Assuming a breakout above horizontal resistance at 141.75, under this scenario upside targets come in at 145.75, 148 and 150.

Say NO to H.R. 1068: Trader’s Tax

A post from Robert Green of Green Trader Tax on his blog yesterday indicates the “Financial-Transaction Tax” proposed during the last session of Congress has been reintroduced in the House of Representatives as of last Friday, 02/13 (coincidence?).

I’ve found that most traders I’m acquainted with are oblivious to this proposition, and the few forex traders with which I am both personally acquainted and who have learned of it seem indifferent because “forex” is nowhere explicitly mentioned. But as anyone trading spot forex ought to know, the IRS has very little explicit guidance overseeing the categorization and taxation of spot specifically. Tax professionals (such as Green) knowledgeable of what can and can’t be reasonably inferred from how forwards and currency futures are treated will tell you spot forex’s identity as futures product for purposes of inclusion under any tax is very easily accomplished. Conflating spot forex with futures if it means subjecting forex traders to the tax, if it means further revenue…uh, “reparations appropriated from the nefarious speculators responsible for our present economic crisis” is not something a cash-starved government is likely to pass by, negligible as the retail forex trader demographic may be next to equity and futures traders.

Given the presence of uncertainty but potential that the bill, once passed, could exert a highly adverse impact on domestic retail forex traders, I’m passing along my own recommendation to read Green’s informative post here and then become conveniently but critically involved by signing the petition and sending emails/letters to your Congressmen/women here.

Chicago Tea Party!

I heard snippets of Rick Santelli’s…ecstatic utterances from yesterday last night on the way home from the office but didn’t catch up on the bruhaha until today.

I don’t watch CNBC (I don’t even subscribe to cable) but occasionally find a clip entertaining. I agree with Santelli in principle (assuming there’s a principle somewhere beneath Santelli’s rhetoric), even while I find his manner of speech is delightfully absurd. Kudlow, somehow, comes off as more of a buffoon, though. Mercifully – though satire is my favorite type of humor, so maybe I am missing out on something truly wonderful – I’m unfamiliar with the rest of the pundits and empty skirts on the channel.

One fascinating aspect of all this is the galvanization of the Right – Santelli’s rant tapped the disenchanted conservative zeitgeist with startling effectiveness, doing something off the cuff and with relatively no expense that McCain/Palin weren’t capable of during back in the Fall. Take this for example. Of course, they didn’t have a tanking stock market on a Democratic president’s watch or quite so many trillions of dollars of debt to rally around. Whether this will truly mobilize anyone and to what effect remains to be seen – but I’m highly doubtful.

The Demise of Laissez-Faire?

A couple weeks back Anthony de Jasay posted a short but fine essay at Library of Economics and Liberty noting critically the about-face in general politico-economic narrative toward vicious reproof of “deregulation” and all things that vaguely smack of laissez-faire now that we’re set upon by the financial apocalypse on all sides.  

My distillation of the now-prevailing current: Bank failures, fiduciary malfeasance in the hundreds of billions (alas, ponzis, and more “legitimate” governmental initiatives) record foreclosures, and manufacturing sector disintegration among the fuller complement of those ravages that are the rotten fruit borne of an idiot neo-con administration are the definitive attestation to the dreadful flaws of any market carelessly left unrestrained by the visible hand of government.  

Many market economists, market analysts and businesspeople (a few of whom I respect highly and on Left as well as Right) have picked up on this bit of groupthink.  Some naively, unknowingly, desperately.  But others with the ardent, knowing fervor of a long-suppressed demagogue suddenly unfettered by a violent shift in bias toward his formerly-derided ideas.  At long last, they suggest in language thinly veiling a self-congratulatory pat on the back , vindication has come. 

But what is fashionable isn’t necessarily defensible or justifiable.  And by my appraisal, much of these analyses de rigueur amounts to so much sophisticated tripe.  A lot of dismal babble has gone into the setup and takedown of so many variants on the same straw man argument (e.g. “domestic financial markets under Dubya – and indeed from Reagan on, except for those edenic Clinton years – finally evinced the logical extension of free-market capitalism and its devastating consequences”); and to what end?  Knowingly or not, mostly in the service of an ideology equally insidious to unbridled capitalism.

As an example, de Jasay says:

Regulation imparts a virtual stamp of approval that is really, well, “toxic! toxic!” if regulators are incompetent or corrupt. It is an open question whether regulation by fallible human beings is not more dangerous than the much-maligned free-for-all where people must watch their step.

It is no use saying that what we need is better regulation. We should always take something better than whatever we have, but it is infantile to think that we always can and that saying so will make it so.

Is 2003-2007 (or however you block off the period of rank excess) really our free-market archetype, capitalism par excellence, touted as the paragon of a rigorously efficient free market? Few if any would say this, or suggest a lack of controls is preferable. But “deregulation” isn’t the true argument here, for as de Jasay observes regulation is given to it’s own brand of failure and, paradoxically, enablement of those practices it intends to abolish.

The true point around which all of this turns is the same old grand narrative: the smoldering ideological war between generic capitalism and socialism, each variously effected with different degrees of adherence to orthodoxy in different times and places throughout the modern and now postmodern period. The scale of utility “socialism” (I acknowledge slight over-simplifying here) exacts from our present crisis is truly immense.

Ideological dominance is nowhere more ruthlessly contested or effectively applied than through something like what Aldous Huxley referred to in Brave New World as hypnopaedia: sleep-learning. This doesn’t mean putting a physics book under your pillow at night. Intellect moves through learning from one position to another by a slow, tectonic but conscious and critical drift. However, in some areas far more efficient is the realization of change through sublimated input. This normally means everything from casual conversation to mass media – the tools are many and subtle, not simply limited to overt propaganda, for example. In this case, the craft if ideology is plied through the visceral, gut feelings our economic debacle has induced: fear, rage, disappointment, resentment, loathing, desperation, despondency. Ideological drift is more easily brought about as it sneaks in on thousands of small skiffs in a tempestuous emotional ocean where measured rational thought is submerged deep underwater. The time for occurrent critical thought is past when a dispositional game-changer has already structurally excluded the subject from consideration through bias or complete marginalization.

Are the arguments over such topics as “deregulation” and the like moot? No – the topic of regulation as de Jasay alludes is of legitimate concern – few would suggest otherwise. But is the rising crude populist-”socialist” tide – even while most expositors of it are unwittingly complicit – constituted of much more than convenient misconstruals, (in some cases deliberately) misdirected discussions, inclusive of ideas maligned, misappropriated and exploited to “irrefutably” demonstrate the demise of laissez-faire capitalism? And toward what purpose but to act as the intellectual foil for an exodus en masse from our basic cultural subscription to the notion of free and self-correcting markets?

Blogroll: Begin With the End in Mind

New on the Trading Blogroll you’ll find the candid, insightful musings and market observations of Bgin2end, a budding entrepreneur of the more traditional variety-cum-forex trader.

Recently begun on the tortuous path of active trading, Michael (as he’s otherwise known) journals not only his trades (which appear limited to EUR/USD at this stage) as he moves in and out of them but the small psychological setbacks and victories attendant to those decisions. Sharp but not overtly (overly?) analytical (search my previous posts for examples of the latter…erm, quality), emotionally transparent but not hyper-introspective, Begin With the End in Mind regularly logs steps – forward and back – along the nascent journey of an aspiring trader who I think shows the honesty, intelligence, capacity for critical self-examination and raw perseverance necessary to trading successfully.

He also share my predilection toward half-rapturously watching Rocky training montages, which, in sum, makes him among the best, most cultured and generally magnanimous people I’ve ever come across.

The Triangle Trade

EUR/JPY continues to wind through a symmetrical triangle that may ultimately spell a further slide for the Euro when the breakout finally comes. Right now price lingers at the upper descending trendline, mulling over whether to advance above or fall back from the 61.8% fibonacci retracement level @ ~117.85 (for 121.50-112 back on 01/18-01/20). That said, there’s an alternate upper descending trendline (this is starting to sound a bit too Elliott Wave) made of touches at 121.50 on 01/18 and then ~120 on 02/08-02/09. That lies at 119, where the 76.4% retracement for the above interval lies.

EUR/JPY: 3H

There is an ascending triangle abutting against this level, however, with the horizontal trendline with a few pips of 118. A break here would also move the pair above the 194 EMA on the 3H which (on my chart, at any rate) has hemmed in the pair on the upside intraday.

EUR/JPY: 15M

GBP/JPY is also moving through an almost-culminated ascending triangle within a larger symmetrical triangle that is apparent on the 1D (not shown) with a descending upper trendline currently at 136. This overlaps exactly with the 76.4% fibonacci retracement level for 140-122 (closing values for Jan 6, Jan 25).

GBP/JPY: 15M

I’ll trade either way as it comes (e.g., EUR/JPY’s trendline tag compounded with the 61.8% retracement level offers a bearish scenario, potentially), but I think upside breakouts are probable overnight on both pairs: a break held above 118 on EUR/JPY; likewise for the 133.75 level on GBP/JPY, targeting ~119 and ~136, respectively.

0020 ET 02/19: Against expectations, the lower ascending trendlines have broken, so I’ve deployed some shorts (also on AUD/JPY) using the close below those lines on the 15M as the trigger line. Some hammers are forming on the current candle, however, corresponding with support at the 144 EMA on EUR/JPY and the 61.8% retracement level on GBP/JPY. Probably giving the shorts room to run for the time being….

0615 ET 02/19: Well, it seems my initial conviction was correct and by actively monitoring the aimless warbling around midnight talked myself out of some legitimate calls. And to think, I even noted the hammers forming…. Stopped out at BE on GBP/JPY, EUR/JPY, -48 on AUD/JPY, -57 on GBP/USD. Thus the vicissitudes of requiring at least some sleep before getting up for work in the morning.

0340 ET 02/20: A little late for any new reflections but I’ll state it anyway: “Damn.” Across thousands of trades those listed here are of minimal consequence, but reverting from assurance on a sound technical basis to tentativeness is not a choice that just sloughs off as trivial. Was the rationale that got me into the trade invalidated, or is it that I set up a longish daytrade/potential swing trade and then almost whimsically decided to reverse it on comparatively scant evidence?

The second scenario. I daytrade well when I do it, but that is not my usual or favored m.o.. Taking a trade in one mode and then revising it in another while retain initial expectations is simply foolish; and I’d like to think I’ve come far enough to know when I’m doing this as I’m doing it. The “analytical fog” that accompanies disorderly revisions is easily identifiable, but oddly impairing of judgement. But then, calling up disciplined rationality to burn that feeling off rather than leaving it to cower beneath the mist in a corner is one of my own most difficult struggles as a trader.

Anyway, as my best childhood friend used to remind me after one of those devastating high school break-ups: “Andrew, hay mas peses in el mar”. One time he even wrote it in Japanese Hiragana on my fogged-up windshield (he could also do an almost endless succession of front hand-springs in a row…which is somehow related…); but that time it was to remind himself. I never washed the interior car windows back then, so it really became a humidity-activated sticky note that appeared occasionally for a couple of years. Apparently it worked. Ingenious, really.

The Late Winter Blog Moratorium

Is over. A looming tax season and the ongoing (equity) market turmoil have meant long days (psychologically, if not by the clock at times) and consequently some market-related blogging languor. Happens occasionally, looking back. The market evinces patterns; and so do I. Expect another mysterious disappearance around June, then. Or so. Put it in your iPhone. The reasons I’ve had for letting blogging (and anything else involving a computer that hasn’t been absolutely necessary) slip to the wayside aren’t going anywhere: so I’ll adapt, instead.

Trading is going relatively well these few weeks. The equity curve in my primary account has leveled off of the geometric-looking rise enjoyed in January with the choppiness characteristic of the past few weeks. Maybe the drudgery of muddling through the trackless waste of a range-bound market (I don’t trade off channel tops and bottoms intraday) has contributed to the malaise?

Whatever the case, the rambling morass that was these 2.5 weeks in February has been very beneficial. Massive trending movements are outstanding for the bottom line, but have an enervative and dulling effect on one’s trading abilities (well, for me anyway). Analytical acuity and the disciplinary rigor intrinsic to consistently successful trading can become lax. Even the wherewithal (which seems basic, but perhaps not) necessary to stay out of the market because getting in would mean getting hacked to pieces on whipsaw after whipsaw can be lacking.

No big blowouts on my part; as I said, though the EQ has moderated from January’s rate, the year continues to go very well thankfully. But as a breakout/momentum/trend-following trader, a ranging market reawakens the vigilance and brings back the leanness markets with a clear directional bias can lull one out of.