One way in which capable speculators differ from both Joe Sixpack and traditional investors is the willingness and ability to take short positions Continue reading
Long and Short
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Monthly Archives: October 2011
Should You Focus Your Trading on Stocks?
Stocks are the most widely held and discussed securities in the United States. Of all the security types, they are the only one that has penetrated popular culture and become a topic of kitchen table discussion. When Joe Sixpack refers to “the market” he’s talking about stocks, not bonds or commodities or derivatives. This is seen as myopia by most financial professionals – while stocks matter, they really only matter at an economic level in the aggregate. Any individual stock is small in terms of capitalization when compared to the T-bond market, mortgage bond market etc. In terms of size, bonds and index futures rule the roost and individual stocks are a backwater.
This pro-bond/anti-stock bias is apt in the context of very large funds and bank trading desks trying to move huge volume. If you want to put billions of dollars of capital into play, you’re limited to a small number of markets – a few bond markets, index futures, oil, foreign exchange. Individual stocks just don’t play. But for the individual trader with a small amount of capital, stocks have some intriguing characteristics. Continue reading
More About Stop Orders and False Breakouts
Previously I posted about order types and mentioned that there was a lot more to say about the topic of stop orders. It turns out there’s a deep relationship between stop orders, trend following and false breakouts that goes a long ways towards explaining market behavior. Continue reading
The Rise and Fall of Trend Following
You may have noticed that modern markets behave in choppy and downright strange ways. Market price rarely moves from point A to point B without several false starts and weird twists along the way. This is true on a wide range of time scales – look at a daily chart of the S&P 500 or a minute by minute chart of oil prices, and you’ll see the same phenomenon. Continue reading
Reading Candlestick and OHLC Charts
Traders frequently use a form of charting known as candlestick charting to display price information about a security. Candlestick charting was originally invented in the mid 19th century by Japanese rice traders, and has subsequently been adopted in modified form by most traders the world over. A candlestick chart has time on the X axis, divided up into periods. The conventional Japanese candlestick chart used a 1-day period, but any period of time works reasonably well. In general the period should be long enough so that multiple trades execute. Here is a candlestick chart of the S&P index future (symbol ES) with a 1-minute time period: Continue reading
New to Trading? Start Here
Are you considering taking up trading either as a source of extra income or as a career? For the right kind of person, I think it’s a very good decision. If you’re smart, disciplined, mathematically & technically inclined, and willing to put in the time and effort required then trading (really, speculating) has the potential to pay better than any other career on earth. Better than being a lawyer or doctor. Better than being a professional athlete or rock star. For the very top traders, better even than being a CEO of a major corporation. It’s perfectly rational to want a slice of that action – I do. Even if you don’t have that kind of ambition, there are good reasons to become a trader – extra income, a better return on savings than investing can provide, freedom from a 9-5 job, and a realistic path to move your family into the upper class come to mind. Having enough money to help others through charity can be very motivating. There’s also the appeal of a true meritocracy – while lucky fools can profit as speculators in the short run, in the long run the capable and skilled prevail and the fools find themselves out of the market.
The very fact that you’re on this site means some part of that sales pitch probably resonates with you, and that’s good. Continue reading
Order Types and Auction Markets Revisited
Last time I posted about how auction markets work and the idea of adding and removing liquidity. In order to keep that post at a reasonable length I had to leave out a fair amount of information about how an auction market works. Now I want to come back and re-visit those details. Continue reading
Auction Markets and Adding/Removing Liquidity
Last post I talked about speculation, market making, and the similarities between them and running a retail store like a grocery. Now I want to get away from that metaphor and talk about the details of how orders are entered and executed in a market – the ways in which a financial market is nothing at all like your grocery store. This is a bit technical, so put on your nerd glasses and let’s get down to it. Continue reading
Speculation and Investment
If you believe the mainstream media and the politicians they quote, the bulk of financial crisis are caused by “speculators”. Speculation has come to mean, by some sort of press fiat, “trading we don’t like”. This is unfortunate, because speculation has an older and more meaningful definition distinct from any implication of financial crisis. This older idea is important because it describes what profitable traders do and how they make their money. If you want to make substantial profits through trading, you will be speculating and thus you probably ought to know something about the subject. Continue reading
The Trader Mindset
Traders don’t look at the world the same way “normal” people do. This applies both to the world at large, and more specifically to the world of finance. For the purpose of this post, I’m only interested in that more narrow subject – how traders view the world of finance. The easiest way to understand this is to look at a couple of pictures. Continue reading