If you pay attention to the financial press, you’ve probably heard the markets described as “volatile” at one point or another. In this context, volatility is not merely descriptive. It has a specific mathematical meaning which can help you make better trading (or for that matter, investing) decisions. In order to succeed as a trader you need to have a strong working understanding of volatility and its implications. Continue reading
Here’s a tidbit to think about: broad market reactions are not symmetrical. The market doesn’t move down the same way it moves up. Downward moves are generally much larger, faster, and shorter in duration. Upwards moves are slower and more sustained. Continue reading
Previously I discussed different divisions within the trading world. One of those divisions is between technical traders and fundamentals traders. I summarized the distinction as:
- Technical traders base their trading decisions on numeric information about the price and trading volume of one or more securities over time. This can include addition information like order book/depth of market (DOM) and tick/time and sales tape information about individual trade executions. Most technical traders use various types of charting and mathematical or visual indicators to make additional sense of this information. Quantitative (“quant”) traders are a subset of technical traders who put more emphasis on sophisticated mathematics to analyze data.
- Fundamentals traders base their trades on economic information, usually betting that over the long run certain known economic relationships will hold. They frequently pay little information to chart studies or previous price and put more emphasis on determining what the price of a security ought to be based on the totality of information about it.
I also mentioned that my personal bias is towards technical trading, although I’ve done both. That’s not to say there’s anything wrong with trading on fundamentals, but technical trading is much more suited to my temperament and skill set.
I’ve come to realize, based on feedback to this blog, that some people have a dislike or distrust of technical trading. Once upon a time this position was common on Wall Street as well, exemplified by the mantra “I’ve never met a rich technician.” Over time, the Street perception has changed, but I still occasionally hear vestiges of the old anti-technical mantra. Now, I have no interest in telling you how you should trade – what you do with your capital is your own business. But I do think technical trading has substantial advantages, particularly for small, non-institutional traders. Here are some of the reasons I prefer it: Continue reading
In order to evaluate trading strategies, it’s very handy to have one number that represents how good a given strategy is – bigger is better. I’ve suggested a couple of ways of doing that – win rate and expectation. Both are uselful, but both also have substantial limitations that render them problematic in the real world. What I want to do here is briefly describe those limitations, and then suggest an alternate mathematical construct called “profit factor” you can use for evaluating systems. Continue reading
You don’t have to spend too much time around the stock market to discover that there’s something fishy about many stocks’ initial public offerings, (IPOs). The standing joke is that IPO really stands for “It’s Probably Overpriced”. While that may or may not be true in any given case, there are a large number of pitfalls awaiting the would-be IPO trader or investor. It’s a case of caveat emptor, and in order to be suitably wary you need to understand how an IPO works and how it can be manipulated to your disadvantage. Continue reading
You might be wondering what, exactly, it is that a trader does all day. Or in my case where I have a 9-5 job, what I do with the 3 or so hours a day I spend working on trading. If you look at the example trades I’ve posted on this blog, they don’t take very long – the Tickle Me Elmo trades were only open for a few minutes each. This morning I waited an hour and a half to take a single trade that lasted 7 minutes (a slow one by my standards). Even taking several such trades a day, there’s no way the actual act of trading is going to add up to more than about an hour of time. And since my trade entry and management is largely computer automated, most of that time when I have a trade on is really spent just sitting there making sure the computer doesn’t crash. In an average day I only spend about 30 seconds to a minute actively entering or canceling orders.
Point being, actually trading makes up a tiny part of what a trader does. Continue reading
I hope my passion for trading comes through in this blog. It’s not just something I do to make money – it’s on the short list of things I care deeply about along with family, charity and God. No joke. When I’m sitting around and there’s nothing going on and that internal monologue everyone has starts up – well, mine’s about trading. Maybe that’s a sign of mental disturbance. I don’t know. But it’s true. When I go about convincing other people that trading could be a good job or side gig for them, it’s because I know some of them will find it as fascinating as I do.
But there’s a downside to contagious passions – sometimes the people who catch them aren’t the people you intended. Continue reading
I rarely comment on current events, but today I’m going to make an exception. We’ve had enough time since the explosion of MF Global to get a pretty good understanding of what happened. This is a “teachable moment” about the dangers of counterparty risk and things you can do to avoid it. Continue reading
I am continually amazed at the number of different types of speculators that exist in the financial markets. While many professions encourage specialization, I can’t think of any others that take it to the same degree. Even medicine, with its 50-100 specializations (depending on how you count) can’t come close.
From the perspective of educating traders, specialization presents a real challenge. Continue reading