With hard-line politicians in the US and Iran dismissing any possibility of a meaningful nuclear agreement between Iran and the West, the negotiators press on in the hope of saving face for the Obama and Rouhani detente.
The reality is that whatever solution they come up with is already history. Until recently Iran's only deterrent against a US attack was its semblance of control of the straits of Hormuz, export route for much of the oil from the Middle East. This particular deterrent has been nullified by the copious amounts of oil in the global market and futility of closing its main trade route.
The second major deterrent is, of course its potential nuclear arsenal. No one really knows how advanced Iran's nuclear weapons programme really is. The layer upon layer of deceit and misinformation has surely ensured that only a small fraction of the immense nuclear and weapons programme will ever come to light.
So despite the waving of agreements the managers of Iran's security know the only thing that separates them from events in Syria or Iraq is a nuclear arsenal. Historically, the dilapidated nuclear power of North Korea can still threaten the US and its allies and remain unscathed yet 2 of the largest armies in the Middle East, Syria and Iraq imploded leading to the disintegrated of those countries. Ironically, Syria was regarded as a safe haven for many Iranian leaders, who kept residences and safe houses there.
Building an advanced nuclear programme with intense sanctions is costly and dangerous. However, the loosening of sanctions and the possibility of a closer relationship with European and US companies can facilitate the import of just the right components to add on to the substandard ones provided by Russia, and North Korea. Iran may curtail its legitimate nuclear programme but it needs advanced rocket capabilities and nuclear warheads for its survival. No Iranian regime would disassemble a programme that it claims, does not exist
Monday 17 November 2014
Friday 14 November 2014
Saudi Arabia: the new OPEC
OPEC's rearguard seems to have momentarily stopped the exponential slide in oil prices. It seems there is a level where all interests converge to stabilizing the price.
The unilateral actions by Saudi Arabia has damaged the relationships within OPEC beyond repair. It is virtually impossible to differentiate between the sectarian battles on the ground and the groupings within OPEC.
The growing mistrust between Iran and Saudi Arabia and the collection of failed states and minnows that make up the rest of OPEC have only self interest as their priority and currently Saudi Arabia either funds or subsidies many of the regimes.
The United States and Saudi Arabia will now want to see a period of stability for oil prices. It seems the ever chaotic region can now tolerate continued sectarian violence, as long as the Saudi oil fields are out of bounds.
- Saudi Arabia has clearly warned of the negative implication of continued US production.
- Iran and Russia have been painfully reminded not to meddle too much in their neighbors affairs, or suffer the consequences.
- OPEC has been thoroughly tamed.
- The US consumers can happily drive to their Thanksgiving dinner without being bankrupted.
The unilateral actions by Saudi Arabia has damaged the relationships within OPEC beyond repair. It is virtually impossible to differentiate between the sectarian battles on the ground and the groupings within OPEC.
The growing mistrust between Iran and Saudi Arabia and the collection of failed states and minnows that make up the rest of OPEC have only self interest as their priority and currently Saudi Arabia either funds or subsidies many of the regimes.
The United States and Saudi Arabia will now want to see a period of stability for oil prices. It seems the ever chaotic region can now tolerate continued sectarian violence, as long as the Saudi oil fields are out of bounds.
Thursday 13 November 2014
OPEC conundrum and the Middle Eastern endgame
It is impossible to believe that a few years ago peak oil was the main paradigm in the oil complex. Shorting oil was unheard of and Middle Eastern leaders were throwing their money around like confetti. The oil complex has gone full circle.
OPEC is powerless and the grand traders and politicians dictate the oil markets and the politics behind it. This is the endgame for many Middle Eastern regimes. A painful war of attrition on the battlefield and the oil field. The nuclear talks with Iran are now irrelevant as the country is hemorrhaging capital and a normalization of ties with the West will even reduce the price of oil further. With the price of oil so low, the larger powers can afford to have a multitude of proxy wars across the region, without worrying about the disruption of supplies. The only issues is how deep are the pockets of the oil producing nations.
It is difficult to fathom how long the Iranian regime can sustain itself with 70 dollars a barrel oil. The rear guard of OPEC desperately push for higher prices, unaware that they will have to pump more to sustain their market share. The dual threat of alternative energy sources and shale oil has thrown the traditional oil complex into turmoil and destroyed the old order.
The revolutions started in the streets but ended in the boardrooms of the great trading houses and oil producers. As economists in the Middle East and the US count the costs of this war of attrition consumers reap the reward of cheaper energy prices. Yet this is a short term phenomenon. The low prices of oil can only lead to trouble in the Middle East. A few points to consider.
OPEC is powerless and the grand traders and politicians dictate the oil markets and the politics behind it. This is the endgame for many Middle Eastern regimes. A painful war of attrition on the battlefield and the oil field. The nuclear talks with Iran are now irrelevant as the country is hemorrhaging capital and a normalization of ties with the West will even reduce the price of oil further. With the price of oil so low, the larger powers can afford to have a multitude of proxy wars across the region, without worrying about the disruption of supplies. The only issues is how deep are the pockets of the oil producing nations.
It is difficult to fathom how long the Iranian regime can sustain itself with 70 dollars a barrel oil. The rear guard of OPEC desperately push for higher prices, unaware that they will have to pump more to sustain their market share. The dual threat of alternative energy sources and shale oil has thrown the traditional oil complex into turmoil and destroyed the old order.
The revolutions started in the streets but ended in the boardrooms of the great trading houses and oil producers. As economists in the Middle East and the US count the costs of this war of attrition consumers reap the reward of cheaper energy prices. Yet this is a short term phenomenon. The low prices of oil can only lead to trouble in the Middle East. A few points to consider.
- How long can Iran sustain its embargo ridden economy with massively declining revenues ?
- When will the increasingly sectarian Sunni-Shia war in the Middle East spillover ?
- How will the new emerging oil states like the Kurds change the oil-state dynamics ?
- How long will Russia remain on the sidelines of this oil war ?
Tuesday 24 June 2014
Trader Dynnamics Toolkit: Riding the wave
These are times of big changes. Volatility is at an all time low in many global markets. Trader apathy is at an all time high and the no economy cocktail of low growth and low inflation has created an economic cycle where Central Banks have cut their hands off.
They have deliberately or foolishly left themselves with very little power to manage the economy. Interests rates are so low that ECB had to bring in negative interest rates to force banks to lend their money. In the US, on Wednesday, Jannet Yellen acted more like a CNBC commentator telling everyone proudly that stocks were not overvalued. The market blindly jumped on the bandwagon.
For many traders it has been a quiet year and, if it wasn't for the special situations that have arisen from political turmoil in the Ukraine or in Iraq many funds would be well under break-eve. Every day more and more forex traders disappear as the Euro/USD regularly trades in tight ranges.
All this is not earth shattering news to any seasoned trader. In fact it is these moments that test the market knowledge of most traders. As robots, computers and automatic algorithms take over much of the trading the possibility of arbitrage, whereby taking advantage of the slight variations in different markets evaporates.
In the past this has led banks and trading houses to come up with novel and exotic ways of making money. We had junk bonds, we had a biotech bubble and a Dot Com bubble. We had a sub-prime bubble. As traders and market followers this is like sitting and waiting for the encore or the next wave in the ocean. The market continues and traders are dusting off strategies for low volatility none existent economic conditions until the next wave appears.
In 2007 Paulson became a billionaire by short-selling subprime mortgages and made $3.7 billion that year. It is hard to believe that in 2011, he made losing trades in Bank of America, Citigroup and, Sino-Forest Corporation.
His flagship fund, Paulson Advantage Fund, was down over 40% as of September 2011. So, how is it possible that with all the resources and a deep understanding of the market the same person can get things fundamentally wrong.
Trading is a combination of 2 activities, one mechanical and one emotional or psychological. The mechanical side of trading is very much like chess. You know all your moves and you can pretty much foresee the other sides moves and counter them. It eventually becomes a war of attrition. Whoever has the most knowledge, patience and willpower will gain the advantage. When things go as planned the mechanical side of trading is beautiful.
Then there is backgammon. The players know all the moves, yet the dice is the king. The game can change quite rapidly if you throw some bad numbers. The reality about trading is that despite all the theory you can not predict what can happen one tick from now.
But the best explanation for me, a mathematician, is Schrödinger’s cat. In the Copenhagen interpretation, a system stops being a superposition of states and becomes either one or the other when an observation takes place. The market can be dead or alive at any particular moment and it is only its observation at any particular moment that makes it relevant.
Financial markets have the same mathematical basis as natural laws. Why else would a Fibonacci number that measures spirals on shells, and spiral galaxies be relevant. There are financial models based on fluid dynamics, wave patterns, crowd dynamics and mass mood psychology. In fact there are very few purely economic models to trade, apart from following fundamental news. However, that can be extremely distorted at times too.
So what is it that makes the trader successful in this dynamic ? It is the persistent and powerful motion of the financial market. Any surfer who sits in the ocean will get a massive wave eventually and maybe it will be a Tsunami. The second he observes the wave he is doomed to act. He will either ride it to the shore or die.
The observation is part of the equation and being observed as an actor is the other. Your system observes the market waiting for the next best move but is all the decisions made by you that ensures the trade is successful.
Many traders sit through wave after wave waiting for the big one and nothing happens. Look in the right places and really observe the market and you will see trading opportunities in every candle. Sometimes you will get it wildly wrong and be on the wrong side of a Tsunami. But that is trading. Sensible money management ensures that you will not get blown out and you keep on trading.
They have deliberately or foolishly left themselves with very little power to manage the economy. Interests rates are so low that ECB had to bring in negative interest rates to force banks to lend their money. In the US, on Wednesday, Jannet Yellen acted more like a CNBC commentator telling everyone proudly that stocks were not overvalued. The market blindly jumped on the bandwagon.
For many traders it has been a quiet year and, if it wasn't for the special situations that have arisen from political turmoil in the Ukraine or in Iraq many funds would be well under break-eve. Every day more and more forex traders disappear as the Euro/USD regularly trades in tight ranges.
All this is not earth shattering news to any seasoned trader. In fact it is these moments that test the market knowledge of most traders. As robots, computers and automatic algorithms take over much of the trading the possibility of arbitrage, whereby taking advantage of the slight variations in different markets evaporates.
In the past this has led banks and trading houses to come up with novel and exotic ways of making money. We had junk bonds, we had a biotech bubble and a Dot Com bubble. We had a sub-prime bubble. As traders and market followers this is like sitting and waiting for the encore or the next wave in the ocean. The market continues and traders are dusting off strategies for low volatility none existent economic conditions until the next wave appears.
In 2007 Paulson became a billionaire by short-selling subprime mortgages and made $3.7 billion that year. It is hard to believe that in 2011, he made losing trades in Bank of America, Citigroup and, Sino-Forest Corporation.
His flagship fund, Paulson Advantage Fund, was down over 40% as of September 2011. So, how is it possible that with all the resources and a deep understanding of the market the same person can get things fundamentally wrong.
Trading is a combination of 2 activities, one mechanical and one emotional or psychological. The mechanical side of trading is very much like chess. You know all your moves and you can pretty much foresee the other sides moves and counter them. It eventually becomes a war of attrition. Whoever has the most knowledge, patience and willpower will gain the advantage. When things go as planned the mechanical side of trading is beautiful.
Then there is backgammon. The players know all the moves, yet the dice is the king. The game can change quite rapidly if you throw some bad numbers. The reality about trading is that despite all the theory you can not predict what can happen one tick from now.
But the best explanation for me, a mathematician, is Schrödinger’s cat. In the Copenhagen interpretation, a system stops being a superposition of states and becomes either one or the other when an observation takes place. The market can be dead or alive at any particular moment and it is only its observation at any particular moment that makes it relevant.
Financial markets have the same mathematical basis as natural laws. Why else would a Fibonacci number that measures spirals on shells, and spiral galaxies be relevant. There are financial models based on fluid dynamics, wave patterns, crowd dynamics and mass mood psychology. In fact there are very few purely economic models to trade, apart from following fundamental news. However, that can be extremely distorted at times too.
So what is it that makes the trader successful in this dynamic ? It is the persistent and powerful motion of the financial market. Any surfer who sits in the ocean will get a massive wave eventually and maybe it will be a Tsunami. The second he observes the wave he is doomed to act. He will either ride it to the shore or die.
The observation is part of the equation and being observed as an actor is the other. Your system observes the market waiting for the next best move but is all the decisions made by you that ensures the trade is successful.
Many traders sit through wave after wave waiting for the big one and nothing happens. Look in the right places and really observe the market and you will see trading opportunities in every candle. Sometimes you will get it wildly wrong and be on the wrong side of a Tsunami. But that is trading. Sensible money management ensures that you will not get blown out and you keep on trading.
Sunday 22 June 2014
Trader Dynamics Toolkit: Evolving on the Edge of Chaos
Markets are inherently chaotic. To an external observer and newbie trader the counter intuitive movements of markets creates a vacuum that makes rational decisions difficult. This is the sole reason why many traders fail and blow out their accounts. They believe all the false moves as changes in the direction of trend and get caught out in a counter move.
Furthermore at lot of the market gurus advocate an over dependence on lagging indicators and short-term trading. Anyone that has followed short-term movements in prices knows how chaotic that is. Throw in the behaviour of banks and market makers in taking out stops and creating false breakouts and we have a very volatile cocktail.
So how does one manage expectations in this turmoil. Firstly even chaos theory recognises that at some level, even micro, there is inherent order in a system. An airport might look like a manic place to most observers but it is a highly organised complex place with every person following a definite route and timeline. One has to acknowledge that within chaos there is a point where perfection exists.
In markets this point is difficult to find as so much of market movements are based on psychology and sentiment. If you break down the movements you see a tug of war between the traders going up and the traders going down. In a micro and short-term time-frame it seems like it goes both ways all the time but on a longer and medium time-frame the charts look quite ordered.
The challenge for most traders is to follow the long-term sentiment yet trade regularly in the short-term. The rapid and chaotic movements in the short-term stops out many people if the entry points are not chosen correctly. If we revisit the airport analogy the people who arrive early have a long wait and the people who arrive late often rush and miss their plane but there is a point right before it gets too busy about 1 and half hours before departure when the momentum gains and most people arrive at the check in counters.
This is when the lines can be longest, but the system is working at maximum efficiency to get the people on that plane. The deadline starts to loom and the authorities want to ensure that everything runs smoothly. This is the moment any accomplished trader should be getting into the market.
Early signs of a buildup of momentum. Most traders get there too early, get nervous and sell out or get there too late and miss the plane. There is a case for getting there early but this is wasted time as the plane may be delayed and the move may not happen for hours, days, or weeks.
The problem with most systems is that they bring you to the extremes. They are either lagging or get there too early. How many times have people made a trade based on the RSI only to realise it has floated up in the extremes for weeks. And how many times have people made a decision based on a moving average, just to see it swing back.
So the only indicator you really need are the key points and blockages. These are normally the pivot points where congestion starts to happen and markets get choppy and some indication that prices are moving and momentum is happening in a particular direction. If you use candlesticks this is when the small candles become long and solid in a particular direction. If you look at numbers you will see numbers start moving fast but predominantly in the same direction 4 forward 2 back 6 forward 3 back, that kind of thing. This is the moment to trade.
Be mindful of the longer term trend and realise you are on the edge of chaos. Things will start moving rapidly but the momentum has started the lines are building up and the people are moving. Just like in the airport. Go with the flow, don’t fight it. You will get there in the end.
Furthermore at lot of the market gurus advocate an over dependence on lagging indicators and short-term trading. Anyone that has followed short-term movements in prices knows how chaotic that is. Throw in the behaviour of banks and market makers in taking out stops and creating false breakouts and we have a very volatile cocktail.
So how does one manage expectations in this turmoil. Firstly even chaos theory recognises that at some level, even micro, there is inherent order in a system. An airport might look like a manic place to most observers but it is a highly organised complex place with every person following a definite route and timeline. One has to acknowledge that within chaos there is a point where perfection exists.
In markets this point is difficult to find as so much of market movements are based on psychology and sentiment. If you break down the movements you see a tug of war between the traders going up and the traders going down. In a micro and short-term time-frame it seems like it goes both ways all the time but on a longer and medium time-frame the charts look quite ordered.
The challenge for most traders is to follow the long-term sentiment yet trade regularly in the short-term. The rapid and chaotic movements in the short-term stops out many people if the entry points are not chosen correctly. If we revisit the airport analogy the people who arrive early have a long wait and the people who arrive late often rush and miss their plane but there is a point right before it gets too busy about 1 and half hours before departure when the momentum gains and most people arrive at the check in counters.
This is when the lines can be longest, but the system is working at maximum efficiency to get the people on that plane. The deadline starts to loom and the authorities want to ensure that everything runs smoothly. This is the moment any accomplished trader should be getting into the market.
Early signs of a buildup of momentum. Most traders get there too early, get nervous and sell out or get there too late and miss the plane. There is a case for getting there early but this is wasted time as the plane may be delayed and the move may not happen for hours, days, or weeks.
The problem with most systems is that they bring you to the extremes. They are either lagging or get there too early. How many times have people made a trade based on the RSI only to realise it has floated up in the extremes for weeks. And how many times have people made a decision based on a moving average, just to see it swing back.
So the only indicator you really need are the key points and blockages. These are normally the pivot points where congestion starts to happen and markets get choppy and some indication that prices are moving and momentum is happening in a particular direction. If you use candlesticks this is when the small candles become long and solid in a particular direction. If you look at numbers you will see numbers start moving fast but predominantly in the same direction 4 forward 2 back 6 forward 3 back, that kind of thing. This is the moment to trade.
Be mindful of the longer term trend and realise you are on the edge of chaos. Things will start moving rapidly but the momentum has started the lines are building up and the people are moving. Just like in the airport. Go with the flow, don’t fight it. You will get there in the end.
Thursday 19 June 2014
Profiting from the fog of war
By now the whole world knows about ISIS. This seemingly invincible army of several 1000 marauding across Iraq tweeting and preparing glossy annual reports. They have been linked to every world power and have now replaced their brand new Toyotas with even newer Humvees. My first impression would be if they are tweeting and communicating and using brand new Toyotas, then surely we should know a lot more about them, then we let on.
The Middle East has always been the toughest region for analysts and journalists. Middle Easterners love drama and exaggeration. They will blame everything on some power or another and conspiracy theories are part of regular day to day reporting. Furthermore, to a Middle Easterner everything happens for a reason. The great powers have meddled in the region for so long most people see some grand imperialist plan behind every event.
I don't find it surprising that even the seasoned journalists are buying into these wild conspiracy theories. They sound good, sell papers and are great copy and paste material from regional websites. As a trader you can't trade on irrationality but you can profit from it, if you look through the fog of war you will see trading opportunities in every market.
The oil companies, aid agencies, and anyone that has to take rational decisions seem to be playing things down a bit. I am glad that the markets did not go into full panic mode. Ironically it is in times of crisis that the markets revert to looking at true fundamentals of the economy.
Iraq is clearly a failed state. It has been for decades. Iraq is currently Baghdad and the few well guarded oil facilities in the South. The much talked about refinery in Baghdad was predominantly for domestic use and a pretty inefficient plant, at that. Iraqi oil has been plagued by so many mishaps and has been on and off the market for so long that the Kurds seem to think they own most of it anyway.
The predominantly Shia Iraqi government and army pretty much allowed the Sunnis and Kurds to manage their own domains. They did not fight ISIS, because there was nothing to fight for. This a feudal, tribal failed state. As far as the Shia are concerned that is Sunni land anyway. If the Sunnis attack Najaf or Kerbala, things will change.
The questions that should be asked are, not so much who is behind ISIS but who will attempt to gain from this bizarre phenomenon and the latest twist in another failed Middle Eastern project. For the list is long and getting longer by the day, but I am sure the journos are already copy and pasting the latest conspiracy theory.
From a trading perspective the noise and trading opportunities are widely amplified by geopolitical activity like this. We saw that in Ukraine, as well. The initial movement tends to be quite rapid, particularly with the algos going bananas looking at ISIS Twitter feeds about world domination.
However hedge funds and regulators are far smarter then they used to be and a nod here and a few encouraging words normally sends the market in the direction it was going anyway or stabilises it.
It is hard to believe, just last week everyone was complaining about a lack of volatility.
Trader Dyanamics Toolkit: Asymmetric trading
History is full of battles with victories for the underdog. Whether it is David and Goliath, Alexander the Great, or Mao Tse Tung, humanity has a habit of routing for the weaker competitor. Markets, are not the same. There are no cheerleaders for bad traders. They tend to get wiped out pretty quickly. That is why you see so many sites comparing trading to battling a vastly superior enemy.
In battle a great leader with a good strategy and well trained and bold followers can achieve more than a great army with no cohesive structure or strategy. This theory can be applied to trading as well. During the financial crisis, it was the giant face less banks with their armies of employees and vast resources that went broke. The smaller hedge funds run by great traders like Paulson or Soros made lots of money.
This is an Asymmetric battle.
Asymmetric warfare is war between belligerents whose relative military power differs significantly, or whose strategy or tactics differ significantly.
Independent traders often think they are at a disadvantage because of the resources available to big banks and funds. However, trading on your own with small lots can be quite an advantage in this fast paced world. As we have seen after the multitude of bank failures financial institutions are placing layer after layer of risk management in their trading models.
Understandably, the high frequency traders make money in milliseconds from slight changes in the market, but we are not competing with them anyway. Most independent traders these days have access to as much information online as a corporate trader.
Most technical analysis packages have all the signals needed and so much news and so many pundits can be easily followed on Twitter. All this can have negative implications, the fog of war.
New traders depend on too much information to make a decision. This multitude of information channels makes rapid decision-making difficult and takes out the edge of being a private trader. This is a problem the majors are faced with, the analysts, program trades, risk managers, hedging strategies, and compliance and regulatory issues makes information sharing and trading quite a challenge for larger funds. Funds spend most of their time trying to put together exotic products to circumvent complex financial regulations.
The principle of asymmetric warfare is to move fast with stealth without the enemy knowing your actions. Private traders can do that. Smaller traders trade smaller contracts so don’t need to worry about moving markets and don’t have risk managers and compliance officers monitoring all our moves.
Use these advantages to level the playing field. You make rapid decisions, pounce and ambush trades and leave quickly if necessary. That is the edge of a mercenary.
It’s the only way to survive in the market and consistently take on the big players. Every day, with every trading decision.
That point must be clearly established based on your money management criteria.
Signal contagion
To make all this easy you need a well-defined system and entry and exit points. Often traders need the comfort of having lots and lots of signals (MACD, RSI, Stochastics, MA, Bollinger), you know what I mean.
All these signals come from the same information, price, they just present it differently. It gives people comfort when they see numbers they are familiar with or colours going from red to blue, but just like the mercenary that is aware of every single noise or movement and quickly decides whether it is hostile or not, the trader should be cautious about his signals.
Lagging signals should predominantly be used for confirming a particular trading hypothesis. There is too much noise in the markets and too many unknowns to rely entirely on signals. Furthermore, many traders like numbers and lines and pivots to predetermine entry and exit points. Therefore you should always be wary of congestion areas on a chart where traders are stop hunting and testing the will of their opponents.
Last night was a great example of this. Federal Reserve Chair says stocks are not overvalued. Promptly a new record for the S&P. Prior to that the market was going down stop hunting. Very few lagging signals would have seen this coming but a careful analysis of the readily available information, your trading signal and rapid action would have got you on the right side of the trade.
In battle a great leader with a good strategy and well trained and bold followers can achieve more than a great army with no cohesive structure or strategy. This theory can be applied to trading as well. During the financial crisis, it was the giant face less banks with their armies of employees and vast resources that went broke. The smaller hedge funds run by great traders like Paulson or Soros made lots of money.
This is an Asymmetric battle.
Asymmetric warfare is war between belligerents whose relative military power differs significantly, or whose strategy or tactics differ significantly.
Independent traders often think they are at a disadvantage because of the resources available to big banks and funds. However, trading on your own with small lots can be quite an advantage in this fast paced world. As we have seen after the multitude of bank failures financial institutions are placing layer after layer of risk management in their trading models.
Understandably, the high frequency traders make money in milliseconds from slight changes in the market, but we are not competing with them anyway. Most independent traders these days have access to as much information online as a corporate trader.
Most technical analysis packages have all the signals needed and so much news and so many pundits can be easily followed on Twitter. All this can have negative implications, the fog of war.
New traders depend on too much information to make a decision. This multitude of information channels makes rapid decision-making difficult and takes out the edge of being a private trader. This is a problem the majors are faced with, the analysts, program trades, risk managers, hedging strategies, and compliance and regulatory issues makes information sharing and trading quite a challenge for larger funds. Funds spend most of their time trying to put together exotic products to circumvent complex financial regulations.
The principle of asymmetric warfare is to move fast with stealth without the enemy knowing your actions. Private traders can do that. Smaller traders trade smaller contracts so don’t need to worry about moving markets and don’t have risk managers and compliance officers monitoring all our moves.
Use these advantages to level the playing field. You make rapid decisions, pounce and ambush trades and leave quickly if necessary. That is the edge of a mercenary.
It’s the only way to survive in the market and consistently take on the big players. Every day, with every trading decision.
- Analyze information rapidly
- Make quick decisions based on available information
- Act.
That point must be clearly established based on your money management criteria.
Signal contagion
To make all this easy you need a well-defined system and entry and exit points. Often traders need the comfort of having lots and lots of signals (MACD, RSI, Stochastics, MA, Bollinger), you know what I mean.
All these signals come from the same information, price, they just present it differently. It gives people comfort when they see numbers they are familiar with or colours going from red to blue, but just like the mercenary that is aware of every single noise or movement and quickly decides whether it is hostile or not, the trader should be cautious about his signals.
Lagging signals should predominantly be used for confirming a particular trading hypothesis. There is too much noise in the markets and too many unknowns to rely entirely on signals. Furthermore, many traders like numbers and lines and pivots to predetermine entry and exit points. Therefore you should always be wary of congestion areas on a chart where traders are stop hunting and testing the will of their opponents.
Last night was a great example of this. Federal Reserve Chair says stocks are not overvalued. Promptly a new record for the S&P. Prior to that the market was going down stop hunting. Very few lagging signals would have seen this coming but a careful analysis of the readily available information, your trading signal and rapid action would have got you on the right side of the trade.
Tuesday 17 June 2014
The new paradigm of trading and politics: Follow the noise
There was a time when to succeed in the developing world you needed a flag, a carefully marked out border, an airline, and a despotic leader with lots of foreign bank accounts. Before that time the world was pretty much a feudal realm with lots of self appointed leaders.
The recent events in the Middle East show us a new acceptable form of global politics. Random territories, controlled by different groups with conflicting sectarian and tribal links. Borders that are nonexistent or highly porous. Armies often number in the hundreds and drive around in Toyotas, pillaging, and massacring. The so called authorities hide in massive fortified citadels protecting their oil. Has anyone ever seen Mad Max, or Game of Thrones. This is a mix of the two. Ironically, Iran is now seen as saviors in this mess. The pariah state condemned by most of the world has gone full circle. How bad are the baddies, when Iran is a goodie ?
In a world of high tech gadgetry, can a couple of 1000 lightly armed men with no air-support really take the world hostage and cause a panic in the oil complex. Then there are the Kurds. A nation that spans four geographic countries, that has no real state but now has the capacity to negotiate and sell its oil in the open market and pretty much do anything it wants. In the middle of this, real nation states like Iran and Turkey struggle to cope with the enfolding crises and somehow get condemned for not following global political and human rights norms. The ultimate questions are being asked and not answered. Were we safer in a world with the likes of Saddam Hossein ??? Who knows.
This is the brave new world of the high frequency traders, super speed news. A world where we can lose an airplane but can locate our Ipad at the touch of a mouse. Its a new world for politics, but also for trading. Most independent traders still look at systems and use indicators. 90 % fail. At any particular moment 10% are succeeding and a few percent are doing rather well. What do the 10% do that is so successful. They wait, they don't trade. Not trading is your best trade. They play Poker. Hang out with the kids and keep a very close eye on things.
They know what moves the market. A market is never over bought or over sold. It is at exactly the right price in that moment. Indicators on most instruments have been over-something for days or months with no reversal.
They just wait. The most difficult thing for a human being in the age of action. Waiting And when the small band of pirates run towards the oil, or when the Bank of England dude talks up the pound or when some random correlation signals a black Swan in a market. they move. With all their available resources. Intensity that you can not believe and an unsurpassed conviction in the trade. You cant really get that conviction with a lagging moving average. The 90% lag and fail, like their indicators. Like the hooded guy on the Iraqi border. They go as fast as they can wiping out all the stops along the way and clearing the table. Then its back to the drawing board.
Now, don't get me wrong, all this requires a ton of preparation. Sure you look at the charts checking out Fibonacci, Ichimoku and other exciting, colorful names from the last millenia , but do they actually trade on it, unlikely. Its funny how oil really did not go up that much after the ISIS business, but it went up quite a lot in the weeks before. There were no secrets, all the info about the impending madness was a Google search away. The eagle eyed algo or the able trader pieced it all together. Everyone else was saying oil was overbought 2 weeks ago. The 90%. That is the new paradigm of politics and of trading. By all means, follow the noise, it is louder than ever, but enjoy the quiet, while you wait.
For more on poker and patience check out the aptly named Mercenary Trader link
The recent events in the Middle East show us a new acceptable form of global politics. Random territories, controlled by different groups with conflicting sectarian and tribal links. Borders that are nonexistent or highly porous. Armies often number in the hundreds and drive around in Toyotas, pillaging, and massacring. The so called authorities hide in massive fortified citadels protecting their oil. Has anyone ever seen Mad Max, or Game of Thrones. This is a mix of the two. Ironically, Iran is now seen as saviors in this mess. The pariah state condemned by most of the world has gone full circle. How bad are the baddies, when Iran is a goodie ?
In a world of high tech gadgetry, can a couple of 1000 lightly armed men with no air-support really take the world hostage and cause a panic in the oil complex. Then there are the Kurds. A nation that spans four geographic countries, that has no real state but now has the capacity to negotiate and sell its oil in the open market and pretty much do anything it wants. In the middle of this, real nation states like Iran and Turkey struggle to cope with the enfolding crises and somehow get condemned for not following global political and human rights norms. The ultimate questions are being asked and not answered. Were we safer in a world with the likes of Saddam Hossein ??? Who knows.
This is the brave new world of the high frequency traders, super speed news. A world where we can lose an airplane but can locate our Ipad at the touch of a mouse. Its a new world for politics, but also for trading. Most independent traders still look at systems and use indicators. 90 % fail. At any particular moment 10% are succeeding and a few percent are doing rather well. What do the 10% do that is so successful. They wait, they don't trade. Not trading is your best trade. They play Poker. Hang out with the kids and keep a very close eye on things.
They know what moves the market. A market is never over bought or over sold. It is at exactly the right price in that moment. Indicators on most instruments have been over-something for days or months with no reversal.
They just wait. The most difficult thing for a human being in the age of action. Waiting And when the small band of pirates run towards the oil, or when the Bank of England dude talks up the pound or when some random correlation signals a black Swan in a market. they move. With all their available resources. Intensity that you can not believe and an unsurpassed conviction in the trade. You cant really get that conviction with a lagging moving average. The 90% lag and fail, like their indicators. Like the hooded guy on the Iraqi border. They go as fast as they can wiping out all the stops along the way and clearing the table. Then its back to the drawing board.
Now, don't get me wrong, all this requires a ton of preparation. Sure you look at the charts checking out Fibonacci, Ichimoku and other exciting, colorful names from the last millenia , but do they actually trade on it, unlikely. Its funny how oil really did not go up that much after the ISIS business, but it went up quite a lot in the weeks before. There were no secrets, all the info about the impending madness was a Google search away. The eagle eyed algo or the able trader pieced it all together. Everyone else was saying oil was overbought 2 weeks ago. The 90%. That is the new paradigm of politics and of trading. By all means, follow the noise, it is louder than ever, but enjoy the quiet, while you wait.
For more on poker and patience check out the aptly named Mercenary Trader link
Monday 16 June 2014
Trader Mindset Toolkit: Playing chicken and winning
Trading is essentially about confidence. Confidence in your system and confidence in your ability to take the trade and follow it through. This confidence does not appear overnight but involves a bit of cultivation and perhaps a change in behaviour. Inevitably, lack of confidence stems from conflict within and outside. One of the best ways to manage conflict is using a well-known theory from Game theory called Chicken.
In game theory the game of chicken involves two seemingly rational people driving full speed towards each other in cars. The point of the game is to overcome fear and stay on course. The driver that gets scared and swerves away is the loser. The problem, of course, is that if both stay on course, then both will crash and die. The principle of the game is that while each driver prefers not to yield to the other, the worst possible outcome occurs when both drivers do not yield.
But, of course, it does not end there. True tacticians say the winner accepts the inevitable and throws his steering wheel out of the window right before the collision. This clearly states his intention and forces the other driver to yield.
The game of chicken is so dangerous that it would be nice if we could just avoid it. But an unfortunate reality is that we are faced with the same reasoning, every day we live and trade. In the uber competitive world of markets, one has to learn how to play the game of chicken. Here are a few strategies that can help you be the winner:
1. Dig in
In the game of chicken, your flexibility is a weakness. One of the best solutions is to prove that you will not change course. Limiting your options, and metaphorically becoming immovable like the steering wheel incident, can show the other side that you will not back down.
2. Pretend: Get a reputation for being tough
If you can’t credibly limit your actions, the next best option is to get a reputation for being tough so people don’t bother believe that you are serious.
3. Go for broke
Sometimes you cannot lock in your actions but instead have to fight head on. In this case it might be wise to show you are serious by going for broke.
The player that has nothing to lose is more dangerous and such threats will be taken more seriously.
4. Raise the risk to your actions (MAD)
Brinkmanship is a strategic move where you raise the risk of the game–bringing everyone closer to the brink–unless the other side relents. While you may prefer not to use these tactics you have to be aware of them as your opponents may employ them. MAD (Mutually Assured Destruction was a good example of this)
5. Withdraw from the game
Walk away, if you do a quick assessment and realise you are totally out numbered and out gunned then you retreat and regroup.
6. Get lucky: change the game
In some situations, you can avoid the game of chicken by being creative. Change the game and you can create incentives to cooperate rather than intimidate.
Friday 13 June 2014
Trader Dynamics Toolkit: Noise trading
The massive moves in oil in the past days made me wonder why loads of people sit and stare at the multitude of indicators on their screen all day. If you look a bit further back you will see oil has been moving for a couple of weeks, quite significantly. If you search in Google you will notice that there were stories about ISIS and Iraq and the impeding crisis around the same time. Suddenly, you have a neural trading system, which would normally cost, you an arm and a leg. But this kind of trading based on noise is age old. Even Edwin Leferve read the ticker and made quick trading decisions based on it in the 1920's
There are all sorts of labels for Traders based on what time-frame and system they use to trade. Everyone has heard of the swing trader and day trader or position trader. In my many searches on the web I discovered a label for a trader I had never seen before. Noise Trader. Actually, it was coined in a report written by Andrei Shleifer and the famous Lawrence H Summer titled “The Noise Trader Approach to Finance” . Link at the bottom of the page for your information.
Many of you think I am mad to think that a 21-year-old document has any relevance to modern-day trading. I agree its all pretty boring until you get to page 28 and positive feedback trading. “The key to success, says Soros, was not to counter the irrational wave of enthusiasm, about conglomerates, but rather to ride this wave for a while and sell out much later.” It goes on to say that this could lead to a bubble but can make you very rich in the short-term. Even back then they were scared of the noise traders as they suggest taxing them to the hilt. Well 20 years later and after a series of bubbles nothing much has really changed.
I guess that means all great traders are noise traders. Now to me that makes perfect sense. The false prophets and market Gurus that peddle indicators and mechanical systems inherently dismiss the one real mover of markets, Sentiment. Yes, some people say much of this is built into the market and I totally agree, if you are a high frequency trader, but most of us are not. For them lagging means a millisecond for us it could be hours or days. It is not bad if you want to make a few great trades, but to be a real trader you need consistency. That means trading well, most days for years. The only way to do that is to follow the successfull crowd, and follow it as perfectly, as you can.
So the question comes down to how one measures noise and sentiment in the markets. Most of trading these days is done by machines and even in dark pools where there is no transparency. The few indicators for momentum are based on the price anyway and are pretty much useless. A friend was following sentiment based on his Twitter posts. That is not a bad idea but its a bit like standing outside a football stadium and predicting the results based on the crowd cheering. You will get it right sometimes but you would be blind, literally.
The answer to all this is very much in built in the strategy. There are a host of analogies traders use, riding the wave, jumping on the bandwagon,and buy low, sell high. The implication for these statements is a fundamental shift in a market, towards a certain direction. Too many traders, these days want to know the whys and the how's. None of that is relevant.
The real questions are ”is the market moving ?” and “why aren’t you in it ?”
The Noise Trader Approach to Finance
http://scholar.harvard.edu/shleifer/files/noise_trader_approach_finance.pdf
There are all sorts of labels for Traders based on what time-frame and system they use to trade. Everyone has heard of the swing trader and day trader or position trader. In my many searches on the web I discovered a label for a trader I had never seen before. Noise Trader. Actually, it was coined in a report written by Andrei Shleifer and the famous Lawrence H Summer titled “The Noise Trader Approach to Finance” . Link at the bottom of the page for your information.
Many of you think I am mad to think that a 21-year-old document has any relevance to modern-day trading. I agree its all pretty boring until you get to page 28 and positive feedback trading. “The key to success, says Soros, was not to counter the irrational wave of enthusiasm, about conglomerates, but rather to ride this wave for a while and sell out much later.” It goes on to say that this could lead to a bubble but can make you very rich in the short-term. Even back then they were scared of the noise traders as they suggest taxing them to the hilt. Well 20 years later and after a series of bubbles nothing much has really changed.
I guess that means all great traders are noise traders. Now to me that makes perfect sense. The false prophets and market Gurus that peddle indicators and mechanical systems inherently dismiss the one real mover of markets, Sentiment. Yes, some people say much of this is built into the market and I totally agree, if you are a high frequency trader, but most of us are not. For them lagging means a millisecond for us it could be hours or days. It is not bad if you want to make a few great trades, but to be a real trader you need consistency. That means trading well, most days for years. The only way to do that is to follow the successfull crowd, and follow it as perfectly, as you can.
So the question comes down to how one measures noise and sentiment in the markets. Most of trading these days is done by machines and even in dark pools where there is no transparency. The few indicators for momentum are based on the price anyway and are pretty much useless. A friend was following sentiment based on his Twitter posts. That is not a bad idea but its a bit like standing outside a football stadium and predicting the results based on the crowd cheering. You will get it right sometimes but you would be blind, literally.
The answer to all this is very much in built in the strategy. There are a host of analogies traders use, riding the wave, jumping on the bandwagon,and buy low, sell high. The implication for these statements is a fundamental shift in a market, towards a certain direction. Too many traders, these days want to know the whys and the how's. None of that is relevant.
The real questions are ”is the market moving ?” and “why aren’t you in it ?”
The Noise Trader Approach to Finance
http://scholar.harvard.edu/shleifer/files/noise_trader_approach_finance.pdf
Thursday 12 June 2014
The ISIS axis. Middle East's new power brokers
With the militant war raging in Northern Iraq it seems like the crazy plan of containing the Syrian civil war has finally failed. The total inaction in Syria for the past 2 years has led to the training and arming of a large army of battle hardened over zealous militants that now threaten to spillover into the rest of the region.
With Syria largely forgotten and with no great prize apart from a desolate wasteland the militants are moving to plan B. Even the name ISIS could have been apt for any James Bond nemesis. Like any great movie the sequel has to have far more action, bigger explosions and involve the whole world.
ISIS is heading directly for the Iraqi capital and the oil fields of Southern Iraq. ISIS's timing is bizarrely perfect. With an America that doesn't seem to have an appetite for war and an Iran that is bending over backwards to seem nice, the vacuum in the region leads nicely to the doorstep of Saudi Arabia. Of course, you do not bite the hand that feeds you, so Saudi is clearly the final frontier for ISIS.
The only questions that remain is will Iran still pretend to be nice or will ISIS wind them up enough for them to unleash their full insurgency in Iraq. You can just imagine the fuming IRGC generals sitting on their hands and gritting their teeth. It wasn't a long time ago that Hezbollah and the IRGC were the most feared insurgency in the Middle East. Those days have long gone.
Oh yes, there is one more question. The Kurds are remarkably quiet in this little war. Could there be a tacit agreement between the Kurds and ISIS to carve up the area. That would be a formidable force. The Kurds are historically some of the most accomplished and battle hardened fighters in the region. They also sit on a nice patch of oil rich land. This is one hell of a sequel waiting to happen. And by the way , if you were thinking of shorting oil and a nice quiet summer forget it.
With Syria largely forgotten and with no great prize apart from a desolate wasteland the militants are moving to plan B. Even the name ISIS could have been apt for any James Bond nemesis. Like any great movie the sequel has to have far more action, bigger explosions and involve the whole world.
ISIS is heading directly for the Iraqi capital and the oil fields of Southern Iraq. ISIS's timing is bizarrely perfect. With an America that doesn't seem to have an appetite for war and an Iran that is bending over backwards to seem nice, the vacuum in the region leads nicely to the doorstep of Saudi Arabia. Of course, you do not bite the hand that feeds you, so Saudi is clearly the final frontier for ISIS.
The only questions that remain is will Iran still pretend to be nice or will ISIS wind them up enough for them to unleash their full insurgency in Iraq. You can just imagine the fuming IRGC generals sitting on their hands and gritting their teeth. It wasn't a long time ago that Hezbollah and the IRGC were the most feared insurgency in the Middle East. Those days have long gone.
Oh yes, there is one more question. The Kurds are remarkably quiet in this little war. Could there be a tacit agreement between the Kurds and ISIS to carve up the area. That would be a formidable force. The Kurds are historically some of the most accomplished and battle hardened fighters in the region. They also sit on a nice patch of oil rich land. This is one hell of a sequel waiting to happen. And by the way , if you were thinking of shorting oil and a nice quiet summer forget it.
Monday 9 June 2014
OPEC: Counter hegemon or lame duck
How many of you remember the imperious personality of Sheikh Yamani ? The suave Saudi Minister of Oil and powerful OPEC delegate for 25 years. There was a time when the whole world held their breath every time OPEC met. The meetings in Vienna became such a global media spectacle that the infamous Carlos the Jackal took the OPEC ministers hostage in 1975 to further his dubious cause.
The world has indeed changed. Even though Saudi Arabia is still an oil powerhouse and the Straits of Hormuz still have strategic value, the emergence of powerful non-OPEC oil producers and the collapse of the OPEC administered pricing system in 1986 ushered in a new era in oil pricing. The nail in the coffin for OPEC was the United States's Strategic Petroleum Reserve and the US energy self sufficiency doctrine that has emerged. This led the US to invest heavily in the technology to produce shale oil and alternative energy sources. The notion of Peak Oil, so popular just a few years ago has been banished to the scrap heap.
The real challenge for OPEC is not setting oil ceilings and controlling prices. That power shifted from multinational oil companies in 1950s and 1960s and OPEC from 1973 to 1986 to the so called market. However, the international market for trading oil is a fragmented beast that involves many diverse private and public entities. This includes investment banks, hedge funds and retail investors, including private investors and high net worth individuals.
The futures markets attracts a wide range of financial players (pension funds, hedge funds, index investors, technical traders, & retail investors). Concerns that these financial players & their trading strategies could move the oil price away from the true underlying fundamentals has alarmed many governments and regulatory authorities.
With large private oil companies and national oil companies virtually powerless to control oil prices and a world that can function with relatively high prices the OPEC countries have been happy to sit on the massive windfall and the enormous budget surpluses that have resulted in Middle Eastern sovereign funds buying whole neighborhoods in London and Paris.
In short OPEC fell from its lofty position, as the only developing world entity that could stand up to the hegemonic power of globalization, to an embarrassing quango with very little teeth and firmly in the pocket of what we loosely term the market.
Even within the elite club the grand vision of the Shah of Iran in the 70s and the war mongering Saddam in the 80s have been replaced with dithering leaders and a dilapidated and fragmented oil complex that is in need of new technology and fully dependent on Western companies to function. Iran is the only country that has tried to run its oil industry without too much outside influence. But this has led it to halve its export capacity and practically eliminate any influence it had in OPEC.
Will this scenario change ? The simple answer is no. Running a Middle Eastern country is a difficult job, with very little job security. Qadaffi, Assad, the Shah of Iran, and Saddam Hussein can vouch for this. Middle Eastern leaders know the oil price will not stay this high forever. One day there will be too many Teslas to warrant a 110 dollar oil price. At that stage the status quo will remain in perpetuity and the Middle East will again become the forgotten route between East and West, the Silk Road.
The world has indeed changed. Even though Saudi Arabia is still an oil powerhouse and the Straits of Hormuz still have strategic value, the emergence of powerful non-OPEC oil producers and the collapse of the OPEC administered pricing system in 1986 ushered in a new era in oil pricing. The nail in the coffin for OPEC was the United States's Strategic Petroleum Reserve and the US energy self sufficiency doctrine that has emerged. This led the US to invest heavily in the technology to produce shale oil and alternative energy sources. The notion of Peak Oil, so popular just a few years ago has been banished to the scrap heap.
The real challenge for OPEC is not setting oil ceilings and controlling prices. That power shifted from multinational oil companies in 1950s and 1960s and OPEC from 1973 to 1986 to the so called market. However, the international market for trading oil is a fragmented beast that involves many diverse private and public entities. This includes investment banks, hedge funds and retail investors, including private investors and high net worth individuals.
The futures markets attracts a wide range of financial players (pension funds, hedge funds, index investors, technical traders, & retail investors). Concerns that these financial players & their trading strategies could move the oil price away from the true underlying fundamentals has alarmed many governments and regulatory authorities.
With large private oil companies and national oil companies virtually powerless to control oil prices and a world that can function with relatively high prices the OPEC countries have been happy to sit on the massive windfall and the enormous budget surpluses that have resulted in Middle Eastern sovereign funds buying whole neighborhoods in London and Paris.
In short OPEC fell from its lofty position, as the only developing world entity that could stand up to the hegemonic power of globalization, to an embarrassing quango with very little teeth and firmly in the pocket of what we loosely term the market.
Even within the elite club the grand vision of the Shah of Iran in the 70s and the war mongering Saddam in the 80s have been replaced with dithering leaders and a dilapidated and fragmented oil complex that is in need of new technology and fully dependent on Western companies to function. Iran is the only country that has tried to run its oil industry without too much outside influence. But this has led it to halve its export capacity and practically eliminate any influence it had in OPEC.
Will this scenario change ? The simple answer is no. Running a Middle Eastern country is a difficult job, with very little job security. Qadaffi, Assad, the Shah of Iran, and Saddam Hussein can vouch for this. Middle Eastern leaders know the oil price will not stay this high forever. One day there will be too many Teslas to warrant a 110 dollar oil price. At that stage the status quo will remain in perpetuity and the Middle East will again become the forgotten route between East and West, the Silk Road.
Trader Mindset Toolkit: Maintaining focus during a trading day
The human mind is constantly wandering and traders are no different. Trading regularly requires an abundance of concentration and there are times when the massive burden of information and pressure can lead to lost concentration and focus. Before you start making trading decisions and blowing up your trade here are some suggestions to limit the damage.
The first step to improve your focus is to identify the mental breakdowns that cause you to lose focus.
For example, a trader with very high expectations for his performance is likely to become easily frustrated, lose control emotionally, when he believes that those expectations are not being met.
Below is a list of the top mental errors that can reduce your focus.
1. Perfectionism — When you don’t perform perfectly you lose composure because you become frustrated and then focus too much on your errors instead of the tasks needed to perform well. Remember that the market is perpetual and there will always be another trade. Don’t miss it fretting over the last one.
2. Social approval or worrying too much about what others think — Worrying too much or mind reading into how you think others may judge you distracts you from your performance. You lose composure because you are too concerned with how others may perceive your performance. This can be a problem in todays wired world where the insecure traders take pleasure in being critical of anyone trading successfully. It could also be friends or partners that have irrational views about trading and money.
3. Irrational Beliefs — Irrational beliefs cause you to stay stuck in old, ineffective patterns of behavior. Some people believe having money or being rich is evil and as a result embark on extensive self sabotage in their trading performance.
4. Fear of Failure – Fear is based on your intense need to win and causes you to worry too much about losing or failing. This can lead to you play defensive and tentative instead of composed and free.
8. Dwelling on Errors — When you get too caught up in mistakes and dwell them, it becomes easier to get frustrated and lose emotional control, which will not help you stay composed after errors.
Here are some tricks for helping you re-gain composure during a trading day
To gain maximum composure you must accept that you are going to make mistake and experience setbacks.
Remember you are human and that you can’t be perfect. Learn to be more accepting of mistakes and encourage the ability to move forward and focus on the next trade.
When you do make a mistake have a strategy that helps you regain composure.
The 3 R’s for composure help maintain composure after a mistake or error.
The 3 R’s for composure stand for: Recognize–Regroup–Refocus.
The first step is to Recognize that you are dwelling on the mistake, which limits your ability focus on your trading.
The next task is to Regroup by interrupting the chain of thought. This requires you to battle your own emotions and dispute your irrational thinking. For example you may have a positive affirmation for this.
The last step and most crucial is to Refocus on the next play. Ask yourself what you need to focus on right now to do your best on the trade? The answer will help you refocus on the task-relevant cues for the next play.
Sunday 8 June 2014
Contrarian Trading: Where perception meets reality
The moves in the market, now, reflect an interesting market dynamics. The Euro-zone continues under performing and the US economy is sputtering to life. The hype surrounding economic recovery is based on a market perception that has been fed with European and Japanese financial stimulus and US Quantitative Easing. As the US starts to taper the Euro-zone picks up the baton and runs the printing presses at maximum speed. Things are not right economically , but we follow the traders not the economists. Economists and politicians love a nice bull run. Traders don't care as long as something, somewhere is moving.
Markets are about perception, much of it is not real or connected to reality. The futures market is exactly that, a perception of the future. There are many perceptions of the future. Which is why people bet against each-other. You cannot compete with someone else’s perception of the future, you have to create your own. Furthermore, even though individually people tend to be rational we have seen, in history, as a group they become completely whimsical. The psychological make-up of the market is more akin to a panicky impulsive 4-year-old then a grown up.
If you follow the US market all you have to do is look at the S & P or Dow. The Dow regularly falls over 100 points and regains it based on the flimsiest pieces of news and conjecture. In the modern era where 60 % of trades tend to be through computers and neural networks trading has become much easier. People may pretend that these algorithms are super complex but the reality is that most of them just look at the prices of a few different instruments and some key Twitter accounts. They look at correlations between certain markets and also filter out key keywords from news sources and then place trades automatically.
They react. They are not really neural and clearly cannot predict much. In fact their power of prediction is far worse then human traders. However, they trade better because all the emotions associated with human traders have been taken out of the equation.
It is true, there are the High Frequency Traders and some people who are privy to inside information, but that is nothing new. If anything, inside information is pretty useless as one cannot predict how the market will react to it. Good news can be bad market and so forth. So how does one trade against these mechanical monsters ?
It is pretty clear if you are a regular market follower. The old adage about trends being your friend is great if you are trading on the daily, weekly and monthly charts. A yearly chart of the US/Yen looks very tradeable but on the smaller time frames this is madness.
High Frequency algorithms, neural networks are inherently linked to the human psyche but magnify our emotional problems. They panic buy and panic sell based on a few keywords. They muddle up correlations between currencies because the people who design them hide behind formulas and equations not the truth about markets. It is for this reason that, after the sub prime crisis, the human traders in hedge funds have a habit of turning them off and trading manually when things heat up.
Do your research, and use your system but when the market goes crazy don’t blame it on the computers, dust off one of your nice contrarian strategies and make money. There are many effective strategies based on divergence. Once you start using them you will see divergence everywhere.
Trading divergence is the modern betting against the panic. It is a tough call and not for the faint hearted but as Hyman Roth said in the Godfather II when his associate Moe Greene got a bullet in the eyeball: And I said to myself, this is the business we've chosen.
Saturday 7 June 2014
The Grey Zone
This has been a month of great moves. All month the financial media has been talking up a massive fall in the US markets yet the SP and Dow have been racking up record after record. How do we reconcile the vast ocean that separates perception and reality ? We have been told every day that traders are shorting the market, yet 100s of points later the market is still rising and will most likely continue to climb.
This is a phenomenal learning curve to experience for any trader that sincerely believes the rubbish that comes from analysts and financial journals. The market will eventually fall but in the interim it will wipe out every short contract in iits way. Believing in the hype and calling tops or bottoms and preempting changes in market direction is a brokers wet dream. No sane person attempts that unless they have vast amounts of margin capital or inside information.
In the age of computers, algorithms and vast permutations the simple trader that trades accounts under 10 million dollar is safer following the market. He gives up a few pips at the top and a few pips at the bottom but he makes that up in not getting snowballed for weeks on end my market makers that are happy raking in massive amounts of margin calls on short positions.
The Noise trader approach where you piggy back on the larger market moves and stay in as long as you can until there is a turn in sentiment has been the preferred trading method for many of the most succcessful traders. In fact it was so effective the famous Mr Summers wrote a paper about it. Check out the paper below on Noise trading. And see if it works for you.
The Noise Trader approach to Finance
How Noise Trading Affects Markets: An Experimental Analysis
This is a phenomenal learning curve to experience for any trader that sincerely believes the rubbish that comes from analysts and financial journals. The market will eventually fall but in the interim it will wipe out every short contract in iits way. Believing in the hype and calling tops or bottoms and preempting changes in market direction is a brokers wet dream. No sane person attempts that unless they have vast amounts of margin capital or inside information.
In the age of computers, algorithms and vast permutations the simple trader that trades accounts under 10 million dollar is safer following the market. He gives up a few pips at the top and a few pips at the bottom but he makes that up in not getting snowballed for weeks on end my market makers that are happy raking in massive amounts of margin calls on short positions.
The Noise trader approach where you piggy back on the larger market moves and stay in as long as you can until there is a turn in sentiment has been the preferred trading method for many of the most succcessful traders. In fact it was so effective the famous Mr Summers wrote a paper about it. Check out the paper below on Noise trading. And see if it works for you.
The Noise Trader approach to Finance
How Noise Trading Affects Markets: An Experimental Analysis
Wednesday 4 June 2014
Volatility conundrum
The key ingredient that moves prices is volatility. Demand and supply, creates a market but price volatility moves it. In the past few weeks volatility has been scarce in the commodities and index markets. Volatility in forex has fallen significantly in the past few years. This development does not bode well for hedge funds which thrive on volatility. However, they are partly responsible for pulling the plug on volatility.
Many of the complex algorithms used by hedge funds depend on a number of interlocking variables that provide regular winning trades again and again. The success of the algorithm is the consistency and the fractal nature of markets. Whether they bet for 5 minutes or 5 months they will ensure a steady return.
The drawback of algorithmic trading is the inevitability that markets change over time. In the past hedge funds have been burned in moments of market change. This time they have learnt from the failed lessons of the past and have pulled the plug on the algos. Most traders are sitting on their hands. Maybe they are waiting for the World Cup to finish. Maybe there is some significant news around the corner that we are not aware of. The only real movement seems to be in treasuries. Who does that benefit ?
Many of the complex algorithms used by hedge funds depend on a number of interlocking variables that provide regular winning trades again and again. The success of the algorithm is the consistency and the fractal nature of markets. Whether they bet for 5 minutes or 5 months they will ensure a steady return.
The drawback of algorithmic trading is the inevitability that markets change over time. In the past hedge funds have been burned in moments of market change. This time they have learnt from the failed lessons of the past and have pulled the plug on the algos. Most traders are sitting on their hands. Maybe they are waiting for the World Cup to finish. Maybe there is some significant news around the corner that we are not aware of. The only real movement seems to be in treasuries. Who does that benefit ?
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