Being young in America means you get to pay

Upholding Obamacare means young people now get to learn what its like to pay for everyone else’s healthcare and not just their Social Security now. Maybe this is why we don’t teach them math skills, so that they dont understand what we are doing to them

Profitable ETF Trading Strategies: Color code price zones to improve decision-making

Intraday trading brings together perspectives from any different time frames into a single arena.  Sometimes it is hard to make sense of why buyers and sellers react so strongly at certain price levels and not at others. How can you quickly and easily organize the information from different time frames to shape your trading decisions?

One way to to frame your trading environment is to look at multiple time frames and find patterns and price levels that indicate support and resistance levels in the past. We cannot know with any certainty why a price level became support or resistance. The good news is that we don’t need to know why, only that it DID!.

The reasons why support and resistance occurred fade pretty quickly in time. All that remains, like footsteps in the snow, is the price record maintained on charts for all to see.  The places where price turned and reversed will begin to take on a power in the minds of all chart readers and will begin to influence their decisions to buy and sell, to preserve profits or anticipate  reversals.

This is why congestion areas begin to form around certain price levels.

In the same way that we should not be supposed to see traffic forming around major cities, we should expect choppy price behavior around previous support and resistance levels, and near the 50 day and 200 day moving averages, the two most popular moving averages.

Once you have identified the obvious support and resistance levels, treat prices greater than the congestion area as “Green zones” where you would not be surprised to see price move swiftly up.

Identify the congestion areas as “Yellow zones” where choppy behavior is the norm and where you do not have a particular edge unless you are a master tape reader.

Red zones are open price areas below congestion, where price can be expected to fall quickly once it breaks out of congestion.

In the Red and Green zones, which are really mirror images of each other, you want to be positioned to go with the path of least resistance.  There’s not a lot of time to wonder what to do when price is here.  Don’t chase price, but certainly take advantage of limit orders to pull you into good positions.

In the Yellow zone you should never chase, and always require a visible 2:1 reward to risk ratio inside the yellow zone to justify your entry.  Don’t expect price to break out either, since congestion zones we expect price to be choppy and for breakouts to be false.

Framing your trading decisions in terms of these 3 color codes can definitely help you make proper decisions in the heat of the moment.

Profitable ETF Trading Strategies: reflections on System Quality Number

here is my take on the IITM System Quality NUmber idea (SQN): and fat right tails. it’s what I said to chuck whitman on this topic 

on my -1R loss exits: this is the result of a single trade decision cycle on that trade that is very effective 

now, on the possibility of a 10R win that “skews” the histogram of results and increases the variability of the data set and therefore lowers SQN and therefore lowers recommended risk 

the essential question is this: was the 20R a consequence of the act of entry, of the fact of entry, independent of any trader decisionmaking along the way?

if you have no influence over the achievement of 20R in the trade, then the argument that the increased variability suggested by the 10R return should reduce the SQN is warranted 

because upside variability that is a result of the market’s “decision” ought to imply the potential of the same kind of downside variability suprising you

that is the essence of the marble game, that once you decide to play that the result is pure random function generator 

BUT: what if you had played the washout pattern in SPY on 10 March and followed every rule and were able to manage the trade thru 6 iterations of successive Washout Cointinuation patterns and as a result of 7 cycles of trade decisions, were able to bring in 10R, yet never risked more than 1R on the downside 

everything is now a function of how you classify that trade batch 

if you say: that is one episode, and the trade is 10R, and the 10R implies i could have taken a 10R loss which is beyond my management ability, then i will say i disagree 

if we have traded a WO pattern system 200 times and my 100 losses show an avg loss of less than 1R, AND my worst loss was 1.4R, and my trading mgt skills enabled me to manage risk properly all the way up the ladder, then simply treating the WOCs as 6 separate trades on avg of 1.6R (6x 1.6R = 10R) gives a true picture of the quality of the system 

the Sortino ratio which examines the stats of just the losses with StDev is the right way to understand the losses and since computation is free you SHOULD do both the standard SQN AND a Sortino to better understand your loss pattern to make your decision on how much risk to take on 

now, if i can get a 10R thru intraday trade mgt by getting a carefully engineered, risk controlled, very manageable morning hook which gives me a boost and my trade is a single continuous episode but Inever was in a position to experience a 10R loss, then you would be nuts to penalize that system

you MUST really know your edge, and where the 10R comes from and decide if it truly represents the possibility of expereincing a 10R loss 

you MUST know your system thoroughly in order to create meaning, to fully understand its risks (as much as it can be understood) 

portfolio heat rules and other heuristics must be in place to protect us against -10Rs beyond our control such as power outages, discontinuity in the mkts, so that we never commit the hubris error of LTCM 

we are no where near that in our application 

here is where SQN is VERY VALUABLE: when i have 5 sets of mechanical rules that i am testing, iindependent of trader discretion, as a check on the robustness of the mechanical framework           

SQN can give me the basis for deciding which to pursue, to revise and extend 

what your studies are revealing is that you are understanding how the SQN math works 

this is a good thing 

example: this morning in the seminar we looked at a Triple Screen on GOOG which if executed mechanically would have given a .8R win going in to the close, but which had “open risk” ie trader initial cpaital at risk AND was in the red for 5 hours until near the close 

by applying trader Quality to it, we engineered the entry timing in order to get a 2R iStop, and scratched the 1st trade, and then earned 6R on the identical setup on the next leg up. 

the open risk was 15 minutes, when we moved to no lose, and then we spent 4 hours in the green until deciding to cash a 5R before the close 

i guarantee that the 5R win should not be interpretted as implying increasing downside volatility and thus lowering SQN 

coming to that conclusion would demonstrate IN MY OPINION, an inferior understanding of interpreting SQN 

let me suggest what true Quality measure could/should include: amount of open risk x # of minutes 

1st GOOG example: 15 min red all of which was <1R and then all green rest of the day up to a 5R win 

correction that was the 2d GOOG example: the 1st GOOG exmaple eas mostkly red all day = lots of pain, low quality; compare the “time area in the red” to the “time area in the green” to really understand the “quality of each system. 

charts to follow 

bottom line: you better know where your outsize R comes from 

you must be ruthlessly focusing on your R losses to ensure you are calibrated in identifying mkt risk to your idea 

you must be open to the potentials of achieving risk managed high R wins, ie fat right tails 

the end

Profitable ETF Trading Strategies: appreciating the power of rehearsals

Rehearals are considered to be one of the highest payoff practices in the military planning process. It’s where units develop and reinforce the patterns of action and decision-making that make all the difference in combat.  Rehearsals  will improve your trading practice as well, if you understand how to do them well.

There are 4 main reasons why rehearsals can improve your trading practice:

1. Practice essential tasks.  By identifying the critical tasks in your systems, you can focus on the ones that contribute the most  to success or failure

 2. Identify weaknesses or problems in the plan. You often will not discover  gaps in your logic or problems with the concept until you have “driven the route ” from start to finish from the perspective of the operator. This is especially true if you have built your plan out of component pieces, each which are individually sound, but have not yet been linked together before.

 3. Coordinate subordinate element actions.  When you use a building block approach to trading system development, sometimes  you will discover that the sum of the parts is different than the whole. This means that there are unknown or unintended consequences of piecing things together which are not revealed until you put the plan into operation, or better yet, have a decent rehearsal to test the seams.

 4. Improve understanding of the concept of operations. Once you have driven the entire plan, you will develop a sense of completeness and appreciation for its qualities or problems areas from the top down. You will be able to see the seams, where pieces come together in utual support or in sequence.

By paying close attention to your rehearsals, and making them as realistic as possible, you will be able to dramatically improve your trading practice.

Taken together with effective After Action Reviews, rehersals are an important part of your preparation phase. Time spent here will add directly to your bottom line.

Profitable ETF Trading Strategies: monitoring global markets

One of the phenomena of a truly global market is the interconnectedness of everything. A good example for situational trader is the recent episode of swine flu that has many people worrying about a worldwide pandemic.

Because of the concentration of confirmed cases in Mexico, the first place we could look to find a potential weakness at the open on Monday morning would be in the Mexican ETF, symbol: EWW. In fact what we saw was a gap down opening of eight percent, followed by weakness throughout the day to close down 9 1/2% for the  session.

The next place that we can look is to expand our focus to the geographic region, by looking at the ETF for Latin America, symbol: ILF. As we might have suspected, Latin America was down much greater than the rest of the world also. So, we can see the connection between countries and regions very clearly here.

Mexico and Latin America are both members of what is considered to be emerging markets. This collection of countries is represented by the ETF symbol: EEM. This ETF was also down much more than the rest of the world today. What contributes to the potential weakness in emerging markets is perhaps the relatively less resourced national healthcare systems which may make emerging market countries more vulnerable to a flu epidemic than the mature first and second world countries.

Taken together, these ETF’s show us how macro economic events in the news unfold across country and regional boundaries and can help us confirm the hypothesis of tradable ideas that appear every day in the news.

By developing trading scenario ideas, the short-term trader is able to assemble a bundle of ETF’s that serve both as tradable vehicles and as research instruments. By having all of these on the trading screen it is possible to see the idea of the tradeunfold in real time right before your eyes. You can then select which of the targets is moving the most in your preferred direction and you can turn your research idea into a tradable vehicle.

By monitoring a standard set of international, regional, country and specialty ETF’s, the short-term trader is able to monitor world events and take advantage of trends in the global market. 

Profitable ETF Trading Strategies: insights from cognitive neuroscience

Cognitive neuroscience has found seven important findings about how your brain is wired that affect your performance. 

1.       The way you sense information and the way your senses are connected to your brain are unique and diverse.

2.       The more you use a particular style of cognition and sensing, the more developed that skill and modality becomes.

3.       Different life skills and job requirements need different kinds of cognition to exploit the best opportunity for success, so it’s important to match your strengths with your profession.

4.       The physical environment you are operating in has a direct impact on your sensing and performance.

5.       When you receive information through your preferred mode of sensing, then your ability to accelerate learning and increase performance is enhanced.

6.       In the same way you have strengths and preferences and sensing modes and cognition style, you can expect to have certain blind spots as well.

7.       At a certain level of stress, performance is reduced no matter which cognitive style and sensing mode you favor. 

Taken together, these seven insights which are supported by strong science, suggest that it is very important for you to align your strengths with a favorable environment when you want to rapidly accelerate learning, understanding and productivity. 

As an individual, it is worth the time to conduct self awareness exercises that will help you identify your preferences and strengths so you can apply them in your career and personal life. 

As a member of a team you will want to know the strengths and preferences of your fellow team members, in order to improve your organization and cooperation. 

As a team leader, you’ll want to ensure that your processes and policies take into account the rich diversity of human cognition so that you leverage multiple points of view and learning styles and so that you ensure you have no group blindspots. 

As a trader, you’ll want to ensure that your trading style and trading environment are aligned with your preferred modes of perception and that your physical environment is conducive to high performance.

Reflecting on the source of qualitative judgement

Profitable ETF Trading Strategies: Respect Volatility, use its power for good

At the most fundamental level, volatility is the fluctuation in the price of an asset. The greter the price swings in the shorter periods of time, the greater the volatility. Periods of great volatility are like thunderstorms. They get your attention.

Volatility is an absolute requirement for a trader to make money. Most investors look at volatility with fear and trepidation, and properly so, because wild swings in price are an indication of uncertainty about the fair value of the asset in question. This uncertainty will play havoc with your bottom line as an investor. It is a normal tradeoff consideration for investors to give up the potential of outsize gains in exchange for protection against downside volatility.

 

It is clear from scholarly studies that increases in volatility correlate strongly with declines in equity value. If you look at bear markets you see volatility everywhere, leading to tremendous gains on up days and tremendous losses on down days. This volatility  is what drives longer term investors to the sidelines and creates the window of opportunity for longer term value players to establish excellent entry points for long term holdings in beaten down companies and sectors. This eagerness to buy value at a discount is why we see buying pressure even in the midst of the worst bear markets.

 

Traders who are looking to make their loving off the buying selling of inventory need the volatility of longer term position traders and short term scalpers to move price in swings that last long enough for them to realize their gains while offering the buyers and sellers from other time frames reasons to get in and out of these positions as well.

 

Because swing traders do not need fundamental beliefs in their positions they are able to operate successfully in swing trades during bear markets, and providing that they can manage their risk in the periods of higher volatility, should be eager to trade on the most violent of das in the market.  For a swing trader the greater the intraday volatility, the easier it is to see opportunities and frame favorable trades in terms of reward to risk. 

Like electricity, volatility can be your best friend or your worst nightmare. As a trader you must learn to use the power of volatility responsibly and effectively.  Stay grounded and respect the power for your own good. 

Profitable ETF Trading Strategies: Good traders know and exploit their edge

As an individual trader, you must be absolutely clear about where your edge is in the market place so that you can ensure your trading strategies are designed to put you into positions where your edge can make the difference against the average market return. 

Let’s be clear too: your edge must give you a reliable means of achieving better than average market returns or you are much better off simply buying and holding lowest cost broad market index exchange traded funds. To do otherwise would be a waste of your time and get you a lower than easily achievable returns on your capital. 

When I consider institutional traders, I see their advantages in computing power, depth of fundamental research, administrative trading cost efficiency  and legitimate inside information, I quickly conclude that there is no way I can find an edge by trading in direct competition with these organizations on a fundamental basis. 

This means I am going to steer clear of situations where my edge would consist of having a better understanding of the fundamental business model and market opportunities of individual firms. The fact that so many businesses go out of business due to misjudgments of market conditions when led by  experts who have a made a career out of narrowly focusing on that line of business suggests to me that I can not hope to have an edge in fundamental analysis. 

I also know that I am not capable of scalping better or market making better than brokerage houses who are fighting for fractions of pennies on large volumes in time periods measures in fractions of seconds. So I will stay out of that trading environment as well. 

I know that I need enough opportunities to allow my statistical edge in trading to manifest, and so I cannot afford to have overly long holding periods and wait for the ship to come in. I believe I need to be like Walmart and trade in quality merchandise that everyone wants, take my decent profits quickly and cycle through inventory efficiently. I want to be the swing middle man helping the market achieve orderly distribution. 

This leads me to look for my edges in the swing trade time periods of 1-5 days, and looking to lock in profits and/establish  no-lose positions as early as possible on the entry day, and only hold overnight when I have clear indications that the extra overnight risk is justifiable. 

Know your edge and stay within your area of competitiveness.  

Profitable ETF Trading Strategies: Stalking your way to success

One of the more neglected topics in trading systems development is the concept of stalking. Traders, particularly early in their career will tend to spend  lot of time, if not ll of their time, focusing on the entry, reasoning that if they can get that part right they will have some control over the market’s inevitable follow thru, which must go according to plan, because of the predictive power of their perfect entry technique. 

If, as a trader, you are able to survive this philosophical approach to the market, based on certainty, control and predictability, you will move along to other aspects of a complete trading system, like the exits, position sizing, trade management of open positions, portfolio heat, overnight rick management, re-entry and matching system performance to specific market conditions. 

These are non-trivial issues in the development of an effective system. Stalking the trade however has to do with the period before the trade is engaged, and offers you opportunities to leverage what may be your greatest edge as an individual trader, if you have discipline and patience to do it properly. 

I believe that stalking is intimately and directly connected to your deep understanding of the edge your trading system has. The better you understand your system and your edge, and the market conditions that favor its use, the better position you will be in to stalk effectively. 

Think of a pride of hungry lions on the hunt. Their stalking consists of knowing their market (their prey) and where they will inevitably congregate in large numbers (watering holes and  grazing lands which represent their trading opportunities). Effective stalking consists of taking advantage of their natural strengths in the market conditions that favor their methods. 

Liosn will sniff the air at a hint of a suggestion of the possibility of their prey. They will scan widely and contuously and begin fllowing the scent until they can vector in on their target and begin their hunt in earnest. Their stalking gets them reliably into the right position to begin the hunt.  That’s what your stalking must do for you.

Your stalking should include some early warning signs that let you know the market and trade conditions that favr your system are starting to emerge from the market mosaic. You can start posturing yourself for action early enough to conduct trade framing and execution rehearsals, and contingency planning, so that if the favorable conditions continue to develop you will be able to take the trade in stride, with full preparation and risk management in hand. 

Depending on the nature of your system and your edge, your stalking may take a different form, but it will always incorporate an early earning system, preparation planning and rehearsals if you want to achieve best results. 

Patience and discipline are the essential qualities of mind that you will need to exploit your deep understanding of your edge.