Archive for September, 2008

“maxpain” Short term trading technique pays off in WB today

September 30, 2008 Leave a comment

the trading room kicked in with another superb short term trade in the “maxpain” category today thanks to our most excellent market observer and trader Robert. It was interesting to see how different traders all applied their own rules for trading the position, with the mastermind effect providing some excellent insights for us all to consider. I am exceited and proud of the work the gang are doing there every day. 

target was WB (Wachovia Bank) which has the distinction of holding my student loan for the doctoral program :P.  It reminded us of the Thornburg Mortgage  maxpain pattern from earlier this year which was such a phenomenal short term trade (although radioactive, as Thornburg went bankrupt later).  Framing the trade to reflect a belief that WB would not go bankrupt enabled a healthy positive move already with a promise of more to come. 

I am preparing an e-book on this trading technique and will doa  draft presentation this month at the next ETF seminar in Ralegh. Melita will be dragging me to Australia and germany next year, so the road show goes a little more interntional next year 😛 

the intraday technique we have been noodling around with for the past year in the chatroom, and then refined at the first Tortoise KC workshop has been very handy for opportuntiy trading in this market with its historic volatility

Here’s a sample of our daily trading plan Decision Support Template:

Categories: Markets Tags:

Profitable ETF Trading Strategies: Reversion to the Mean Trading Style

September 30, 2008 Leave a comment

One of the time tested principles of market dynamics is the principle of the Reversion to the Mean. Over the long run, performance, volatility, price, relative strength: all of these measures mathematically require that periods of out-performance shall return to the mean.  Naturally, this is not prediction, only an appreciation of how the math is performed. Nevertheless, it does allow for the trader to establish some shorter term trades that have very favorable reward to risk characteristics.

ETFs, by their nature as a composite trading instrument, are even more likely to exhibit the reversion to the mean behvioral characteristic than the stocks that individually compose the ETF. It is now a habit of mine to frame recent performance for a basket of ETFs in terms of the number of standard deviations they have moved away from their recent mean, and then look for the first signal of price evidence that the reversion to the mean has begun. I take that opportunity to see if I can frame a favorable reward to risk trade based on a stop at the recent turning point (the hypothetical end of the last swing) and a return to the mean.  If I can get a 2:1 minimum, preferably 3:1, then I will take the trade, using the normal risk management and position sizong algorithms in the kit bag.

Today’s trade in Wachovia (WB) (though not an ETF) and last week’s trades in EEV (2x inverse emerging markets) and ILF the Latin American ETF are all excellent examples of this trade strategy.

What I like is that it does not require fundamental analysis (I dont have a trading edge there) and it reduces individual company risk by virtue of using the ETF.  Example: today’s WB trade, since it is an individual stock, does not allow me to risk as high a percentage of my portfolio as I could with an ETF.

My current practice is to use a 180 day look back period for establishing “normal” and then considering 30 day look back periods for the current proprietary indicator reading to determine conditions of overbought/oversold. Using this screen and filter technique has been satisfactory for me.

Congressional malpractice: fire them now

September 29, 2008 Leave a comment

While the Dow experiences its worst point drop ever, and the rest of the world is in absolute freefall, our Congress, led by the People’s House, are taking off 2 days to…wait for it…. celebrate the Jewish holidays!  You can’t make this stuff up.


If they were doctors , you’d sue them for malpractice, and certainly wouldn’t think of putting the scalpel back into their hands where they could do more harm.  After feathering their own nests as lobbyists and regulators and board members of the GSE’s, former and current members of Congress look like a bunch of ostriches and now are demonstrating a singularly tone-deaf lack of urgency in the face of a crisis greater than that represented by the Iraq War. 

In that case, Congress simply failed to perform their constitutional duty of oversight, but now they threaten the underpinnings of Western civilization and the new world order of peaceful capitalism and western style trade.

Dictators and warlords are sharpening their knives as they contemplate the new found impotence of the US to act in the face of naked agression in Georgia and now, by extension, anywhere else in the world. D

Does anyone seriously think we could possibly undertake another intervention anywhere in the world given the costs of the current over-reaching?

Meanwhile, Congress fiddles while resting, and the candidates, mutually indistinguishable, continue to pander. Politics as normal is what we get when we are incapable of responding to truly exceptional circumstances.  Martial law is not impossible to consider and further nationalization of crucial industries is not far off. GM is a prime candidate for nationalizing for national security purposes. For the first time in history, a heavy BCT is explicitly assigned the mission of homeland defense in the continental US.

Russia’s next move will be dramatic. I wonder what purpose that nuke armed ship sailing slowly towards Venezuela serves?

Categories: Markets Tags: ,

Profitable ETF Trading Techniques: Hedging your long term portfolios with ETFs

September 29, 2008 Leave a comment

The long term advantages of a buy and hold strategy are well known, and well supported by scholarly research.  However, there are some simple, effective things you can do during confirmed bear markets that can bring you peace of mind, protect your long term positions, secure your retirement, and protect you against the most visious of bear markets.  Exchange traded funds turn out to be excellent tools to accomplish these purposes. 

Here are some ideas for you to consider with your financial advisor.  Please remember that these comments are generic, and do not constitute investment advice.  Investing has inherent risk, and you must do your own due diligence

Bear markets are relatively infrequent, but the selling pressure can be painful and have long term impacts on your bottom line. This is especially challenging fro peple approaching retirement who may have been counting on normal bull market returns to help them achieve their financial objectives.  How can you recognize a bear? What can you do about it?

The simplest method of identifying a bear market for purposes of this discussion is to use a simple rule of thumb favored by institutions. It’s important to look at tthe the market througy the eyes of institutional money so that you are prepared to take advantage of the trends established by large money flows. 

On any free charting service, like Yahoo Finance or MSN Money, you can track the 200 day moving average. When price closes below the level of the 200day Moving Average, you can treat the market condition as bearish.  Studies have shown that the average return of stocks and the market are noticeably lower during periods when price is below the 200day moving average.

What can you do?

Consider hedging your long term positions by suspending the purchase of additional securities, and rather, place that money in an inverse market ETF, like  DOG, which is the inverse of the Dow 30 industrials.  This position will make money when the market goes down, and serve to offset the losses from the long positions in your portfolio.  This one act alone will tend to smooth out your equity curve.  When price comes back above the 200day moving average you would close the short position (or inverse ETF position) and return to a long only posture.  In this manner you can smooth out the periods of market underperformance.

There are other more sophisticated shorter term strategies available to more active traders, but this idea will give you a start on your research.

Categories: Creativity, Markets Tags: , ,

Profitable ETF Trading techniques: Pair Trading in Down Markets

September 29, 2008 Leave a comment

In a nutshell, here is what pair trading is all about.

You pick 2 trading instruments that you believe will continue to perform on a relative basis in the way they have been.  Thsi means you think the stronger one will continue to be stronger, and the weaker one will still be weaker.

A pair trade is a way to neutralize market volatility.  As an example, right now the US market is losing money every day.  Emerging markets are also losing money everyday. The crucial difference is that emerging markets are losing money faster than US markets.

Since this relationship may very well continue for the near future, here is what you can do (hypothetically, for purposes of discussion and education only): 

  • Go long the US market by buying shares of the S&P 500 exchange traded fund (symbol: SPY).
  • Go short an equal dollar amount of the emerging markets exchange traded fund (symbol: EEM).  T
  • Then on days when the US is down 3% but emerging markets are down 5%, you will net the difference in the 2 performances, which in this example is a positive 2%

As you can see this method will neutralize market volatility and allow you to make money based on the difference in relative performance. 

Exchange traded funds are an ideal way to play this kind of short to intermediate term trade because they are composites of underlying companies, and you are able to minimize the risk of idividual companies.

By analyzing a relatively small number of exchange traded funds, you will be able to find some persistent macro-economic trends in the market that give you an opportunity to make money even when all markets seem to be going down.

As with all investments, these have been hypothetical examples and you should do your own due diligence, and consult with a financial professional.

Categories: Markets Tags: , ,

Fear of failure? Failure is the state of nature; success is what’s surprising

September 28, 2008 Leave a comment

Why do we fear failure?  Why do so many things fail?
What can we learn about failure that protects us from the shock of actual failure?
Why do we persist as a species knowing the odds are stacked against us so badly in just about anything we do?

I have been reading some commentary and advice about overcoming fear of failure, and wanted to comment on some ideas from an excellent book I am currently reading by Paul Ormerod “Why Most Things Fail”, a scholarly look at the normal phenomenon of why even robust successful, organizations, entities, and species fail on such a regular basis.

Ormerod draws some very interesting parallels between the rates of failure of dinosaur species and large human enterprises like corporations, and there seems to be some compelling parallels.  He makes the usual observations on the well known failure rates of new business enterprises as well.  From these many documented evidences of categories of failures, he begins to develop a sense of an Iron Law of Failure. He basically asserts that life is so variable and so complicated, and populated with so many organisms and enterprises that are already very lean and mean that the margin of error for success is extremely narrow. 

Couple that fragility with a healthy dose of environmental variability and you have a recipe for almost certain failure.

Our natural optimism and willingness to suspend disbelief allows us to focus on how an idea can succeed, whereas looking at the results of a category of enterprises would lead us to conclude that failure is normal and expected.

Rather than concluding that action is futile, this may actually help us get over fear of failure, since it is by far the most likely outcome. Free of that fear we can safely venture with our ego intact since failure seems to be an integral part of nature and not a personal shortcoming.

So take your pick: If you act you will probably fail, but if you don’t act, you will absolutely fail.  Where are the odds?

I find that a very freeing thought. To act without fear or worry, to do my best, and accept the outcome, and keep learning.  One day it will click.

A reflection on Problem-solving vs Decision-making

September 27, 2008 2 comments

I see an important distinction between problem-solving as a method and decision making as a process. I see problem solving as an important component of decision-making but I see this distinction: decision-making seems to be the ultimate act of convergent thinking as a prelude to action. I see problem-solving as an analytical or intuitive process of gathering facts, sifting and sorting, ranking and filtering, and forming and describing; I see decision-making as the executive action that provides specific context and value judgments that lead towards actions. So I think they’re complementary but not identical. I think it takes different skill sets to be able to operate effectively in both domains.

There is a continuum from rationality to bounded rationality to garbage can method to recognition primed decision-making. The garbage can method describes the case where problems, solutions, money, action officers are all jumbled together in one spot (ie “rattling around inside a garbage can”) with action occurring when any two  intersect. Each method can be useful, but I think the garbage can method is poorly named when in fact I think it is the most prevalent decision-making style in bureaucracies and governments in complex organizations.

I think this is because of the many different roles people are playing inside a large organization: some are resourcers , some are in sales, some are in manufacturing, some are in HR. When all of these competing agendas with their different time lines and projects are put into one big pot it is normal to see decisions being taken when any two of them come into contact. Describing this as the “garbage can method” has a tendency to trivialize this important political, sociological process.

I think Vroom’s decision-making styles continuum is excellent to the point where I use it in the classroom to describe different options available to large unit managers and leaders. The decision tree is particularly effective in laying out a systematic, coherent, logical approach to solving problems that don’t lend themselves necessarily to recipes.

Gary Klein’s recognition primed decision-making is excellent and I find it very appropriate at times when experts are in a position to make judgments within their domain of expertise. Klein offers this as an alternative to pure rational decision-making. My particular area of interest for this deals with a third category however. And that is when we are faced with solving problems and making decisions that go beyond rationality and bounded rationality domains of expertise into the area of ill structured or wicked problems. The Army is looking for ways to move from ill structured problems to the domain of semi structured problems where either expert or rational decision-making then becomes appropriate. I am examining how the Army’s proposed theory compares to current theory and practice in this area.

I think it’s important to address the distinction between problem-solving and decision-making so that you can be clear is a leader about what you’re currently doing and so that your people are not confused.