Monday, August 24, 2015

Market Takes a Breather and Drops over 9% in 4 Days

What a difference a week makes! Last Tuesday, the Dow closed around 17500. Today the Dow closed at 15781, about 9.3% lower – erasing all its gains for the year.

Of course all the market talking heads have plenty to say about it after the fact, but what were they saying before it happened? If they don’t have the ability to warn of impending market reversals, then how much weight should you put in their “after market” analysis?

Mega moves like this is a great illustration of why one should always employ stop losses and risk management when in the market. The only absolute control you have is when you enter the market and when you exit.

It’s a guaranteed fact that there were traders who were long in this market without employing any stop losses. It’s also a near guarantee that those traders had their accounts wiped out.

It’s also likely that there are traders who were short without using stops, and those who didn’t blow up their accounts with the market’s move up during this year likely made a killing these last few days, but these type of traders are doomed to give their returns back to the market because eventually they will be on the wrong side of a massive move and suffer the same fate as the traders who wiped out their accounts. Trading without using stop losses is equivalent to engaging in Russian Roulette on a continual basis- it’s not a question of if you will suffer devastating losses, but when.

The true professionals love downdrafts like this as they look for some good bargains that were oversold due to excessive fear. Of course low prices can head even lower, so risk management and stop losses are still needed.

Those like myself, analyzing market price behavior, have been given a golden year of data. The market spent several months in a pretty narrow trading range that heavily favored a delta neutral style of trading. The big drops now favor trending and momentum players. Seeing how the market behaves in both a tight range and trending environment provides great insight opportunities.

Saturday, July 11, 2015

Life Cycle of Trading Blogs

In the past I blogged about the scarcity of personal trading blogs, and the difficulty of finding US based trading blogs in general on the Web. For the trading blogs found, they typically go through the following stages of existence:

1) The Introduction

The start of a trading blog is very similar to any blog in general- a brief introduction followed by what they intend to write about. There we see one big split among trading blog intros:
a) Normal
b) Attention Grabber/Proclamation

Normal intros just state their case that it will be a blog on trading without much fanfare. The "proclamation" intro makes a big claim about intended performance that attracts attention from others. An example of attention grabbing blog intros:
I'm new to trading, but will try to make big bucks from my modest account.
These fall under claims such as someone starting with around $30K, and saying they plan on building it up past a million bucks over time. Some even put a time limit on this feat to add to the pressure of achieving it. Mind you every trader is aware of (or at least should be) the high rates of failure in day trading and the corresponding low rates of success. Hope springs eternal with new traders. =) Another example would be someone saying they will double their money on a regular basis over time.
It's fair to say even those who make far more modest claims privately hope to achieve these type of results, but don't wish to be judged by that bar level.

2) The Activity Phase

Here is where the actual blogs of traders put their plans into action. Results here invariably follow the reality of low success probabilities with the majority of trading results being mediocre at best or losing big sums of money at worst. There are a few rare ones that show high promise with successful results with at least a positive balance over time. The successful ones attract a good amount of attention since they are few in number.

3) The End Phase

Trading blogs reach a point in time where they mostly end in one of the following ways:

a) Blowing up- when a day trader loses all their money and can no longer trade. The odds favorite for this type of scenario typically goes to the blogs that make those big proclamations of making big bucks fast. This makes sense since the pressure to perform results in greater risks being taken. A side effect of many "blow up" blogs is their sudden disappearance, as in the blog will be taken offline as if to erase the past.

b) Abandonment- this is the typical path most blogs of all types take. Blogs become less frequent over time and eventually stop with no official ending.

c) Official Hiatus - When a trader decides to take some time off to work on their system due to lack of performance expectations. The majority of these don't return.

These above three are the most common ways trading blogs end. Here are the extremely rare ones:

d) Officially Giving Up- Trader admits day trading is too hard to master and actually calls it quits. No one like to admit defeat so this makes sense.

e) Successfully Retired- When a trader successfully trades the market over time and eventually retires the blog to move on to other ventures and generally enjoying the lifestyle successful day trading provides. As expected, this is the rarest of all endings.

I've seen some short term successful trading blogs stop blogging, but I've never seen one that showed their continued success over a significant amount of time like at least a year or more of consistent high profits, which justified their reasons to stop blogging along with a formal ending saying they were moving on. Just to be clear, I'm referring to personal trading blogs and not commercial ones of any individuals selling training courses or systems of some sort.

Of course, that's not to suggest successful non professional traders don't exist, just that many likely don't blog.  Here's an example of one of the best past blogs I've seen chronicling the performance of traders that don't blog: Link

An example of an extremely successful personal blogging trader is Michael Burry, a medical doctor who traded/blogged during his off time as a hobby. He eventually created a hedge fund and scored huge on his correct market calls during the 2008/2009 market crash.