The Traders Inner Enemy

The truth is that many people set rules to keep from making decisions.Mike Krzyzewski

I've seen traders sit quietly, motionless, appearing in control, while their minds are in such a twisted rage that they are incapable of closing a bad position. I have seen people curled up in their seats holding their stomach in physical pain from stress. I've been before the screen, myself, palms sweating, blood pounding, face flushed, and adrenaline pouring through my veins, as if I were in physical danger. All I was doing was watching numbers on a computer screen. Ever wonder what the inner enemy is, that makes this business such a battle? What are the forces that can bring out irrationality, even violence, while watching something as logical as numbers?

Learning to conquer the inner enemy may be the single most important element in succeeding as a trader or speculator. While some fail and some succeed, the difference is not intelligence, it is not knowledge. It is the will to execute knowledge! Acquiring the requisite knowledge to trade is relatively easy, execution not necessarily so. Take for example the subject of weight loss. You can walk into any bookstore and find a countless number of books, by experts, on the subject of weight loss. Yet only 12% of those who start a weight loss program actually lose weight and only 2% maintain the weight loss for more than one year. That is a 2% success rate, which is even worse than the 5% success rate for people trading futures.

Whether it is losing weight or trading, the most difficult part isn't knowing what to do or how, the most difficult part is making the decision to do it, and sticking to it. When following through is difficult, it is because our minds are still in a state of conflict regarding which course to take. What is the source of this conflict? Why is it that even when we know what we should do, it often seems impossible to do it?

"My head tells me to stop, but my heart tells me to go for it," this common statement implies a dualism in the nature of human beings; the rational side on one hand and the emotional side on the other. Most people believe these two aspects of human nature are separate, unrelated, and often in opposition to each other. The acceptance of this dichotomy between emotion and reason, the belief that they are necessarily unrelated and often conflicting, is at the root of most human conflict.

How can it be possible to lead an integrated, fulfilled life without suffering constant inner turmoil and frustration? If you accept the premise that emotions and reason are mutually incompatible, it is not possible. As long as you believe the soul is destined to permanently duel with itself, it will. This is the enemy that can make trading such a war. The way to end it, is to challenge the premise that emotions and reason are separate and unrelated aspects of human nature, which means focusing on the nature and purpose of emotions in human life, with particular emphasis on the role of anger and fear.

Reprint from a 2006 Prudent Trader Newsletter

Ranking Fidelity Select ETFs

Yesterday I read a news article on Bloomberg stating that Fidelity Sector ETFs have reached over a billion dollars.  Assets in these exchange-traded funds have tripled from the start of 2014. 

Relative strength is an important and often misunderstood investment thesis. In 1998 UCLA professors Narisimhan Jegadeesh and Sheridan Titman did some tests utilizing price changes (relative strength) over several different time frames. They found a direct statistically significant correlation between relative strength and later price performance up to 12 months later. The most consistent period for defining the initial relative strength was six months.

Relative strength and ranking are also the cornerstones of legendary investors such as James O'Shaughnessy, Bill O'Neal, and Charles Kirkpatrick, CMT.  Here are the top 10 ETF's by relative strength over four different time frames; 3, 6, 9, and 12 months. These are the top 10 out of our list of 1,165 ETF's that have been trading at least one year.

Not enough time has elapsed for the 9 or 12 month time frames. Below are the relative strength ranks over 3 and 6 months.

New Multi Year Highs

Look for a link to last evenings screen at the bottom of this page.

Remember that stocks are never too high for you to begin buying or too low to begin selling. Reminiscences of a Stock Operator (Jesse Livermore)

The Prudent Trader publishes a screen everyday of stocks making multi-year highs. I thought it would be interesting to back test this idea of buying new multi-year highs, this test which occurred a little over two years ago will hopefully be updated sometime in the fall. The conditions of the test:

• SP500 is above its 100 day moving average.
• Stocks 7 day moving average of  volume exceeds 500K.
• We'll allow some room so the stop will be the trailing 3 month low.
• If not stopped out, sell in 30 trading days.
• $100K account maximum position size is 5% of equity - allowing up to 20 positions at any given time.
• Buy and Sell price is always the opening on the following day.
• Run against all stocks in the Worden Database (~7,300), from 1/1/2000 thru April 2012.

Results:

To Get Last Nights List Click HERE!

Fear of Failure Paralysis

You have just made five consecutive losing trades. Your confidence is shaken, and now you are reluctant to make another trade. You begin to think, "Why should I try again, I'll just lose again, and if I do, well, I don't think I can take it." Outlook and expectations influence how we trade. If we recently have experienced a series of failures it changes our outlook. Rather than anticipating a win, we now expect failure. We become paralyzed by the fear of failure. We have trouble putting on another trade. 

When trading, it is sometimes necessary to get the law of averages to work in our favor. That can often mean making trade after trade to determine if our strategy is faulty or if market conditions have changed. It is necessary to counteract the fear of failure and to motivate ourselves to press on in the face of setbacks.

Identify the core assumptions that underlie your fear and refute them. Many times a fear of failure concerns your tendency to avoid facing problems head on. Rather than face our fears, we tend to believe that it is easier to avoid dealing with them by denying their existence. Fortunately, we can often beat this fear by realizing that facing our fears isn't as difficult as we expect them to be.

A second assumption that underlies our fear of failure is our belief that one must be thoroughly competent, adequate, and achieving. Holding such a belief produces fear and anxiety, which for traders often produces hesitation and self-doubt. It is easy to see how you developed this belief. While growing up, whether it was at home, school or work, you often faced adverse consequences for not being capable. Consequently, over time, you learned to believe that you must be thoroughly competent, adequate, and achieving in everything that you do. If you believe that you must always be competent, you will waste all your limited psychological energy mulling over the negative consequences of failing, rather than focusing on what you are doing now to implement your current trading plan.

Don't let a fear of failure interfere with your trading success. You don't have to be perfect. As any seasoned trader will tell you, one is bound to make mistakes occasionally, and if you are consumed with avoiding them, you'll be so anxious and fearful that you will make even more mistakes. So remind yourself that it is not useful to believe that you must be thoroughly competent, adequate, and achieving. No trader can live up to that standard, and ironically, if you try to, you'll have difficulty trading profitably and consistently.

Reprint of 2005 PrudentTrader Newsletter

Non-U.S Developed World ETFs - Over/Under Weight

Relative strength, is a great way to keep you focused. One way is to use a relative strength rate of change, over longer periods, to define weightings of Sectors, Industry Groups, Stocks, and ETFs within categories.

I have found over the years that if the relative strength for your sector, stock, or ETF is positive, i.e. overweight,  surprises, if any tend to be on the positive side.

Today's category is ETF's:  Non-U.S Developed World. A downloadable Microsoft Excel Spreadsheet is linked to below picture, with all non-US developed world ETFs. and includes Underweight, and Market Perform as well.

To download a Microsoft Excel Spreadsheet Click HERE!

Why Are We Such Suckers For Prediction?

I keep articles of interest on my computer and refer to them from time to time. I found this one by Charles Maley a partner, Angus Jackson Partners. Here he takes a stab at digging into our psyche…enjoy the article!

I keep CNBC on all day while I work. Perhaps I think I will miss something, or maybe it’s the background noise that’s appealing. In any event, what I always find amazing is the parade of experts making one prediction after another. I think I would fall out of my chair if I heard one of them say “Well, to tell you the truth Mark, I have no idea”.

What’s most surprising is the arrogance in which these forecasts are made. The forecaster always seems convinced he is right. I think the world is far more complicated than we think, yet we always seem to place way more value in what we know over what we don’t know. If you are an auto mechanic, you most likely know more about fixing cars than you don’t know about fixing cars. Also, errors are easily rectified. In this light, a good mechanic is an expert.

If you are a psychologist or an economist, I don’t think so. In fact, it’s practically impossible that your knowledge of the human condition would exceed your lack of knowledge of the human condition. Not to mention that mistakes can be catastrophic in these “big system” type professions. Plumbers don’t kill people but doctors do. Mistakes when predicting the weather, the economy, or the financial markets can and do ruin our lives. Nothing is as potentially dangerous as a rational prediction in an irrational world. So, are there really experts in these professions or are they just the one-eyed men in the land of the blind? I Guess Yogi Berra, the great baseball player/coach had it nailed when he said: “It is tough to make predictions, especially about the future.”

I think we love predictions because if we make predictions, and/or concoct explanations for those events we predicted wrong; then we won’t feel like victims of randomness. We feel more in control. But are we more in control or just intoxicated by some illusion of control?

In his book “The Black Swan” Nassim Taleb says,” We have seen how good we are at narrating backwards, at inventing stories that convince us we understand the past. In spite of the empirical record we continue to project into the future as if we were good at it, using tools and methods that exclude the rare events.” Funny isn’t it, since the big, rare, unpredictable events are precisely what shape the world. Events like the automobile and the World Wars, the Internet and the Beatles.

I think it’s ironic that by accepting we have little control over most things, actually gives us greater control over what might happen. By realizing our lack of control we may be able to minimize the more negative events. If we realize anything can happen when trading commodities, then we are more likely to actively manage our exposures to big loss and potential ruin.

Charles Maley - Charles has been in the financial arena since 1980. Charles is a Partner of Angus Jackson Partners, Inc. where he is currently building a track record trading the concepts that has taken thirty years to learn. He uses multiple trading systems to trade over 65 markets with multiple risk management strategies. More importantly he manages the programs in the “Real World”, adjusting for the surprises of inevitable change and random events. Charles keeps a Blog on the concepts, observations, and intuitions that can help all traders become better traders.

Sector Watch

Some prefer to concentrate their efforts on the major indexes. Personally I prefer to follow sectors. Below are the 31 Morningstar sectors with various data points that may be of interest. The relative strength ranks are of 31 sectors only, one is best, 31 worst. The relative strength Over/Under weight column is a Prudent Trader calculation. Victor Sperandeo's diversified trends indicator is represented in the next two columns. This is a monthly calculation only and from his book Trader Vic on Commodities. The rest should be self explanatory.

Click Here for large image

Relative strength is an important and often misunderstood investment thesis. In 1998 UCLA professors Narisimhan Jegadeesh and Sheridan Titman did some tests utilizing price changes (relative strength) over several different time frames. They found a direct statistically significant correlation between relative strength and later price performance up to 12 months later. The most consistent period for defining the initial relative strength was six months.  Relative strength and ranking are also the cornerstones of legendary investors/authors such as James O'Shaughnessy, Bill O'Neal, and Charles Kirkpatrick, CMT

135 Indexes

Perusing message boards it kind of seems traders are trading indexes. Perhaps for the two or three times leverage, who knows.  If you're interested in indexes here's a list of 135 with various data points for you to analyze and ponder.

Zoom to read Data (Cntrl + or Cmnd + for pc or mac). Or right click and open image in new tab.