BarroMetrics Views: Few Are Chosen

Many hopefuls come to to trading looking for their place in the Sun.  The attraction comes from our human core believe that we are the masters of our own destiny - that we have a say in the role we play in life - that our destiny is not fixed at birth. But at the same time, we give ourselves so many ‘reasons’ why we should not make the attempt or having made the attempt why we should not continue. At the base of those reasons lies ‘fear’.

We are afraid to give our all to the changes we need to effect to succeed:

• “What if we do really try and fail? We will be left with the scaring memory of failure!
• Worse still, we’ll be left with the ‘reality’ that our present is our future without hope of change!”.

So, we don’t make a real effort - many of us take the easy road: we ‘wish’ to change but fail to ‘want’ to change and thus, our default future does forever become our present. But it need not be so.

If we are not currently successful in our trading, we need to make the changes that will transform our present to the future we desire. One way of doing this is to apply Sparrow and Knight’s KASH model. The model is shown in Figure 1, (Emotional Intelligence Coaching). The figure shows that success in any field is dependent on Knowledge, Attitude, Skills and Habits.  Most newbies fail because they tend to focus ‘knowledge’ and little else.

This focus, as I have written elsewhere (search for “Coyle” in this site), is the result of the educational model available to traders; the model works against rather than aids the newbie in his quest for success.

To succeed you need the other areas. The first step to success then is to employ the tools and language pertinent to the thinking and emotional brain. By doing so, we increase our chances of succeeding where so many have failed.

Figure 1 Tip of the Iceberg

Refer this blog post to a friend or colleague…

Cross ref

 http://idkitana.wordpress.com/2010/03/10/cashflow-with-ray/

Cashflow with Ray

March 10, 2010 at 6:44 pm (Uncategorized) · Edit

Analysts say Cathay profits will be better than expected. Takashi Toyokawa, financial correspondent at dealReporter and Ray Barros, CEO of Ray Barros Trading Group discuss the numbers ahead of their release with CNBC’s Oriel Morrison.

Predictions of Silver & Godl

http://www.cnbc.com/id/15840232?video=1436730438&play=1

Viewer emails

http://www.cnbc.com/id/15840232?video=1436734072&play=1

Refer this blog post to a friend or colleague…

BarroMetrics Views: Reminiscences of a Stock  Operator

One of the first books I read was Edwin Lefrevre’s ‘Reminiscences of a Stock Operator’; it is still one of my most thumbed books. Every 18 months or so, I re-read it and always seem to find some nugget of information I had previously  overlooked.

Now Wiley Press has come out with an Annotated Edition that provides historical comment alongside the story. It brings to life in a way I had not thought possible. How often have I read the name ‘A. R. Fullerton’ without realizing that it was E. F. Hutton. For those not trading in the 1980’s, E F Hutton and Co itself makes a rollicking good yarn (see http://en.wikipedia.org/wiki/E._F._Hutton_&_Co.)

So that’s one reason to read this version: the added information makes it an even better story to read.

But that’s not the main reason I love Reminiscences of a Stock Operator; the main reason  I keep going back to it, is because it is a refresher on what is needed to be a successful trader.

For example, on page 3 (annotated version), Lefevre writes: “…It was rather a sort of record of my hits and misses, and next to the determination of probable movements I was most interested in verifying whether I had observed correctly;…”

You could not have a better explanation of one reason why traders ought to keep quantitative journals with a qualitative explanation for our trades.

Then there is the quote I used to have in front of me when I traded. Like most novices, when I first started trading, I tended to hold fast to losing positions; had I understood much sooner, the implications of this quote, I’d have saved tons of money.

“It takes a man a long time to learn all the lessons of all his mistakes…..there is only one side to the stock market; and it is not the bull side or the bear side, but the right side…”

Measure your opinion of what the market ought to do with what it is doing: are you on the right side? The key is to define the ‘right side for your trader’s timeframe’.

This edition of Reminiscences comes with a foreword and interview of legendary trader, Paul Tudor Jones. The interview is a must read, so even if you don’ buy the book, take a few moments to read the interview from a library copy.

Reminiscences of a Stock Operator. Annotated Edition

Refer this blog post to a friend or colleague…

BarroMetrics Views: Risk Management

What is risk management? For me it’s a set of tools that balance maximization of profitability with minimization of risk of ruin. It’s made up of two categories:

1. Trade Management: the strategics and tactics to manage an initial exit (when we first place a trade) and the strategics and tactics to manage our position once a trade starts to move in our favour.
2. Money Management: the strategies and tactics to answer four questions:

• How much to risk of this trade?
• How large a position size for this trade?
• The maximum portfolio risk at any one time?
• When to decrease and when to increase our trading capital i.e. at what point of the loss/profit cycle? For example: the simplest method is to increase or decrease after each trade.

But behind the strategies and tactics, a trader needs a certain mindset leading to certain habits and routines; this is what I’d like to talk about today.

When we first start to trade, we may get unlucky:

• we either get stopped out repeatedly only to have the market move in our favour and/or
• hold to losing trades and be rewarded with eventual profits
• taking positions too large for the capital and be rewarded with profits

As a result, we decide that no exit strategies are the way to go. Eventually of course, the market catches up with us: we learn that we need to cut our losses or we’ll blow our account; if we fail to learn this lesson,  we eventually have to stop trading.

If we learn to cut our losses, our main tool, at least in the beginning, is the stop-loss order.  Some of us never move beyond this tool. Others learn that preparation and defining the circumstances we will exit a position and under what circumstances we will remain takes precedence over the ’stop-loss’ order.

This is easier said than done. As behavioural psychologists have observed, humans have a status quo bias.  This means that once we are in a trade, we tend to look for reasons to remain in the trade. Add to this bias, the fear that if we exit a trade, it may go our way and you have powerful reasons why early exit is difficult.

But if you think about it, there is no reason why an ‘early exit’ (i.e. exit before the stop-loss order is elected) should not form part of our exit strategies. If we know why we take a trade and understand the assumptions behind it, then once the assumptions are invalidated - ‘if correct then the market will generally not behave this way’- we should exit.

In my case, I found keeping a journal an invaluable aid to train me to accept early exit.  By keeping track of what did happen after an early exit,  I proved to myself that my profitability increased. Yes my loss rate went up but the decrease in ‘average dollar loss’ more than made up for the higher loss rate.

So now, I prepare for a trade by defining what I expect to occur if my analysis is correct and what has to occur for me to consider early exit.

Refer this blog post to a friend or colleague…

March 5, 2010 at 10:29 pm (Uncategorized)

http://www.ndtv.com/news/videos/video_player.php?id=1206792

Ray Barros, CEO of Ray Barros Trading Group, said, “Sensex is in the middle of a trading range from 15500 to 17750 and Nifty may top out at around 5300 level. I see limited upside in crude futures.

 Idkit aka Ana

Ag Moderator

Refer this blog post to a friend or colleague…

BarroMetrics Views: Uncertainty and Trading III

I thought I’d round off the week with this idea.

On Wednesday, I took time off from my schedule just to gather my thoughts. I had been feeling uneasy about the EURUSD trade and not because I had been trading a larger than normal size. My gut was feeling the way it feels when I am missing something important. I have found that the best way to deal with the situation is to go away to a quiet corner and start from my basics.

In this case, it meant labeling the impulse and corrective waves in the current structure (see Fig 1). Once I did that, I realized what the feeling was about. It was telling me I had formed myopia about what was happening. I had started with the idea that the structure was either a ‘6-wave Running Correction’ or ‘3 Drives to a Low’. Even the subsequent labeling of the sideways (a) to (e) in Fig 1 was predicated on the initial scenario.

Once I stood back, what jumped out was this question: was the market reacting to zones of the corrective structure waves  1 to (a) or waves 3 to (a)? Once I identified that, [waves 3 to (a)], everything else fell into place.

1. The correct placement  of the stop was above the Waves 3 to (a)’s Maximum Extension, 1.3857
2. If this idea was correct, the market ought not accept above 1.3747 (the ME of the small Sideways Pattern (a) to (e).
3. A penetration of the reaction high at 1.3691 ought to result in a move down that should at least lead to a test of the low at (e).

These were my journal thoughts prior to trading yesterday.  Adding to that, after last night, a rally now above 1.3735 would mean a rally originating from the Death Zone. This would lead me to exit my shorts before my stop is hit because:

1. Death Zone rallies usually result inthe start of a new impulse move and
2. The penetration of 1.3691 and re-acceptance below the Primary Sell Zone of the ‘3 to (a)’ structure ought to have resulted in a move to at least 1.3444 before the market re-penetrated 1.3735. In such a situation, I had a Negative Development Buy Signal.

Interestingly (and I guess to be expected): once I saw that waves 3 to (a) were the boundaries of the active range, my discomfort went away.

FIGURE 1

Refer this blog post to a friend or colleague…

BarroMetric Views: The Danger to the US Economy

I was was watching a couple of the Fed Presidents on CNBC. It seems to me that unless the US Fed Reserve is very careful, the very thing they are most afraid of will come to pass. Their comments indicated that they are dismissing the risk of high inflation (brought about by the bailout’s huge printing press, ‘quantitative easing’).

It seems to me that given the trillions spent (trillions that the US does not have) inflation will result; the risk is a hyperinflation led deflation UNLESS the FED takes prompt action. 

Casey Research produced an interesting chart in its latest letter. It’s subject to copyright so I won’t reproduce it here. But do visit the site for a gander. You’ll see that according to the Taylor Rule, the Fund Rate ought to be at 4%; the official Fed Fund Rate is below 1%.

This suggests that the Fed is again behind the curve. This crisis  was brought about because of too much money for too long - part of the problem was the Fed Fund Rate was kept too low for too long. It seems the Fed has not learnt much from history and those who fail to learn from history are doomed to repeat it. More’s the pity, the FED will drag us along with its persistent errors.

Refer this blog post to a friend or colleague…

BarroMetrics Views: Uncertainty and Trading II

Baz asked if I was sure about uncertainty? I am not sure whether he means if I am sure that uncertainty is a trader’s perpetual companion or whether he believes there is certainty in the markets…..

But for the purposes of this blog, I’ll assume that meant whether I am sure that uncertainty is a trader’s companion.

I start from the premise that charts are a reflection of  the actions of the buyers and sellers i.e. a reflection of human action. If you accept that premise, then ‘certainty’ must go out the door.

Nowadays much is made of the findings of behavioural psychologists: that humans aren’t totally rational. I could never understand the fuss - I learned that on my Dad’s knee and I am over 60. Among my trading friends who are successful, I have yet to meet one who believes in the Efficient Market Theory - a theory  created by economists for economists. The theory was based on assumptions that made for pretty algorithms but ones that failed to describe the real world. The sub-prime crisis was caused by the failure to made this essential distinction.

Once we accept that markets are a reflection of human decision-making, then our probabilities become ’subjective ones’ i.e. probs based on our perceptions. In turn, based on these perceptions, we make certain assumptions; then we base our trades on these. The key point of the process is this: as new info comes in, we need to change or confirm our assumptions.

Let’s return to my EURUSD trade. Those that follow the Forum-Twitter comments know that yesterday I raised the idea that the EURUSD may breach 1.3444 and then rally.  Last Friday,  this idea was such a low prob occurrence that it was only on the periphery of my consciousness. But as price action developed,  the idea became one I needed to consider.

But what if instead of  making uncertainty my handmaiden, I had focused only on one interpretation? Then I’d have shut out the information that contradicted the main scenario and yesterday’s price action would have caught me unprepared.

That’s what I mean when I say traders have to accept uncertainty.

Refer this blog post to a friend or colleague…

BarroMetrics Views: Uncertainty and Trading

Humans crave certainty and when the activities we engage in fail to provide it, we go out of our way to seek and/or create it.  This I believe is the main reason why patently absurd ads in the trading game are so successful.

Not too long ago, I was at a dinner. Seated next to me was a budding trader who had just started trading. He had attended a local guru’s seminar and had  three or four consecutive wins. When he found that I also was a trader, he asked me for some tips on how to succeed. I started to tell him that trading is a probability game and that each approach had its own rate of success. For end-of-day trading, you could expect an average win rate from 30% to 55%. To succeed he had to manage his Expectancy Return (see below), rather than focus on the win rate.

He took exception to the comment, after all hadn’t he just had consecutive wins thus ‘proving’ the guru claims of over 90% winners? I have learned not to engage in debate and moved on to another topic of conversation. I met him again the other day. He was still looking for that elusive certainty that would make him a success.

This need for certainty affects us in other ways.  I am a discretionary trader who mainly uses pattern recognition for my trading. I consciously seek information that runs contrary to my conclusions to avoid myopia. For example in the current EURUSD short position, I have determined that the EURUSD is in the process of completing a ‘6-wave Running Correction’ continuation pattern. If this proves valid, the pattern projects a target to the 1.27 to 1.24 area.

On the other hand, if my interpretation of the pattern proves  incorrect, we may be seeing the ‘3 Drives to a Low’ which projects a target to the 1.3900 to 1.4100 zone.

I formed a conclusion about which pattern was the most probable and acted on that information. But I need to bear in mind that the pattern is an opinion about future direction. It’s not a hard probability, only a subjective assessment which may need revision as new information comes to hand.

This is the source of the difficulty with trading. To trade well, we need to accept that our judgment is constantly being called into question and we need to keep ourselves open to all information not just the items of data that favour our conclusions.

EXPECTANCY RETURN FORMULA

(Average $ Win x Win Rate) - (Average $ Loss x Loss Rate)  = +$

The formula must result in a positive number for long-term success.

Refer this blog post to a friend or colleague…

BarroMetrics Views: The Evolution of the Market Profile

The ideas underpinning the Market Profile as well as the actual charting technique helped bring about my trading success.

Many are unaware that the Profile has undergone at least 3 stages:

• Stage 1: Traditional Market Profile - fixed periods of 30-minutes that begin and end with the day’s ‘pit’ session.
• Stage 2: The Steidlmayer Distribution (now also called Market Profile)
• Stage 3: Cap Flow software

I stopped ‘following’ the Profile at the Cap Flow stage. Knowing Pete, I am sure there have been have been enhancements to Profile theory of which I am unaware.

In this blog, I’ll briefly talk about Stage 2.

Stage 2 was a major breakthrough  (at least so far as I am concerned).

Prior to Stage 2, Profile traders relied on Long Term Activity Charts (see Mind Over Markets) for the the longer term perspective. I found LTA lacking in flexibility and difficult to assess. The Steidlmayer Distribution (SD) is a much easier tool to understand and apply.

The key to the SD is to be aware that it begins and ends because of its own structure - not because of any fixed period. A structure begins with what I call an Initial Price Movement (IPM). This is a directional move that usually begins at the Point of Control of the previous structure and usually comprises of single prints. A structure ends when either a new IPM begins or the structure turns from a Bullish (or Bearish) structure to a neutral one (i.e. a normal bell curve).

Figure 1 shows the current combined E-mini that I started from Feb 1, ‘L’ period -that’s when I believe a new IPM began. The directional move during yesterday’s ‘L’ period. After that development (rotation) began. As long as we don’t see acceptance below 1091 (50% of IPM), a BULL profile will form. Once the development completes, I assume that we will IPM up.

Should we accept below 1091, then:

1. We can expect the ES to go to the 3rd stdev of the former bull pattern: 1082 to 1081.
2. If we do see the ES reach 1082 to 1081 then either:

• a sideways congestion will form between 1101 to 1081 or
• a new directional move will form.

To understand the logic of the moves, you need to know that one of the learnings from Market Profile is markets generally go from Bull to Sideways to Bear and vice-versa. You seldom see a Bull to Bear change in trend. This is an important observation that many traders fail to appreciate.

(Figure 2 shows the Bull, Bear and Sideways SD Patterns)

FIGURE 1 Combine Market Profile

FIGURE 2 Profile

Refer this blog post to a friend or colleague…