I have been thinking about my new process, and as the balance between fundamentals and technicals tilts towards the former, it occurs to me that I should make some record of what is going on day-to-day so that I can go back over it and see whether my understanding and expectations were later borne out. To that end I am going to try to resurrect the diary (I say “try”, because it has to be written at the end of the day — I have always been most comfortable with a day that starts off structured and becomes ever less so).
Nothing to do today, and I am struggling to throw of the ennui of last week. I feel out of touch with the markets and I suppose it will just take a while to get it back.
I have found before that too much reading is a bad thing, because the only way one can do a lot of reading for a prolonged period it to make it one’s focus, at the expense of a focus on the markets. I think this is what has happened here.
As so often, I am finding it frustrating not to be at my best. The important thing is that my process should continue regardless of whether I am at my best or not — that is vital to long-term success. To that end, I have recently created a scanner function that checks all my markets for breakouts and gives me a list. This means that I am forced to consider each potential trading opportunity regardless of whether I am in the mood.
I think I sometimes make it sound as if I am sitting here looking out of the window or messing about, and that I am not enjoying being a trader. That is far from the truth. I am working and quite focused, but always dissatisfied with a performance that I know can be better.
It has turned out to be a mistake to take my profits early and sit out the end of the month not just from a trading point of view, but from a psychological point of view as well. I am bored — dreadfully bored. I know I can’t do a trade, and I don’t have any capital at risk, and the movements of the markets either frustrate me or leave me cold. This is an awful state to be in, and I can understand why people trade just for the thrill of it. It is all very well to do research and read interesting things, but you can’t do that all day long — I read for hours yesterday, until I couldn’t take in any more, and still had hours to spare. I want action, and the action I want is to fight and win. There aren’t many things you can do in modern life that give you that.
You have to learn lessons for yourself, and the lesson here is what I have always thought: trading for the sake of your monthly performance is a mistake. I don’t think I will be doing it again.
This highlights one of the great things about trading: it is a reason to want to know everything. What does a professional, say, or a factory worker, gain from reading economics, science, psychology, market theory, international politics, and so on? Nothing except the satisfaction of curiosity. I can use, and have used, understanding gained from all these fields in my work.
I have been worrying recently that trading has still not crystallised in my mind. It took a good three years for a general overview of the markets to crystallise when I was in my last job, but I need it to happen rather faster than that if I am to make money trading.
The key questions in trading are: when to get in, and when to get out.
- Getting in I am getting sorted — when an expectation is confirmed by a breakout in the right direction, it is a good time to trade. But I am still too inclined to trade a breakout in a direction opposite to the one I was expecting — as with the S&P 500 in my latest trade. Also, this only deals with pro-trend entries. The quest for countertrend entry signals is something I have been working on recently — I have been experimenting in Tradestation, looking for indicators that show a change in supply and demand conditions such that a reversal can be expected to occur.
- Getting out is, in a way, not too difficult at present. Either my stop is hit, or my profit target is hit. I have also had two successful exits where I got out of a trade before it made much of a loss. In one case I used my supply and demand indicators to do this, and in the other the movements of other related markets. When using profit targets has become second nature I may introduce some variability to allow for more upside.
- What has been happening?
- Is it going to carry on?
I don’t know what to write today. There are no trades to do, and I have been reading a lot, but somehow not very satisfyingly. I am getting bored with the same round of reading every day: FT, Bloomberg, economics blogs. I think these are good things to read, but it all seems to take so long. Perhaps that is the nature of the job and I should just relax about it.
Some days I seem so busy, and some days it feels very quiet. This feels like a quiet day — everything is proceeding along its short-term trend.
The exception is coffee, which is rocketing as longs holding their contracts to delivery have seen shorts scrambling to close out positions or buy in the physical market. This story was tradeable on Thursday, with a breakout from a triangular range (which can be very strong), but I didn’t do it because I didn’t know what was happening. Now the tale is rather old and I am keeping away. I missed the trade because my system doesn’t always see triangular breakouts — foolish.
I keep thinking about how the global economy could get out of its present fix.
The story is that everybody needs to export their way out of recession, but, of course, not everybody can. This will be even more true as fiscal retrenchment reduces both government and consumer spending. With economies weak and inventories rebuilt, there would seem to be little scope for investment spending to rise to fill the gap. That leaves net exports as the only available path to growth, and it isn’t one that everybody can use.
One counter to this miserable picture is that emerging markets (EM) are presently importing more goods from stricken Western economies. If this situation can persist for long enough for the developed world to advance the process of balance-sheet repair in the government, household and financial sectors then the West may be able to export its way out of trouble before the next emerging-market crash. Or, at least, the market may believe that it can for long enough for risk assets to rally.
EM imports are partly dependent on strong credit flows into certain emerging markets that have their origins in Western quantitative easing (QE) policies. Consequently there is a risk of a vicious cycle emerging whereby concerns about the health of Western banks based on their exposures to sovereign risk breaks the transmission mechanism between QE and EM credit inflows. That could lead to rising trade balances in the EM and a new recession in the developed world. However, it is hard to be too bearish about this: first, because European politicians are putting together a short-term fix that may alleviate concerns about bank solvency; and second, because China’s bubble is self-funding. China may be tightening, but its monetary policy is still far from tight, and the lesson of bubbles is that they can go on for much longer than anybody believes possible. Continued strength in China should build confidence in EM and make it more likely that QE liquidity flows will return to other EM.
So an optimistic case would be that the developed world is able to grow through net exports during a period of weak consumer spending, government spending and investment (the Eurozone benfiting more than the US as the euro falls), and that EM booms will last for long enough for the developed-world recovery to become self-sustaining. Thereafter the bubbles can burst. Thus the heavy lifting in restoring the world to financial health would be done by those that can afford to do it — EM and, to a lesser extent, the US. The price would be an eventual bursting of an EM credit bubble.
What is wrong with this picture?
Both open positions have moved a little against me today, but not yet enough to worry about. I am happy to be in both of these trades and quite relaxed. One has to wonder whether natural gas will break its 200-day moving average (which it would have to do to hit my profit target), but I can survive a failed test and still take a small profit.
I have reverted to spending more of the day on research than on watching the markets. This certainly makes me feel more in control. I am still keeping more tabs on the movement of markets thorough the day than I have in the past, but it is important to have some perspective on short-term moves.
Standard deviation has been on my mind. What does standard deviation give you? It is a measure of market trend, rather than “volatility” as ordinary language defines the word. Average true range seems a much better measure of volatility. I am not sure how this observation ties in with modern portfolio theory — I will have to let this idea percolate and see if anything comes of it.
I have been wondering about making a “what is going on” video blog in order to clarify my thinking. I’m going to play with the idea for a while before going on camera.
I don’t know where the time goes. I haven’t done half the reading I wanted to do today, but I have further improved my market personality pages and various other indicators. I am having a thoroughly creative time.
EUR/GBP is moving in my direction, and natural gas has run strongly upward (through its previous 60-day high). I stayed out of cocoa — it wasn’t a strong enough signal to rush in — and am glad that I did because the market has fallen sharply today. I am enjoying this new wider-stops style of trading: it means that I am not thinking the whole time about the exact moment to buy or sell, and so am less tense and have a clearer mind.
Have a good weekend everybody.
AUD/JPY and risk assets generally have had an off day — I will be annoyed if I have been stopped out on a short-term low-volume spike. A non-farm payrolls report tomorrow is expected to be very strong because of hiring for the US census — but it has also been thoroughly well leaked in advance.
I have spent the day in bed — not because I am ill, but because I started work when I woke up and didn’t want to stop. It has been quite an interesting day for research. A friend suggested an indicator for trading the S&P 500 which turns out to be remarkably successful, and I have been playing with different types of breakouts to see whether I can improve a breakout system in a simple way. It isn’t at all easy!
I keep wondering whether there is anything special about a breakout level or whether a breakout is most useful as an indication of the trend. A way to test this would be to buy on pullbacks after breakouts and see whether that improves the system. I am also wondering how a “breakout” as defined in my systems — i.e. an n-day new high — is a better or worse signal than a true breakout from a support or resistance level. The only way to test this is manually, since the computer is not very good at spotting levels. One day I will have to set aside the time to go back over old charts and work out the success rate of breakouts from a decent support or resistance level (though there is a danger the success rate will improve over time as I get a better eye for a good level).
Lastly, natural gas is breaking out to the upside from a tight consolidation range after a long down trend. I am wondering whether to trade, or to wait for an up-trend to get established. The cause of the breakout seems to be hot weather and the hurricane season in the US. The fact that everybody is short natural gas makes me more inclined to take the trade.