Updates from January, 2012 Toggle Comment Threads | Keyboard Shortcuts

  • Trader Lyn

    Trader Lyn 11:39 am on January 31, 2012 Permalink | Log in to leave a Comment  

    Understanding 200 years of defaults 

    Something a little different this month -  I would like to share with you a report that I found has some valuable  explanations of what has happened in past history what is happening now and what will happen in the future which effects ultimately the stock markets.

    This report is Written by Carmen M. Reinhart, University of Maryland and NBER, Kenneth S. Rogoff, Harvard University and NBER

    Abstract:

    This paper offers a “panoramic” analysis of the history of financial crises dating from England’s fourteenth-century default to the current United States sub-prime financial crisis. Our study is based on a new dataset that spans all regions. It incorporates a number of important credit episodes seldom covered in the literature, including for example,defaults and restructurings in India and China. As the first paper employing this data, our aim is to illustrate some of the broad insights that can be gleaned from such a sweeping historical database. We find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies.

    Major default episodes are typically spaced some years (or decades) apart, creating an illusion that “this time is different” among policymakers and investors. A recent example of the “this time is different” syndrome is the false belief that domestic debt is a novel feature of the modern financial landscape. We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses. Thus, the recent US sub-prime financial crisis is hardly unique. Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements.

    Click the link below to view this 124 Page document:

    http://www.economics.harvard.edu/files/faculty/51_This_Time_Is_Different.pdf

     
  • Michael Brook

    Michael Brook 9:50 am on January 30, 2012 Permalink | Log in to leave a Comment  

    Eliminating the Confusion Factor – Building a trading system that works 

    One of the curious things about trading is that it is a rule free place. There aren’t any real rules as to how you interact with the ebb and flow of price on a daily or minute by minute basis. There isn’t a policeman there to tell you that you are speeding or going the wrong way. There aren’t any stop signs telling you that you just about to drive into a highway on the wrong side when all the traffic is heading in the opposite direction. The trading environment is a rule free space.

    There’s a saying in german, “Wer hat der Wahl, auch hat der Qual”. Translated this means that if you have the choice you have the burden of the choice and it’s consequences.

    In a rule free space like trading you have to make a lot of choices repeatedly and the burden of those choices are yours and yours alone. Every time you think about a trade you are making a choice about that trade. Will you stay in or will you get out… what about the last time this happened?, what’s going to happen next? Etc, etc, etc…

    In such an environment, what is critical it to decrease the burden of the choices you necessarily have to make by virtue of being in the rule free space we call the market.

    The best way of doing this is to have a clear set or rules that you have for yourself that you have worked out works for you. My style of trading will be different to your style. My risk profile may be different to yours, my skill level may be different, the instruments I like to trade may be different to the ones you like to trade etc, etc,etc…

    Before you can trade successfully you need to make clear decisions about:

    • The instruments and markets you trade in
    • The timeframe you trade in
    • The level of risk you are tolerant of.
    • The amount of time you have to learn the skill.
    • The intention you have for learning how to trade.

    Each of those choices will affect your decisions and future profitiability and success.

    Some people trade intruments that are too highly leveraged for their skill level. It surprises me that many people will trade instruments with the highest risk (leverage) without considering the downside consequences of that type of trading first.

    This is akin to taking a learner driver and putting him behind the steering wheel a formula one race car telling him it’s going to be fine you’ll get there really fast. The predictable carnage is not easily explained away.

    Traders who able to make quick decisions can make better short term traders than others who take longer to make decisions.

    Once you have decided the things above you will need to do everything you can to reduce the amount of work that you will need to be doing in your decisions making.

    To reduce the confusion factor you will need to have a trading plan that has clarity. The more complex any system is the more things that can go wrong with it. System theory holds that for a system that has “n” components there are “n squared” possible failure modes of that system.

    So if you are building your trading system you want to make it as simple as you can.

    In order to make your trading system simple you need to:

    • Have it as simple as you can
    • Have a precise market (context) for each trade
    • Have a set of trades for each market.
    • Have a set of simple entry and exit rules.
    • Have a detailed review methodology

    If your trading is not working the probability is that either the decisions you made before you started trading have not stood up to your interaction with the market or the market is not favoring your trading system.

    If you trading system is not as simple as it needs to be or is dripping with complexity the chances are that you aren’t getting the results you want out of it. There is a reliable predictable path for most traders whose trading gets initially more complex then substantially simpler with time.

    Most expert traders have systems that are simple to implement.

    The path to trading success is much like sharpening a knife. You have test it out before you know if it’s sharp enough. This means sometimes you will get a cut or too in the process.

    The saying that the simple things in life are often the best is true particularly when it comes to trading systems.

     
  • Lyn Summers

    Lyn Summers 10:51 am on January 16, 2012 Permalink | Log in to leave a Comment  

    The trigger to set off a Global Recession is Europe! Do we see this happening now? 

    Italy’s largest Bank UniCredit lost 40% of their share price in the last 4 days and that’s after a 10 for one reverse stock split a strategy used to help prop up the share price but I guess it failed. They have 40 million customers globally in 22 countries.
    Check out the chart

    We are all  exposed with the outcome in Europe if their banks stand or fall the effects will be felt globally on different impacts.

    Europe’s troubles continue they are slipping into recession the austerity measures are proving to be challenging Bond yields are rising.
    The bond buyers are demanding a higher yield due to the risk perceived yes the Fear of default. This in turn pushes the countries debt up higher something they are struggling paying now an impossible situation or solution.Standard & Poor’s on Friday cut its ratings on nine European countries, including France, Spain and Italy the start of more to come.
    We have already seen the fall in the Euro, check out the chart below:

    What’s going on with the US
    JP Morgan reported quarterly earnings on Friday that met Wall Street expectations in profit but missed on revenue the Banks are an important sector to watch if confidence is lost in the banks this could lead to credit issues.
    The US  banks are also holding $4 million  foreclosure’s off their balance sheets remember they are hoping to put them on the market one day with the housing market lower than it was in 2009 it would  seem an inappropriate time to do that as it will further depress the housing market and they could take a lot less than they are anticipating.
    Stimulus has driven the US  stock market rally since 2009, now without more stimulus where is the stock market headed?
    Combined with the Europe woes any trigger could set off a selling frenzy at any moment on global markets the smart money are distributing  so the market top looks close. It’s Bear Wrangler time…

     
  • Michael Brook

    Michael Brook 10:07 am on January 16, 2012 Permalink | Log in to leave a Comment  

    A year of firsts. Lessons to be learnt. 

    If we fail to learn from the past we are condemned to relive it. Nothing is more truthful than this saying applied to trading. This is why many traders, correctly so, look to previous patterns of price action to guide their actions in the future.

    However, the market is constantly changing and evolving. One year may not be the same as any other. This year has proven to be different from every other year there has been in the market. As traders we must evolve our trading to the changing market within which we operate.

    In 2011 there was unprecedented volatility in the financial markets. In 2011 we saw

    • The first year where the XJO (the asx S&P200) closed down 2 years in a row.
    • The first day ever when XJO moved a total of 11% within a single day on XJO (Aug 9)
    • The largest ever single day volume spike in the history of XMJ ( the Australian materials sector)
    • The largest every 4 day volume on the history of the DJI Aug 9-11
    • The first year ever with 100 days greater than 100 point moves on the SPY.
    • The first time in 41 years where the spy closed within 0.5% of its opening, (this occurred in spite of the fact that the DJI moved over 120% of it’s value in 11 major moves)
    • The first period ever where 80% of all volume on an exchange was algorithmic(this occurred through august on the DJI)

    The market this year was characterized by massive moves sparked by news announcements, natural and man-made disasters and ongoing concerns about debt in Europe and elsewhere.

    So what is the significance of this information and how do we use this to our advantage?

    Firstly, we should never expect the past to be similar to the future. The speed and range of market movements is increasing and we should expect more of this in future markets. As the penetration of the algorithmic traders increases and the exchanges become more dependent on the income derived from those traders, the price movements will become more consistently larger.

    Secondly, traditional methods of trading are becoming more and more unprofitable. In such volatile markets last year’s where rapid movements of entire indices occur, tradition trading methods would have stops being hit all the time. Trend traders would be unable to make money because of the rapid swings and periodic clean outs of stops. Patterns would have difficulty making money as many patterns fail immediately after break out. The support and resistance line traders would have been worked over similarly as the volatility of the market pushes price briefly above and below support and resistance levels only to reverse once trades are entered into.

    Finally, the methods of trading that support shorter term profit targets that take advantage of the volatility will be the trading style that will be rewarded. Many retail traders like to hold positions for longer time periods. This is referred to buy and hold typically long trades. That strategy will have proven to be very costly in the past 18 months.

    As traders we must adapt to the new market and to use what the market throws at us to our advantage.

     

    An expertise acquisition perspective.

    The acquisition of expertise involves a systematic practice of the performance skill in many different conditions, so that when the performance is required in a new context it can be accomplished with skill.

    One aspect of training that is central to expert performance is the acquisition of flexibility to perform in different contexts. The performance skill is practiced in as many different possible environments to build flexibility into the performers performance.

    As traders, we need to have trading plans that are flexible that are able deal with different market conditions.

    By building flexibility into your trading you are able to function in profit in a market that is volatile.

     

    If you have flexibility as part of your trading strategy,

     you will never be in a market that you can’t profit from.

    So, how do you do that?

    Firstly, you need to have trade setups for volatile and non-volatile markets.

    Secondly, you need to have contingencies for each trade if the volatility of the market suddenly increases

    Finally, you need to know what sort of markets you don’t want to be in. If this isn’t it you should be out.

    2012 is likely to be as volatile as 2011. The causal factors of the volatility have not gone away and are likely to accelerate to their conclusion. If you are prepared you can trade profitably in any market.

     

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