What does psychology tell us about market returns? Are we programmed by biology to fail in the stock market? How do professional traders deal with the limitations of human cognition?
Profitable ETF Trading Strategies - Appreciating Behavioral Finance
By [http://ezinearticles.com/?expert=Ken_Long]Ken Long
We know that people pride themselves on their rationality and analytical skills. This is very evident in traders who invest a lot of psychological energy into their systems and personal discipline. It is also very clear that psychology is extraordinarily evident in financial decisions. Time and again, psychological pressures will over-rule rational analysis and the herd will behave in predictable, reliable, sub-optimal ways when markets reach extreme conditions.
There is no purely rational explanation for this behavior unless you study human cognition and then recognize that human decision making is a blend of both emotional intelligence and rationality. Most evidence from the literature favors emotional intelligence as the dominant force, particularly in times of stress, when the brain is flooded with hormones that trigger the fight or flight behaviors which have been so successful in biological evolutionary terms for millions of years. The development of conscious rationality is a relatively recent phenomenon, and in moments of stress cannot compete with our unconscious and subconscious thought processes. No matter how much we may want to believe that we are rational creatures with pure free will, biology tells us otherwise.
The Nobel prize winning work of Kahneman and Tversky in behavioral finance is a direct look into the workings of the human mind in this respect. Their investigations have spawned a whole host of scholarly inquiry that reinforces these ideas of the importance of the often counter-productive role of normal instinct and snap decision-making in financial markets.
The habits and processes of mind that have proven to be so successful in the physical, biological world do not migrate effectively to financial markets where flights to safety at moments of extreme pain characterize price action at market bottoms. When all the people who can be driven from their positions and there is no one left to sell, then all the remaining market players are able to more or less calmly gather up great bargains.
It is a combination of art and science to know when these moments of extreme overreaction have occurred. The market is littered with the corpses of bottom-pickers who staked their capital on the confidence they had in their ability to rationally pick the bottom, unlike the other pilgrims who panicked at that price level. Mistaken confidence in our own ability to be rational accounts for these many false starts.
What can a trader do who wants to participate in the opportunity represented at or near market bottoms but doesn't want to repeat the mistakes of other would be bottom pickers and panicked sellers? It is a real challenge, and anyone who offers a fail-safe, high reliability should be looked at skeptically. They should be asked to explain how their method of selection and timing accounts for the demonstrated fallibility of rationality in moments of stress. Why is their method different than those of the failed traders who right up until the moment of catastrophe were supremely confident?
This is the challenge of Long Term Capital Management, whose Nobel prize winners were undone by their belief in the power of their own special brand of rationality and nearly brought down the world financial markets.
Can it be that success in the markets is NOT a function of pure rationality alone? That as long as markets are driven by emotional responses to moments of extraordinary stress that the emotional qualities of human psychology will produce statistically unlikely occurrences on a regular basis? I think so, and I will always operate on that basis until I see compelling evidence to the contrary.
It turns out that survival in the market begins with a heightened sense of danger that begins to account for the possibility of extreme adverse market moves well before the selling is fully manifested. Does this mean that there are times when you have to forego the apparently easy money that comes from following irrationally exuberant megatrends?
I believe so, in the same way that the wise second mouse must forego the easy cheese sitting out there in plain sight. The first mouse often gets the easy cheese until that swift moment of final total consciousness when he discovers that the easy cheese was not so easy after all. Unfortunately the first mouse doesn't get to reflect for very long on his new found knowledge.
I want to be the second mouse, and design systems and rule sets that operate on that basis and philosophy.
Examine the source and basis for your confidence in your own abilities or in the abilities of your trusted custodians. How does their approach account for the possibility of overconfidence?
Good hunting!
Ken Long, Chief of Research, Tortoise Capital Management
finance: http://www.tortoisecapital.com
essays: http://kansasreflections.wordpress.com
Independent research, combining technical analysis and behavioral psychology.
30 day free trial of reports and live trader chatroom.
Training, education, mentoring and coaching for professional traders.
Article Source: http://EzineArticles.com/?expert=Ken_Long http://EzineArticles.com/?Profitable-ETF-Trading-Strategies---Appreciating-Behavioral-Finance&id=1557178
Showing posts with label retirement. Show all posts
Showing posts with label retirement. Show all posts
Sunday, October 12, 2008
Profitable ETF Trading Techniques - Market Classification
The very first thing I analyze when I am creating my daily trading plan is the current market classification. The reason? Because, depending on which scholar you read, the market itself contributes as much as 50% of the return of individual stock gains/losses.
Profitable ETF Trading Techniques - Market Classification
By [http://ezinearticles.com/?expert=Ken_Long]Ken Long
The very first thing I analyze when I am creating my daily trading plan is the current market classification.
The reason? Because, depending on which scholar you read, the market itself contributes as much as 50% of the return of individual stock gains/losses. It makes sense to me then that the most important single factor should be the first place to research.
If you only get one thing right, it should be the current market condition.
I look at market condition in 2 time dimensions: Long term and Intermediate term. The time periods I chose are specific to the way I trade and the typical time periods I look to hold individual positions. I believe that your time frame should affect how you look at the market. I believe one size fits all strategies are not well suited for individual success. To that end, I consider long term to be the last 180 days and short term to be the last 10 days.
I look at long term market condition in 2 dimensions: Price level and Relative Volatility. Without going into the specific techniques I use to classify individual states, suffice it to say that I have 3 price categories: Bull-Sideways-Bear, and 3 volatility conditions: Quiet-Normal-Volatile. This creates a 3×3 matrix, with 9 possible market condition states. (See table below)
Looking back at the last 13 years of S&P 500 price data (that's as long as the S&P ETF: SPY, has price data available), I analyzed the statistics of the returns of the market for the next day based on the current market condition as defined, and concluded that there were distinct differences in the results for each of the 9 states. It turns out that there are only 4 of the 9 states where, on average the following days return is positive.
This is an extraordinarily important piece of information to know when looking at trading opportunities for the following day, especially if your trading instrument or "target" is strongly correlated to the US large cap market. The image below is an example of the market classification matrix in action. It shouldn't surprise you to see the market is currently (as of Oct 4, 2008) in Bear Volatile: the worst condition for expected returns.
What's important to note is that my analysis model classified the market as Bear Volatile on Sept 9, and has remained there ever since. The market is down well over 10% in that time period. It's down over 20% since entering Bear Quiet mode on June 03, 2008. Being alert to market condition can prevent those kinds of losses from occurring and add tremendous value and insight to any long term investment program as well as inform short term trading strategies.
Ken Long, Chief of Research, Tortoise Capital Management
finance: http://www.tortoisecapital.com
essays: http://kansasreflections.wordpress.com
Independent research, combining technical analysis and behavioral psychology.
30 day free trial of reports and live trader chatroom.
Training, education, mentoring and coaching for professional traders.
Article Source: http://EzineArticles.com/?expert=Ken_Long http://EzineArticles.com/?Profitable-ETF-Trading-Techniques---Market-Classification&id=1555815
Profitable ETF Trading Techniques - Market Classification
By [http://ezinearticles.com/?expert=Ken_Long]Ken Long
The very first thing I analyze when I am creating my daily trading plan is the current market classification.
The reason? Because, depending on which scholar you read, the market itself contributes as much as 50% of the return of individual stock gains/losses. It makes sense to me then that the most important single factor should be the first place to research.
If you only get one thing right, it should be the current market condition.
I look at market condition in 2 time dimensions: Long term and Intermediate term. The time periods I chose are specific to the way I trade and the typical time periods I look to hold individual positions. I believe that your time frame should affect how you look at the market. I believe one size fits all strategies are not well suited for individual success. To that end, I consider long term to be the last 180 days and short term to be the last 10 days.
I look at long term market condition in 2 dimensions: Price level and Relative Volatility. Without going into the specific techniques I use to classify individual states, suffice it to say that I have 3 price categories: Bull-Sideways-Bear, and 3 volatility conditions: Quiet-Normal-Volatile. This creates a 3×3 matrix, with 9 possible market condition states. (See table below)
Looking back at the last 13 years of S&P 500 price data (that's as long as the S&P ETF: SPY, has price data available), I analyzed the statistics of the returns of the market for the next day based on the current market condition as defined, and concluded that there were distinct differences in the results for each of the 9 states. It turns out that there are only 4 of the 9 states where, on average the following days return is positive.
This is an extraordinarily important piece of information to know when looking at trading opportunities for the following day, especially if your trading instrument or "target" is strongly correlated to the US large cap market. The image below is an example of the market classification matrix in action. It shouldn't surprise you to see the market is currently (as of Oct 4, 2008) in Bear Volatile: the worst condition for expected returns.
What's important to note is that my analysis model classified the market as Bear Volatile on Sept 9, and has remained there ever since. The market is down well over 10% in that time period. It's down over 20% since entering Bear Quiet mode on June 03, 2008. Being alert to market condition can prevent those kinds of losses from occurring and add tremendous value and insight to any long term investment program as well as inform short term trading strategies.
Ken Long, Chief of Research, Tortoise Capital Management
finance: http://www.tortoisecapital.com
essays: http://kansasreflections.wordpress.com
Independent research, combining technical analysis and behavioral psychology.
30 day free trial of reports and live trader chatroom.
Training, education, mentoring and coaching for professional traders.
Article Source: http://EzineArticles.com/?expert=Ken_Long http://EzineArticles.com/?Profitable-ETF-Trading-Techniques---Market-Classification&id=1555815
Surviving a Stock Market Crash - 5 Tips to Show You How
It is scary when you see most everything you own declining in value and with it, all your dreams of retirement, education or a home. You can and will survive this by following these 5 tips.
Surviving a Stock Market Crash - 5 Tips to Show You How
By [http://ezinearticles.com/?expert=Fern_Alix_LaRocca]Fern Alix LaRocca
It is scary when the money you were counting on for retirement, education, or your home is rapidly declining in value. Don't panic though. Here are some 5 tips to help you survive:
1. People are living longer:
Males that reach the age of 65 nowadays will have a 49% chance of living to 86. Women will have a 49% chance of living to age 89. With that in mind, it's obvious that you will still need the help of equities (stocks and stock mutual funds) to help you grow your portfolio and keep ahead of taxes and inflation.
Don't abandon these investments.
2. Rebalance where necessary.
Take a look at your portfolio winners. If you had targeted say 20% in international and it is now 30% of your portfolio. Sell enough to bring it back down to 20% and use that cash to invest in another sector that you don't own. Remember that you don't have a realized loss until you sell. Take just enough of a loss to offset the gain that you took above, and then you will pay no tax on the transaction.
3. Diversify.
Don't have any winners? Then you weren't diversified enough to begin with. You should have had enough in each asset class (large-cap, mid-cap, small-cap, international, etc.) and each style (growth, value, blend, balanced, etc.) to create an investment plan to reach the return you need with the risk you are comfortable with, and in the time period that you targeted. Believe it or not, there are some mutual funds that have managed to keep their returns higher than the more than 23% loss of the S&P500 Index this year. There are a lot of free resources such as morningstar.com that will give you the data you need to diversify and feel better about your holdings.
4. Make decisions now.
Act now. Don't look for bottoms. You don't ever know where the bottom is but you do know that stocks are steadily getting cheaper and there are some fantastic buys out there. You may not have control over the market but you do have control over what you buy and what you sell. Don't wait.
5. Get a guaranteed income for life.
Along with positions of cash, bonds, and equities, a fixed annuity should play a part in a portfolio of someone close to working part-time or retiring altogether. An annuity is an insurance contract that in return for a lump sum of money gives you a steady fixed stream of income that is guaranteed for your life or the life of you and your spouse. For people who want to spread out their risk, this is an excellent addition to a portfolio. The downside is that you don't get any inflation protection since the payments remain the same. The upside is that you get an income stream guaranteed by the insurer so you don't have to worry about managing the money. Of course, you need to make sure the insurer is financially strong enough to be able to pay you throughout the term of the contract.
People like Floyd Odlum made millions during the Great Depression, not by fleeing into cash and bonds but by buying into stocks as the market dropped. His motto during the crash was: "There's a better chance to make money now than ever before."
Don't lose this opportunity to arrange your portfolio to meet your future needs. Follow the five steps above, and you won't have to worry about what the stock market is doing ever again.
2008© Fern Alix-LaRocca CFP® All Rights Reserved
Interested in more tips to survive this [http://wholeheartedway.com/index.html]crisis? Get the [http://wholeheartedway.com/]Whole-Hearted-Way eNewsletter written by Fern Alix LaRocca, a fee-only Certified Financial Planner TM with over 24 years in the industry today.
Article Source: http://EzineArticles.com/?expert=Fern_Alix_LaRocca http://EzineArticles.com/?Surviving-a-Stock-Market-Crash---5-Tips-to-Show-You-How&id=1566884
Surviving a Stock Market Crash - 5 Tips to Show You How
By [http://ezinearticles.com/?expert=Fern_Alix_LaRocca]Fern Alix LaRocca
It is scary when the money you were counting on for retirement, education, or your home is rapidly declining in value. Don't panic though. Here are some 5 tips to help you survive:
1. People are living longer:
Males that reach the age of 65 nowadays will have a 49% chance of living to 86. Women will have a 49% chance of living to age 89. With that in mind, it's obvious that you will still need the help of equities (stocks and stock mutual funds) to help you grow your portfolio and keep ahead of taxes and inflation.
Don't abandon these investments.
2. Rebalance where necessary.
Take a look at your portfolio winners. If you had targeted say 20% in international and it is now 30% of your portfolio. Sell enough to bring it back down to 20% and use that cash to invest in another sector that you don't own. Remember that you don't have a realized loss until you sell. Take just enough of a loss to offset the gain that you took above, and then you will pay no tax on the transaction.
3. Diversify.
Don't have any winners? Then you weren't diversified enough to begin with. You should have had enough in each asset class (large-cap, mid-cap, small-cap, international, etc.) and each style (growth, value, blend, balanced, etc.) to create an investment plan to reach the return you need with the risk you are comfortable with, and in the time period that you targeted. Believe it or not, there are some mutual funds that have managed to keep their returns higher than the more than 23% loss of the S&P500 Index this year. There are a lot of free resources such as morningstar.com that will give you the data you need to diversify and feel better about your holdings.
4. Make decisions now.
Act now. Don't look for bottoms. You don't ever know where the bottom is but you do know that stocks are steadily getting cheaper and there are some fantastic buys out there. You may not have control over the market but you do have control over what you buy and what you sell. Don't wait.
5. Get a guaranteed income for life.
Along with positions of cash, bonds, and equities, a fixed annuity should play a part in a portfolio of someone close to working part-time or retiring altogether. An annuity is an insurance contract that in return for a lump sum of money gives you a steady fixed stream of income that is guaranteed for your life or the life of you and your spouse. For people who want to spread out their risk, this is an excellent addition to a portfolio. The downside is that you don't get any inflation protection since the payments remain the same. The upside is that you get an income stream guaranteed by the insurer so you don't have to worry about managing the money. Of course, you need to make sure the insurer is financially strong enough to be able to pay you throughout the term of the contract.
People like Floyd Odlum made millions during the Great Depression, not by fleeing into cash and bonds but by buying into stocks as the market dropped. His motto during the crash was: "There's a better chance to make money now than ever before."
Don't lose this opportunity to arrange your portfolio to meet your future needs. Follow the five steps above, and you won't have to worry about what the stock market is doing ever again.
2008© Fern Alix-LaRocca CFP® All Rights Reserved
Interested in more tips to survive this [http://wholeheartedway.com/index.html]crisis? Get the [http://wholeheartedway.com/]Whole-Hearted-Way eNewsletter written by Fern Alix LaRocca, a fee-only Certified Financial Planner TM with over 24 years in the industry today.
Article Source: http://EzineArticles.com/?expert=Fern_Alix_LaRocca http://EzineArticles.com/?Surviving-a-Stock-Market-Crash---5-Tips-to-Show-You-How&id=1566884
Saturday, October 11, 2008
Money Management 101!
This is the most important aspect of Forex trading! Nothing else even comes close. All the investment experts agree that with proper money management you don't even need a trading plan!
Money Management 101!
By [http://ezinearticles.com/?expert=Joshua_Geralds]Joshua Geralds
If you've been trading a while or have been reading up on trading then the term money management will be familiar to you. But money management in Forex trading is very different from money management else where.
Especially in currency trading money management takes the top spot for making or breaking an account! Just what exactly is money management you ask?
Well money management is a series of steps an experienced trader takes to protect the profits gained and to ensure that losses are minimized.
To give an example money management is the safety net for a trader to make profits.
For instance you are a day trader and you trade the 5 minute charts. So let's say on the average you make 10 trades a day. Now your daily tally should be the average score of all 10 trades. Thus you will have a daily pip profit and not base your success on individual trades
Money management is also concerned about position sizing. This is the way professional traders control their risks and returns for any given trade.
To learn and use position sizing is thankfully straight forward and simple. Take for instance you trade the Cable (Pound against US dollar). Each lot you trade is 100k how you can mitigate your risk is by breaking up the size of each lot you trade in.
By diversifying your lots you give yourself the flexibility to hedge your position should a trade turn against you. In that way you can position your trades in uncorrelated economies thus increasing the probability of a day profit. Money management in this way will serve to protect your account. Over here it is appropriate to touch on the compounding effect and how it works with money management. As you are aware a trader makes money by steadily growing his or her account. Steady growth for day traders do not mean a profit in each and every trade. But you have to ensure a profit every day. The worse position is a break even. When compounded and coupled with position sizing the trader grows his or her account.
Words of caution here do not expect to make every trade a winning trade. If you trade 10 times a day you have to expect to have 50% of your trades as failed trades.
If your edge is good and you have made a due study of the market, expect a failure rate of 35% and that's saying you're a very good trader already!
In conclusion let up recap on what money management is and what it can do for you. First money management is a process of controlling risk. Second it is a method of increasing profits. Third it is a way to discipline a trader. Fourth it is not a way for quick bucks. Fifth it will enable a small account to compound at the best rate possible and earn consistently. Lastly coupled with position sizing it gives to the trader flexibility to hedge their trades thus ensuring a daily profit. So make some money for yourself.
Dr. Joshua Geralds is a successful Investment Specialist with over twenty years experience increasing the income of people world wide. Visit http://www.pipsalot.com to learn how to make steady profits through safe trading and down load your FREE e-book "Money Management" for a limited time only!
Article Source: http://EzineArticles.com/?expert=Joshua_Geralds [http://ezinearticles.com/?Money-Management-101!&id=1564884 ]http://EzineArticles.com/?Money-Management-101!&id=1564884
Money Management 101!
By [http://ezinearticles.com/?expert=Joshua_Geralds]Joshua Geralds
If you've been trading a while or have been reading up on trading then the term money management will be familiar to you. But money management in Forex trading is very different from money management else where.
Especially in currency trading money management takes the top spot for making or breaking an account! Just what exactly is money management you ask?
Well money management is a series of steps an experienced trader takes to protect the profits gained and to ensure that losses are minimized.
To give an example money management is the safety net for a trader to make profits.
For instance you are a day trader and you trade the 5 minute charts. So let's say on the average you make 10 trades a day. Now your daily tally should be the average score of all 10 trades. Thus you will have a daily pip profit and not base your success on individual trades
Money management is also concerned about position sizing. This is the way professional traders control their risks and returns for any given trade.
To learn and use position sizing is thankfully straight forward and simple. Take for instance you trade the Cable (Pound against US dollar). Each lot you trade is 100k how you can mitigate your risk is by breaking up the size of each lot you trade in.
By diversifying your lots you give yourself the flexibility to hedge your position should a trade turn against you. In that way you can position your trades in uncorrelated economies thus increasing the probability of a day profit. Money management in this way will serve to protect your account. Over here it is appropriate to touch on the compounding effect and how it works with money management. As you are aware a trader makes money by steadily growing his or her account. Steady growth for day traders do not mean a profit in each and every trade. But you have to ensure a profit every day. The worse position is a break even. When compounded and coupled with position sizing the trader grows his or her account.
Words of caution here do not expect to make every trade a winning trade. If you trade 10 times a day you have to expect to have 50% of your trades as failed trades.
If your edge is good and you have made a due study of the market, expect a failure rate of 35% and that's saying you're a very good trader already!
In conclusion let up recap on what money management is and what it can do for you. First money management is a process of controlling risk. Second it is a method of increasing profits. Third it is a way to discipline a trader. Fourth it is not a way for quick bucks. Fifth it will enable a small account to compound at the best rate possible and earn consistently. Lastly coupled with position sizing it gives to the trader flexibility to hedge their trades thus ensuring a daily profit. So make some money for yourself.
Dr. Joshua Geralds is a successful Investment Specialist with over twenty years experience increasing the income of people world wide. Visit http://www.pipsalot.com to learn how to make steady profits through safe trading and down load your FREE e-book "Money Management" for a limited time only!
Article Source: http://EzineArticles.com/?expert=Joshua_Geralds [http://ezinearticles.com/?Money-Management-101!&id=1564884 ]http://EzineArticles.com/?Money-Management-101!&id=1564884
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