World Full of Opportunity and Abundance

The following 3 tips about trading were taken from a book I read many years ago.

1) It’s not about who’s right.

Winning traders are concerned about making money, not about being right every single time. We are a product of our upbringing and our environment.

When you were in school the focus was on getting good grades and you have to be correct on the answers on tests to get good grades. Right?

So if you wanted an “A” you usually had to get 90% of the answers correct.  So many traders are constantly thinking that if I’m not getting a very high percentage of these trades “correct” then I’m failing.

Well it doesn’t work that way in trading. The most important thing is that you have a plan and you stick to that plan. You are not going to be correct on every trade.

Depending upon your trading approach you may be correct on 60-70% of your trades and make money, or you may be correct on 40% and make money. An important key with both approaches is to keep your losses small.

2) Forget the past.

Stop worrying about the mistakes you’ve made. Always keep a journal and log you trades and the plan for each one. Log the result.

You should go back and analyze past trades to learn from them, but if you are following your plan, don’t beat yourself up for a loss or for several of them in a row.

Statistically I remember reading somewhere that it is totally possible to have 10 losing trades in a row, yet you are still putting on good trades.

“The recent past is no more important than any other historical time period; it only feels that way. The ability to avoid recency bias is an important component of successful trading.”

3) Avoid the future tense.

Stop trying to predict the future. Neither you nor anyone else knows for sure whether a given trade is going to make money.

Focus on your process, your discipline and the trading results will take care of themselves.

“Trading is filled with uncertainties. You do not know whether a trade is going to make you money. The best you can do is be confident that the rewards will outweigh the risks over the long run.”

 

No matter what approach you take in trading, you must take responsibility for your trades.  Learn from any mistakes and move on.  Remember it’s a world full of opportunity and abundance.

These 3 tips came from a book that may surprise you. “Way of the Turtle” by Curtis M. Faith.

Curtis was one of the original Turtles in a special trading group created by Richard Dennis and his partner William Eckhardt. The quotes used above were taken directly from the book.

It doesn’t matter whether you are trend trading commodities like the Turtles or trading a much shorter time frame, the emotional qualities needed to be successful trading, apply to all traders.

Markets Can Stay Irrational

As we are in the 11th year of a stock market rally off the Financial Crisis low of March 2009, a quote came to mind the other day.

“Markets can stay irrational longer than you can remain solvent.” – John Maynard Keynes

This quote was attributed to Keynes in the 1930s when the stock market was a very trying time. But indeed this saying applies to any market…stocks, futures, currencies, etc.

As our stock market continues to defy gravity and valuations remain near levels seen only in 1929 and the late 90’s (see the CAPE ratio) it is good to keep this quote in mind.

Option Sentiment Provides a Warning

This post is based on information provided daily to the Insider Membership.

I like looking at option sentiment because it tells you what people are actually doing versus what people say they are doing. When I talk about option sentiment I’m talking about the level of trading in puts and calls.  For those of you unfamiliar with options, a call option is simply a contract that allows you to make money when a stock or index goes up. A put option allows you to make money when a stock or index goes down.

So when there is significantly more activity in calls versus puts that is a sign that bullishness is getting extreme. Another way to look at this is simply puts versus calls and that is why it is called the Put/Call ratio. Overall there is more bullishness in the market than bearishness so you have to take that into account when looking at option sentiment.

The data I look at comes straight from the Chicago Board of Options Exchange (CBOE).  And specifically I look at option trading on equities only. So just stocks, not indexes.  I’ve kept this data since November 1, 2006.  I have the raw data and then calculate the 10 day moving average. This is what I use for the primary signal for option sentiment.  Sometimes an individual day will also give a clue as to what might be happening.

So I bucket my signals into excessive, extreme and ultra extreme categories for both bullish and bearish scenarios.  Usually the data will provide signals that are several days to weeks long but sometimes it is only just one day.  I think of the excessive readings as warning flags that something is up and things could be about to change. If that reading is just a one day signal, it’s kind of a “shot across the bow” warning.

I am not going to share the actual levels that define these various categories, as that would not be fair to the Insider Members. But let’s take a look at where these signals have occurred over the last 2 years. The two charts below are for the S&P 500 Index (SPX) and show the daily view. In the first chart, there was a tremendous period of excessive bullishness that lasted 9 weeks and included a 6 day period of extreme bullishness right at the top, January 23-30, 2018.

The period in May and June 2018 also had a couple instances of excessive and one period of extreme bullishness but no market collapse. After the huge break in early February it was almost as if option traders were expecting the next shoe to drop but nothing major happened. It started to sell off in mid-June but then turned around.

Then came the warning flags in late August and late September that preceded the huge selling avalanche of the 4th quarter. That 2nd period of excessive bullishness lasted from September 20 to October 3.

Daily view from Nov 2017 thru Oct 2018

The next chart begins with December 2018 thru today.  The selling in December got extreme and this too was reflected in the Put/Call ratios.  Then we got the huge rally in January that just kept on pushing higher.  First warning flag appeared in late February but only resulted in a minor pullback. The second warning seemed to coincide with the minor pullback in late March but that too did not go anywhere.

Then came the third period of excessive bullishness in late April and that preceded a pretty strong selloff into mid-June. But since late April the only signals sent were one day “shots across the bow” at the beginning of July and in mid-September.  I view these one day signals as if they were a flare sent up.  Not enough to raise the warning flag, like on a beach for danger, but enough to say, ‘heads up’.

Daily view from Dec 2018 thru Oct 23, 2019

Gold Still Trending Higher

This post is based on an excerpt from the Weekend Market Analysis published for the Insider Membership.

The chart below shows the weekly view for the Gold ETF (GLD).  Gold is tracing out a large ZigZag corrective pattern. The first leg down was Primary Wave A (circled) that completed in December 2015. The next wave is Primary Wave B (circled) that doesn’t appear to be complete yet. Wave B (circled) consists of 3 waves: Wave (A) that ended in July 2016, a triangle Wave (B) that ended in April 2019 and a Wave (C) that still appears to be underway.

Data thru Friday, October 11

This next image shows a little more detail to what looks like the final leg up. At this point I have labeled Minor Waves 1,2, 3 and 4 of Wave (C).  Since waves 1 and 3 are fairly equal in size, I am looking for Wave 5 to be larger than wave 1 or 3, as it pushes higher. We still don’t have confirmation that Wave 4 has finished, but we may be getting close.

Data thru Friday, October 11 (this is an image from a video)