Blog March 2006
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Elliott Wave Principle by Robert R. Prechter Jr. and A. J. Frost
Paul King, March 28th 2006
Before I took a serious look at
Elliot Wave technical analysis, I was of the (common I believe) opinion that it didn’t work, wasn’t specific enough,
and was a couple of steps down from Voodoo in my list of ‘sound trading methods to think about using’. All that changed when I took a serious look at Elliott Wave International and specifically the book Elliott
Wave Principle (EWP) by Frost and Prechter.
I would consider this book the
definitive guide to the theory, history, and practical application of Elliott Wave (EW) to trading. If you are only going to read one book about the subject, this should be it. Now I’m not saying EW is perfect, but that it is a lot more sound, robust and well-defined than the
general "here say" would have you believe, and this book covers the whole thing from history to application.
I found the book to be relatively
easy to read, but very hard to get my head around without practical application. Imagine
a chess Grandmaster writing a book on how to play really good chess. They could
describe the rules of the game, the guidelines and overarching principles, and specific examples of good play, but chess is
a complex game and it would be difficult to really get a feel for the whole thing without actual play.
Exactly the same can be said for
EWP. The book goes into extreme detail about why 5 progressive followed by 3
regressive waves is the most efficient way for a market to move, and sets out an amazingly detailed and complete list of rules
(rarely if ever broken) and guidelines (often fuzzy, but useful all the same) for the identification and application of wave
theory as well as a nomenclature for identifying the complete range of cycles from the tiniest ticks to the secular movements
that take decades to complete.
I guarantee you will have to read
sections of this book more than once to get the underlying meaning, and also have to practice the application of the theory
in real time before you really ‘get it’, but I believe it is well worth the effort – even if you ultimately
don’t end up using the methods, there are many traders who do, and so this is a self-fulfilling technique that works
because people use it, and people use it because it works.
I would consider myself a complete
beginner in this technique, but I know enough to know that EWP contains most of what I’ll ever need or want to know
about Elliott Waves.
Buy Elliott Wave Principle at Elliott Wave International.
Product Review: How you can be Right when the Crowd Loses, presented by Jake Bernstein
Paul King, March 24th 2006
In this InvestorFLIX presentation Jake Bernstein talks in detail about how sentiment of 'the lowest form of trading life'
as he calls individual non-profession traders is nearly always wrong, especially at major turning points in the markets.
With some humor he talks about how most indicators, methods, and individual traders "just don't work". He also shows
many examples of extreme bullish sentiment immediately preceding tops and bearish sentiment bottoms. There are a lot
of examples that repeat the same concept, but I suppose he is just trying to show it is not an isolated case, but a fundamental
way that markets work.
The study of individual trader sentiment forms the basis of his trading philosophy which is to use sentiment as a contrarian
indicator. You may be thinking 'How does he gauge the sentiment of individual traders so accurately?' and the answer
is that he conducts a daily survey with a representative sample, and published his results called the Daily Sentiment Index
This seems like such a simple concept that it can't possibly be any good, but the data is available historically so you
can test it out for yourself. It is also ironic that although each survey participant receives all the data, and knows
exactly how it is being used, they still can't get it right - I suppose they all think that it is the other guys who are wrong!
Read our other InvestorFLIX reviews.
The Art of Trading #3
Paul King, March 23rd 2006
The Five Factors continued
iv By command I mean the general’s qualities of wisdom,
sincerity, humanity, courage, and strictness.
You are the one who is in control of your trading account, trading systems, and every decision
made that makes or loses money. Creating a system or method which, if traded
accurately, will make money is difficult, but not impossible. What is much more
difficult is having the qualities to trade it accurately – taking every single trade entry, and exit without making
any implementation errors. You have to have the mental strength to command your
trading environment effectively, and this is one of the main barriers to successful trading.
There are 2 aspects to trading a system successfully.
One is having a complete system and trading plan and the other is implementing it accurately.
A complete trading system has rules which specify the following things with no ambiguity:
- Market selection – which markets
- Instrument filter – which instruments
within the market are considered tradable
- Trade setup – what conditions signal
a potential trade
- Entry signal – what rules determine
a position should be taken
- Position sizing algorithm – how
much to trade
- Exit rules – when to exit the trade
If you do not have pre-defined answers to all these questions before you enter a position,
you do not have a complete trading system or plan and it does not matter how much mental discipline you have, you will not
be able to trade consistently or accurately because you have not defined what this means.
Once you have a detailed plan, you can easily spot deviations from it (trading implementation
errors) and work on your self-discipline to correct the errors and put rules in place to make sure they do not recur. One definition of stupidity is ‘making the same mistake twice and expecting
different results’. We all make mistakes, but what differentiates successful
traders from the rest is that they can identify the mistake and take action to prevent it happening again.
More coming soon even if nobody sends me any feedback…
Web Site Review: MarketClub
Paul King, March 20th 2006
is a web site that has some nice features to help you become a better trader.
The site is split into 4 main sections:
- Chart Portfolios
- Smart Scan
- Trade School
- Data Central
Chart Portfolios is where you can create, manage and chart the instruments you are interested in. Equities, Forex,
Futures, and Mutual Funds are included. The charting is a nice implementation using Java-based charts and has all the
features you would normally need (trendlines, studies, different timeframes, etc.). The unique feature is the 'Giant
Footprint' button that shows good entry and exit points on each chart in different timeframes. It is a simple concept
that uses the highest-high, or lowest-low of the last 3 periods, but is surprisingly effective.
Smart Scan is a useful scanning technology that finds instruments that are making new highs or lows, and have strong or
weak Displaced Moving Average (DMA). Again all the instrument types are supported and you can use this scan to quickly
find good trade setups.
Trade School is a series of audio workshops and workbooks that cover many aspects of good trading. A few of them
are a little dated (1996), but they mainly cover topics that are 'classic' and can never really go out of date.
Data Center is where you can download 1 minute, 5 minute, 15 minute, 1 hour, or daily data in tab-separated, comma-separated,
or MetaStock format for any of the instruments supported by MarketClub. Great for doing your own analysis. There
is no limit to the amount or frequency of the downloads you can perform.
Overall this is a handy, useful, and informative site, and the additional movies that demonstrate how to effectively use
all the features of the service are excellent.
Web Site Review: TradingEducation.com
Paul King, March 16th 2006
It’s not very often that
I come across a really good site with useful trading information, and this one is special because nearly all the content happens
to be free. There are interesting articles by well-known trading authors like
Van Tharp that cover the psychological as well as practical aspect of trading.
There are also various online
trading tutorials that cover things from the basics to fundamental analysis or candlestick patterns. Tutorials on the following topics are included:
- Basic Trading Concepts
- The Business of Trading
- Fundamentals for Traders
- Chart Patterns
- Technical Indicators
- Candlestick Patterns
As well as general information
like a commodity futures glossary, and other interesting trading website links
there are also various free offers that you can sign up for including ’10 Rules for Successful Trading’, a forex
trading eBook, and a Money Management Webinar.
Lastly there is a free weekly
newsletter (and a newsletter archive) called Synergistic Trading that is definitely worth signing up for.
All-in-all this site is a free
hidden gem of trading information that I only found out about by accident through an associate. I hope everyone finds it as useful as I have. Take a look
now before they start charging for the content!
Book Review: Blink by Malcolm Gladwell
Paul King, March 15th 2006
In this short, concise, and to-the-point
book, Gladwell delves into the subconscious mind and just how much it actually affects our personality, opinions, and decision-making
in ways that are not immediately apparent. The example short stories used have
significant relevance to trading and here are a few of the main ones:
a Greek Statue is a Fake
Even after months of scientific
study and evidence that a particular statue was genuine, key people kept getting a ‘negative’ feeling when they
first saw it; their hunches turned out to be correct. In trading, before I enter
a position I take a quick look at a 1-minute chart of the last 5 days and I immediately get a feeling that says ‘Not
liquid enough for my position size’. This is ‘thin-slicing’
and Blink demonstrates how it can be a useful and interesting phenomenon that one can consciously use.
Red Deck/Blue Deck
In an experiment where a game
was played with 2 separate decks of cards, one of the decks had a much higher expectancy in the game than the other. It was shown that after about 50 cards were played, people normally learned to avoid
the bad deck. Professional gamblers, however, started to avoid the bad deck after
10 cards without consciously knowing why. This is an example where feelings can
be telling you something important much quicker than any rational analysis of the situation can. It would be a good idea to develop and incorporate these kinds of feelings into your trading.
Throughout the book there are
many examples where priming radically affects our decision process and even our actions in ways we would not even think of. Being given a word game to play that simply has words that are associated with ‘old’
can make people walk slower and more stiffly after finishing the game! Priming
oneself to be an accurate and successful trader can be an effective, but simple technique that can have immediate and tangible
Simple is Best
Studies have shown that a simple
set of rules can be a more accurate predictor of whether someone is having a severe cardiac episode than an expert opinion
using a large array of factors. In trading, Occham’s Razor should always
be applied to cut through to the minimum set of important factors that determine whether a trade is low risk/high reward or
not. Including ‘everything but the kitchen sink’ in your trading
system or method is actually counter-productive and less effective than a simple but elegant solution.
The Sip Test
It has been shown that people
prefer one kind of cola over another much more often in a simple sip test. This,
however, has little relationship to market share, and how people enjoy each product in real life drinking a whole can or case. We use a completely different part of our brain to evaluate a sip than we do to drink
a whole can of a product. In trading, the first few minutes of a trade are irrelevant
to the final outcome – it is the closed trade results that matter, not what the ‘first sip’ tastes like.
I could go on, and on, with more
trading examples from this book, but why don’t you just read it and determine the applicability for yourself.
Blink is #8 on our Non-Trading Recommended Reading List here.
An eBay Arbitrage System
Paul King, March 9th 2006
eBaytrage, noun, buying and then re-selling an eBay auction item for different prices and making a profit equal
to the difference between the purchase and selling price.
Why some eBay items are incorrectly priced
In order for an arbitrage to be successful we must be able to identify items for sale that are under-priced relative
to the 'normal' market price. On eBay some items are under-priced because they cannot easily be found due to spelling
errors, and therefore attract fewer bids than they should.
Popular 'commodity' items that are misspelled on eBay will ultimately sell for less than the prevailing market value
for the item if it was listed correctly. Therefore it should be possible to 'low-ball' these items, purchase them, and
relist them for a significant profit.
Examples of misspelled eBay items are listed below: (you can click on them to perform current Ebay searches)
The item for sale must have a history of selling for a high price (based on a completed auction search) and be a commodity,
rather than a 'difficult-to-value' item. Examples of commoditized items include electronics, software, and books.
Not every item will be a good candidate. It is important to check the seller profile to ensure they have sold a
reasonable number of items and have a high positive feedback number.
Not every trade will offer a good risk/reward. It is important that the item has a high historical sale price compared
to the anticipated sale price for the misspelled auction. Using a maximum bid that is half of the historical ending
auction price for the item gives a good margin of safety.
The implementation costs for the arbitrage are the shipping and handling costs to buy the item, and the eBay listing
fee to sell the item. The potential profit should be a reasonable multiple of the implementation costs to make
the trade worthwhile.
As with any trading system, position-sizing is a key concept. Never allocate more than a few percent of available
capital to any one trade even if it is possible to simultaneously buy and sell the same item. It is always possible
for something to go wrong (for example you end up with an item that doesn't function and you can't relist it and may lose
the entire cost of the item).
if you have any interesting comments about this system.
The Art of Trading #2
Paul King, March 7th 2006
The Five Factors continued
ii By weather I mean the interaction of natural forces;
the effects of winter’s cold and summer’s heat and the conduct of military operation in accordance with the seasons.
All markets have cycles, seasons, and prevailing
temperaments and it is important that your trading system or method adapts to the current market conditions. At a minimum you should identify the different types of market your system performs well in and then only
trade when conditions are favorable. The main classifications of a market that
effect trading are volatility and trend. Volatility can be lower than normal,
normal, or higher than normal. Trend can be downwards, sideways, or upwards. Combining the two parameters gives us 9 different market types that your system must
be able to perform well in, or it should be suspended during times when conditions are not good.
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Product Review: Business Planning for Traders and Investors by Van K Tharp
Paul King, March 1st 2006
This set of CDs (8 audio, and 1 supporting
data) from the Van Tharp Institute is a recording of a series of telephone conferences that Van Tharp held, which includes
guest speakers from each area of expertise. The CDs deal with the difficult
and sometimes intimidating subject of effective business planning
If you have been trying to trade without a business plan (and probably losing money) this course can help you get on the right
track and actually set and reach your goals for your trading.
Here is a special point that I learned from
each CD. I’m sure that when I listen to them a second time I will pick
up even more information.
Disc 1 - Commitment
Treating oneself as a 'business entity' and
addressing each personal issue this bring up is a powerful way to find out how you can operate efficiently.
Disc 2 - The Big Picture
Global and macro-economic factors will affect
any business, and trading is no exception. Inflation, real estate, gold, interest rates and the overall stock market
are all important to how you trade.
Disc 3 - Discipline
Listing all the tasks you need to do in the
context of a purpose, vision and goals, and then categorizing them by roles that create results is a great way to know you
are working on what is important.
Disc 4 - Basic Trading Knowledge
Using expectancy to estimate the value of
other business transactions is a useful concept.
Disc 5 - Personal and Business Finances
Conceiving and planning for the largest business
you can imagine is a great way to set your sights high from the start and have a better chance at success.
Disc 6 - Personal Edges
Paying yourself with 'mental dollars' for
achieving planned important tasks is a clever way to avoid disappointment for a losing month/quarter/year.
Disc 7 - How Systems Work Under
No trading system works all the time, and
knowing when your system is broken is a useful thing to understand and have rules in place for.
Disc 8 - Review of Example Business
Goals should always be matched to actions
so that you know what you are working on will bring tangible results.
Disc 9 - Data CD
Some very useful additional material that
includes example business plans to help you see the level of detail that should be aimed for.
Visit the Van Tharp Institute for more information about this excellent CD series.
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Information and thoughts contained in this blog should not be construed
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