When the music stops, leave the dance floor

March 27, 2010

When the music stops, leave the dance floor
Even the Best Investors Make This Huge Mistake… Make Sure You Don’t!
By Dr. Steve Sjuggerud
Personally, I have just one rule: Avoid big mistakes.
If I do that, I know I’ll be fine. I know I won’t “blow myself up” in my investments. Knowing that gives me peace.
I can’t believe how many brilliant, successful people fail to do this one simple thing… and lose what they have… or even lose everything.
Look, if you do nothing else, remember this: Avoid big mistakes. And the biggest of the big mistakes is STILL DANCING when the music stops.
Get the heck out of there, my friend! If you’re a little late to realize it, then STILL get out. Better late than never. Let me show you what I mean…
Chuck Prince, the former CEO of Citigroup, is a perfect example of a guy who kept on dancing…
In the summer of 2007, just as the banking crisis was getting underway, Chuck actually told the Financial Times he was “still dancing.”
About the banking business, Chuck said, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
But the music had already stopped when he was speaking. Shares of Citigroup are down 93% since he said that… just a year and a half ago. And Chuck lost his job less than four months later.
I’ve also seen it close to home…
Most of the wealthy investors where I live made their fortunes in local real estate – that’s Florida real estate.
The music stopped in Florida real estate a few years ago… But even today, they’re STILL dancing. If they had acknowledged the music stopped early, they might have been able to keep much of their wealth.
I could go on, with examples throughout history… from Sir Isaac Newton in the 18th century South Sea Bubble to George Soros in the 2000 tech bubble.
The message today is incredibly simple…
When the music stops, STOP DANCING.
Get off that dance floor… and do it fast. Do NOT allow small mistakes to become big ones.
It sounds simple. But as I briefly showed, even the smartest people succumb to it.
We are all vulnerable to the risk. So you must make a conscious choice here… you must tell yourself you will never let a small loss become a big one.
You can use whatever “system” works for you to reinforce this idea: stop losses, trailing stops, NOT averaging down a losing position, NOT taking too big a position in anything.
I actually use all of the above.
Whatever works for you, do it. The important thing is, do NOT let a small loss become a big one.
Want to be just fine, forever, in your investments? Then don’t forget my one rule… Avoid big mistakes!
Good investing,
Steve

Market cap graph – Eastern europe

March 9, 2010

Source: Google public data explorer


Insights from Ed Seykota

March 9, 2010

Excepts from Ed Seykota’s FAQs

Traders and Surfers both have to deal with feelings of missing out on the small ones, until the big one comes along. They also have to deal with feelings of staying with the big one.

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Sometimes markets trend smoothly. Other times they chop. A long-term trend following system provides direction for all types of markets. The basic Trend Trading rules are:

Trade with the Trend
Cut Losses and Ride Winners
Manage Risk
The definition of Trend is specific to individual traders.

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Trend followers trade at new highs and at new lows.

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Yes. At the moment two markets simultaneously hit buy stops, they correlate tightly, particularly in the very short term. To diversify, include an instrument that breaks out while others sleep. For example, take stocks from different sectors – or commodities from different groups. Silver and soybeans might break out the same day and thus correlate well in the very short term. A portfolio of silver and soybeans provides more diversification that a portfolio of silver and, say, more silver. The opposite of diversification is plunging, betting it all on one horse.

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As with all markets, to get a good piece of the major move, you may have to ride out some corrections.

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In actual trading, even with stops, you cannot predict your exact risk. In actual trading, you might consider taking small independent positions, each with a ½% risk to stop, up to a total of 25%. With this plan, your winners and losers tend to average out so you get the same overall gain with a smoother ride (less volatility).

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In Trading – diversification might even mean getting bearish and picking out some good shorts.

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Very short term systems tend to succumb to transaction costs.

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The complexity of a trading system has little to do with the markets and little to do with the math; it has mostly to do with your emotions.

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Your terms: volume trends; likelihood; trend continuance are all ambiguous, fuzzy notions. They have little to do with trend following except to provide excuses for missing signals. Trend followers take their signals and leave distractions to fuzzy-mentalists.

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Transaction costs, such as commissions and slippage, become increasingly severe with increasing trading frequency. To minimize these effects, use longer term (slower) systems. In trading, slow and steady profits beats fast and choppy whip-saws. Acting like a Snail might be the fastest way.

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During trending markets, trend followers tend to wax strong and confident; they follow breakouts with enthusiasm and vigor. This tends to precipitate choppy markets and strings of false breakouts that tend to discourage trend followers. The percentage of money on trend following methods tends to seek its own optimal value. Choppy Waters tend to discourage all but the most stalwart sailors.

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A system comprising 3 to 4 subsystems is a single system.
A system exists as long as someone follows it. People have a life span and tend to lose effectiveness near the end.
Trend Following acknowledges the principle of Momentum; as long as momentum exists, there is a place for trend following.

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The big, major-mover, long-term multi-fold trends tend to occur on the long side – although riding them can have complications.

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Traders may find that the majority of their trading activities are basically ritualistic in nature and actually contribute little to the process of trading successfully. Meanwhile, a few activities, many of them subtle and unconscious, dominate the trading.

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A fish does not see the water and you do not see your own drama.

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We live in a continually evolving, self – computing moment of now. We have no access to the future or the past. Our notions of future and past all reside in the now, along with everything else. Time is a notion that connects two non-existing positions. Belief in time allows people to avoid taking responsibility, and enables derivative myths such as causality, guilt and blame that provide bases for organizing society. As a society matures and control centralizes, these myths become increasingly important control tools. Children who show signs of resisting the cultural myths – by displaying anxiety – typically receive attitudinal adjustors such as Ritalin. People who live in the myth commonly speak of time as a substance. They save it, make it last forever, bottle it up, spend it, go through it, share it, take it up and waste it.

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The market is trending to a new level, now, only now and always now. A trend is a general direction in which something moves. To define a trend, pick a historical price, and subtract it from the current price. The difference tells you the direction and magnitude of the trend. A market has no inherent trend. It only has a price, now. A trend is a notion you bring to the market, depending on your own definition of trend.

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As you experiment and test various systems – and as you work to free your self from drama, your trading system and you as a trader tend to converge toward something that works.

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You can’t steer a car by placing your hands on the rear view mirror and twisting it around. You can’t deal with your fear of whipsaws by tinkering with your computer system. You might try taking your feelings of fear and frustration to a Tribe meeting where you can experience them.

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Frustration can intend various positive results. You can find the ones particular to you with TTP. Frustration – A cousin of risk control.

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Jumping to logical conclusions about the “causes” for problems might be a clever way to avoid experiencing forms you don’t want to experience. Logic can be a detour – around experiencing forms.

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The storm destroys the other shrimp boats, so Forrest Gump and the Captain gain an edge – after the storm. Similarly, choppy markets discourage many trend followers and set the stage for the surviving trend followers to enjoy smooth trending markets. One Way to Harvest Shrimp is to put up your boat, take a vacation, sit in a nice restaurant, enjoy a shrimp cocktail and wait for calm seas to return.

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I trade stock indices according to their trends. I trade individual stocks according to their trends. Sometimes they trend together and sometimes they don’t.

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The difference between various optimizations of your system is likely much less than the difference between sticking to it and not sticking to it – and that’s where TTP comes in.

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When your mission becomes about serving others by managing their money, rather than about avoiding experiencing poverty by hitting on rich people, you might become attractive to serious investors.

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The principles of Trend Trading:

trade with the trend
ride winners
cut losers
manage your risk
You might also add: when strong feelings come up that prevent you from sticking to your system, experience them. A mechanical system can help increase your consistency, the number of items you can track, and your adherence to the principles.

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Fred wants you to experience your feelings. If you are willing to do so, Fred has no desire to “control” you. To the extent you are unwilling, Fred finds ways to deliver the feeling to you by setting up dramas. An ambiguous trading system of any type provides room for Fred to set up drama for you in your trading. Strict trend followers, with very precise systems, often have trouble sticking with their discipline. Strong feelings come up that make them jump their systems. If they learn to experience these feelings, the feelings dissolve into AHA’s. This makes it easier to stick to a system.

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The study demonstrates that stocks that look similar on a 100 day chart may look very different on a longer chart. There are many ways to define strong and the definition you use can make a big difference.

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Defining a System Clarifies it and dissolves questions about what it is and how it works and converts its application from drama to right livelihood.

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The theme of the Workshop is “Defining Your System.” You might see if you can define the specific properties of stocks that “look weak” to you. Then, you might also define the specific action you take in response to a weak-looking stock. Absent specific methodology, Fred tends to hijack your trading to help you experience feelings you are otherwise unwilling to feel. How Things Look is Largely up to Fred.

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You pose an interesting question. If two charts have identical intermediate-term strength and are also in new-high ground for several years, would you be inclined to buy the one in all-time high ground or one that still below all-time highs. Keep an eye on the Charts page for some investigations along these lines.

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A Small System properly constructed, can attract and hold large assets.

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Computing the probability of a stock rising (in the future) is inconsistent with trend following.

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You might notice the extent to which you “validate” a trading system by the daily percentage change in a few stocks. Other methods of measuring success include noticing how well you follow your signals, ride your winners, cut losses and manage risk.

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Rule of thumb for passive trend following systems – allow about 50% of your expected annual profit for drawdowns – so if you want 1,500% per year, you might allow for 750% drawdowns.

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Trader Job #1: Manage the Risk

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Under Fred helps us get what we want whether we like it or not. The feelings we are unwilling to experience are our real trading system. When you receive Fred, and experience your feelings, you may get an AHA, and know what you want to do and how to do it. TTP intends to assist Fred and CM to communicate about feelings. Out of this alchemy, you might receive an AHA, or enhance the intuition you report. Defining your system consciously, committing to stick to it, and accepting the feelings that come up allows you to transcend your own machine-like subconscious behavior.

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A Fish – at One with the Water sees nothing between himself and his prey A trader at one with his feelings feels nothing between himself and executing his method.

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Commitment, includes intention and agreement with others. Commitment aligns CM’s on the logical plan level, and aligns Freds on the Under Fred Network. Commitment is the power to realize that intention = result.

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My experience is that about 20% of the activities you perform as a trader contribute about 80% of your profit – and that the other 80% of the things you do, have, at best, no effect.

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The trend is your friend except at the ends where it bends. Astute Cyclists don’t try to tell the path where it “should” go.

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You not only seem to want the perfect trading system, you seem to want it to appear as a definite set of rules. Typically, sets of trading rules, such as you find in books and on internet sites are ambiguous, even internally conflicting. Even if you could find a set of rules that you can compile into code, your program would likely guide only a sub-set of your actual trading process. For example, essential trading tasks include selecting the markets to put on the system, determining the overall and individual portfolio risk, selling instruments to make room for more promising ones, picking points at which to roll contracts and at which to enter a new customer, etc … If you notice feelings of desire for the “Holy Grail” or feelings of wanting someone else to take responsibility for your actions, you might take these into TTP. For example, you might take the feelings you have in your stomach into TTP as a starting point. Your Actual Trading System is the set of feelings you are unwilling to experience.

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Most markets have both trending and sideways periods.

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When you are willing to experience boredom, it passes through. When you are unwilling to experience boredom, Fred finds ways to make your life interesting.

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If the trend is already in progress, one way to get on board is to enter a stop order just outside the recent trading range. If a trend is not currently in process, you can enter a stop order outside the long-term trading range.

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Trend Followers – buy on penetration of resistance, sell on penetration of support and ignore targets.

This post has special permission to reprint  from ED SEYKOTA – for more please visit ED’s site http://www.seykota.com


Ed Seykota Quotes

March 4, 2010

Markets

The markets are the same now as they were five or ten years ago because they keep changing-just like they did then.

Short-Term Trading

The elements of good trading are cutting losses, cutting losses, and cutting losses.

Outcomes

Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.

I think that if people look deeply enough into their trading patterns, they find that, on balance, including all their goals, they are really getting what they want, even though they may not understand it or want to admit it.

Market Trends

The trend is your friend except at the end where it bends.

Charles Faulkner tells a story about Seykota’s finely honed intuition when it comes to trading: I am reminded of an experience that Ed Seykota shared with a group. He said that when he looks at a market, that everyone else thinks has exhausted its up trend, that is often when he likes to get in. When I asked him how he made this determination, he said he just puts the chart on the other side of the room and if it looked like it was going up, then he would buy it… Of course this trade was seen through the eyes of someone with deep insight into the market behavior.

Predicting the Future

If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it’s coming in, it’ll never happen. The market is always right.

Trading

To avoid whipsaw losses, stop trading.

Here’s the essence of risk management: Risk no more than you can afford to lose, and also risk enough so that a win is meaningful. If there is no such amount, don’t play.

Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top.

Markets are fundamentally volatile. No way around it. Your prolem is not in the math. There is no math to ge you out of having to experience uncertainty.

It can be very expensive to try to convince the markets you are right.

System Trading

Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.

I don’t think traders can follow rules for very long unless they reflect their own trading style. Eventually, a breaking point is reached and the trader has to quit or change, or find a new set of rules he can follow. This seems to be part of the process of evolution and growth of a trader.

Feelings

Our work is not so much to treat or to cure feelings, as to accept and celebrate them. This is a critical difference.

Fundamentalists figure things out and anticipate change. Trend followers join the trend of the moment. Fundamentalists try to solve their feelings. Trend followers join their feelings and observe them evolve and dis-solve. The feelings we accept and enjoy rarely interfere with trading. Trying to treat or cure feelings adds mass.

When a feeling dissolves, it ceases to be your enemy and begins to be one of your allies.

Technology and Uncertainty

Advanced technology for analyzing the markets is interesting, entertaining, distracting, and even counter-productive to coming to terms with emotional reactions to uncertainty and volatility.

By the way, if you want something certain about the markets, uncertainty itself almost certainly happens to be one of the most certain things about the markets.

Experience Feelings

Feelings naturally appear during trading. The feelings we don’t like seem to have roots deep in our unresolved issues. Somehow they get stuck and do not finish passing through, and can cloud the judgment and interfere with trading. The feelings we do like seem to pass through quickly without much trace.

I suggest getting to know your feelings, by experiencing them, expressing them, letting them pass through and finding out they are pretty much all good ones.

Jet engines work best when they are open at both ends.

Feeling Stuck

The feelings you don’t like don’t pass through. Feelings you do like pass through. To get feelings to flow through, and not interfere with your trading, learn to like them. Part of that comes from experience, part with identifying their positive intentions. For example, consider the feeling of being lonely and having others tell you are wrong. When the market is trending nicely, it’s a feeling traders might especially enjoy, even use as a signal to add to a position.

The feeling of everyone telling you that you are right, might actually be the scary one.

Knowledge

There is nothing quite like admitting you don’t know anything to make people think you know something.

Success

In your recipe for success, don’t forget commitment – and a deep belief in the inevitability of your success.

Tools

Define your project and the right tool appears. Questions about the tools indicate uncertainty about the project.

Avoiding Pain

Embracing the moment, celebrating the pain, and finding the positive intention, tends to transform pain into wisdom. Trying to avoid the bad stuff only tends to institutionalize it, and miss it’s positive intention.

If running out of gas is a bad feeling, you might be tempted to put masking tape over your fuel gauge … and miss out on the positive intention of that information.
Trading

Trends are markets having aha moments.

What you believe is true for you.

In futures trading, the short and long positions define each other.

A fish at one with the water sees nothing between himself and his prey. A trader at one with his feelings feels nothing between himself and executing his method.

Traders and Surfers

It’s all about sticking to your plan and experiencing feelings as they arise. If you are unwilling to feel your feelings, the temptation is to avoid them by jumping off your system.

Traders and Surfers both have to deal with feelings of missing out on the small ones, until the big one comes along. They also have to deal with feelings of staying with the big one.

Feelings you Dislike

Feelings you dislike, grow stronger; the feelings you like disappear, leaving you wiser.

The turning point in the Process occurs when you become willing to feel a historically unpleasant feeling.

Positive Intention

You might consider the positive intention of anger – hint: the positive intention of thirst is to make sure you have enough water in your body.

Children

Children seem open to feel whatever they feel. Their moods change from moment to moment as they keep experiencing their feelings. As we mature, we learn to contain our feelings.

Emotions

Thinking about emotions, trying to control emotions, talking about emotions … are all different from experiencing emotions.

Losses

Lungs Lose Air about Half the Time.

Fear

The experience of fear varies from person to person. The positive intention of fear is risk control.

Fred(Your subconscious mind) finds ways to get the fearless to feel fear.

Hard Work

Hard Work does not Guarantee Profit and one man’s hard work might be another man’s recreation

Finding your calling

Finding your calling is a continuation of the process of unifying Fred(unconcious mind) and CM(concious mind).

As we clear out our personal pains and dramas, our issues and feelings tend to turn outward, toward others, toward building community, being of service, locating and expressing our talents and gifts …

Things you Measure Tend to Improve.

Communication

Becoming a better trader and becoming a better person seem to go together.

The Most Direct Communications require no words. They require only a good receiver.

Most people are really pretty agreeable, until you try to change them.

Your Experience of Others may depend on the degree to which you support or resist their mission, as they see it.

Responsibility

The responsibility model, in which you intend a result and assume responsibility, seems to provide a better fit for real-life situations.

World Peace

We are all here on this planet, temporarily, sharing some room with each other. Some chop wood and some carry water.

How about we help each other a bit more, fight a bit less.

Partner

When you are willing to experience your mate just the way she is, she loses her power to control you and she becomes your ally.

Your judgment of her judgment empowers it.

Sticking with System

John (Bollinger) tells me audiences can sit for hours and listen to him describe his famous, and simple, equation. They cannot, however, stand to listen to advice about risk management or sticking with a system.

This post has special permission to reprint  from ED SEYKOTA – for more please visit ED’s site http://www.seykota.com