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