Knowing Your Trading & How to Be a Trader

If you want to know how to trade, you must know yourself and your trading. You probably wonder what that is and what I mean by that, let me do my best to elaborate.

If you’re reading this you are likely a member of StockTwits or Twitter and follow many traders and watch them ‘rake in the money’. I can speak from experience in this regard – they don’t always make money and their strategy is not the only ‘right’ one. When I first started to trade I would follow so many traders on Twitter and watch them trade everyday and seemingly make money each and everyday. I wanted that, but oh how naive I was – just because they could do it did not mean I could or that they had the only way figured out.

Twitter community has a tendency to only show you the good times. Sometimes a trader will Tweet out that they had a losing trade, but more often than not the bad trades that these traders take will be down-played and not spoken about often. On the flip side, the good trades are going to talked about constantly – it’s just the nature of the selfish world we live in. To be clear; I am guilty of this myself. I often Tweet both my good and bad trades but only really elaborate on the good ones.

My aim is this; do not be discouraged or deceived – the traders you often aspire to be are the same ones that the trader himself is aspiring to be. More often than not when learning to trade we are not comparing ourselves to real traders that are ‘so amazing’, but rather comparing ourselves to an untainable imagined trader that people often place on display as a sort of facade.

To be a trader you must drop the unrealistic expectations and comparisons. To be a good trader you must drop the stress of making money. To be a good trader, trading must not be enthralled in trading. To be a good trader, you’ve got to have a realistic expectation. To be a good trader, you be patient. To be a good trader, you must know you’re not ‘a great trader’. 

How do you get to this point? Below are a couple points I want to offer you on that subject:

  • Drop your expectations
  • Live your life outside the charts – don’t think about it all the time, please
  • Learn from others, but don’t expect to do what they do
  • Be patient
  • Consistency
  • Don’t change your strategy because someone else is better than you – who cares
  • Read and Learn but don’t expect it to come in a day

All real traders ‘know’ they are a trader, they have a sense of communication (of sorts) with the charts. They’ve seen the patterns enough that they come more naturally and fluidly. So, please remember you can do it – anyone ‘can’ – but it’ll take losing your expectations and losing your unhealthy desire to do so.

The “TA is Bogus” Fallacy

“TA is Bogus”

People who employ this sort of thought have unfortunately committed a major logical  flaw in their mental processing.

Most people who come to this abrasive, definitive, conclusive opinion about the validity of Technical Analysis (TA), have in fact – done zero research to substantiate this claim. Have you not noticed that people who make the most abrasive (perhaps offensive) claims are also the same people who do not – often – have a shred of evidence for their beliefs. Similarly, ever notice that the people who are consistently calm and unfazed have the most confident position because they HAVE done the research and come to a legitimate conclusion. Now, before I go further I want to say; there are some people who have completed empirical evidence refuting TA – I am not speaking to them – as they are are not the ones who make the abrasive comments, they actually fall on the side of being ‘consistently calm’.

Perhaps there is a bias that influences people’s investigating of the legitimacy of TA before they even get started. Personally, I think this is almost always the case.

So, please be careful with every single thing that ever enters your life whether it be Technical Analysis, A political campaign, a World View – research it with the most open mind you can possibly have as doing it any other way is (or can be) horrendously detrimental to your personal development as a human being (or as a trader).

Til’ next time. Let me know if I can help you in anyway – that’s what I am here for.

The Steps to Learning (How to Trade)

Every so often I am asked to teach someone ‘how to trade’ or ‘how to make money’ or ‘what stocks are’, then list could likely go on, but you get the point. After some time, I think the best thing I could do in answering these questions is to address them in a blog post. The purpose of this post is not to stop people from asking me questions (I am happy to answer them), but rather to educate people on the subject matter before delving into it with inaccurate preconceptions.

First and foremost; trading is difficult. I do not think I realized this when I first started to trade equities. Subconsciously, I believed that trading was just like doing a math problem; you learn the process (the only process) and then that’s all, you would know how to trade forever. This, of course, is far from the truth. By no means I am intending to scare you in saying this, but I feel like you need to hear the truth. Trading is not a ‘walk in the park’, if you open up an account today, do not remotely expect to be able to make money by next week (or even next month). Unlike doing a math problem, there is not only one right way; there are thousands. We are all different and each one of us interprets reality in a slightly different way, the stock-market included. If I were to trade like someone else and try to copy their strategy I would be, in a sense, trying to replicate their cognitive process of interpretation, which of course – is impossible. This being said, it is still very much possible to learn from other people. In fact, I would encourage it. However, be careful not to copy what they say as being absolute truth. What they tell you, may very well be true – but it does not mean it is the only way/truth towards the stock market.

Once you have established the basics and learn some more about the stock market and perhaps have begun to trade, it is time to start to implement some of the implicit rules of trading – risk management. I talk to people on a weekly basis – unfortunately – whom do not implement any sort of risk management into their trading. They go through trades believing they are right (and they could be), but refusing to establish a point in which they are incorrect. This is absolutely detrimental to anyone’s success in the markets (or in life). Consider this, if you were going to to walk into a casino and say to yourself ‘I am going to play until I will’, you will (without a doubt), walk out of that casino with no money left at all. By assuming you are better than the game, you will always lose the game. Humble yourself in face of the market. There is nothing gained from telling yourself you ‘will’ be right. Nothing, other than a lot less money.

Now, the way in which you decide to determine where you are incorrect is very much dependent on your individual process of trading (what we spoke about previously). So, I cannot answer the question of whether or not you should sell something – no one can – except you because you know your process.

I would like to add another note on the process point. It is a daunting task, I know. I have been there. It seems as if you will never be able to create a process that is robust and profitable. It seems as if you have no where to start. I know this feeling all too well. I spent a lot of my early career trying to come up with something – out of nothing – to be my process. This is failing way to develop a process. May I recommend the following tips:

  • Study other’s process – see how they work and don’t work
  • Try to trade a couple stocks based off a pattern – learn from them. Did they work?
  • Read about more patterns and trading strategies. Don’t settle.
  • Trial and Error.

There is nothing more I can say without overstepping my bounds other than what is above. Creating a process is a grueling process and it isn’t fun as you will likely lose money – at first. Remain confident and steadfast in your pursuit, which leads me to my last point.

The reason for your trading is the most crucial thing you have. If you are trading solely for making money, you will lose. The market does not like greedy people and if this is you, please humble yourself before every placing a trade and realize the market is bigger than you and isn’t a piggy bank full of money. Trade because you enjoy it, not because you it makes you money. The most successful traders are trading because they like the concepts, the psychology, the mindset, the introspective learning that it brings; not centrally focused upon the money.

This hardly covered it all but in your learning how to trade, I would strongly recommend that you refer back to this article and reflect on the what and they why of your trading. Feel free to reach out if you have any questions!

Before the Car Ride Home

When is the last time you didn’t feel so well, mentally?

Likely not too terribly long ago. It happens often, whether because of trading, relationships, events or the countless other not so pleasant things that can occur. The important thing is what we do once we get this feeling. Let’s take trading for example.

Joe (made up), had a poor week and last all the month’s earnings. He doesn’t feel good at all, has the lurking feeling of despair deep inside him as he drives back home that night (you know the one). Obviously, to simply tell him that it is going to Okay likely is not going to be enough – even though it is the truth. Joe has a couple decisions he can make, one to reconcile the situation and one that makes it (probably) worse.

1. He quits. He looks at the day’s work and says ‘Trading is not for me, can’t be. I am simply not good enough. Apparently I do not know what I am doing after all, despite winning some.” 

Or

2. He says “This is not a good day. But I know that I have made money in the past and I have this process of mine that I can fall back on that is the truth, my crux, the essential piece. This process is immutable, I have managed to make it out of trial and error and even though it is not 100% factually based to the point that is not irrefutable (even conceptually), I have faith in it’s ability and it has worked for me.”

In the case of the first decision, Joe obviously made a poor and emotional decision when it came to the determining of whether or not he should continuing trading. Now, be careful here, I am not saying that once you trade once, he should never stop and never change; no. Not at all. I believe that trading is not for everyone, but to give up because of one bad day/month is not reason enough to throw in the towel on the whole thing.

Okay, so if Joe were to select the second choice he would be making a wise, thoughtful decision for his livelihood (mentally and economically). He recognized the importance of taking a step back and looking at the facts before coming to an unsubstantiated conclusion.

Let’s now be honest with ourselves. Joe is us. Joe is not simply some imaginary character in another world. He is us. We have all been Joe before and will again (probably sooner than later).

Before you get in the car and start that drive home in the midst of a poor mental mindset, remember to take a step back; look at the facts, the history and what is truly important (or not). 

Econophysics and it’s Lamentable Stalling

The below paper was an assignment for my English class this semester, therefore the style is quite a bit different than that in which is usually on this website. However, I still wanted to share it with you because it related to my trading and the financial markets. Let me know if you have any questions. 

 

Ben C. Banks  Econophysics and it’s Lamentable Stalling

Econophysics–the combination of economics and physics–offers us a much-needed new look at widely-accepted finance industry concepts like the theory of efficient markets. However, if econophysics is to broaden its reach and provide new factual knowledge, physicists and economists need to learn to collaborate, by sharing knowledge, in a understanding manner for the benefit of all parties.

If the Efficient Market Hypothesis is true, there is zero reason to hire a financial advisor as there they have no potential to produce any higher return than purchasing the ‘market’ itself. Standard economic theory says that the price movements in the financial markets are normally distributed. Consequently, the Efficient Market Hypothesis (EMH) was created by economists to explain the incapability of consistently achieving returns higher than the broad market indices. Specifically, EMH, via Investopedia, states “it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.” With the introduction of econophysics, this foundation of economic theory is now being questioned. Econophysics is the revolutionary study of the integration of physics concepts into economics, specifically the financial markets. The purpose of econophysics is to study the dynamic and complex behavior of the financial markets, including the efficient market hypothesis. There has been little tenable research in terms of the actual movements of the markets. Up until recently, the movement was attributed to be random and normally distributed, however, with the introduction of econophysics, new empirical data emerged with a different explanation of price movements allowing for a more precise description of the ‘why’ behind price movements within the financial markets. Econophysics–the combination of economics and physics–offers us a much-needed new look at widely-accepted finance industry concepts like the theory of efficient markets. However, if econophysics is to broaden its reach and provide new factual knowledge, physicists and economists need to learn to collaborate, by sharing knowledge, in a understanding manner for the benefit of all parties.

I believe econophysics is a reliable field of study because it is fundamentally based in mathematics, which allows for a new perspective on our finances. All consumers (you, I, financial advisors) want to have accurate information about how their money is being used. This study offers revolutionary knowledge on the dynamics of the markets, allowing for better economic decision making.! Which is what we all truly want! Econophysics is very new field of study, especially relative to most other common scientific fields. The study of econophysics technically began in 1996 (Franck & Schinckus, 444), but the first physics concept applied to the financial markets occurred as early as the 1970’s. The limited research at this point in history created many assumptions, thus creating the fundamental economic theory. Any theory fundamentally based upon assumptions is logically flawed. Therefore, the current, well revered economic theory holds the “burden of proof” in regards to support for their theoretical claims (ex. EMH). From the dawn of research for financial markets, mathematical studies and financial economies have progressively diverted away from one another, both coming to drastically different conclusions (Franck & Schinckus, 451). For the commonly known study, financial economics, the research is based on the assumptions of rationality, normally distributed returns and the market’s ability to be ‘efficient’. On the other hand, the mathematics (econophysics) explanation of market movements is based upon empirical data that examined without the baggage of prior assumptions.

Some may say econophysics is a ‘mystical genie know-it-all’ formula, but that’s false; it is a more accurate representation of the data we presently have compiled. “Econophysicists do not contend that they are attempting to integrate physics concepts into financial economics, but rather that they are seeking to replace the theoretical framework that currently dominates with a new framework derived directly from statistical physics.” (Franck & Schinckus, 446) The financial managers that we hire to manage our money are operating under the assumed theories of economics and need to be, at a minimum, aware of how the given theories were conceived, to prove the legitimacy (or not) of their operations – for our sake! The historical style of examining the financial markets is a-world-away from the new way econophysics is answering the same questions. In their article, “The Emergence of Econophysics: A New Approach in Modern Financial Theory”, Franck Jovanovic and Christophe Schinckus describe the difference as being a “fundamentally new approach”. The authors go into depth into the fundamental differences between the two types of analysis, explaining that the “practitioners are not economists taking their inspiration from the work of physicists to develop their discipline, as has been seen repeatedly in the history of economics. This time, it is physicists who are going beyond the boundaries of their discipline, using their methods to study various problems thrown up by the social sciences.” We all need econophysics to allow us to grow our money in a more effective manner. It is not a spiteful attack on economists.

Many already believe physics can be applied to a diverse range of topics, including everything from bugs to traffic. Currently a disconnect between present economics and physics and their seeming incompatibility is stalling the development of econophysics as a viable field of study. Some physicists, subjectively, contend that physics applied to social sciences is not in fact ‘real physics’. This argument is logically flawed as one cannot accept the un-‘real physics’ argument while still accept applicability of physics to traffic patterns, and insects (Econophysics Matter, 1).The zero irrefutable evidence for the support of the continued division between economics and physics should be enough to continue this study. Especially given all that physics has already accomplished (ie. establishing that markets are not normally distributed).

Through coordinated interdisciplinary collaboration, this disconnect can be resolved, opening the door for the expansion of econophysics. I think some economists need to accept that they may not have all the answers and treat the study of their field as a playground, a place to experiment, grow and become more knowledgeable. On the other side of the spectrum, physicists assignment is to treat the application of physics to economics delicately and recognize the large contrast between the study of both economics and physics. Both parties have equal responsibility to enact their knowledge and expertise with humility and respect, while being focused that a greater understanding of financial markets will benefit everyone. A new interdisciplinary journal, joint-conferences, joint-classrooms at universities, open discussions are all very tangible actions economists and physicists can take to began to share their knowledge.

Econophysics’ (mathematics) goal is not to over run all the financial managers and create computer systems that know the future. Some economists believe that the econophysics is trying to discover a ‘cookie-cutter’ formula to beat the stock market. This is an unsubstantiated claim that couldn’t be further from the fundamental purpose of econophysics. In his article Can Math Beat Financial Markets?  David Biello clearly outlines the overall purpose of the study of econophysics. Unlike the common presumption, econophysics is not the study of prediction, “No model can consistently predict the future. It can’t possibly be.” Rather, the study of econophysics lies within the field of the examining of risk associated with a given security (stock, bond, commodity). No one or thing can predict the future, consequently, the ‘runner-up’ is what’s the risk linked to the placement of a decision (ie. a financial security entity). As David Biello explains, econophysics is analogous to insurance companies, “they cannot tell you when you are going to die, but they can predict the risk that you will die given the right information.”

Econophysics is a growing field, but the disconnect between the economists and physicists is a worthy point of concern. However, this itself is not enough to stop econophysics dead in it’s tracks. In fact, “there is now a body of respected economists who acknowledge the potential value of ideas and tools taken from other sciences, including physics, and who are receptive to the efforts of physicists. (Econophysics Matter, 1). Thus, the continuation of econophysics is evidently still ‘alive’, nonetheless, it is at a much slower, less respected, pace than it reasonably should be.

Another reason for the lack of growth is current fundamental economic theory principles have yet to be concretely defined, by empirical facts, making the entrance into the field of economics more difficult for the physicist. Through placing the econophysicist at the very beginning of the spectrum of knowledge, it forces them to develop and research financial markets from the their very core, outwards. The forced research of econophysicists from the framework of finance to the outer realms of abstract theory may have helped discovery the ‘un-normally’ distributed returns of the markets, which EMH rests heavily upon. Research from the ground upwards creates a more broad range of discovery, thus furthering the benefits of the study more than would have been previously possible.

Econophysics is worth further consideration and respect in the finance industry. In the Nature article ‘Econophysics Matter’, the author explains “Economics and physics are two disciplines that, contrary to widespread perceptions, have significant common agendas. Shame, then, that the professionals don’t do more to recognize the fact.” Econophysics has already made substantial contributions to the finance industry; from the use of leverage, and to the refutation of the Efficient Market Hypothesis. Within his article “What Has Econophysics Ever Done For Us?” Mark Buchanan outlines eight objective points in support of econophysics. By discussing the already realized contributions Mark portrays a coherent, irrefutable argument for the continuation of this field of study, especially in regards to the unsound practices currently in place, which includes EMH.

There is a considerable number of financial advisors who subscribe to an approach that is unsubstantiated, unlike that of which econophysics rests upon. Econophysics has “…helped to establish empirical facts about financial markets…” (Buchanan, 1) Despite the widely accepted theory, the financial markets’ returns are not normally distributed, consequently refuting the Efficient Market Hypothesis, modern portfolio theory and capital asset pricing model (CPAM) (Franck & Schinckus, 454). The ramifications of the discovery of non-normally distributed markets (gaussian distribution) to the finance industry’s current market processes is substantial. For example, by EMH being false, financial advisors are now responsible and theoretically capable of producing superior returns to those of their peers and towards the overall stock market. EMH being false also increases the competition among advisors to produce higher returns. Mark Buchanan describes this revolutionary finding by stating “Econophysics research has shown, however, that completeness brings with it inherent market instability… a possibility never raised by standard economic analyses.” Following a logical sequence of reasoning, it becomes painfully obvious that standard economic theory was doomed from conception, basing entire theories on nothing but more theoretical assumptions is circular logic that cannot stand up to empirical facts in which econophysics provides the finance industry.

To base econophysics worth solely upon the above points would be ludicrous, nevertheless, enough for the continuation of this revolutionary field of study. Through econophysics we achieve a new look at the, unsubstantiated, widely-accepted finance industry concepts such as the theory of efficient markets. Econophysics has enormous potential, it is here to stay, but economists and physicists both need to set aside their differences, look at the facts and collaborate in producing interdisciplinary journals/meetings in a way that will be beneficial for all parties.

 

“Econophysicists Matter.” Nature.com. Nature Publishing Group, 07 June 2006. Web. 30 Jan. 2015.

Buchanan, Mark. “What Has Econophysics Ever Done For Us?” Nature.com. Nature Publishing Group, 03 June 2013. Web. 30 Jan. 2015.

Jovanovic, Franck, and Christophe Schinckus. “The Emergence Of Econophysics: A New Approach In Modern Financial Theory.” History Of Political Economy 45.3 (2013): 443-474. Business Source Complete. Web. 30 Jan. 2015.

Biello, David. “Can Math Beat Financial Markets?” Scientific American Global RSS. Scientific American, 16 Aug. 2011. Web. 30 Jan. 2015.

“Efficient Market Hypothesis (EMH) Definition | Investopedia.” Investopedia. Investopedia, 18 Nov. 2003. Web. 09 Feb. 2015.

How to Spend Your Time Wisely

Who’s going to be crying at your funeral? Yeah, it sounds a bit too much – I concur. However, there is no better way to describe what I am about to write about other than with a pretty forthcoming question. In all sincerity, it’s important to answer this question in one’s life. The answer to this one question will, with no doubt, solve so many of the problems we face as temporal beings. We live inside the constraints of time, every day the alarm will go off at the same instant within our continuum of our life. Every 60 minutes, an hour passes. Every 24 hours a day. There is nothing we can consciously, mentally, physically do to reshape this enormous limitation. There will never be a scientist that finds a formula to give us more time in the day (I don’t believe time travel will ever be a reality), there will never be any philosopher that can answer the question of what time is (other than it’s limits) . There is nothing, anyone can do in regards to the temporality encapsulation we are all inside. Given this premises, which I feel confident any rational person would agree with, we are then faced with the ever so daunting question: How do I spend something that is finite, limited and immutable? Simple answer, is you spend it wisely. However, to get people thinking into a concrete train of thought, consider the question I posed at the beginning of this article: Who’s going to be crying at your funeral? If you were to answer this question, the answer to how you spend your time should/would drastically change. The time we spend in this moment would move from focusing on the next due date, project, and meeting to a more relational focus: How can I further the love, kindness, and understanding of the people whom I care about in my life? My intention is not to trivialize the way in which you currently spend your days, this is not of my concern. However, my intention is to bring to your attention the importance of how we make decisions in our life. Every decision we make it bound and tied up within the context of the limited time we have. Therefore, we mustn’t consider the decisions we may on a daily basis to be unimportant, meaningless or irrelevant. As, in fact, they are very much pertinent how we spend this precious, confined, time we all have.

A Losing Streak (Journal Format Post)

“If you aren’t first you’re last.” We’ve all heard this false saying, this couldn’t be further from the truth. In fact, given the right perspective, losing can be winning, as you learn more about yourself through the process. Nevertheless, we’ve all lost. In fact, I would probably argue that we’ve all had losing streaks during our time as market participants. It is almost a given that we go through periods of growth and then periods of lack-of-growth. Growing, is painful.

Perhaps I am being cliche, it is an apt to use these saying within this context. On occasion, refection is dire to the health of our mental bodies. To relate down to a personal level, I have been on a losing streak as of lately. Unfortunately, I cannot tell you the exact reason as I feel as if I am still doing what I have always done, which makes it more difficult. Therefore, I wanted to share of my personal, rambling, thoughts on the subject. I don’t believe I have anything to hide in terms of my trading, I am here to learn and grow and sometimes that requires being uncomfortable.

I have traded a few times this year. Almost all of them losers, I don’t trade too actively (maybe once every 10 days), so there has not been many overall trades. However, within these few trades I have managed to lose a sum of money – not a ton – still very much ‘in business’ – but enough for me to question my practices some. Often times, I think that traders can get into a losing streak because they lose once, then don’t trade for a while and then feel the urge to get back into it, consequently forcing a trade and losing more money in the process. Now, of course this is not what all traders would admit to, people are really good at coming up with coherent excuses for their mishaps, but in all reality, we are all broken, fumbling around trying to be the best we can be. Look no further than a pick up game of basketball to see this flaw in play. Imagine a couple guys playing some ball and they began to lose, by a lot. Some of the guys get upset and in a way, stop trying to play. Eventually, the game ends and the score is too embarrassing to speak about. Naturally, most people will try to downplay the significance of this loss by making statements like “they got to warm up”, “we didn’t have the right ball”, or my favorite, “Come on ___  (name of someone), you have to make your shots”. All of these are represent the psychological term “self serving bias”, which is defined as “The self-serving bias is people’s tendency to attribute positive events to their own character but attribute negative events to external factors.” We all have this and when it comes time to self-reflection, implementing this self-serving bias can be detrimental to one’s growth as a person as they reflect and see ‘nothing’ wrong.

At this point, you are more than likely realizing this is truly a rant. Well, I would have to concur, but is the best way I find to get my thoughts out of my brain. It’s like they’re all bouncing around in the walls of my head but until I speak or write them down, I don’t exactly know the significance of them. Anyways, back to the stocks: the point is, we all have losing streaks, like me, right now. We all need to reflect, but we all MUST be careful for when we do, we do not enact the natural tendency to view oneself as innocent to mistakes. We all make mistakes, let’s all admit this and move on and work towards learning more about them, why we make the mistakes we do, not the ‘what’ of the mistake. Think about it, wouldn’t you much rather know why you did something versus what you did? This is the power of self-reflection, it tells you why you did something. If you know what it is, but know why it is, it is close to meaningless.

In conclusion, before this rant gets to be over 1,000 words (that would a ton of writing within about 2o minutes of sitting). I think the reason I have been losing is this: While I have confidence in my strategy, I have inflated myself to a level that is unequivocal to the literal level I am currently at in terms of my process’ ability to produce winning trades. Sitting here at college, getting told all the time you are are going to be super-rich someday is not healthy for my psyche. It is important for me at this point to cool it off, focus on the best-of-the-best and realize this the stock market, and that’s it. It pales in the comparison to salience of the broad scope of my life on this planet earth.  

Let me know if you have any questions or comments. Happy you all are here to journey through the highs and the lows.

6 Facts About The Stock Market Right Now

It’s about that time again; when everyone who has a blog (or a Twitter) tells you that the market is about the correct, finally. The thing is, they can say this all they would like, but in the end: No one knows, not even those people on the television screen. So, before we go any further, if we have not already made it obvious: I do not know where the market is going to go, so if this is what you came here for, it’s time to click the ‘X’ button in the corner of your screen.

Instead, we’re going to discuss what we currently know:

1. The market is below it’s 21 moving average

2. The market has failed to rally/bounce when given the chance

3. As of Friday, the market has hit the same level of support (198.50) on $SPY for the fith time

4. The market has been consolidating in a sideways manner for the past 2-3 months (longer for the IWM)

5. The number of quality long set-ups is low, so low that I currently have zero positions on (but again, this is just MY process)

6. The market is technically NOT oversold, as per Bollinger Band analysis

 

There are many more facts that could be said, but part of being a trader is being able to sift through the noise and derive the meaning of moves through careful analysis of the facts we have. Therefore, the above six things are the most important six things I find to be pertinent in the market at this point.

To me, the above six listed facts do not describe a ‘healthy’ market, and regardless of whether or not the market is going to go up or down next, it is not in a healthy state.

The point is: I don’t know what’s going to happen, nor do I need to. I need to know if the market we currently have is healthy for swing trading and the answer to that (right now) is a resounding, NO. Perhaps this changes tomorrow, next week or even next month, but until it does, I will do nothing. 

 

Efficient Market Hypothesis Refuted By EconoPhysics?

So, if you follow me on Twitter you may have noticed that I Tweeted about a term by the name of EconoPhysics. I was asking if anyone had ever heard of the term or done any research on the subject, I did not receive any replies. Thus, I wanted to write this post to explain and give a brief overview of my research thus far within this new, innovative study that is making it’s debut in the economics field today. But first, a little background. Econophysics is essentially the combination of ‘statistical physics’ and ‘economics’ into one study, really interesting, I know. The article I was reading alot of today defines it as: “econophysics refers to the extension of physics to the study of problems generally considered as falling within the sphere of economics.” (The Emergence of Econophysics: A New Approach in Modern Financial Theory). There is a lot more to it than that but that’s the basics of the study. The controversy in this study is as follows: It contradicts much of what people consider absolute truths about the financial markets, such as: the efficient market hypothesis. 

I am researching this topic for a paper in my English class this semester. The requirements were to find a scientific editorial to write a subject out and after a lot of searching I found myself in front of an article by the name of ‘Econophysicists Matter‘, you can view this editorial via this link: http://www.nature.com/nature/journal/v441/n7094/full/441667a.html Immediately after seeing this title I wanted to investigate, at a minimum, how they related the two concepts (that being economics and physics), because at it’s core, I love the idea of such integration. As I started my research and began to read a couple of those really technical scholarly articles about the subject, it dawned on me that what they were talking about really was (in some way) the foundation to using technical analysis for analyzing the price trends. The econophysicists used historical price data determine the probability of a future move through the creation of formulas that I could not (and likely never will) understand.

At this point, my excitement in the subject grew even greater and I surprisingly found myself enjoying the reading of a scholarly article. One of the major take-aways from the article I read the most of was as follows:

“Moreover, one specific probability distribution plays a key role in the history of the discipline: Gaussian distribution (also known as normal distribution). This distribution underlies the creation of the majority of theories and models from the mainstream: the efficient market hypothesis, modern portfolio theory, CAPM, and the Black and Scholes model. We can therefore consider this distribution as a constituent of financial economics. But econophysics rejects the idea that financial distributions must be described only with a Gaussian distribution,-‘ and, as we explain in the section 3, this rejection characterizes the emergence of econophysics.” (The Emergence of Econophysics: A New Approach in Modern Financial Theory)

And the same concept continued later in the article:

“However, from the time the first statistical databases of prices were constructed in the early twentieth century, some authors noted that the distributions were leptokurtic.’^ This characteristic of statistical distribution was incompatible with Gaussian distribution [normal distributions], and mathematical and statistical work to model leptokurtic distribution appeared later.^^ At that time, while specialists were able to identify a non-Gaussian phenomenon, they had no statistical tools for dynamic analysis of observations of this kind. Non-Gaussian distribution was then only a matter of observation, and it was not modeled by a specific statistical framework.” (The Emergence of Econophysics: A New Approach in Modern Financial Theory)

Okay, to decode what this means isn’t too terribly challenging. Essentially, it is saying that the economic theory, that so many people believe, is the foundation of how the stock market ‘moves’ may not be the ‘actual’ reason for the moves. Or in other words, we have been using out-dated information and basing our investment decisions on a theoretical explanation of how the market moves (in a normal distribution). This implies that the investment theories that were developed from this theoretical explanation my not be exactly accurate in terms of their accuracy (i.e the efficient market hypothesis), and if you are a behavioral finance market participant, you consequently cannot believe in this hypothesis. Below is picture of the difference between a normal distribution and a leptokurtic distribution, the difference is subtle, but massive when applied to the overall implications of the stock market.

Leptokurtic vs Normal Distribution

To summarize in a succinct manner, IF  these new found distributions are in fact accurate in terms of their representation of how the market moves, it undermines all arguments for the truth of the efficient market hypothesis. Further more, it undermines a lot of what we make think is factual in the market-place. The theory is taboo, but if true, the ramifications are immense and every investment advisor must consider why they choose the strategy in which they do, what is their statistical foundation for such a strategy, what is the mathematical evidence for pursuing such a strategy, these are all important questions the advisor must answer if one is going to truly understand the foundations of their strategy towards this (obviously) unknowable, untamable, immensely complex beast called the market.

Obviously, I am far from an expert on the subject and over the next few weeks I hope to learn more. I woke up this morning not knowing a thing about this subject, so I think I have come a long way in a day. Regardless, I plan to post more on this subject as I learn more about it for my personal english paper on the subject. Until then, some further resources on the subject:

 

A Video:

 

Wikipedia (good for a brief definition): http://en.wikipedia.org/wiki/Econophysics

A Google Search, of course :: Google Search already made

Drown Out the Noise in Noise of Your Own

The market is a noisy place. A good analogy would be to imagine yourself at a Electronic Dance Music concert full of teenagers all screaming at the top of their lungs, now multiply that by a few times and you get closer to how noisy the stock market is like. Within the stock market there are many different types of noise though, some are good and enjoyable, while others are annoying, (ie. EDM music).

The Bad Noise

The bad sort of noise within the market is what we have all heard before; the Television, Radio, Twitter/StockTwits, Magazines, etc. Essentially, any media source can be considered, to some degree ‘bad noise’ (perhaps even this). The consequences to listening to this noise can be detrimental to your overall emotional well-being, let alone your success in the stock market. Reading and listening to everyone’s opinion is not only a difficult task, but is physically, mentally, emotionally exhausting. This is especially true when it is your money in which you are trying to make educated decisions about through your personal preferences. If you choose to read/listen to others, it hinders your mental strength to focus and implement your personal process towards the stock-market. However, the clarification needs to be made that I think it is extremely, vitally, important to examine your process, refine it and learn more from other people. Do not shut yourself off from the outside world in the name of ‘bad noise’, rather, recognize the role it plays and the importance level it holds in your process (which shouldn’t be high).

The Good Noise

The ‘good’ noise is the exact opposite of the above ‘bad’ noise. In this case, this is the noise you want to listen to, or in other words, this is when your favorite band plays your favorite song on a Friday night in late Spring. This is, your process’ noise. Just as we discussed in the previous paragraph, all media sources have the potential to be a ‘bad noise’ (if you let it be), the only reason why we consider this to be ‘bad’ is it is not your personal process, it is someone else’s. However, when it comes to your personal process, turn up the noise, make it loud, make it heard, consume yourself in it like a crazy fan would to their favorite band.

Recognizing the difference between good and bad noise is important, not for you to ignore other’s work, but rather so you know where you stand and you can stand firm in your beliefs but all the while learning and growing from the study of other people. 

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