By CHARLES DUHIGG
Published: July 23, 2009
It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.
It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.
Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.
These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.
Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.
And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.
Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.
“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”
For most of Wall Street’s history, stock trading was fairly straightforward: buyers and sellers gathered on exchange floors and dickered until they struck a deal. Then, in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea.
But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.
High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.
High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.
“It’s become a technological arms race, and what separates winners and losers is how fast they can move,” said Joseph M. Mecane of NYSE Euronext, which operates the New York Stock Exchange. “Markets need liquidity, and high-frequency traders provide opportunities for other investors to buy and sell.”
The rise of high-frequency trading helps explain why activity on the nation’s stock exchanges has exploded. Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive, stock exchanges say that a handful of high-frequency traders now account for a more than half of all trades. To understand this high-speed world, consider what happened when slow-moving traders went up against high-frequency robots earlier this month, and ended up handing spoils to lightning-fast computers.
It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.
The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.
In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.
Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.
The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.
Multiply such trades across thousands of stocks a day, and the profits are substantial. High-frequency traders generated about $21 billion in profits last year, the Tabb Group, a research firm, estimates.
“You want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient,” said Andrew M. Brooks, head of United States equity trading at T. Rowe Price, a mutual fund and investment company that often competes with and uses high-frequency techniques. “But we’re moving toward a two-tiered marketplace of the high-frequency arbitrage guys, and everyone else. People want to know they have a legitimate shot at getting a fair deal. Otherwise, the markets lose their integrity.”
Thursday, July 23, 2009
Saturday, July 18, 2009
Standing Meditation
The Relaxed and Calm Standing Form consist of 18 specific requirements:
01 stand with feet parallel at shoulder-width
02 bend your knees
03 relax your hips
04 round your crotch
05 gently contract your anus
06 contract your abdomen
07 relax your waist
08 sink your chest without collapsing it
09 raise your back but don't hunch it
10 allow your shoulders to hang down
11 drop your elbows
12 open your armpits
13 relax your wrists
14 think that your head is suspended from above
15 pull in your chin slightly
16 close your eyes gently
17 close you lips
18 place your tongue against your upper palate
01 stand with feet parallel at shoulder-width
02 bend your knees
03 relax your hips
04 round your crotch
05 gently contract your anus
06 contract your abdomen
07 relax your waist
08 sink your chest without collapsing it
09 raise your back but don't hunch it
10 allow your shoulders to hang down
11 drop your elbows
12 open your armpits
13 relax your wrists
14 think that your head is suspended from above
15 pull in your chin slightly
16 close your eyes gently
17 close you lips
18 place your tongue against your upper palate
Friday, July 17, 2009
Health Quotes
How can anyone, particularly a cancer patient, cope with stress?
"Faith in God is one way. By entrusting one's life to a supreme being, the burden is taken off oneself. Exercise, meditation, leisure activities, counselling and use of anti-anxiety drugs may all help in improving one's psychological well-being too. Be happy and live each day to its fullest." --- Dr Ang Peng Tiam
"Do everything in moderation and stay healthy and happy. I have seen how being happy and positive, with good family support, has worked wonders for cancer patients especially in how they control the disease" -- Prof London Lucien Ooi
"If I am ill or injured such that I cannot express my wishes, if the doctors cannot save me without residual disability, I want no treatment - and that includes no artificial hydration or nutrition, no artificial ventilation or any treatment at all.
However, if my parents are still alive, and if the doctors can save me, although I would have some disabilities, if the disabilities are not of such a degree that I am unable to look after my parents, then salvage me. If the disabilitiles would prevent me from looking after my parents, then I want no treatment
I signed myliving will, witnessed by a friend who is a psychiatrist and another who is not from the medical prefession." ~ Dr Lee Wei Ling
"To die well is to escape the dangers of dying ill" -- Seneca
"Faith in God is one way. By entrusting one's life to a supreme being, the burden is taken off oneself. Exercise, meditation, leisure activities, counselling and use of anti-anxiety drugs may all help in improving one's psychological well-being too. Be happy and live each day to its fullest." --- Dr Ang Peng Tiam
"Do everything in moderation and stay healthy and happy. I have seen how being happy and positive, with good family support, has worked wonders for cancer patients especially in how they control the disease" -- Prof London Lucien Ooi
"If I am ill or injured such that I cannot express my wishes, if the doctors cannot save me without residual disability, I want no treatment - and that includes no artificial hydration or nutrition, no artificial ventilation or any treatment at all.
However, if my parents are still alive, and if the doctors can save me, although I would have some disabilities, if the disabilities are not of such a degree that I am unable to look after my parents, then salvage me. If the disabilitiles would prevent me from looking after my parents, then I want no treatment
I signed myliving will, witnessed by a friend who is a psychiatrist and another who is not from the medical prefession." ~ Dr Lee Wei Ling
"To die well is to escape the dangers of dying ill" -- Seneca
Thursday, July 16, 2009
The Joy of Sachs
By PAUL KRUGMAN
Published: July 16, 2009
The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?
First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.
Second, it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away.
Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.
Let’s start by talking about how Goldman makes money.
Over the past generation — ever since the banking deregulation of the Reagan years — the U.S. economy has been “financialized.” The business of moving money around, of slicing, dicing and repackaging financial claims, has soared in importance compared with the actual production of useful stuff. The sector officially labeled “securities, commodity contracts and investments” has grown especially fast, from only 0.3 percent of G.D.P. in the late 1970s to 1.7 percent of G.D.P. in 2007.
Such growth would be fine if financialization really delivered on its promises — if financial firms made money by directing capital to its most productive uses, by developing innovative ways to spread and reduce risk. But can anyone, at this point, make those claims with a straight face? Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls. They increased risk rather than reducing it, and concentrated risk rather than spreading it. In effect, the industry was selling dangerous patent medicine to gullible consumers.
Goldman’s role in the financialization of America was similar to that of other players, except for one thing: Goldman didn’t believe its own hype. Other banks invested heavily in the same toxic waste they were selling to the public at large. Goldman, famously, made a lot of money selling securities backed by subprime mortgages — then made a lot more money by selling mortgage-backed securities short, just before their value crashed. All of this was perfectly legal, but the net effect was that Goldman made profits by playing the rest of us for suckers.
And Wall Streeters have every incentive to keep playing that kind of game.
The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win, tails other people lose. If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand.
And the events of the past year have skewed those incentives even more, by putting taxpayers as well as investors on the hook if things go wrong.
I won’t try to parse the competing claims about how much direct benefit Goldman received from recent financial bailouts, especially the government’s assumption of A.I.G.’s liabilities. What’s clear is that Wall Street in general, Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong.
You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.
Now the last time there was a comparable expansion of the financial safety net, the creation of federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure that banks didn’t abuse their privileges. This time, new regulations are still in the drawing-board stage — and the finance lobby is already fighting against even the most basic protections for consumers.
If these lobbying efforts succeed, we’ll have set the stage for an even bigger financial disaster a few years down the road. The next crisis could look something like the savings-and-loan mess of the 1980s, in which deregulated banks gambled with, or in some cases stole, taxpayers’ money — except that it would involve the financial industry as a whole.
The bottom line is that Goldman’s blowout quarter is good news for Goldman and the people who work there. It’s good news for financial superstars in general, whose paychecks are rapidly climbing back to precrisis levels. But it’s bad news for almost everyone else.
Published: July 16, 2009
The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?
First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.
Second, it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away.
Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.
Let’s start by talking about how Goldman makes money.
Over the past generation — ever since the banking deregulation of the Reagan years — the U.S. economy has been “financialized.” The business of moving money around, of slicing, dicing and repackaging financial claims, has soared in importance compared with the actual production of useful stuff. The sector officially labeled “securities, commodity contracts and investments” has grown especially fast, from only 0.3 percent of G.D.P. in the late 1970s to 1.7 percent of G.D.P. in 2007.
Such growth would be fine if financialization really delivered on its promises — if financial firms made money by directing capital to its most productive uses, by developing innovative ways to spread and reduce risk. But can anyone, at this point, make those claims with a straight face? Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls. They increased risk rather than reducing it, and concentrated risk rather than spreading it. In effect, the industry was selling dangerous patent medicine to gullible consumers.
Goldman’s role in the financialization of America was similar to that of other players, except for one thing: Goldman didn’t believe its own hype. Other banks invested heavily in the same toxic waste they were selling to the public at large. Goldman, famously, made a lot of money selling securities backed by subprime mortgages — then made a lot more money by selling mortgage-backed securities short, just before their value crashed. All of this was perfectly legal, but the net effect was that Goldman made profits by playing the rest of us for suckers.
And Wall Streeters have every incentive to keep playing that kind of game.
The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win, tails other people lose. If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand.
And the events of the past year have skewed those incentives even more, by putting taxpayers as well as investors on the hook if things go wrong.
I won’t try to parse the competing claims about how much direct benefit Goldman received from recent financial bailouts, especially the government’s assumption of A.I.G.’s liabilities. What’s clear is that Wall Street in general, Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong.
You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.
Now the last time there was a comparable expansion of the financial safety net, the creation of federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure that banks didn’t abuse their privileges. This time, new regulations are still in the drawing-board stage — and the finance lobby is already fighting against even the most basic protections for consumers.
If these lobbying efforts succeed, we’ll have set the stage for an even bigger financial disaster a few years down the road. The next crisis could look something like the savings-and-loan mess of the 1980s, in which deregulated banks gambled with, or in some cases stole, taxpayers’ money — except that it would involve the financial industry as a whole.
The bottom line is that Goldman’s blowout quarter is good news for Goldman and the people who work there. It’s good news for financial superstars in general, whose paychecks are rapidly climbing back to precrisis levels. But it’s bad news for almost everyone else.
Wednesday, July 8, 2009
The Rules of Trading and Investing
The objective is not to buy low and sell high, but to buy high and to sell higher.
By MICHAEL PREISS
AMONG economists and on Wall Street in general there is now an active debate whether the massive stock market rally we saw globally since the mid-March lows is the beginning of a new bull market or whether it is simply a bear market rally that is now running out of steam. Since the March lows some stock markets around the world have risen 30-100 per cent while there was an increasing talk about 'green shoots' and the real economy recovering or at least getting less worse.
As we are entering the second half of 2009, most investors would do well to do a 'reality check' and reconsider their risk exposures and portfolio contents.
Investors are moving in lockstep like never before, driving up stocks, commodities and emerging markets and risking a replay of last year, when they all plunged the most since World War II. The herd mentality threatens to leave investors with no refuge amid signs that the worst US recession since 1958 isn't abating.
The market response to sell stocks now suggests a dose of nerves at the end of one of the best quarters for world stock market returns in history. It took the same nerves to go long and buy in March when everyone or at least most people were maximum bearish among widespread end-of-the-world sentiment.
Evidence on whether the positive economic currents have turned into profits for companies, which will start flowing soon, is needed before the rally can progress further. Stock price gains might be harder to come by as investors search for profit growth to justify the 41 per cent rally in the MSCI World Index. Whatever your view is on the state of the global economy, it pays to consider some truths and rules about trading and investing.
Never, under any circumstance, add to a losing position...ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin! Remember Citibank shares at US$55 less than two years ago, it fell to US$30, when our friends in Abu Dhabi tried to save them with a US$7.8 billion lifeline investment. Many thought Citi was cheap and 'averaged-in' only to see the once largest bank in the world slump to less than US$1.
Trade with an open mind. Still too many people only buy stocks and hope they will rise. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.
The same applies to emerging markets. While fundamentally a lot of the emerging markets offer great long-term potential, short-term several countries look over-bought. So in emerging markets, it seems 'Short-term SHORT, Longer-term LONG' might be the best tactical advise.
Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital, not to mention stress.
The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is 'low'. Please remember Citibank. Nor can we know what price is 'high'. Always remember that sugar once fell from US$1.25/lb to two cent/lb and seemed 'cheap' many times along the way.
In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many. 'Markets can remain illogical longer than you or I can remain solvent,' according renowned British economist Maynard Keynes. Illogic often reigns and markets are enormously inefficient despite what the academics believe.
Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds. They shall carry us higher than shall lesser ones.
Try to trade the first day of a gap, for gaps usually indicate violent new action. I have come to respect 'gaps' in my nearly 25 years of watching markets; when they happen (especially in stocks), they are usually very important.
Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In 'good times', even errors are profitable; in 'bad times' even the most well researched trades go awry. This is the nature of trading; accept it.
To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market's technicals. When we do, then, and only then, can we or should we trade.
Respect 'outside reversals' after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more 'weekly' and 'monthly' reversals.
Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds clarity. Respect and embrace the very normal 50-62 per cent retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen just as we are about to give up hope that they shall not.
Bear markets are more violent than are bull markets and so also are their retracements. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making superhuman insights.
Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are 'right' only 30 per cent of the time, as long as our losses are small and our profits are large.
The market is the sum total of the wisdom...and the ignorance...of all of those who deal in it; and we dare not argue with the market's wisdom. If we learn nothing more than this we've learned much indeed. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.
The hard trade is often the right trade: If it is easy to sell, don't; and if it is easy to buy, don't. Do the trade that is hard to do and that which the crowd finds objectionable. In mid-march that trade was major bull. Now after the second half and a massive rally, common sense would indicate 'book profits' across the board and move into cash if not out-right short, if you are a tactical trader. In the words of a Chinese saying: 'Fortune favours the brave - and the prepared mind.'
The writer is a Chartered Wealth Manager and can be reached at Michael@michaelpreiss.net
By MICHAEL PREISS
AMONG economists and on Wall Street in general there is now an active debate whether the massive stock market rally we saw globally since the mid-March lows is the beginning of a new bull market or whether it is simply a bear market rally that is now running out of steam. Since the March lows some stock markets around the world have risen 30-100 per cent while there was an increasing talk about 'green shoots' and the real economy recovering or at least getting less worse.
As we are entering the second half of 2009, most investors would do well to do a 'reality check' and reconsider their risk exposures and portfolio contents.
Investors are moving in lockstep like never before, driving up stocks, commodities and emerging markets and risking a replay of last year, when they all plunged the most since World War II. The herd mentality threatens to leave investors with no refuge amid signs that the worst US recession since 1958 isn't abating.
The market response to sell stocks now suggests a dose of nerves at the end of one of the best quarters for world stock market returns in history. It took the same nerves to go long and buy in March when everyone or at least most people were maximum bearish among widespread end-of-the-world sentiment.
Evidence on whether the positive economic currents have turned into profits for companies, which will start flowing soon, is needed before the rally can progress further. Stock price gains might be harder to come by as investors search for profit growth to justify the 41 per cent rally in the MSCI World Index. Whatever your view is on the state of the global economy, it pays to consider some truths and rules about trading and investing.
Never, under any circumstance, add to a losing position...ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin! Remember Citibank shares at US$55 less than two years ago, it fell to US$30, when our friends in Abu Dhabi tried to save them with a US$7.8 billion lifeline investment. Many thought Citi was cheap and 'averaged-in' only to see the once largest bank in the world slump to less than US$1.
Trade with an open mind. Still too many people only buy stocks and hope they will rise. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.
The same applies to emerging markets. While fundamentally a lot of the emerging markets offer great long-term potential, short-term several countries look over-bought. So in emerging markets, it seems 'Short-term SHORT, Longer-term LONG' might be the best tactical advise.
Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital, not to mention stress.
The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is 'low'. Please remember Citibank. Nor can we know what price is 'high'. Always remember that sugar once fell from US$1.25/lb to two cent/lb and seemed 'cheap' many times along the way.
In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many. 'Markets can remain illogical longer than you or I can remain solvent,' according renowned British economist Maynard Keynes. Illogic often reigns and markets are enormously inefficient despite what the academics believe.
Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds. They shall carry us higher than shall lesser ones.
Try to trade the first day of a gap, for gaps usually indicate violent new action. I have come to respect 'gaps' in my nearly 25 years of watching markets; when they happen (especially in stocks), they are usually very important.
Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In 'good times', even errors are profitable; in 'bad times' even the most well researched trades go awry. This is the nature of trading; accept it.
To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market's technicals. When we do, then, and only then, can we or should we trade.
Respect 'outside reversals' after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more 'weekly' and 'monthly' reversals.
Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds clarity. Respect and embrace the very normal 50-62 per cent retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen just as we are about to give up hope that they shall not.
Bear markets are more violent than are bull markets and so also are their retracements. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making superhuman insights.
Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are 'right' only 30 per cent of the time, as long as our losses are small and our profits are large.
The market is the sum total of the wisdom...and the ignorance...of all of those who deal in it; and we dare not argue with the market's wisdom. If we learn nothing more than this we've learned much indeed. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.
The hard trade is often the right trade: If it is easy to sell, don't; and if it is easy to buy, don't. Do the trade that is hard to do and that which the crowd finds objectionable. In mid-march that trade was major bull. Now after the second half and a massive rally, common sense would indicate 'book profits' across the board and move into cash if not out-right short, if you are a tactical trader. In the words of a Chinese saying: 'Fortune favours the brave - and the prepared mind.'
The writer is a Chartered Wealth Manager and can be reached at Michael@michaelpreiss.net
Wednesday, July 1, 2009
THE IMPORTANCE OF RISK MANAGEMENT
TEH HOOI LING EDITOR
PULSES JULY 2009
"THE DIFFERENCE between a good trader and a bad trader is risk management," says Victor Sperandeo, a veteran
Wall Street trader with more than 40 years' experience.
Indeed, for reckless traders, events of the past 18 months would have wiped them out completely with a slim chance of any comeback. Typically, in a bull market, investors don't worry too much about risk. But a sudden downturn will drive home the importance of risk management. Unfortunately, that lesson will be forgotten as soon as the good times return.
So perhaps as a constant reminder, an investor should have a checklist on risk placed in a prominent spot on his trading screen. What would be on my checklist? Well, first on the list would be: Don't over-extend yourself by taking on huge loans. Leverage, as we all know, cuts both ways. In a rising market, it boosts your return on equity. In a downmarket, it can bankrupt you. No need to look far for examples of that.
Next, when engaging in speculative trades, risk only the capital you can afford to lose. It is unwise to put one's entire life savings in speculative small-cap stocks or their warrants or even structured products which one may not understand. It absolutely befuddles me that some private bankers would put their clients' entire life savings into structured products alone. Some investors saw their entire portfolios go up in a puff of smoke after the collapse of Lehman Brothers.
Perhaps the private bankers themselves don't understand the risk of these products. Perhaps the collapse of Lehman was totally unforeseeable. Still, putting everything one has into a single investment product is not a good idea.
Also, I always try to remind myself: The lower the market goes, the lower the risk. The higher the market climbs, the higher the risk. This is counter to what our emotions would have us believe. When the market is going down, we are gripped by fear and paralysed into inaction, or worse, panicked into selling. When the market keeps going up, we are motivated by greed to make a quick buck. This reminder is good to have in front of one's trading screen!
According to Mr Sperandeo, nicknamed Trader Vic, only 5 per cent of all rallies go up 40 per cent without a correction. And once a rally goes past 107 days, its risk rises from low to moderate or high. Beyond 242 days, the risk is very high. "Rallies are like humans. Getting into the market now is like buying an 80-year old man. Yes, he can live to 85. But if you buy a 21-year-old, you have better insurance," he said when he was in Singapore recently.
A number of trading rules are also targeted at risk management. Rules like: Use stop-loss orders whenever practical; When in doubt, get out; Be patient, never overtrade; Buy weakness and sell strength; Be just as willing to sell as you are to buy; Never initiate a position in a fast market; Don't trade on the basis of "tips".'
Ultimately, the objective of all these risk management pointers is to PROTECT YOUR CAPITAL. And that should be the heading of your checklist, in bold capital letters!
PULSES JULY 2009
"THE DIFFERENCE between a good trader and a bad trader is risk management," says Victor Sperandeo, a veteran
Wall Street trader with more than 40 years' experience.
Indeed, for reckless traders, events of the past 18 months would have wiped them out completely with a slim chance of any comeback. Typically, in a bull market, investors don't worry too much about risk. But a sudden downturn will drive home the importance of risk management. Unfortunately, that lesson will be forgotten as soon as the good times return.
So perhaps as a constant reminder, an investor should have a checklist on risk placed in a prominent spot on his trading screen. What would be on my checklist? Well, first on the list would be: Don't over-extend yourself by taking on huge loans. Leverage, as we all know, cuts both ways. In a rising market, it boosts your return on equity. In a downmarket, it can bankrupt you. No need to look far for examples of that.
Next, when engaging in speculative trades, risk only the capital you can afford to lose. It is unwise to put one's entire life savings in speculative small-cap stocks or their warrants or even structured products which one may not understand. It absolutely befuddles me that some private bankers would put their clients' entire life savings into structured products alone. Some investors saw their entire portfolios go up in a puff of smoke after the collapse of Lehman Brothers.
Perhaps the private bankers themselves don't understand the risk of these products. Perhaps the collapse of Lehman was totally unforeseeable. Still, putting everything one has into a single investment product is not a good idea.
Also, I always try to remind myself: The lower the market goes, the lower the risk. The higher the market climbs, the higher the risk. This is counter to what our emotions would have us believe. When the market is going down, we are gripped by fear and paralysed into inaction, or worse, panicked into selling. When the market keeps going up, we are motivated by greed to make a quick buck. This reminder is good to have in front of one's trading screen!
According to Mr Sperandeo, nicknamed Trader Vic, only 5 per cent of all rallies go up 40 per cent without a correction. And once a rally goes past 107 days, its risk rises from low to moderate or high. Beyond 242 days, the risk is very high. "Rallies are like humans. Getting into the market now is like buying an 80-year old man. Yes, he can live to 85. But if you buy a 21-year-old, you have better insurance," he said when he was in Singapore recently.
A number of trading rules are also targeted at risk management. Rules like: Use stop-loss orders whenever practical; When in doubt, get out; Be patient, never overtrade; Buy weakness and sell strength; Be just as willing to sell as you are to buy; Never initiate a position in a fast market; Don't trade on the basis of "tips".'
Ultimately, the objective of all these risk management pointers is to PROTECT YOUR CAPITAL. And that should be the heading of your checklist, in bold capital letters!
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