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Trading Tips

Dealing with information overload

overthinking

A conversation was recently started on Trade2Win on the subject of information overload. The original poster wanted to know how to deal with that particular problem.

Having been a professional market analyst working in a real-time environment, I can definitely attest to the need to be able to handle the massive amount of information that can sometimes be flowing. I had all kinds of charts, news feeds, television, emails, chats, and office conversation swirling around me contributing to the mix. It’s really easy in that kind of situation to get overwhelmed.

There tend to be two types of things that happen in that sort of case. The first is paralysis by analysis. That’s the situation where you think yourself in to inactivity. You can make arguments for why you should and should not do a trade, which leads you to doing nothing at all.

The other reaction to information overload is that you can over-act. By that I mean you become excessively reactive to new bits of information. Essentially, you reach a point where every little bit of news or price movement or whatever becomes highly significant in your mind. That leads you to feel like you have to react to it, which can have all sorts of negative consequences. I wrote about this in the post Improving your trading by thinking less a while back.

Dealing with information overload is all about being focused and understanding what information is actually important and meaningful. There is only certain information you need for your trading. You’re probably best filtering out anything which doesn’t fall into that category.

It is really easy to forget this, especially when we’re nervous about a trade. We have a tendency to want to get confirmation before pulling the trigger. That might mean looking at additional news. It might mean checking another chart you wouldn’t normally check.

I’m not saying those sorts of things are inherently wrong. You just need to consider that if those sources were important, shouldn’t they already be part of your process? If you’re reaching out beyond what you normally look at, it’s probably a sign of an issue.

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Trading Tips

Understanding the requirements of trading success

rising arrow

Ray at Blog for Trading Success – who is one of the contributors to my Trading FAQs book – recently had a post on the subject of why traders fail. He summarizes things fairly well with this comment:

“They don’t know what is needed for success i.e. they lack the foundation for success.”

I totally agree. Most traders coming in to the markets think that basically all they need to do is figure out the best place to buy and the best place to sell. While it’s certainly true that selecting good entry and exit points is important, it is far from the only aspect of trading success.

Ray follows up by adding:

“Traders also fail because they don’t do what they know.”

I might have said, “They don’t know what they don’t know,” but I think the idea is there. This is something that is always the case in any new thing we take on. In the early developmental stages we think we know things, but we really don’t. It’s not until much later that we start to move into the realm of understanding how much we actually don’t know.

In a project I’m working on separately, I’ve been involved in interviewing dozens of very successful volleyball coaches from around the world. We often ask how they compare themselves today to the coach they were when they were younger. You often hear them comment on how little they knew then, but how much they thought they know, whereas in the later stages of their career they were much more aware of their knowledge gaps.

The tricky part about making that progression from not knowing what you don’t know to knowing what you don’t know in trading is that it can be very expensive. One single ignorance-based error can potentially ruin a trading career, and really damage one’s personal finances.

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Trading News

Changing the monetary regime

currencies

A recent article on Zero Hedge talked about how the folks Switzerland are considering eliminating fractional reserve lending. The piece starts off by sharing the results of a recent vote in which a referendum requiring the Swiss National Bank (SNB) to increase it’s proportion of reserves in gold up to 20%. It called that a failure to move toward more “sound money”.

Any time someone talks about money backed by something – gold, silver, whatever – being “sound” I can’t help but shake my head.

Having currency backed by something doesn’t make it sound by itself. The issue is fractional reserve lending. That’s the process by which banks lend out some multiple of the amount of money they actually have on-hand. For example, banks in the US are only required to have 10% of the money they lend out on-hand in the form of reserves.

If you have a currency backed by gold and still allow fractional reserve lending, you don’t have sound money. As long as financial institutions can lend more than they have on-hand, then the same problems exist as in a non-backed currency situation. Banks can create money. If you ascribe to the idea that inflation is caused by too much money chasing too few goods, then here you have a contributing factor.

Essentially, if Switzerland were to eliminate fractional reserve lending it would mean banks could no longer create money. That would be paradigm shifting in modern finance.

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Trader Resources Trading Tips

Is social trading all it’s cracked up to be?

social trading

The other day I came across an article at Finance Magnates which encourages brokers to add social trading to their product offering. It offers up ten reasons:

  1. Social trading brings a new age of transparency.
  2. Social trading improves customer relations by creating a more confident trader that is happy trading with your brokerage.
  3. Social trading can be an essential marketing tool that seeks to blast through the acquisition barriers to entry, while at the same time bolstering client retention.
  4. Social trading entices users to convert themselves into traders simply by following and copying already established traders in a broker’s social community.
  5. Social trading helps a broker boost their acquisition and deposits by giving a novice trader who is nervous about losing his money, the notion of being able to copy from already established traders with a proven track record, thus quelling his fear of a first deposit.
  6. Social trading helps brokers lower their attrition rates and in turn boost retention by giving traders an FX community they can feel a part of. Once a trader finds his place in a network and begins following and copying a master, he would prefer to stay with your brokerage and not forfeit what he has already accomplished.
  7. Social trading helps a broker increase their trading activity. When a master trader opens a position in a social trading community, all those traders copying him will open the exact same position at virtually the exact same time.
  8. Social trading networks that are seamlessly integrated into a broker’s trading platform tend to increase the amount of time a trader spends inside the platform, thus increasing trading activity and retention.
  9. Social trading gives traders the ability to trade even when they are asleep. A broker may see his traders being active even during their downtime if they are following a master who may be trading in a different time zone, and is therefore active.
  10. Social trading makes newbie traders more comfortable because the experience is more social and less intimidating.

Obviously, this piece was targeted at the business side of retail forex. Many of the points made relate to gaining and keeping brokerage customers. In fact, at the end of the article the following justification is made:

When implemented correctly, social trading can boost the lifetime of the average trader by 14% or nearly a full month, increase trading activity by more than 50%, increase net deposits by 32% and a broker’s P&L by 40%, thus raising the value of each trader significantly.

I don’t know where those numbers come from as there aren’t any citations included.

I’d actually like to look at things from the trader’s point of view, though. I did a fair amount of work with Currensee, which was the first forex trader social network and one of the early social (copy) trading platforms (they were eventually bought by OANDA, then later shut down). As a result, I got to learn about some of the downsides of social trading. I also recently completed a PhD focusing on trader performance, so I have an idea of the sorts of issues that can arise in this kind of structure.

That’s why I have some problems with #1. Transparency isn’t necessarily all that great. There are signs that sharing one’s trading with others can actually result in worse returns. In fact, at Currensee one of the original Trade Leaders (as they were called) totally blew up once they brought him in to the program. Basically, he couldn’t handle it psychologically. Once they dropped him, though, he went right back to being profitable.

And related to #10, one of the things I heard from the Currensee folks is that traders were messing around with the social trades being done in their accounts. Specifically, they were closing them early, to their detriment.

On top of all this, there is a lot of research into the poor track record of investors moving in and out of mutual funds. This is essentially the same idea as being able to change which traders one accepts social trades from, so that’s another pitfall.

Oh, and as to #9, many traders already have that sort of access. They do so by using Expert Advisers (EAs) and the like to trade automatically.

I’m not saying social trading can’t be beneficial. I’m just saying it needs to be given a lot of thought and consideration.

 

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Trading Tips

Ten rules of risk management

risk management

Somewhere along the way a while back (I think first started this draft in late 2011!) I came across someone’s Ten Rules of Risk Management. Unfortunately, at this point I don’t recall whose it was or where I found it. I think they are work discussion, though, so here they are:

  1. Trade with stop loss orders
  2. Leverage to a minimum
  3. Trade with a plan
  4. Stay on top of the market
  5. Trade with an edge
  6. Step back from the market
  7. Take profit regularly
  8. Understand currency pair selection
  9. Double check for accuracy
  10. Take money out of your trading account

I would probably move #5 to the top because if you don’t have an edge the rest of it doesn’t really matter very much. Admittedly, though, when you’re a new and developing trader you’re still trying to figure out what edge you can apply. In which case, the other things tend to fall in to the category of “How to lose as little as possible during the learning phase”.

There are some potential problems with #7. If you’re taking profit regularly you run the very real risk of exiting trades too early. That’s something which can very seriously impair your performance, especially for certain styles of trading (like trend following).

I also have a bit of a niggle with #10. If you’re long-term objective is growth of your capital -as opposed to trading for a living – then the compounding factor only works if you keep the money in your account. Or maybe better stated, it only works of you are trading based on the full amount of capital.

For example, say you run a $10,000 account up to $20,000. You can take the $10k in profits out, but to allow for the benefits of compounding you’ll want to trade as if you had $20k in terms of your position sizes. If you don’t, while you’ll still produce profits (assuming you’re a net winner), those profits won’t increase in size over time.

The rest of the list is all fairly common sense.

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Trading Tips

Is forex more predictable than other markets?

prices

In a recent post at Zero Hedge, the following assertion was made:

“But the currency markets are easier to trade from a predictability standpoint compared to many other markets once one learns the relationships.”

The whole piece is essentially one long sales pitch in favor of trading forex over other markets, so it is perhaps no surprise to see a comment of this sort. I’m not here to agree or disagree with that general sentiment. The bottom line is that each trader should pick the market or markets which best suit them and their particular situation.

What I will challenge, however, is the above quote.

I don’t know if anyone has done any tests of market predictability, but if I were to hazard a guess as to which one tops the list I’d have to say stocks. Just look at any major index and the trend it’s had going back multiple decades. Just to be clear, I’m not talking individual stocks here, but rather the market as a whole.

Now, one might say something like, “But who trades in that kind of time frame?”

It’s true. Thinking in terms of decades is the realm of the investors, not traders. That brings me to the main point I want to make with respect to predictability.

The author of the statement above makes a valid point about central banks, etc. signaling their intentions. What they fails to consider, however, is the time frame variation involved.

The vast majority of retail (individual) forex traders operate in the hours to days range. They are day or swing traders, for the most part. The central bank signaling is something which works over significantly longer periods.

While it may be true that the BOJ wanting the JPY to be weaker results in a general down trend in the yen exchange rates, that path is anything but straight and smooth when considering normal trader time frames. Along the way toward yen devaluation there are any number of market influences at work in the shorter time scales.

To my mind, in the shorter term where traders tend to operate, no market really has a long-term predictability advantage.

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Trading Tips

Trading goals – making and achieving them

Over at The Market Speculator, Paul J. Singh has a post offering up eight ways to achieve your trading goals in 2016.

trading goals

They are as follows:

1. Call them goals, not resolutions.
2. Say “I will” or “I am”
3. Create specific actions.
4. Focus on mastery
5. Focus on the Few
6. Act on your Goals
7. Change Your Habits
8. Persevere
9. Review and Analyze Weekly

A little typo there in your post Paul. You had #9 also listed as #8. 🙂

I particularly like #4, especially for developing traders. A lot of folks will tend to want to make return-oriented trading goals like, “I will make a 25% return in 2016.” No doubt, that is a somewhat conservative annual return compared to what many traders have in mind for this year. I’ve been there. I know!

The reason for focusing on mastery, though, is that it’s something you can control. You can do specific things to improve yourself as a trader. You cannot control the markets, therefore you cannot control the returns you make. Granted, those who trade for a living and tend to operate on very short-term time scales have a higher degree of predictability in their performance because of the sheer number of trades they make (assuming they have a trading strategy/system with a clear statistical edge). For those who don’t trade as much, though, are more subject to the trading opportunities they do find.

Along a similar line, #9 might be a bit of overkill. Weekly check-ins are fine if you’re a high frequency trader. If you’re a swing or position trader, though, you can probably get away with something like a monthly review.

The other thing I would throw in the mix is that you might not want to share your trading goals with others. This may sound counter-intuitive, as many feel like this helps keep them accountable. The problem is, though, that I read something during my PhD research which suggests that goal sharing can actually be counter-productive.