Chart reading and Newton’s First Law of Motion

Chart reading can be simplified into two steps process by following Newton’s First Law of Motion:

“Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it.”

The first step is seeing if price is remaining in the state of motion.  In other words, is price trending?

The second step is seeing if there is an external force being applied that stopped the price from continuing its original path.

Basically, if you answer “yes” on the 1st step, there is no 2nd step.

Nevertheless, if you answer “no” to the 1st step; then the matter becomes a bit more challenging.  The burning question will then become: “is this external force powerful enough to stop the original motion from going forward?”

From my perspective, why do we have to struggle thru this 2nd step?  Why not just take your profit first and see how strong the external force is before you get back on the horse to keep going?

If the original motion is strong enough to overcome the external force, then jump back in for the ride.  Yes, you may give up some profit by buying back at a higher price; but once we know the motion is strong, why do we care as long as the trend continues to push forward?

After all, capturing “a piece” of the action is all we asked for, not necessarily the whole 9 yards.  It is those who tried so hard to capture the whole 9 yards that they ended up giving back a large part of the gain or worse, turn gain into loss.

Trading doesn’t have to be complicated.  It can be as simple as 1-2-3.  It is our own human tendency to analyze everything to death as well as our emotional leaning that bring complication to our trading life.

The issue of time-frame.

Yes, while shorter time-frame saw external force in action first, longer time-frame may not necessarily shares the same picture.  However, longer time-frame have a larger risk factor and a much bigger reward that comes with it.  The key question to ask yourself is: “Are you willing to take that larger risk to follow the longer time-frame?”

Some may jump ship from shorter time-frame to longer time-frame ’cause they didn’t want to face the truth of the time-frame that their wallet is suitable for; thus by jumping to longer time-frame, they may unnecessarily shorten their trading life if the trades did not work out as expected.

In summary, find the time-frame that fit your wallet and your style of trading (from minute chart to weekly chart) and stick with it.

Life is simple and so is trading, it is when we try to interfere with our mind that life becomes like a roller-coaster ride.  Perhaps, this is why thrill parks are so popular.  We love to add thrill to our life; but do you really want to pay an expensive fee for the thrill ride in the trading market?

Good Hunting!

In my opinion, QCOM poor guidance is a tell-tale sign.

If price take out 4-17 low, it is going to trigger a lot of stops…

Good Hunting!

averaging down on SZYM.

SZYM is in my vision portfolio and, unfortunately, it was going thru a rough patch the last 2 weeks right after the big jump on the joint venture with Bunge news.  In fact, I reduced my position as the price continued to decline to the downside.

The good news is that because I did not average down, even though I still believe in its future potential, I am not being distracted by the downward move.  The impact of the SZYM negative move is inconsequential to my portfolio.

IMAGINE IF I had averaged down, I would be in a world of hurt and emotional turmoil.  It would tie up my cash and probably even distracted me to focus on DDD and SSYS.

This is the classic example of why I don’t do averaging down..  It just doesn’t pay.

Remember, when you average down (or up), you are adding size.  Don’t you want the market to be in a more favorable term when you are adding size?  Like the trend going in the same direction of your trade you are adding size on?

And look what happened to DDD and SSYS, I kept averaging up when the trend is going up.

Statistically speaking, an upward momentum (or downward momentum) tends to continue the same direction until an opposite force come in to stop the momentum.  This is actually the definition of Newton’s First Law of Motion:

“Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it.”

There you have it, these three trades (SZYM, DDD, and SSYS) in my vision portfolio are further proof that averaging down (against trend) doesn’t pay and averaging up (with the trend) gives you a better edge.

Good Hunting!

3D Systems’ (DDD) acquisition of Paramount Industries just made me realized we are witnessing a reshaping of our industrial revolution.

It is akin to watching the development of Ford T car assembly line production except that we are talking about something far more advanced.

My take is that the technology behind 3D printer and its direct manufacturing and product development solutions is the wave of the future.  It simply CANNOT be stopped.  You are witnessing the birth of a new techno-industrial revolution, so to speak.

SSYS and DDD, the two MAIN players in the field, provide a dose of healthy competition to each other; it will be interesting to just sit back and watch them grow into GIANT.

Needless to say, I added more SSYS and DDD today, again!

As opposed to buying more when trend is down (averaging down), I’m buying more when the trend is up (averaging up).

Good Hunting!

ps. of course, the above is just my interpretation of the reality… so take it for what it is.

The merger of SSYS and Objet LTD is an auspicious sign.

I’m averaging UP since my base is lower than my purchase price at the open.

2 years from now, you will look back at today price in amazement…

Good Hunting!

Why is it that traders/investors averaging down?   Seriously, what is the main rationale for buying more when you are losing on your trade?

Here is a simple answer: Greed

Here is a long answer: our being uncomfortable with seeing loss and want to make it right by buying more so that we can be “right” again sooner when the price turns back our way.

“Holy mackerel!  It is getting cheaper!  I’m buying more here!”

“It is so cheap here that I’m going to increase my portfolio allocation to this stock to buy more…”

“No F**kng way! how can it be??? The fundamental is so strong!  I’m buying more here…”

“Oh crap! Not again! I’m not going to take loss here ’cause it ALWAYS go back up after I do.  I’m buying more here!”

Sound familiar?

Regardless of the “thought” behind buying more when you are losing in the position; you are actually increasing your risk by buying more.  Simply put, by buying more when you are losing, you are “multiplying your loss” even more when prices continue to go against your position.  Whereas before your averaging down, the rate of loss is steady and all of a sudden, your rate of loss is 2x or more than before (depending on the magnitude of your averaging down) on every tick that go against you.

Size cuts both way.

Sure, many were able to “get away” with averaging down ’cause the prices did come back in your direction even though some had to wait a long time for it.  Unfortunately, this only encourages the bad habit of buying more when you are losing.

“It works!  I’m back in the black sooner!  Wow, I’m making even more money now!!!”

And thus, buying more when losing becomes a tactic to use the next time you face the same situation.  Averaging down will always work as long as the direction of the trade you are taking is trending the same way.  And so the habit of averaging down continues to strengthen while the ability to cut losses becomes even harder to do.

Lo and behold!

A correction against the trend you are trading is taking shape…

“Nah, we are in a bull market! This correction will be over soon, I’m buying more!”

But… price keeps going down.

“Wait a minute… this is not right.  My loss is deeper now…  I can’t take loss here, what if the price goes back up when I’m out.  Let me buy some more here so I can make it right sooner when prices head back up.”

Yet, price keeps heading down… and the loss accelerated as a faster clip because of the multiple averaging down

“Holy Shit!”  Now, fear becomes a dominant emotion.  Paralysis begins to set in.

Price goes thru a dead cat bounce..

“Thanks goodness.  Come on baby!  Get back up!”  Instead of finding a point to get out to reduce the loss from this “godsend” bounce; all the energy goes into “cheering” for the price to go back up to make you whole.

“I think I buy more here since it looks like a bottom”

Price continues the downtrend but with a bit more zest..

“F**k!!!” By now, the portfolio lost 1/3+ of the value.

Need me to go on?

Think about it, if you cut your loss on a planned 5% stop loss in your stock, you probably loss only a tiny fraction of your portfolio when price changed direction.  And what more, you are now sitting in more cash when the market continues its correction phase which may or may not lead to a trend change.

The good thing about taking your 5% loss (or whatever % you feel comfortable with) is that you are now giving the opportunity to buy back the stock as a much cheaper price after witnessing the deflating of the price on the sideline.

And if you truly believe in the fundamental value of the stock and choose to hold on to your position WITHOUT averaging down, you are in a much better position to handle the drawdown against you.  Instead of witnessing a quick dead to your portfolio, you are flowing with the tide of the market like most of the investors out there.

Next time when you are facing a losing position, instead of letting your need to be right “sooner” by buying more, ask yourself if you really want to “increase” the risk of destruction first.

Averaging down may not get you right away, but eventually it will destroy you when you least expect it.  Simply because by the time we realized the market trend has changed, it is already too late to save your portfolio from your averaging down.

Good Hunting!

Excerpt below has some creative idea of using MA to identify trading range that may give you an edge.

Please click here for the article by Thomas Demark.

Good Hunting!

Excerpt from “Moving Averages By: Thomas Demark“

“To avoid a multitude of signals while locked in a trading range market, I created a moving average system that only became active when price recorded either a 13-day-high low or a 13-day-low high.  Let me explain this concept further.  If price advances and it records a low greater than all previous 12 lows, then a 3-day moving average of lows is installed and followed for a period of 4 trading days to identify a place to sell.  Conversely, if price declines and it records a high less than all previous 12 highs, then a 3-day moving average of highs is installed and followed for a period of 4 trading days to identify a place to buy.  The moving average is active for a period of only 4 days after the higher low or the lower high is recorded.  As you can see, the application of the moving averages is dependent on the fulfillment of various prerequisites.  Other variations of this approach can also be applied.  In every instance, however, the key ingredient of any approach is its ability to remain dormant while price moves sideways.  Once price breaks out of the trading range, the technique should be sufficiently sensitive to detect any movement that would precede a trend reversal.

For many years, I observed a central tendency for price activity to move within a band defined by a moving average that was identified by multiplying each day’s price low by 110 percent and each day’s price high by 90 percent.  This band can be smoothed by multiplying an average of the previous 3 days’ lows and highs and by increasing the band factors to 115 percent and 85 percent.  When price exceeded this moving average band, overbought and oversold readings were generated.  The percentages presented can be adapted to specific markets.

One technique I developed many years ago I call the TD Moving Average technique.  It is designed to initiate buy and sell signals on the first day both of two moving average – a long term and a short term – turn up or down simultaneously for the first time.  Generally, the short-term confirms – that is the day action is to be taken.  In other words, the first instance they both move up or down versus the previous day’s TD Moving Average readings is the trigger day.  Typically, the two moving average periods I use are 13 and 55 days, but the latter period has been adjusted to use as many as 65 days.

I believe another approach has merit, but because of both software and data constraints, I have been unable to test it.  This method involves identifying and averaging the median (middle) price recorded each day for a particular period of the day.  I plan to experiment with variations of this technique now that I possess the software required; I am awaiting the necessary data.

My moving average techniques are unconventional.  They have been designed to counteract the nemesis of all moving average approaches – trading range and sideways markets.  I believe that these methods circumvent the obstacles confronting the average trader, and can be implemented to give the savvy trader a market edge.”

The Fly already mentioned DDD and SSYS so I’m not going to regurgitate this one; but they are in my “vision portfolio”.

Today, I like to bring to your attention SZYM.

Solazyme specializes in biofuel and they have been very successful in turning science into practical use.  Instead of trying to explain the science; please visit their site and do your due diligence.  You can start with this link below:

http://solazyme.com/videos

Today, Solazyme announced a joint venture with Bunge Ltd. (BG) to build a plant in Brazil.

http://www.bloomberg.com/news/2012-04-03/solazyme-jumps-on-bunge-biofuel-deal-in-brazil-sao-paulo-mover.html?cmpid=yhoo

I believe this is just the beginning.  The fact that a plant is going to be built speak volume to the effectiveness of SZYM’s technology.  If you do your DD, you will find that the application for SZYM biofuel expands across many industries.

Of course, SZYM is in my “vision portfolio”; but remember my vision can be wrong.  Therefore, I’m prepared to take action to save my portfolio when necessary.

Good Hunting!

In part 2, I discussed how Richard Dennis, the legendary commodity trader, proved to all of us that trader can be trained to become successful; he/she doesn’t need to be born with the talent.  We have much to thank Richard Dennis for this very insightful experiment he conducted.  The experiment also taught us that the key to trading success is the temporary restrain of the chest-thumping gorilla inside us (in which I postulated in part 1).  Richard Dennis imposed discipline (external imposition) by threatening the survivability of the trading trainees.  This external imposition of discipline forced the trading trainees to put aside their chest-thumping gorilla and gave themselves the opportunity to witness and experience the strengths and weaknesses of the long-trend trading strategies taught by Richard Dennis.  After knowing that the trading systems worked,  some of the trading trainees learned to trust the systems and went on to become famous money managers on their own.

So, how do we follow the same path without the benefit of a benevolent trader like Richard Dennis to coach us?  One of the key element of external imposition of discipline is that the trading trainees were willing to set aside their chest-thumping gorilla in favor of an external guidance.  The trainees knew that Richard Dennis was a bona fide trading legend and therefore trusted him totally.

In the same token, we are going to find something we can trust totally so that we can control our gorilla better.  And what better way than to trust our very own hunting instinct that we are all born with?  We will let our hunter mind guide our action instead of relying solely on our chest-thumping gorilla.  Think about it, our ancestors did not survive this long without our inborn hunting instinct.  Yes, we have two very important characteristic traits that sustained our survival- the chest-thumping gorilla for protection against predator and the hunting instinct for foods.

Due to our advancement in modern science that pretty much eliminated the need for hunting; we somehow “forgot” about our talent for hunting!  And as a child, we weren’t taught the skills and discipline that are compatible with our hunting instinct inside us. Nevertheless, deep inside us, we are always yearning to hunt.

Try this one for size, our stock market is our own creation as a way to establish a “virtual”  hunting ground to fulfill our desire to hunt!  There, there, if you accept this premise, you are ready for the next step to utilize our inborn hunting instinct to control the chest-thumping gorilla inside us.

What does hunter do to capture their prey?  First thing a child learns from the hunter father is to understand the prey they are hunting.  The child is taught the nuance and habit of the prey- from their eating habit to where they prefer to sleep.

Light bulb light up yet!  Yes, understand the stock you are trading!  Know how your stock price action moved in different market environment.  Understand the fundamental behind it.

Next, the child is taught the hunting skills.  There are many hunting skills to learn since different prey required different skill set and weapon for the kill.

Learn all the technical analysis (chart reading and/or tape reading) and becomes an expert at it.  Learn to know which technical settings are more appropriate for long-term trading as opposed to short-term trading.  Learn the basic financial/accounting skill so you can decipher  the fundamental information provided by the 10K reports.

Next, the child is taught that patience is required for the hunt.  A steadfast and calm demeanor are required so as not to alert the prey.

One must be patience to wait for the proper signal before taking a trade.  The stock must trigger the parameter in your trading system before you take a trade.

Next, the child is taught to summon the chest-thumping gorilla inside to go for the kill when the moment is right.

When your trading signal is triggered, you must summon your inborn strength to take the trade.

Next, the child is taught that if the kill was not successful, he/she must retreat immediately to save him/herself first so they can hunt another day.

If your trade was not successful, take your loss immediately so you can move on to the next setup for trading opportunity.

Finally, the child is taught to be humble and be thankful for the kill since an arrogant hunter will eventually become “careless” and mauled by the prey.  This is more to remind themselves that their chest-thumping gorilla inside them must be contained after the kill.

By focusing on the hunt and all its intricacies, we are putting our chest-thumping gorilla to the sideline and only called out for trade execution- from entry to exit to cut losses or to take profits.

In summary, direct all your energy not at the stock market but as a hunter scouting the stock market.  The focus of energy is different- at the market, you can get carry away by the mob mentality and forget to take your profit or cut your loss; as a hunter, you are focusing on the hunt itself and that put you in a position to “observe” the mob mentality instead of being part of it.  Thus, you are more likely to take profit or cut loss before the trend changed direction in a big way.

We,as human, have two very powerful characteristic traits that we passed on from generation to generation- the chest-thumping gorilla trait and the hunting instinct.  Brush off the dust and bring your hunting instinct back up so as to balance against your gorilla trait.  Both are needed for the success of the hunt.

Now, you know why I always sign off with…

Good Hunting!

Link to Part 1 & 2:

Understanding Discipline- a new perspective (part 1)

Understanding Discipline- Turtle trader approach (part 2)

In part 1, I postulated that exercising discipline on our own is like exerting control over a chest-thumping gorilla inside us.  If you think about it visually, it is almost impossible if you don’t have a strong desire and motivation to make it happen.  Exercising discipline in the trading arena is no different than exercising discipline in the martial art or boxing arena. A lot of time is needed to devote to this endeavor.  Practice, practice, & practice are needed to ingrain the actions (cutting losses and taking profits as trigger points, etc) you wanted into your trading mind.  If you are not embarking on a journey to tame your chest-thumping gorilla inside you, the probability of you being part of the 97% traders who eventually lost their hard-won gain is very high.

Nevertheless, there may be a “way” to master discipline on your own.  I said “maybe” because it is still up to each individual to take this approach seriously.  Before I get into this; let me offer a real-life example of how discipline is being instilled in a group of turtle traders hand-picked by Richard Dennis, the legendary commodity trader who, based on what I read, turned $2,000 into hundred of millions.  I’m sure some of you already know the story of how Richard Dennis and his partner came to a decision (while debating the issue in a Singapore’s turtle farm) to do an experiment to prove Richard Dennis’ theory that traders can be trained to succeed instead of being born with the talent.

Based on the books by Michael Covel and Curtis Faith, some of these turtle traders went on to become some of the greatest hedge-fund and money managers out there.  How did Richard Dennis accomplished this feat?  How did he instill discipline in these traders in such a short-period of time?

It was devilishly simple, Richard Dennis came up with an elegant solution to remove the chest-thumping gorilla in each of the traders he was training by stating that if anyone deviated from the trading methodology he was teaching, he/she would be fired.  He also reminded the traders that they were trading his own money, not theirs.

First, Richard Dennis’ approach, while simple and elegant, is not an approach anyone would try.  If Richard Dennis hadn’t done the experiment, I don’t think we will ever hear any success stories about the former turtle traders.  Come on now, who would risk million of dollars on a group of trading newbies with no experience?  Richard Dennis did it because he could.  It was like making a million dollar bet he could easily afford to lose.

Without a doubt, the new turtle traders learned shortly that Richard Dennis’ long-term strategies worked brilliantly in a trend market.  Despite some difficult periods before the trend took hold, the turtle traders were able to witness and experience first hand that draw-down and cutting losses were very much a part of the trading business.  They also experienced the trials and tribulations of seeing a long-term trend play thru to the end.  This was no easy task since they were witnessing profits disappearing, reappearing, increasing and decreasing thru out the trending phase.  As you can see, if you have the opportunity to witness and experience the strength and weakness of a winning trading system as a participant, the action of executing the trades day in and day out would eventually become part of your daily trading discipline.  The turtle traders began to “believe and trust” the trading system they were taught. In other words, these turtle traders were extremely lucky to be able to “practice, practice, & practice” proper trading discipline using real (but someone else) money; and on top of that, coached by the best trader there was at the time.

Bottom line, if you can master yourself (meaning your own chest-thumping gorilla), you can become one of the 3% successful trader.  Richard Dennis proved it.  But here the caveat, it is all depended on your commitment to tackle the gorilla inside you.  Without an effective coach and free money to practice, mastering discipline can be as difficult as preparing yourself to climb Mt. Everest.  Not every turtle traders in the group became successful, but those who did also possessed the desire and motivation to succeed.  Do you have that desire and motivation?

In human, the chest-thumping gorilla inside us is what make us stand tall among all species, it is actually our greatest asset, from business to artist, unfortunately, it is lethal in the trading arena if not cultivated correctly.

To be continued.

Good Hunting!