Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Quantum Mechnanics & Trading (by Leisa)

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Calabi-Yau manifold

I've many books in my bookshelf that beg reading, none more compelling than
Brian Greene's, The Fabric of the Cosmos:  Space. Time. And the Texture of Reality.  Greene is a theoretical theorist–a mind that dwells in the stratosphere of
conceptual thought.

Greene is that wonderful composite of rocket scientist and gifted writer, making his work accessible to mere mortals.  Rather than reading
equations, such as this. . . .

g_{i\bar{j}} = \frac{\partial^2 K}{\partial z^i \partial \bar{z}^{j}}

. . . I'm blessedly spared both the headache of trying to hum along with some
lip mumbling–even spurts of drooling –and the shame of having to admit that
I've not understood a thing.  Rather, I simply need to read one of his
beautifully crafted books.

Gmak, made a terrific post on TA, and it engendered a very good discussion. 
I was particularly happy to see it as I had become cross eyed looking at a
number of charts whose ultimate destination seemed unfathomable (like our
drawing above).  "Now what does any of this have to do with trading?" you might ask
impatiently (is that your toe I hear tapping? ).  I ran across two passages in this
book that I wanted to share with Slopers.  The first, I shared already but will
repeat.

Understanding_copy

The second I wanted to commit to a post, because I thought that is was
something worth reading.  I quote from page 11.

But according to the quantum laws, even if you make the most perfect
measurements possible of how things are today, the best you can ever hope to do
is predict the probability that things will be one way or
another at some chosen time in the future, or that things were one way or
another at some chosen time in the past.  The universe, according to quantum
mechanics, is not etched into the present; the universe,
according to quantum mechanics, participates in a game of chance.

. . . most physicists agree that probability is deeply woven in to the fabric
of quantum reality.  Whereas human intuition, and its embodiment in classical
physics, envision a reality in which things are always definitely one way
or another, quantum mechanics describes a reality in which
things sometimes hover in a haze of being partly one way and
partly another.  Things become definite only when a suitable observation forces
them to relinquish quantum possibilities and settle on a specific outcome. The
outcome that's realized, though, cannot be predicted–we can predict only the
odds that things will turn out one way or the other. (p.11)

Running across this passage so quick on the heels of our having a
conversation about TA and its 'predictive' abilities, made it resonate deeply. I
could not help but note that trading/TA is not so far from quantum mechanics. 

When your capital is on the line, probabilities must be considered
carefully–and none more judiciously than the probability of your being
wrong in a trade. As our trading is fraught with our successfully managing (surviving) uncertainty, I thought the passage timely and insightful.

Our technical analysis, for all of its purported faults, is a construct that gives us understanding and cultivates insight.  More importantly, our TA and our trading plan anchors those insights. It is not predictive, but it does reveal to us the promise of certain outcomes. To those promises we must overlay our trading discipline. We are not really trying to managed the outcome of a chart, rather we are managing the outcome of the relationship of our trading capital with the chart.  Accordingly, our trading discipline is the construct of that universe of uncertainty.  Most importantly, we are the final arbiter of those rules those rules dictate the outcomes.  That is great power, is it not? 

We really are masters of our own universe.

Super

Market Sniper! (by Biffermas)

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In the realm of competent, coherent traders, few compare with Market Sniper.  He stands out in many aspects beyond trading, notably real estate, disaster preparation, precious metals, macroeconomic issues, etc.  Because my trading plan and approach to the markets have both benefited immensely from his input, I chose to focus this interview on trading.  I could easily conduct 3-4 more pieces discussing other aspects.  He is a great teacher to have on the Slope, and I feel very fortunate to have him around.

Biff:  Did you have a previous career in a typical day job?  How did you get into trading?

Ideas1-300x300 Market Sniper:  I have always had an entrepreneurial nature. Both my parents were university professors. Sociologists.  At a very early age I decided not to pursue academia.  From the age of 13 on, I was making more than my father through various endeavors including a gardening route which I sold to a Japanese gardener at the age of 15 for $25,000 as my father had accepted a Fulbright Grant to teach at Ain Shams university in Cairo, Egypt.  I worked my way through University of California, Los Angeles with a combination of the GI Bill and a great part time job for the Los Angeles Times in newspaper production.  I was already doing some real estate by then as I bought my first house at the age of 17.  Upon graduation I was hired on by Aetna Life and Casualty as a workman's compensation field representative.  I managed workman's comp claim cases. I left them and went into the house painting business with a partner. During that time I had discovered real estate in a big way and started buying, fixing and selling houses.  I got to the point where I decided to get a salesman's license just to save part of the commissions.  I originated the concept of the 100% commission real estate office where the salesmen rented my broker's license for a fixed fee per month. That operation was bought out by what became White House Properties.  I was already dabbling in the stock market with mutual funds at that time. In 1984 I decided to become a stockbroker with EF Hutton.  I had both Series 7 (stocks) and Series 3 (commodities). During that 2 year period I did everything you’re not supposed to do and lost substantial sums.  I went back to real estate then and swore off stock and commodity trading forever.  I revisited that decision in 2001 and decided to devote full time, first to learning and THEN to trading.

Biff:  What were the major trading errors you committed that made you swear off stock and commodity trading?

Right-way-wrong-way1 Market Sniper:  Trading errors. LOL… you name it, I did it. NO trading plan, NO methodology. Also when positions went against me, I was stubborn and averaged DOWN.  It got so bad, I was trading my commission checks.  I did have the good sense NOT to tap into more than $100,000 of my capital so the on-going blow up was not as bad as it might have been.  Towards the end I did have a couple of very "lucky" breaks.  I found Larry Williams and bought an S & P futures mechanical trading system that did VERY well.  I also had the good fortune to have had an insider as a client that traded off that inside information.  In those days, you got caught doing that, they just took your profit away!  At the end when I gave it all up, got back close to even. I was down nearly a million dollars.  Redeemed myself with my clients as well.  Trading other people's money can be the pits.  When your right, it was THEIR idea. When your wrong, you’re the A-hole.

Biff:  Since you re-entered the markets in 2001, has your trading style been consistent?  What changes, if any, have you made to your trading plan over this span?

Study Market Sniper:  Great question!  My first step after making the decision to get back involve with the markets was to set aside a 6-month study period.  Fourteen hour days, damn near every day.  I did not even paper trade.  What I did was get a hold of a tremendous amount of reading.  First, to truly understand what goes into price and what creates it.  An area most traders do not really understand.  I read everything I could get my hands on about Jessie Livermore, including his hand drawn charts.  I read Jack Schwager's Market Wizard books.  Then I read everything I could find on trader psychology.  Mark Douglas had just published Trading In The Zone and I also had his previously published book The Disciplined Trader.  I tattooed BOTH books on the inside of my eyelids.  Next was the search for method.  I looked at a lot of different things.  Martin Pring's Technical Analysis was a great help with that.  Also, everything that Larry Williams had put out as well.  

Seasons When I started trading with actual money, I started with an $8,000 futures account. The "plan" was to get it to $100,000 as fast as possible.  IF the money got blown up, replace and repeat immediately.  This is NOT a recommended way to go, by the way.  At first, I leaned very heavily on seasonal trading.  It is what took that account to 100K in 43 trading days.  To Larry Williams, I owe a debt of gratitude for that.  For my money, Williams is perhaps the premier seasonal trader out there.  I then took a two week break. a vacation, to settle down.  I did know that what I had done was to create a "few" bad trading habits.  Most of all was poor risk management.  After vacation, I calmed down and put together how I would manage risk going forward.  Within a year, I found that pivot swing trading was the me
thod that resonated with me the most.  To this, I added a lot of the work of John Carter for specific setups that were outside the pivot methodology.  Basically, my method has evolved over nearly a decade, from pure seasonal trading and chart pattern recognition to basically a pivot broad market futures day trader.  I use John person's methodology whether trading equities, futures and FOREX.  It works for me in all markets that create a chart and in all time-frames I chose to trade.  To that, I add specific setups such as trading the opening gap, extreme TICK fade trades, etc. Still on the constant lookout to discover trading edges (merely the higher probability of one outcome over another).

Biff: Poor risk management is the central cause of market blowouts for so many people, and is either absent in their trading plan or neglected.  Will you talk about your approach to managing risk?

Risk Market Sniper:  First we need to differentiate between you trading business plan (yes, trading is a business) and trading plans.  Risk management is part of your business plan and its elements are then utilized in your trading plans.  Your business plan should include the amount of trading capital you are willing to risk in any single trade.  This can vary widely as this is an individual decision.  I have found that the more trading capital you have, the amount (as a percentage of the capital) I am willing to risk decreases.  I would HIGHLY suggest that even for a small account, that percentage should NOT exceed 5% of trading capital.  To risk a higher percentage courts trader ruin.  You should already know the expectancy rate for ALL your trading setups.  Each will be different.  Expectancy rate is found over a long series of trading a particular setup.  It should also be discovered for the broad methodology you chose to utilize as well.  It is simply the expected return using that setup/methodology over the long haul.  Included would be the maximum drawdown (longest series of negative outcomes) for that setup/methodology.  You need to find that maximum drawdown.  You can have a long-term positive expectancy but can have trader ruin long before realizing that long term expectancy.  If you lose 50% of your account, you need to get a 100% return on remaining capital to get back to even.  Risk management then must incorporate correct trade sizing.

Biff:  Can you give us an example of this structure applied to a hypothetical trade?

X and o Market Sniper:  Let us say your setups calls for buying a certain stock at $100 per share.  Based on your methodology, your stop loss is $95 per share.  At $95 dollars per share, the market is telling you that you are on the wrong side of the trade.  Let us use that mythical $100,000 account.  Your trading business plan says that you NEVER take more than a 5% loss in any individual trade.  How many shares do you buy?  Potential loss is then $5,000 per your business trading plan.  Based then on this example, the maximum trade size is 1,000 shares.  Inappropriate trade size is a major reason for trader ruin as well.  You will need to know what your entry strategy and exit strategy will be per your trading plan.  Do you buy all 1,000 shares at entry?  Do you scale in?  If scaling in, what triggers additional shares being purchased? The same should be included in your exit strategy in your trading plan.  Other than stop loss being hit, do you scale out as the trade moves in your favor? Is time in the trade a factor? 
I personally manage risk by sizing different trades differently depending on the strength (long term expectancy) of the trade setup.  The weaker the setup, the smaller the size.  The predominate time frame I trade in is for a session.  Going to cash at or before close is another method of managing risk.  For swing trades that are directional, I tend to use long options.  By their very nature, your risk is limited to capital in the position.  Risk management is all well and good. However, if you do NOT have the discipline to honor your stops, it will not do you much good.  The point, as a trader, that you should aspire to is to become just a trade execution machine.  Your trading plan already incorporates all eventualities.  We do NOT get any smarter once we are in a trade. Experience shows we actually become dumber!  STICK to your trading plan!  As the trade setup appears, you execute that trade according to your plan.  At a certain point, you should be so confident of the trade expectancy, it no longer matters at all the outcome of any particular trade!  When you get to THAT point, you have become a professional trader, extracting capital from markets at will.

Biff:  With the increased role of algorithms and computerized trading has your style changed? Do you engage in automated trading?

Market Sniper:  The increased role of "black" box trading has really not led to any change in how I trade. Since I went to mostly day trading before HFT started to hit the big time.  Most HFT is to capture the liquidity bonus anyway.  Now, if we are talking about upward market manipulation, that is NOT algo or black box generated. 

Black I do engage in automated trading to some extent in FOREX markets.  I have used off the shelf FOREX trading robots.  These are mostly scalp programs. IF you’re the average FOREX trader, the dealer is actually trading AGAINST you. I had one account shut down by the dealer when I had scalped him for a bit over 42K using a robot. Since then, I have gotten a FOREX account with direct bank desk access.  IF your FOREX broker is NOT charging you a commission, most likely, he is the counter party to your trades. This is especially true with mini and almost always the case with micro-min FOREX accounts.  I have developed my own robot to deal with direct bank desk access.  Had to as most robots trade off the MetaTrader4 platform and is not compatible with direct bank access. I am also currently working to re-establish a mechanical S and P trading system originally
purchased from Larry Williams back in the mid-1980's that I will automate once I get the kinks worked out.

Biff:  Do you have any hobbies or other enjoyable distractions from your trading / real estate life?

Morgan dollar Market Sniper:  I am an avid collector of United States coins.  A life long hobby started at the age of 5. I collect only coins that were meant for trade and commerce (no proof coins).  I also further limit my collection to coin types that are no longer being minted.  Therefore, my penny collections stop at Indian Head pennies, Buffalo nickels, Winged Liberty dimes, etc.  I am particularly proud of my Morgan dollar collection, the coin I specialize in, including VAMs (different die and die pairs).  I also have a very good collection of early coppers (1/2 cent and large cent) but I do not collect them by Sheldon type. Lot of history in those coins!  Did you know that the United States has put out 2 cent coins, three cent coins (both in silver and nickel) as well as a twenty cent piece?  Also, before the nickel was a nickel and made out of nickel, they were called half dimes and had exactly 1/2 the silver content of a dime?  I am an avid reader of history and enjoy reading science fiction as well. I do some gardening with my gal which is her passion.  I also use casino gambling as a hobby.  The rest of the time I devote to my grandchildren.  Wish I had more time to travel as that has always been a passion of mine as well.

Biff:  What advice would you give an enthusiastic rookie trader to help avoid the grand pitfalls?

CautionThisMachineHasNoBrainUseYourOwnTH Market Sniper: 1. Work on what is going on between your own two ears while in a trade. Understand trader psychology.  2. Understand price and find a methodology that resonates with YOU.  3. Do NOT enter a trade without a full trading plan in place for that trade.  4. FOLLOW that trading plan faithfully while in the trade!

Biff:  Thanks for sharing your expertise with us!

 

Desiderata

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When I was a youngster growing up in the deep south, I had two older brothers. They shared a room, and since they were quite a bit older than me, I always considered their room a really cool place to hang out and see what the big kids were doing.

On their wall was a poem that you may or may not have seen before – Desiderata. My parents probably saw it printed in the newspaper one day and decided to make it sort of "artsy" – – mounting it on an old piece of wood, giving the paper and antique finish, and so forth – – – basically make it look like a centuries-old text that had been found in the back of a storage room somewhere.

I read it many times as a child, and its message is as true today as ever. It also resonates quite well here on Slope, where we've had a few "vexations to the spirit" and a few who were "dull and ignorant", but, on the whole, "many people strive for high ideals."

This piece means a lot to me, and I hope you find it enjoyable and edifying………


    Go placidly amid the noise and haste,
    and remember what peace there may be in silence.
    As far as possible without surrender
    be on good terms with all persons.
    Speak your truth quietly and clearly;
    and listen to others,
    even the dull and the ignorant;
    they too have their story. 

    Avoid loud and aggressive persons,
    they are vexations to the spirit.
    If you compare yourself with others,
    you may become vain and bitter;
    for always there will be greater and lesser persons than yourself.
    Enjoy your achievements as well as your plans. 

    Keep interested in your own career, however humble;
    it is a real possession in the changing fortunes of time.
    Exercise caution in your business affairs;
    for the world is full of trickery.
    But let this not blind you to what virtue there is;
    many persons strive for high ideals;
    and everywhere life is full of heroism. 

    Be yourself.
    Especially, do not feign affection.
    Neither be cynical about love;
    for in the face of all aridity and disenchantment
    it is as perennial as the grass. 

    Take kindly the counsel of the years,
    gracefully surrendering the things of youth.
    Nurture strength of spirit to shield you in sudden misfortune.
    But do not distress yourself with dark imaginings.
    Many fears are born of fatigue and loneliness.
    Beyond a wholesome discipline,
    be gentle with yourself. 

    You are a child of the universe,
    no less than the trees and the stars;
    you have a right to be here.
    And whether or not it is clear to you,
    no doubt the universe is unfolding as it should. 

    Therefore be at peace with God,
    whatever you conceive Him to be,
    and whatever your labors and aspirations,
    in the noisy confusion of life keep peace with your soul. 

    With all its sham, drudgery, and broken dreams,
    it is still a beautiful world.
    Be cheerful.
    Strive to be happy. 

Frequency Modulation

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I am back in Palo Alto, having been away in the mountains for the past week. I would like to say it was a relaxing and enjoyable vacation, but it wasn't – – not because I didn't enjoy the skiing and time with my family, but because my mind was haunted by the topic I'm going to discuss below.

On January 19th, my portfolio had reached a nadir for the year (down about 2%). Over the next 13 trading sessions, little by little, I completely turned that around, and by February 5th, my portfolio was at a new high. I felt fantastic, and I had just had the biggest cash gain intraday of my entire life.

In the subsequent nine sessions, by February 19th, I was right back to where I was before. From the 19th to the 19th, I had come full circle.

I worked very, very hard to get absolutely nowhere. Worse than that is the knowledge that, had I simply covered everything on the 5th, I frankly could have taken the rest of the month off, doing absolutely no trading, and been in great shape. But instead, I face the same challenge, all the while equipped with the same knowledge of what the market is going to do next that all of us have (which is: no knowledge at all).

Now, the whole woulda/shoulda/coulda thing is the hallmark of amateurs, and I rarely indulge in it. The simple truth is that, the entire time, I followed my rules and I acted rationally. On February 5th, none of us knew what was next. What if, on the 5th, I had indulged myself in profit taking, covered everything, and the market plunged 10% the following Monday? I would have been furious with myself, because I would have blatantly broken all the rules of discipline that I choose to follow. That would have been a far worse error.

Still, it stings. I don't like busting my butt for nothing, and the problem I'm facing is one of frequency. That is, I'm at my best as a swing trader (metaphorically represented by the lower portion of the image below), whereas the market is currently behaving optimally for day traders (represented by the top portion of the image). I am badly "out of phase" with the market's speed right now.

0219-waves 

 
So what do I do about this? Become a day trader? No; I think that would be reckless on my part. I suppose I could try to augment my present trading with elements of a few large positions that are more in tune with a day trader's market. But in my heart I think what I need the most of right now is patience. Past experience has shown me that, in the end, technical analysis works, and as frustrating as the market's recent gyrations have been, I believe that utterly changing how I trade would be little different than trading randomly.

Just to add to my gloom, I think bears still have about 20 points on the ES points "at risk"; the wall of resistance is much stronger at about 1125 than it is at the present 1105.

0219-es 

But, for me, it all returns to the chart below of the Russell 2000. I've been trading for a long time, and I've never seen a chart like this before. In my opinion, it spells one thing for market: doomed. And I am fervently hopeful that all my hard work and discipline will finally pay off when what I surmise will materialize finally comes to fruition.

0220-russell

An Alien Observation

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I imagine some of you have recognized that when you first arrive somewhere new – particularly a new country – you are able to observe far more interesting and unusual things about the culture and the surroundings than the natives there. It's understandable, because they have become inured to their surroundings, whereas it's much easier for a newcomer to notice things.

I had a similar experience yesterday, during the handful of instances I glanced at the Super Bowl. I was mostly interested in the ads, and I started noticing a consistency among them. They seem to be playing to an audience which:

+ Feels oppressed by others (their girlfriends/wives/bosses) and is deeply embittered by it;

+ Desperately needs a way to express their inner Id – often by way of a noisy, unattractive American car;

+ Finds people in their underwear really, really funny

In other words, it seems the target market is men endowed with the minds of twelve-year old boys (with the aforementioned oppression being delivered, at that age, by teachers and mothers). I offer Exhibit A: