Why Anticipatory Trading is so Tricky

Charts give us the opportunity to wait for confirmation or enter ahead of time – to anticipate.  And while the latter may give us more of a feeling of being right, it’s not an easy way to trade. Here’s an example from this week… AGP is sitting in a bullish consolidation pattern here within an existing uptrend.  This is a quality pattern – but it has yet to confirm.  A breakout would happen beyond the upper channel trend line, currently at $70.  Check out the setup, then down below let’s discuss trading it.

The Zurich Axioms

I first learned about The Zurich Axioms by Max Gunther in the daily Worden Report when Don mentioned it among his favorite trading books a few years ago. Soon after, I picked up a copy and found it was indeed packed with some great insights.

There are 12 major axioms highlighted in the book, with a chapter devoted to each, as well as 16 minor axioms.  It’s a relatively short book at only about 123 pages, but the “Rules of Risk and Reward Used by Generations of Swiss Bankers” offers no shortage of wisdom and insights for any trader or speculator.

Without disclosing all of the Axioms, I’ll summarize two of my favorites.

Always Play for Meaningful Stakes.

This minor axiom highlights the importance of trading with enough size for it to matter.  This goes beyond the learning stages in which a developing trader needs to hone his skills and not fixate on the money.  Rather, playing for meaningful stakes is about getting over the fear of getting hurt in such a way that when a play works, it’s well worth the risk taken.

A story is told in the book about the oil tycoon J. Paul Getty, who grew up rich, but once he became an adult he was sent out on his own.  Wanting to enter the oil business, he shunned various opportunities to invest $50 in the early 1900′s in favor of betting nearly his entire savings of $500 on an oil lease he felt was more promising.  After paydirt was hit, he sold his holdings for $12,000 just a short time later.

Getty mentioned that if he had not struck oil, the $500 would have hurt, but that he could have found a way to save that amount back up again.  He was quoted as saying “it seemed to me I had a lot more to win than to lose.”  That’s playing for meaningful stakes.

As a trader, it’s not about walking a tightrope where bankruptcy is the result if you slip.  It means you don’t nickel-and-dime your way throughout the entire year if you want to get somewhere interesting.

Optimism means expecting the best, but confidence means knowing how you will handle the worst.  Never make a move if you are merely optimistic.

What an excellent reminder for traders!  Gunther makes the point that without some level of optimism, one cannot trade to begin with.  However, there is general optimism and there is specific optimism.  According to Gunther, it’s the venture-specific optimism which can become dangerous if you allow it.

The latter mention of what true confidence is just cannot be ignored here.  Do you know how you will handle the worst?  If you do, then you’ve got arguably the most difficult element of a trading plan already in place – the adverse exit.  The ability to fail gracefully in trading – over and over – is what will ultimately define how long you can stay in the game.  Your success may eventually be tremendous, but if you’re unable to handle losing the right way, you’ll be taken out long before the big wins can ever come along.

My advice? Pick up a copy of The Zurich Axioms and get a pen ready to mark up the margins and underline key points.  It’s a quick read and one you’ll return to often.

An International Bond ETF Roadmap

Just a few years ago there were only a handful of bond ETFs available to U.S. investors, and almost all of them focused on securities from U.S. issuers denominated in U.S. dollars. One of the most noteworthy innovations to shape the ETF industry over the last several years has been a significant growth in international bond products; as issuers have worked around concentration-related issues and other hurdles, the universe of bond ETPs targeting markets beyond U.S. borders has grown tremendously.

That's the Spirit!

No, this is not another of my now famous rants against the airlines and Spirit Air an particular. No, this is about the spirit of the analysis of charts. You can check out an old blog post on this topic here. This is how it began:

3 Ways to Grow from Trading Adversity

Dean Karnazes runs like a man possessed.  He’s an ultramarathoner, which means he goes beyond marathon distances – sometimes a lot farther.  He once ran 50 marathons in 50 states in 50 consecutive days.  Apparently, the dude loves pain. In his book Confessions of an All-Night Runner, he makes the following statement:

Rules to Live By

On my special holiday show, I’m going to go over rules – MONEY RULES…INVESTMENT RULES that most people don’t live by…that most people ignore. HAVE SELL RULES The first time I met William O’Neil and David Ryan in the early ’90s, I remember asking both of them, “What’s the most important thing people need to know?” They said:

Deja Vu All Over Again

In 1980, I sold my legal practice and turned to full-time trading. At the time, Gold was in a downtrend, and I seemed to pick to go short the precise day when it would correct up for 2 to 3 days. I compounded the loss by stopping and reversing (so from short, I was now long, usually at the top of the rally). Then as Gold resumed its downtrend, I’d get stubborn and add to my longs until I blew my account. ‘Dumb’ is the kindest word that I can use to describe that type of trading.

Have a Plan

After the last two bear markets, most investors understand that they have to have a plan to protect their portfolios. Traders live and die by this. They are taught that knowing when they should sell is more important than when to buy. In other words, they recognize when it is time to cut their losses. Investors should understand this, too.

Timeframes and Position Size

Equally important to locating entries and exits is the matter of sizing your positions. Too much and you can’t stick with the trade plan, aborting in favor of diminishing emotions (whether greed or fear). Too little and you don’t maximize the use of your capital. While some traders prefer a standard lot size, in this video I’ll discuss the notion that your timeframe for the trade should influence your position size. Yes, the chart itself will help determine your exits, but that’s also a function of how long you’ll expect to be in the trade.

Addressing Those Fat Tails

The problem of fat tails is everywhere in risk analysis. It’s a big issue, but there’s no easy solution. There are, however, lots of partial solutions. Each comes with its own set of pros and cons, which implies that the practical strategy for dealing with the messy but essential issues related to measuring and managing risk starts with the iron rule to never, ever rely on one risk metric.