“There is nothing either good or bad, but thinking makes it so.”
I like the above quote from Bill the poet. And here is a partial quote from another one of my favorites, Pat Buchanan:
... Human nature trumps ideology.
Markets, while littered with ideology, are grounded in human nature. Keep that in mind as you read through today's missive ...
Fundamentals vs. Technicals
I write about global economics, but my trading with real money is increasingly technical in nature.
And as the time-frame of the trade setup shrinks, i.e. monthly, week, daily, hourly, etc., the trade decisions take on a greater degree of technical analysis. I am sure many of you employ a similar methodology.
It’s interesting how people tend to get strident when it comes to fundamental versus technical analysis. We all want to believe our method works best.
It seems to me the fundamental guys, maybe because they are greater in number, win the stridency prize. They believe they KNOW chart analysis is a joke. But they fail to realize their "Investment Themes" are just as ephemeral as technical trade setups.
And I would argue that at least by following technical setups, you are following the one thing that really matters if one keeps score in money made or lost—price action.
Two quotes sum this up well, one from Woody Dorsey and another from Edward Allen Toppel ...
Where can we find all the latest cultural concepts and investment themes? It turns out that if we want to get a glimpse of market culture, we have to go to the Concept Café. At this kind of café, we don't order the soup du jour, we listened to the stories du jour. To really understand this we may need to play the part of the flaneur. A flaneur is a gentleman of leisure who frequents cafés and observes the spectacles of street life purely for pleasure. His observations and inferential focus is an apt metaphor for the process of determining the Investment Themes, or the Mind concept of Triune Theory. A flaneur may be in the crowd but is not of the crowd. The life of the street, the culture of the city, and the concerns of the citizens are seen as opera or a story to be both observed and savored. Everything the flaneur sees, every vignette is an open investigation. The flaneur detects everything while no one detects him. The Concept Café is where Investment Theme, or the ephemeral and fickle stories circulating in the market, can be seen and heard. Most people believe the fundamentals are real, solid, authentic, reliable, and durable reasons we can count on to explain the market; however, the flaneur, or a behavioral trader, knows differently. In fact, we have to take into account the reality that the marketplace is full of propaganda or what we call spin. Spin has been an aspect of human behavior from the beginning.
...Descartes had a huge influence on what philosophers call the mind and body question, also known as Dualism. Simply put, the still unresolved problem revolves around the relationship between the body (technical analysis) and the mind (fundamental analysis). Which influences which? What are their natures and how do they interact? We have two natures or live in two different worlds, the world of our minds and the world of our bodies. Descartes came down on the side that the mind is immortal and immutable compared to the body. This presumption is at the heart of the fallacy of "rationalism.” On Wall Street they still think that the Mind, or Investment Themes, rule everything. They've always dismiss the body or, the “Technicals,” just because Descartes effectively told them to.
Woody Dorsey, Behavioral Trading
Fundamentals and "Investment Themes" are important to understand, at least as they tell us what the crowd is thinking about.
Technicals are important because price is the final arbiter in any market. In other words, no matter how much confidence one has in his fundamentals, a person either 1) goes broke or 2) must have extremely deep pockets and a long trading time frame if he wants to fight price action.
Of course, the times we become most confident are when price seems to validate our fundamental theme. This places us high up in “guru land” -- an angelic-like setting where most newsletter writers work and live thanks to the team of marketing and public relations personnel behind the scenes. (I plead guilty as charged your honor, but I'm not proud of it.)
Though keep in mind, just because price validates our themes doesn’t mean our theme is correct. Many times, while trading, price moved my way and without a doubt validated my personal rationale. I said "Gee, I am smart." I many cases I learned (after more objective analysis) price action had nothing to do with my rationale whatsoever.
This falls into the category of “better lucky than good” and should be a constant reminder why we must do the best we can, as exceedingly hard as it may be, at keeping Mr. Hubris from entering our personal space when we're fortunate enough to be making money in the market.
Now to Toppel ...
The perfect master is the market itself. The market speaks to us in one language--price. Numbers, if you will. Numbers that you can recognize and differentiate. More than likely you've been listening to a different sound. The noise is your ego's voice. Stop listening and turn to the only expert worth following--the market.
A market can change direction quickly. It is emotionally and physically exhausting to keep up with the swing. The best we can do is stay in the present moment and see with the next moment brings.
Each trader or investor must define what he thinks a moment is. For floor trader, it can be the smallest change in direction. For an armchair investor, he can be looked at from closing price to closing price. Some mathematicians think they can provide a switch parameter based upon historical price movements and statistical formulas. Beware of these people and their systems!
Toppel warns us technical analysis is no Holy Grail. But it is clear that technical analysis is the best way to determine what the Master—price action—is telling us.
My 2012 Mea Culpa
As you know, it is easy to talk about trading, but a lot harder to do it well.
It is possible to do it well, over time. As such, after a bad year in 2012 (perhaps my worst ever), things changed starting in October. Here are some lessons I re-learned that may help you evaluate your own trading:
1. Despite what has worked for you in the past, remain open and always learn something from the market each day in order to improve. This doesn’t mean throwing out everything that has worked for you just because you are having a bad year. But rather it is about staying open to the environment, tweaking your system, and pressing down on your ego.
In retrospect, I made two primary mistakes last year that I “believe” I have rectified since October 2012 (or just have been lucky; time should tell):
- I fell in love with my fundamental themes. The global economy was bad, and I felt certain markets had to break and “risk off” would drive trading for most of the year. I got stuck on my “hard money” views and underestimated the power of central banks and fiscal largesse. (In the long-term my hard money view may prove true. But even so, it was no fit with the time frames I use to trade currencies.)
- I tried to perfect my Elliott Wave analysis and count the perfect stylized wave (after studying EW for about fifteen to twenty years, off and on, I thought I finally had it all nailed). After a major re-think during last year, I began experimenting with what I would call a Dow Theory approach to Elliott Wave analysis. That is: primary moves are all three wave functions, not five wave impulse and three wave corrective. In addition, this same modification which led to abandoning the wave-4 overlap rule (the three-wave major moves can break into three or five). That is the tweaking process I am talking about. I am now officially thrown out of the Elliotticians Club, but I am making money. That's all that matters.
2. Trade within yourself. There is a certain trading size that seems to be a natural set point. And when we exceed that point we tend to get ourselves in trouble. There are several emotional/psychological components to this that I won’t go into now. But trading too large was another thing that caused me trouble last year. Trading too large tends to breakdown your ability to properly discern risk and gives Mr. Hubris an opening. My risk management was sacrificed to a great degree because I was poised on many occasions to “clean up” on a trade. The euro “had” to break based on my confident macro themes about the single currency system.
3. Stick to your rituals. Rituals for a trader are extremely important. Whether that means drawing lines on your charts every morning to define pivots before you start your analysis, or taking time to meditate before you even look at your screens. There are many rituals that we often perform, but underestimate how important these rituals, which allow our minds to freely focus, can be to trading success. This is also an area, in retrospect, where I strayed last year as a trader. I abandoned my rituals. This year, that will not happen.
The other purpose of this mea culpa is to give you a glimpse of the type of things I will be discussing at our upcoming Forex Trading Workshop. The workshop will be short on theory, and long on real-world understanding of foreign exchange and application of the many hard-won lessons I have learned over the years.
So far this year things have improved, as I said. And though this is tempting fate, below is our closed position summary for 2013 in our Currency Currents Professional service:
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