GOLDEN RULES OF INVESTING

CUT YOUR LOSSES

REVERSE TO NEW POSITION OR STAY OUT AND WAIT FOR NEW INDICATORS

RIDE THE PROFITS

GOLDEN RULES OF INVESTING

CUT YOUR LOSSES

REVERSE TO NEW POSITION OR STAY OUT AND WAIT FOR NEW INDICATORS

RIDE THE PROFITS

STARTING CAPITAL

Ed Seykota profiled in Jack Schwager's Market Wizards, is a Trend Follower. He traded $5,000 into $15,000,000 in 12 years in his model account.

SUCCESSFUL TRADING PHILOSOPHY

CUT YOUR LOSSES

REVERSE TO NEW POSITION OR STAY OUT AND WAIT FOR NEW INDICATORS

RIDE THE PROFITS

CUT YOUR LOSSES AND RIDE THE PROFITS

Ken Tropin: Chairman of Graham Capital is a Trend Follower

Michael Covel (March 21, 2005)

Kenneth Tropin

Ken Tropin was formerly President of John W. Henry. Before that he was President of Dean Witter Futures. Now on his own, he is another successful trader with a Trend Following trading style:

The ability of trend following strategies to succeed depends on two obvious but important assumptions about markets. First, it assumes that price trends occur regularly in markets. While trends do not exist in all markets most of the time, they do exist in most markets some of the time. Secondly, it assumes that trading systems can be created to profit from these trends. The basic trading strategy that all trend followers try to systematize is to "cut losses" and "let profits run". Trend following has had positive returns over a 20 year period because trends occur in virtually all markets some of the time. Trend followers create quantitative models to capture these long term trends while limiting the cost of doing so. These models create an expected return profile similar to being long options. A strategy has a long option profile when the strategy limits downside losses while potentially achieving very large upside returns. For example, trend followers use stop losses to achieve limited downside exposures on their positions.
Ken Tropin, Graham Capital Management

Making money has been easy for Ken Tropin, although wealth doesn't exactly run in his blood. He grew up comfortably, first in the Bayside section of Queens, New York, and then in Harrison, a suburb about an hour north of New York. His parents both worked for nonprofit organizations. His father was in public relations at the United Nations, and his mother was employed by the International Committee for European Migration, which helped refugees settle in the U.S. "Their priorities were not about making money," he says. "They were more about helping people out." Nor did Tropin have much use for conventional measures of achievement. In the early 1970s he traipsed off to Plainfield, Vermont, to attend Goddard College, an institution that eschews majors and grade-point averages. When Tropin wasn't sculpting, he was skiing. After graduating From Goddard in 1974, he moved back to Harrison and started a small contracting business, which did painting and light construction. "I hired all of my friends from high school," he recalls. "We didn't make a lot of money." He soon grew bored. After a family friend suggested he get a job on Wall Street, Tropin hooked up with a small firm called Rosenthal Group, which later merged with Collins Commodities to form the Rosenthal Collins Group. He then moved to Shearson Loeb Rhoades as a broker specializing in futures and equities...A few months after leaving the firm [John W. Henry], Tropin started getting edgy. He bought a number of computers and taught himself programming, working in the guest cottage at his New Canaan, Connecticut, home. Within nine months he was able to write programs based on his own trading ideas and back-test them. It was then that he came to understand that neither Dean Witter nor John W. Henry & Co. had fully satisfied his entrepreneurial spirit. "I realized that what I wanted to do was start my own business," he says....Tropin won't go into detail about his proprietary systems except to say that they are designed to take advantage of sustained price changes that take place over several days, weeks or months. "The computer model tells us when to get in and when to get out," he says. "The computer understands what the price is telling us about the trend of the market." What does the software look at, exactly? "Volatility, price behavior. How much does it change every day? We're trying to use as much data as we can get to interpret potential future price." Successful positions remain in place for about six months; Tropin's programs bail out of unsuccessful trades after a month. "All of the systems are designed to risk modest amounts of capital and to stay with winners as long as possible," he says.
Institutional Investor

Graham Capital Management White Paper: Trend Following

• Download PDF.

Official Biography

Ken Tropin is the founder and chairman of Graham Capital Management, L.P. Graham Capital is an alternative investment management company with approximately $4.4 billion in assets under management including over $500 million of proprietary capital. Mr. Tropin developed the majority of the firm's core trading programs and he is additionally responsible for the overall management of the organization, including the investment of its proprietary trading capital. The company is located in Stamford Connecticut and has approximately 80 employees. Prior to founding Graham Capital in 1994, Mr. Tropin was president and chief executive officer of John W. Henry & Company, Inc. and previously, senior vice president at Dean Witter Reynolds, where he served as Director of Managed Futures and as president of Demeter Management Corporation. Mr. Tropin has also served as chairman of the Managed Funds Association and its predecessor organization, which he was instrumental in founding during the early 1980s.

THE GOLDEN RULE OF INVESTING

If there is a golden rule of investing, it should be the discipline to cut your losses when a stock drops 7-10%. The usual protest to this idea is "what if the stock goes right back up, as I know it's going to do? I've lost 10% of my money for no good reason."

Let's take a logical look at this argument. If a company's stock price drops 8%, it can then do three things. It can go right back up (but then why did it take a big drop in the first place? Hmmm), stay right where it is, or most likely drop even further. Sorry, but dropping to even a lower price is what’s most likely to happen.

For example, you buy a stock at $25.00, it drops to $23 where you sell and take a $2 loss. Over several weeks or months, you watch it drop down and hold at a "support level" of $17 to $19. The price begins to move up so you buy back in at $20. A month later it is back to $25.00.

If you had simply held on to the shares, you are now back to a break-even point. But by getting out early then buying back in as it began to come back, you made $5, minus the $2 loss, for a gain of $3 per share. Not only that, you protected your investment from greater loses if the stock continued falling and not regaining its old price level. This happens all the time!

I know so many investors that have stocks in their portfolios of good companies, and the stock seemed fairly priced and had great potential when they purchased it. They bought IBM at $125, then watched it drop to $65.00. They bought AT&T at $60, then watched it drop to $9.00. They bought Enron at $70.00, then watched it drop to $0.00.

And what were they saying while the stock was tanking? “This is a good, solid company. The price will go right back up. I can’t sell it now, at a loss!” Then they would say something like “I’m going to hang on to it until I just get even.” Do you want stocks in your portfolio that the best that you are hoping for, is to break even?

I know this sounds silly that a person would hold on to losers, but believe me, most people do. Don't let yourself become trapped by a stock that's costing you money. The only good stock is one that's making money for you.

It is also likely that if most of your stocks are dropping in price (assuming you have selected them based on their growth and solid earnings performance), then the whole market may be in a downturn. The Nasdaq lost 75% of its value from March 8, 2000 to July 20, 2002. The S&P 500, from January 1973 to September 1974, lost 43%.

A smart investor, rather than trying to beat a bear market, will keep his cash on the side, ready to jump in when the next bull market takes off. That is the time to shop for bargains in discounted, solid companies.

So I’ll repeat this golden rule of investing: cut your losses when a stock drops 7-10%. All big losses start out as small ones.

Investing should not be ”buy, hold, and keep your fingers crossed”. Invest the right way and you won’t have to worry about your investments. You want to sleep at night.

Other Stock Market Basics Topics:

1. Stock Market Investing – the Right Way
2. More Stock Marketing Investing
3. How to Pick Winning Stocks
   
4. The Golden Rule of Investing
   
5. Avoid Psychological Traps to Have Successful Investing
   
6. Changes in Stock Values Can Be Big Numbers
   
7. How to Invest Smart
   
8. Stock Advice - Important Selling Rules
   
9. Poor Stock Buying Decisions
10. Market Indicators
11. Stock Market Cycles
12. When a bear stock market may not be a bear market
13. Stock Index Futures
14. Four Things that Affect Stock Valuation
15. What is a P/E ratio?
16. Value Investing
17. Cheap Stocks
18. What is a Financial Statement?
19. Analyzing Financial Statements
20. Stock Market Tip - Red Flags to Look For When Investing?
21. The Annual Report – How to Read
22. Stock Market Analysts – Stock Market Advice and Tips

TRADING POSITION - CPO AND CI

CPO FUTURES

SOLD (SHORT) CPO FUTURES ON THE 16TH APRIL AT RM3674

CI FUTURES

BOUGHT (LONG) CI ON THE 15TH APRIL AT 1244

TRADING POSITION - CPO AND CI

CPO FUTURES

SOLD (SHORT) CPO FUTURES ON THE 16TH APRIL AT RM3674

CI FUTURES

BOUGHT (LONG) CI ON THE 15TH APRIL AT 1244

THE FOLLOWER OF TURTLETRADER - TRADING GURUS

CUT THE LOSSES IMMEDIATELY, NO SECOND THOUGHT, THE LOSS IS ACTUALLY MINIMAL
REVERSE THE POSITION
RIDE THE PROFITS

BEATING THE STREET

CUT THE LOSSES IMMEDIATELY, NO SECOND THOUGHT, THE LOSS IS ACTUALLY MINIMAL
REVERSE THE POSITION
RIDE THE PROFITS

BURSA MALAYSIA Q1 PROFIT DROPS TO RM42M

Bursa Q1 profit drops to RM42mil
By ELAINE ANG

PETALING JAYA: Escalating US subprime-related issues and local political concerns saw stock exchange operator Bursa Malaysia Bhd’s net profit shrinking 40% to RM42.1mil in the first quarter ended March 31 versus the same quarter of 2007.

Revenue fell 25.6% to RM101.3mil from RM136.1mil before while earnings per share dropped to 8 sen from 13.5 sen.

Bursa attributed its dismal performance mainly to a decrease in trading revenue from the equity market as a result of investor caution.

It said the equity market recorded a velocity for on-market trades (OMT) of 46% (first quarter 2007: 68%) and a daily average trading value for OMT and direct business trades of RM2bil (first quarter 2007: RM2.8bil).

“The lower trading value, change in trading pattern and revision in the clearing fee structure to 0.03% from Jan 1 resulted in a 44% decrease in equity trading revenue to RM48.9mil in the first quarter compared with the first quarter last year,” it added.

The KL Composite Index has fallen 12.28% year-to-date to 1,267.65 points yesterday.

TA Securities said in a research note that Bursa’s first-quarter earnings were pretty weak and expected to see turnover continue to fall.

It said the change in clearing fees structure would have a negative impact on Bursa’s future revenue with retail participants having fallen to 25% in March from 33% in the fourth quarter last year.

“We are maintaining our earnings forecast of RM211mil for (the financial year ending Dec 31) FY08 and RM208mil for FY09. On April 10, we reduced our velocity rate assumption for FY08 to 45% from 55% previously and cut our FY09 velocity assumption to 43%,” it said.

An analyst from Aseambankers said Bursa’s performance was below expectation as the first-quarter result was only 23% of its full-year net profit forecast of RM183mil – a revision of 31% of its earlier forecast – and 17% of the market’s forecast of RM243mil.

“Our house view is that the market will continue to be weak in the second and third quarters before experiencing a slight rebound in the fourth quarter,” she said, adding that there would be a revision in net profit forecast from Aseambankers.

Bursa said developments on the local political front were expected to continue to influence market performance in the remaining quarters although underlying economic and business fundamentals remained intact.

“Despite the less favourable global and local market conditions, the group will continue to roll out initiatives which are expected to enhance the performance of the equity and derivatives markets.

“If market conditions pick up in the remaining quarters, the group’s financial performance is expected to improve,” it said.

However, it cautioned that should current global and local market sentiments not improve, it would be a challenge for the group to achieve its targets for the year – 56% velocity for OMT and 50% growth in derivative contracts.

Bursa shares closed unchanged at RM8.85 with 1.6 million shares traded yesterday.

MANAGING LOSSES - CUT LOSSES IMMEDIATELY

CUT THE LOSSES IMMEDIATELY, NO SECOND THOUGHT, THE LOSS IS ACTUALLY MINIMAL
REVERSE THE POSITION
RIDE THE PROFITS

SUCCESSFUL TRADING PHILOSOPHY - MANAGING LOSSES

MANAGING LOSSES

CUT THE LOSSES IMMEDIATELY, NO SECOND THOUGHT, THE LOSS IS ACTUALLY MINIMAL
REVERSE THE POSITION
RIDE THE PROFITS

DISCIPLINE IN TRADING

Discipline
Michael Covel (February 16, 2005)

Ted Williams. The man epitomizes the word "discipline". Trend Followers, like Williams, wait for their pitch -- and then whack it for homeruns.

Now think for a moment about investment sites such as all of the stock tip chat houses. They are useless when it comes to helping you to make money in the long run. Why? There is no discipline. They say there is a good pitch to hit everyday. This is far from true.

There are typically three stages an investor goes through before they become successful. Building discipline starts with an understanding of these points:

1. Easy Money: The first stage involves thinking there is easy money to be made. This is the thinking of a newbie. Often, after a big stock tip gone wrong or a couple great broker recommendations that lose serious money, you enter the second stage.
2. I need a plan: The second stage begins when an investor or trader decides a plan is needed to win. The problems begin when the search for a plan becomes a search for the Holy Grail. And we all know there is no Holy Grail. What is needed is more than just a "system". What is needed is you following the system. This leads to stage three.
3. I'm responsible for my success: Stage three comes when the investor or trader realizes that success comes from inside the person, not outside. To achieve true success you must understand the market is not responsible, you are. There is no one to blame or compliment but yourself when it comes to trading. So find a solid plan and follow it.

Trend Following demands that you detach emotions from your trading and maintain exacting discipline. Trend Following, for example, can be a winning plan, but you must be disciplined to do the hard (and right) thing everyday.

Hedge Fund Fraud: Learn Lesson

Hedge Fund Fraud: Learn Lesson
Michael Covel (September 08, 2005)

From Reuters:

WASHINGTON, Aug. 31 (Reuters) - The Securities and Exchange Commission filed civil fraud charges Wednesday against two executives of KL Group, a hedge fund in Palm Beach, Fla. The S.E.C. charged that Won Sok Lee, Yung Bae Kim and another unidentified defendant "defrauded investors through misrepresentations and omissions concerning the profitability and security of their investments in the hedge funds." The whereabouts of Mr. Kim and Mr. Lee are unknown and they do not have any known legal counsel, according to the S.E.C. senior trial counsel, Scott A. Masel. In March, the hedge fund was shut down and its assets frozen by a Florida judge after the S.E.C. filed a civil action to halt what it described as an $81 million fraud. The March complaint charged that the KL Group, a related trading entity and the KL principals, Won Sok Lee, John Kim and Yung Bae Kim, fraudulently raised over $81 million, attracting investors by using fake account statements showing that the hedge funds were profitable."

Credit Derivatives Markets Booms Despite Bust

Credit Derivatives Markets Booms Despite Bust

Hey, good news in all the credit troubles out there: The credit derivatives business boomed in 2007. According to ISDA figures released tonight, the notional value of credit default swaps was $62.2-trillion at the end of last year, up smartly from $34.-trillion at the end of 2006.

So what? Well, that works out to a 10x increase in a mere four years. To put it in terms more familiar to shell-shocked credit market participants, Holy shit!

“Cut your losses, let your profits run,”

According to Ed Seykota, elements of good trading include, “(1) cutting losses, (2) cutting losses and (3) cutting losses. If you can follow these three rules, you may have a chance.” Few non-trend-following traders realize that Seykota is talking about three different kinds of losses. The first two of them are offered above – reducing the largest loss by strictly limiting position size and reducing the overall number of trades. Only trend followers know about the third. To quote John W. Henry again, “The desire to have close stops to preserve open trade equity has tremendous costs over decades.” In essence, he is referring to cutting the exit stops that would turn trades into losses in volatile markets and greatly reduce eventual gains. This once again draws attention to the fact that trend followers, while trading in the same markets as everyone else, are living and working in profoundly different and more detailed worlds.

Does this make taking a loss easier? Yes and no. Yes, trend followers know they can’t know the future, that there are statistical opportunities for those who know how to exploit them, that they must respond to every opportunity, and that they must preserve capital to continue trading. They backtest this until they are convinced it’s the case. Then they set up their systems and take the trades that the system calls.

And no, trend followers are human and hate to part with something of value. The need for the adage “Cut your losses, let your profits run,” is much like the need for the Ten Commandments. We do not have to be told what is in our nature. In going against our nature, instinct and a lifetime of cultural conditioning, trend followers really earn their money.

The psychology of choking under pressure

The psychology of choking under pressure
Once anxiety extends its tendrils into the sportsman or woman's mind, the results can be disastrous. But what causes this choking under pressure?

There are two rival theories - one states that anxiety is so distracting it stops performers from being able concentrate on what they're doing. The other argues that anxiety causes the sportsman or woman to become overly conscious of their movements - skilled actions that had become automatic are made excruciatingly explicit, thus causing the athlete to regress to their standard as a novice.

Now Daniel Gucciardi and James Dimmock have tested these rival theories with twenty experienced Australian golfers, who have handicaps ranging from 0 to 12. The golfers performed putts in three conditions - they either had to focus on three words that represented components of their technique (e.g. "arms", "weight", "head"); focus on three irrelevant words, for example three colours; or focus on just one word that summed up their putting action, such as "smooth".

They did all this in a low anxiety context first, and then the whole thing was repeated with the pressure cranked up by the offer of cash rewards for the best performances. Would the anxiety of the high pressure context cause the golfers' performance to deteriorate?

The added anxiety only caused the golfers' performance to deteriorate when they were focusing on three words that represented components of their putting action. By contrast, their under-pressure performance actually improved slightly when they were thinking of irrelevant words or just one word that holistically represented their action.

These findings appear to support the idea that anxiety affects performance by causing people to think too much about their actions, not because it is distracting per se. If anxiety was a problem by virtue of being distracting, then having to focus on three irrelevant words should have compounded the problem just as much as three words related to the putt.

Overall, the golfers' performance was most accurate when they focused on a single, holistic word that represented their putting action. The researchers said this finding, though preliminary, suggests expert performers should be encouraged to "adopt more global, higher-level cue words that collectively combine the mechanical process of their technique, which may act as either a schematic cue or a conscious distraction."
_________________________________

Gucciardi, D.F. & Dimmock, J.A. (2008). Choking under pressure in sensorimotor skills: Conscious processing or depleted attentional resources? Psychology of Sport and Exercise, 9, 45-59.

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Posted by Digest at 10:44 AM

Labels: Sport

US crisis not to derail India story: Soros

US crisis not to derail India story: Soros
Press Trust of India / New York April 14, 2008
Showering praise on Prime Minister Manmohan Singh-led reform process and Ambani brothers for their contributions to Indian economy, legendary investor George Soros has said that the US financial crisis would not have much impact on the country's growth story.

While dubbing the ongoing global financial crisis as the biggest since the Great Depression of 1930s, George Soros has noted that the dynamic developments being witnessed by economies like India might still not be disrupted.

The billionaire investor has made these observations in his latest book, 'The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means', whose electronic version is currently being sold over Internet and a print edition would be launched on May 19.

Noting there are no grounds for predicting a prolonged period of credit contraction or economic decline in the world, Soros has said there are countervailing forces at work.

"China, India and some oil-producing countries are experiencing dynamic developments which may not be significantly disrupted by the financial crisis and a recession in the United States," he says.

Soros also has words of praise for Prime Minister Manmohan Singh. "The groundwork for economic reforms was laid by the present Prime Minister Manmohan Singh, when he was Finance Minister more than a decade ago, and it took some time for the dynamics of the economy to change," he says.

Recalling his visit to India in late 2006, the renowned investor says that the country's economic growth rate has more than doubled since then. Putting India on a higher trajectory than China in terms of an investment destination, Soros says the rise of Ambani brothers is emerging as the most spectacular one.

Sime, IOI drag market lower at midday

Monday April 14, 2008
Sime, IOI drag market lower at midday

KUALA LUMPUR: Market sentiment weakened in the later part of the morning session on Monday, dragging the KLCI down 1.12% at midday, but losses were less compared with major Asian indices which fell between 1.8% and 4.44%.

At midday, the KLCI skidded 13.95 points to 1,232.84, the FBM Emas lost 94.67 points to 8,326.66 while the FBM Second Board fell 76.13 points to 5,698.93.

Turnover was thin with 166.81 million shares done valued at RM352.23mil. Declining stocks beat advancers 462 to 69 while 151 counters were unchanged.

Asian markets tracked the losses on Wall Street last Friday after General Electric shocked the markets with its weak earnings outlook.

Shanghai’s A Share Index lost 4.44% or 162.63 points to 3,502.20; Japan’s Nikkei 225 down 3.21% to 12,896.10, Hong Kong’s Hang Seng Index declined 3.3% to 23,854.66 and Singapore’s Straits Times Index lost 2.67% to 3,043.28.

Light crude oil was at US$109.62 (RM346.45) per barrel while crude palm oil futures rose RM7 to RM3,461 per tonne. The ringgit was quoted at 3.1605 to the US dollar.

At Bursa Malaysia, heavyweight plantation stocks Sime Darby and IOI Corp were among the major losers. Sime fell 25 sen to RM8.85 while IOI Corp lost 30 sen to RM7, accounting for 2.74 points and 3.35% decline on the 100-stock KLCI.

Other plantation stocks which also fell were KL Kepong, down 40 sen to RM16.10 and Sarawak Oil Palms 25 sen down to RM5.35 while Batu Kawan gave up 30 sen to RM10.

Analysts said they were maintaining an overweight on Sime Darby and IOI Corp and their crude palm oil price assumption was RM3,150 per tonne in 2008 and RM3,000 in 2009.

“IOI Corp remains fundamentally the strongest. However, on valuations, Sime Darby is now offering value as it has been the biggest underperformer in the sector, and shares are trading close to our floor value of RM8.70 per share in our stress test dated March 26,” said JP Morgan.

Nestle was the top loser, down RM1 to RM28, BAT lost 50 sen to RM43, MISC declined 35 sen to RM8.90 while Bursa fell 30 sen to RM8.45.

RCE Capital was the most active with 5.95 million shares transacted. It ended the morning session one sen lower at 60 sen.

PPB was the top gainer after it declared a special dividend of 62 sen for the year ending Dec 31, 2008. The dividend will be payable on May 12.

Hexagon-WA jumped 29 sen to 44 sen and Pensonic-WA 17.5 sen higher at 25 sen. DiGi and Mudajaya 10 sen lower to RM23.80 and RM3.50.

More Money Management

More Money Management
Michael Covel (April 03, 2005)
Money Management

When any trader makes a decision to buy or sell (short), they must also decide at that time how many shares or contracts to buy or sell — the order form on every brokerage page has a blank spot where the size of the order is specified. The essence of risk management is making a logical decision about how much to buy or sell when you fill in this blank. This decision determines the risk of the trade. Accept too much risk and you increase the odds that you will go bust; take too little risk and you will not be rewarded in sufficient quantity to beat the transaction costs and the overhead of your efforts. Good money management practice is about finding the sweet spot between these undesirable extremes. on a per-trade basis.
Gibbons Burke

Money management is the crucial concept for all traders and investors. But, mainstream press never writes of its importance. The author below, for example, simply opines a feel good market view. Nothing he says could help you make a dollar.

TurtleTrader editorial comments are bold.

How to Weather the Tech Stock Storm
By SCOTT HERHOLD
Mercury News

With an avalanche of earnings reports, the stock market last week demonstrated almost perfect schizophrenia. The semiconductor equipment people confessed to woes. But Intel exceeded expectations. EBay thrived. Microsoft stumbled. Sun bounced [TurtleTrader® comment: His point? The market always changes, he states the obvious. Volatility is nothing new. Prepare for it].

The market climbed. The market fell. But mostly, the market shuffled sideways. Was it all sound and fury signifying nothing? And where does an investor go from here? Is this the time to jump in ahead of a potential rally later this year? Or is it a time for caution? [TurtleTrader® comment: You need a plan ahead of time]

Some of the people I trust have thrown up their hands and decided, at least as long ago as last spring, to take a year off from owning tech stocks. Much like scavengers pawing through the embers of a fire, they plan to revisit the terrain next year to see what remains [TurtleTrader® comment: This is no plan].

This is a tempting point of view. It has definition. But things can change rapidly. So if you're still paying attention and your wounds from 2000 have more or less cauterized, here are some of the factors you must be thinking about:

Remember just who's playing this game.

You may remember the television commercial that shows a short, fat guy who dreams of playing pro basketball and dunking the ball past the NBA stars. In a lot of ways, that guy illustrates the plight of the individual investor in today's market.

The volatility of the market last week was driven largely by hedge funds and other institutional investors, who move quickly in and out of stocks, often covering their positions by taking out options like puts and calls [TurtleTrader® comment: Markets move for a variety of reasons, identifying why is a waste of effort, concentrate on how you react within a strategy].

Friday was the day that options settled. And that caused fierce jockeying to take advantage of earnings news.

Everyone in the market is playing the same game, says Harvey Baraban, a San Francisco stock market trader and educator. It's very nervous, scared money. But it's also very large and very aggressive. [TurtleTrader® comment: Why is money emotional, people are emotional, money has no feelings]

Memo to investors: If you think you can beat the pros at this short-term game, you can probably outdunk Shaquille O'Neal as well. You've got a healthy fantasy life. At the same time, the absence of individual investors makes it harder to restart the market [TurtleTrader® comment: Markets don't stop or need to be re-started, they move, have a system that takes advantage of moves].

Keep an eye on the longer term [TurtleTrader® comment: Finally, some truth].

Yes, this means paying attention to the overall economy, which is still delivering dismal news. Every other day, the other shoe drops, says David Gold, a venture capitalist with Indosuez Ventures in Menlo Park. I think we have a centipede or millipede crawling across with so many shoes dropping.

The key equation is capital spending, which has been put on virtual hold at many companies. That in turn has caused piles of unused inventory. But capital spending is not uniform across the board -- and some sectors do better than others [TurtleTrader® comment: More fundamental data useless to a trader trying to make money in the market].

An interesting study was done recently by Techtel, an Emeryville research firm that tracks the real tech demands of companies. (A real need describes what a company really uses, not what a salesman has persuaded them to commit to. If a company has bought 1,000 Oracle software seats but uses only 500, real demand is the 500).

The good news here is that demand, after falling sharply at the end of 2000, shows signs of flattening out or even strengthening, particularly in areas like mid-range servers and storage area networks.

The bad news: Soft spots exist with PCs and database software.

We don't see overall demand going up, says Michael Kelly, Techtel's chairman. We see it as basically flat.

But he adds: Flat is good. [TurtleTrader® comment: Flat is good for no one]

Memo to investors here: It's worth making distinctions amid tech stocks. The Techtel study would suggest that certain outsourcing companies -- including IBM and EDS -- are better positioned for revival than, say, a PC maker like Dell or a database software supplier like Oracle. Sun is stronger in higher-end servers than in mid-range machines.

Keep watching the charts.

We're not talking about astrology here -- though given the market's performance over the past year, we might just as well. But there are some technical patterns that are worth thinking about.

Essentially, the market has been on a downward slide for the past 16 months [TurtleTrader® comment: Yes, we know]. Yes, there was a major bounce after the market hit a low in early April. But the current market is testing those lows once again. The technicians say a strong surge upward will probably reverse that longer-term downward trend.

So when will that happen? [TurtleTrader® comment: No one knows. If you even attempt a prediction you will likely lose money. Trend Following trading, for example, never predicts, it reacts to market movement telling you how much to buy or sell at a given time] One cautiously optimistic view comes from WitSoundview's technical strategist, Arnold Berman, who has studied the number of confessions -- or preannouncements of earnings disappointments -- among tech companies.

Partly because investors are used to bad news, disappointing results no longer pack the wallop they once did. Berman says the stock of the typical preannouncing company declined only 9 percent in the second quarter -- compared with 26 percent last year.

The overall picture on technology remains negative, Berman writes. If we argued differently, we'd be like the TV weatherman who tells his viewers it's not raining when a glance out the window shows it's pouring. However, a good weather forecaster doesn't predict rain for tomorrow just because it's raining today.

Memo to investors: Be cautious, yes. But don't be blind. Sometime the clouds will part [TurtleTrader® comment: An article that says almost nothing. A great example of the financial press helping no one].

TurtleTrader editorial comments are bold.

TREND FOLLOWING PHILOSOPY

Trend Following Philosophy
Michael Covel (February 17, 2005)

Q. Is trend following obsolete because markets are different now?
A. Trends in financial markets have been strong for the last hundred years. But are markets different now? After researching the question at the National Agriculture Research Library in Maryland, TurtleTrader discovered that the number of trends in currencies, bonds, grains and stocks in the 1800's were approximately the same as the number today. Moreover, the trends have always been random and unpredictable. That's why the key to trend following will always be reaction to market movement not prediction.

Q. Why is Trend Following successful?
A. Trend Following is a measure of market psychology. Trends, like epidemics, build in geometric progressions. Some people jump on the bandwagon; some get in early either by chance or luck; others get inside information about the fundamentals. Finally there is a critical mass that makes it possible for even more people to simply hear about the trend and get on board. If you design a strategy to take advantage of this basic human behavior, you can apply the psychology to a broad range of markets from cotton to currencies to stocks, and win. This is a key to Trend Following.

To be successful in the trading game, find a sound strategy and then learn and understand the rules of your strategy. Most investors don't want to work that hard. They don?t want to know how Trend Following turns their mindless approach to trading upside down. It can be hard to change old ways or learn new methods, but it's worse to continue losing money with no strategy at all. However, if you learn Trend Following, you will wonder why you ever listened to a broker's tip or watched TV for tips.

WHAT CAUSES TRENDS

What Causes Trends
March 06, 2008

An email in this morning:

"...but am basically trying to understand what creates a trend. My point is that deep fundamentals create a trend, as these guys are putting their capital to work. My grandfather ran a family farm in Louisiana for 60 yrs, and would take me to the Cotton Exchange in Memphis to trade cotton. He had a few guys he trusted over the years there. I always recall him asking what abc and xyz (large institutional cotton buyers) were doing every time we were there. I finally asked him why. He said that these guys get 500 calls a week from cotton detectives/analysts all over the U.S. and world, and therefore knew infinitely more about the demand and supply of cotton than he ever could sitting in Winnsboro, Louisiana reading the WSJ. and of course, he always traded along with the big guys. He knew to ride the wave, but the wave in his mind was created by deep fundamental research. Well, don't know if I have a point - maybe just an axiomatic observation that deep fundamental research causes trends. Fair?

I don't know that understanding what causes trends is important to making money from them. As to "what causes?", my best guess is that every link on this page goes a long way toward answering that question.

Ph.D.s and Money Management

Ph.D.s and Money Management
Michael Covel (February 15, 2005)

A recent experiment was conducted involving forty people with Doctorate Degrees. Their Ph.D.s were not in mathematics, but all were in traditional areas of academic endeavor. The doctorates were given a computer game to trade. They started with $10,000 and were given 100 trials playing a game in which they would win 60% of the time. When they won, they won the amount of money they risked in that trial. When they lost, they lost the amount of money they risked in that trial.

How many Ph.D.s made money at the end of the experiment? Two. The other 38 lost money. 95% of these very academically smart people lost money playing a game in which the odds of winning were better than any odds in Las Vegas. Why did they lose?

They lost because of poor money management. For example, if you start out risking $1,000 and lose 4 times in a row, you are now down to $6000. You might be thinking, I am due for a win now. But that's nonsense since your chances of winning are and will always be 60%!

Even though your chances of winning are still 60%, let's say you decide to double your bet size since you are due now. You lose again and you're down 60% now. If you keep thinking you?re due for a win you will soon be broke with any potential recovery vanished.

Good money management is fundamental to avoiding disasters like this one.

Profiting in Bad Times

Profiting in Bad Times
April 09, 2008

From Bloomberg:

Mulvaney Capital Management Ltd., a $127 million managed futures fund based in London, rose 57 percent in the first two months of 2008, the most recent data available. The same program was down 33 percent in July and August. "This time the boot is on the other foot," said Colin Lloyd, head of investor relations at Mulvaney Capital. "For a systematic manager one of the greatest difficulties is to resist the temptation to say the world has changed and start recalibrating the model." Managed futures suffer their worst performance when markets suddenly reverse, explaining why some funds gave up gains in March when crude oil, wheat and gold fell from highs. David Harding, one of the original partners in AHL, said an "agnostic" approach to investing often has critics ready to pounce. "Most people believe it doesn't work, or it did it soon won't work," said Harding, founder of Winton Capital, which oversees $13.6 billion. "We almost never do anything based on our opinions. If we do, it's based on opinions about mathematical phenomenon and statistical distribution, not opinions about Fed policy."
Mulvaney and Winton are both systematic trend traders

Barbara Dixon, a student of master trend follower Richard Donchian, writes in 1974:

Wisdom from 1974
April 06, 2008

Barbara Dixon, a student of master trend follower Richard Donchian, writes in 1974:

Technical Analysis is based on market action, or price. The theory derives from basic economics. The price of a commodity at a given time is determined by the supply, the demand, the general economic outlook, the weather, the political climate, the optimism or pessimism of the population, and other factors. The technician looks only at the price, since by itself it represents one side of the equation and thus encompasses all the other inputs. The technician mentally substitutes the words “buy” for demand and “sell” for supply. Thus, when corn increases in price, the technician says that buying – demand – is increasing and that the price is going up. The trend follower makes no attempt to forecast the extent of a price move. His basic tenet is that once a trend begins, it has a tendency to persist in the same direction for some time. He devises precise rules to determine what, to his mind, constitutes a trend and identifies the situation when a trend has finished or reversed. He then further disciplines his thoughts into a strict set of conditions for entering and exiting the market. He acts on these rules (his “system”) to the exclusion of all other market factors. In so doing, a trend follower removes, hopefully, emotional judgmental influences from his individual market decisions.
Not exactly dated wisdom!

TREND FOLLOWING - A BRIEF NOTES

Commodity and Stock Trading with Trend Following and Turtle Trading Systems
Michael Covel (February 16, 2005)
Trend trading is reactive and systematic by nature. It does not forecast or predict markets or price levels. Prediction is impossible! Trend trading demands that you have strong self-discipline to follow precise rules. It involves a risk management system that uses current market price, equity level in an account and current market volatility. Trend traders use an initial risk rule that determines your position size at the time of entry. This means you know exactly how much to buy or sell based on how much money you have. Changes in price may lead to a gradual reduction or increase of your initial trade. On the other hand, adverse price movements may lead to an exit for your entire trade. Historically, A trend trader's average profit per trade is significantly higher than the average loss per trade.

Trendtrading is not a Holy Grail. It is not some passing fad or hyped-up secret black box either. Beyond the mere rules, the human element is core to the strategy. It takes discipline and emotional control to stick with trend trading through the inevitable market ups and downs. Keep in mind though, Trend Followers expect ups and downs. They are planned for in advance. What must all trend followers consider?

Price: One of the first rules of trend following is that price is the main concern. If a market is at 60 and goes to 58, 57, 53 - the market is in a down trend. Despite what every technical indicator might predict, if the trend is down, stay with the trend. Indicators showing where price will go next or what it should be doing are useless. A trader need only be concerned with what the market is doing, not what the market might do. The price tells you what the market is doing.

Money Management: The most critical factor of trend following is not the timing of the trade or the indicator, but rather the determination of how much to trade over the course of the trend.

Risk Control: Trend following is grounded in a system of risk control and money management. The math is straightforward and easy to learn. During periods of higher market volatility, your trading size is reduced. During losing periods, positions are reduced and trade size is cut back. The main objective is to preserve capital until more favorable price trends reappear. Cutting losses is the way to stay in the game.

Rules Rule: Trend following should be systematic. Price and time are pivotal at all times. Trend Following is not based on an analysis of fundamental supply or demand factors. Trend Following does NOT involve seasonals, point and figure, Market Profile, triangles or day trading.

Trend Following answers these critical questions:

How and when to enter the market.
How many contracts or shares to trade at any time.
How much money to risk on each trade.
How to exit the trade if it becomes unprofitable.
How to exit the trade if it becomes profitable.
Conclusions
If you want in-and-out day trading, we can't help. Good trend following systems average five or six trades per market per year. What do you need to get started?

An active mind, willingness to learn and passion to win.
No knowledge of what an Italian bond is worth or what companies comprise the S&P or FTSE index. The key is the price on the chart.
Discipline and common sense to do the right thing per all rules.
About an hour each day at the end of the day to check trades.
A PC and telephone line (or internet connection).
Trading is a zero-sum game. For every winner, there is a loser. What's the difference between winners and losers? Smarts and strategy. For every loser in the NASDAQ implosion there was a winner. Does this mean that there are traders with neither strategy nor smarts actively losing, effectively shifting their funds to the winners, armed with strategy and smarts? Yes, absolutely.