Reminiscences of a Stock Operator
Chapter 2; page 14; paragraph 3 continuing on page 15
" I proved it. Whenever I read the tape by the light of experience I made money, but when I made a plain fool play I had to lose. I was no exception, was I ?" ...
"Of course I let the craving for excitement get the better of my judgment. ... The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages."
"A stock operator has to fight a lot of expensive enemies within himself."
Let's start with the last quote first. For my money, no truer words have ever been spoken about the market.
Listen folks, I will tell you this as plainly and as clearly as possible. The entire game of becoming a successful stock operator revolves around your willingness and capacity to identify and control the enemies within yourself, whatever they may be.
The reason most folks, including myself, run into trouble is because the expensive enemies are running free. They undercut everything we are trying to acheive. It's also true that these enemies are difficult to tame and harder still to kill.
For example: There was a time in my trading life where I though I really had a gambling problem. As Jesse put it "craving excitement". I was over-trading and losing but not stopping. It's funny too. In my life outside of trading, true gambling holds little appeal. A weekend in Vegas might include dropping $200 into some slot machines, but nothing more. It holds no fascination for me.
But yet, there it was. I had to take a serious look at it. It was hard and agonizing. Regardless of what I called it, the over -trading was ruining me. It took me a long time ( months and months ) but i finally instituted rules that did not allow me to put on a trade the same day i got a bright idea. I imposed a 24 hour trading moratorium between trade idea and trade execution. If I had a bright idea today and it still seemed like a bright idea in 24 hours, I'd give myself premission to make the trade. In the scheme of things, 24 hours doesnt make a hill of beans difference to a swing trader or his results. It turned out that after 24 hours a lot of those bright ideas didnt seem too smart just a day later. Another thing I did was limit my open positions to a certain number. If i was maxed out on open positions and i had a new idea, my rule set forced me to close something else. Another self imposed rule to slow me down.
The process was hard and tedious and i didnt adhere to my rules 100% of the time at first. But over time, I licked the problem and have become a better trader for it.
The afflictions that derail traders today are the same ones that derailed Livermore a hundred years ago. Those enemies are alive and well; they dwell within us all. We aren't different.
Lastly....dont underestimate the power of these enemies. Killing them is the hardest work you will ever do. THat's why 90% of traders dont even bother trying.
Happy Hunting and Good Trading.
If you have any questions or get stuck, I'm here to help. Reach out any time.
email me at firstname.lastname@example.org
A true story I want to share.
About 6 months ago I re-connected with a childhood friend whom I had not spoken to for 25 years.
I’ve known my friend Guy since Kindergarten. We went through grade school, Jr. High, and H.S. together. Academically, he was as gifted as they come. What took me hours of study to accomplish or complete, Guy seemingly could accomplish in a third the time and get better results. He was in the National Honor Society in High School and was accepted at MIT in the fall of 1979.
After his first year at MIT, Guy secured a summer internship at a brokerage firm in Chicago at the CME. He started as a gopher in June, but by August he was trading on the floor of the exchange. Old school trading; hand signals and all. Guy’s effort, results, and promise led the firm to “make him an offer he couldn’t refuse”. His trading career was underway…..he never set foot at MIT or any other institution again.
He traded in Chicago for a few years, then the company moved him to CA where he traded on the Pacific Exchange. After about 5 years, he quit to start a winery in Oregon. It did not work out. Severely tapped out financially from the Winery Operation, he moved back to the Chicago “to make some money”. There he spent many years as a market maker / trader in a number of stocks. All told, he spent 25 years in the pits.
After some “googling” I caught up with Guy. I told him what I was doing and solicited his help as a trading mentor. ……I assumed he was still in the business.
Turns out he retired as a floor trader about 2 years ago and is now back in the Pacific Northwest. When asked why he quit, he said. “I really didn’t like what I was doing”.
He got his Real Estate license and now has a small real estate office.
I asked him why he didn’t just trade his own account from home. He said “I tried, but I wasn’t successful.” I was absolutely dumbfounded. Here is one of the smartest people I know with a 25 year track record of success as a trader failing as a stay-at-home trader. We talked about that and drilled down. Here are my conclusions.
Circumstance, Environment, Tools, and Attitude Play a huge Role.
So although trading from home seemed like a no-brainer, it turned out to be a problem in real life. From Floor Trader / Market Maker to ThinkorSwim platform in the basement, doing a job you don’t particularly like was a step down the food chain. Its doesn’t really sound appealing…..or a recipe for success.
Guy's story doesn't need to be our story. Guy made his mark on the floor and in the pits. We can make our mark in our own way.
Happy Hunting and Good Trading.
Allegheny Technologies ( $ATI ) has been lagging its peers in the steel group. You can see in the bottom panel of the daily chart that $DJUSST, the Steel industry group, is outperforming SPY. Meanwhile $ATI has been pinned under $18.50 since August.
I am watching $ATI closely here. When I look at the weekly chart below, what catches my eye is both the bullish ascending triangle with price pressing towards $19 and the big volume / price air pocket between $19 and $26. If price were able to punch through $18.50 - $19, I think you'd see a quick run to $26 with nothing in the way.
Use both the daily and weekly chart in conjuction with one another. Alarm above $18.50 on the daily for a head's up on the move. That is your first trigger, Then, look for the weekly to close above $19. That is the final trigger to get long. I'd use $18.50 on the weekly as a stop loss. If the weekly closes below $18.50, kill the trade; It would be a failed breakout.
My first target is $26 on the weekly chart. Let's see how price behaves over the next week or so. Hopefully the set up pans out, but be patient and wait for it. Set your alarms so you dont miss the move.
Happy Hunting and Good Trading
DAILY CHART BELOW
WEEKLY CHART BELOW
As many readers of mine already know, I am not a big fan of mainstream financial media. I think most of what is offered on CNBC and other outlets does more to clutter and confuse the mind rather than provide insight and clarity. I have, for the most part, eliminated watching these types of investment shows from my routine. Where I have made a notable exception is for RealVision TV.
'RealVision TV is a subscription - based video-on-demand channel for investing, where the world’s best investors share their ideas. In essence, they are the Netflix of Finance. Their content features exclusive in-depth interviews and presentations from the world’s sharpest independent analysts, fund managers, investors and economists. Fresh content is released several times each week and subscribers also have access to the ever-expanding video vault. RealVision presents its viewers with the very best economic information and financial insight available and then allows them to make up their own minds.
RealVision is the brainchild of co-founders Raoul Pal and Grant Williams. Pal, an economist and strategist, has been a semi-regular guest on CNBC. Grant Williams has 30 years of finance / trading experience mostly on the trading desks of Singapore and Hong Kong.
I have been a subscriber of RealVision TV for almost a year. At $365 / year it isn't particularly cheap but I still find it offers a nice value. As long-time readers of mine know, I get great inspiration and knowledge reading about Market Wizards. RealVision offers me the opportunity to tune into the Market Wizards of today and listen to what they have to say. I mean, where else would you get to hear an hour long interview with Jeff Gundlach or Kyle Bass? RealVision has also introduced me to many titans of the trading world that I'd never heard of before. I've learned so much listening both to their perspectives on the world and them describe their trading processes.
RealVision does a nice job of covering a diverse cross-section of the investment landscape from precious metals, equities, bonds, portfolio construction, monetary & fiscal policy, commodities and currencies. There is certainly something for everyone at RealVision. Best of all there does not seem to be a hidden or obvious agenda here. Certainly guests have opinions and freely share them, but they are not out there trying to sell anything. Viewers are left to make up their own minds without any arm twisting. The site keeps content fresh by adding 2-3 lengthy interviews each week. The site also offers a searchable database of content which is handy when you find a guest or topic that you'd like to dig deeper on.
If however you are looking for specific trade ideas I think you would be disappointed. The most you are going to get is that, for instance, Kyle Bass is bearish on China. He will lay out his thesis with nice detail but he isnt going to tell you exactly how to short the Yuan or the Chinese financial sector. The site offers much in the way of global macro trends and trading ideas which for me is a useful addition to my primarily technical approach.
My subscription to RealVision TV will be up for renewal soon. I plan to re-up for another year.
RealVision offers a free one -week trial, but after that, they ask you to pony up for a full year in advance. It would be nice if they offered a pay as you go subscription but that is mostly nit-picking around the edges.
You can find out more by visiting their website: www.realvision.com/trial/regular
Disclosure: I received no compensation from RealVision TV for this endorsement.
I recently listened to a segment on NPR's "Here and Now" where they interviewed Tony Bennett who just turned 90.
You can listen to the 11 min interview here if you like.
Bennett recounted how his career blew out of the gates in the early 1950's. He had multiple hits and looked unstoppable. After a sold out performance, he was met backstage by George Burns and Jack Benny. They wisely offered some sage advice based upon their own experiences. They told him "its gonna take a long time for you to learn what not to do". Robin Young, the interviewer asked Bennett how long it took. Bennett replies " 7 years "
If you pay attention you will be quite amazed at how often the " 7 year rule / cycle" pops up.
Ask almost any professional person ( artist, doctor, lawyer, engineer, carpenter etc ) how long it took them to become truly comfortable and capable in their profession and many will say 7 years. I don't think its a coincidence that the highest divorce rate among married couples occurs at or very near the 7 year mark of the marriage. Its a law of nature.
Read "Market Wizards". Nobody, not even wizards, hit the ground running and never look back. Most are beset by painful and humbling experiences; often more than once. Even the very best took time to become the best. Don't think that after a couple of years you'll reach hero status.
Tony Bennett was lucky. He was given a gift. But even for him, it took a long time to learn what not to do; how not to screw it up. For myself and probably most traders, learning to become consistently profitable traders is a long road. We need to learn not only what to do, but what not to do. That takes a long time.
For those relatively new to trading and even for those that have been at it a while, keep things in perspective. Rome wasnt built in a day and trading is no different. It's a long, tough haul. Dont be too elated with a few nice wins, nor depressed during a rough patch. If you're working hard on your process and keeping your focus on becoming a true craftsman, then you are making progress. You'll likely start becoming competent and self assured over time.... it's gonna take about 7 years.
Reminiscences of a Stock Operator
Chapter 2; page 14; paragraph 2
"I told you I had ten thousand dollars when I was twenty, and my margin on that Sugar deal was over ten thousand. But I didn’t always win. My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I’d have been right perhaps as often as seven out of ten times. In fact, I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game—that is, to play the market only when I was satisfied that precedents favored my play. There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily—or sufficient knowledge to make his play an intelligent play."
Have the patience to stick to your game plan! Livermore points out that when he was patient waiting for his particular set up and stuck to his game plan that he had a solid winning record. Precedents favored his intelligent play.
Having patience to wait for your preferred set up and sticking to one's game plan seems so obvious that it is almost a throwaway line in any conversation about becoming consistently successful in trading. In my experience, often the simplest of statements are the most difficult to execute. As traders we want to trade. As a result we often manufacture set ups that are not there. If we do find a prime set up and take a trade, more times than not, we undercut ourselves by not sticking to our trading plan ( if we even bother to have a plan or to write it down ). Maybe you have found that to be true as well.
It takes real work to crystallize one's "go-to" set-ups and then wait patiently for them to present themselves. Once presented it takes discipline to stick to the plan, even when the trade does not pan out and the plan calls for taking a small loss.
Happy Hunting and good Trading
Reminiscences of a Stock Operator
Chapter 1; page 7; paragraph 2
"I didn’t have a following. ( within the brokerage houses ) I kept my business to myself. It was a one-man business, anyhow. It was my head, wasn’t it? Prices either were going the way I doped them out, without any help from friends or partners, or they were going the other way, and nobody could stop them out of kindness to me. I couldn’t see where I needed to tell my business to anybody else. I’ve got friends, of course, but my business has always been the same—a one-man affair. That is why I have always played a lone hand."
Humans are social animals. They enjoy interacting with other people. That is the reason why Facebook can go from an idea in 2003 to 1.2B users in 2016. The recent political season brought tribalism into the spotlight. Are you a Republican or a Democrat? Mainstream centrists need not enter the conversation.
What does this have to do with trading? Quite a bit actually. Look at the popularity of StockTwits, Seeking Alpha, and other popular investing websites that have a heavy dose of social integrated into them. Trading chat rooms and Twitter add a whole new dimension. Lots of traders spend a lot of time on these sites and in the chat rooms. Are you a Bull or a Bear? blah blah blah. I wont condemn these sites universally because there are kernels of good information to be found, but there are many traps. It is so easy to be sucked into endless debates the neither proove anything nor gain anything either. Its also very easy to be sucked into group think. I discussed in an earlier post how I got sucked into the bear camp earlier this year. It caused me not to trust my bullish charts; It was an expensive lesson.
I could go on and on about the evils of spending a lot of time in these places, but I will jump directly to Livermore's conclusion. Trading is a one-man business. Your trades wont be helped by the opinion of others, but your mindset may well become polluted by them. And, does anyone really care if you are long $FB or $GPRO?
Use the web to seek true knowledge; it can be a useful tool for you. Just remember that trading isnt a social club. Can you imagine a Market Wizard logging into StockTwits to post their latest trade? Can you imagine them wasting even 5 minutes debating their trade with a 43 year old, nameless person that is likely trading a paper account from their Mom's basement? Its silly when you think of it that way.
Reminiscences of a Stock Operator
Chapter 1; page 4; bottom paragraph
The Message of the Tape: The fluctuations were from the first associated in my mind with upward or downward movements. Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore. It doesn’t go into explanations. I didn’t ask the tape why when I was fourteen, and I don’t ask it today, at forty. The reason for what a certain stock does today may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now—not tomorrow. The reason can wait. But you must act instantly or be left. Time and again I see this happen. You’ll remember that Hollow Tube went down three points the other day while the rest of the market rallied sharply. That was the fact. On the following Monday you saw that the directors passed the dividend. That was the reason. They knew what they were going to do, and even if they didn’t sell the stock themselves they at least didn’t buy it. There was no inside buying; no reason why it should not break.
The human brain is inherently curious. From a young age the child asks "Mommy, why is the sky blue?' As we enter school, we are encouraged to ask why. To discover, explore, and explain. The pupils who can answer the whys most often and the most correctly win; and that's the problem. We as traders carry this mindset into the market and we lose. We lose opportunities as we ponder the meaning and reasons for a stock cratering or rocketing higher. We lose capital as trades go against us while we do nothing but grasp at possible reasons and conclude"nothing has changed". "There is no good reason for the pull back; I will hold my long position and wait for the inevitable come back". You lose as you wait.
As Livermore points out "what the dickens does it matter?" Do you want to make money or impress your friends with your pontifications and postulations about what the market is doing? Maybe you absolutely need a reason before you pull the trigger. Either way, that mental exercise will hold you back. As Livermore says "the reason can wait".
Training oneself not to ask why is a big challenge. It goes against everything we've been taught and a lifetime of experiences. We ask why about everything. Have you ever asked a lover "why do you love me?" Does it matter if they love your body, or your mind, or your humor, or your friendship? Really, does it matter why? In my experience, its best to simply accept and cherish the fact that someone loves you; it is no small thing. The same is true for stocks. Cherish the fact a stock you are watching is breaking out. Check your charts; check them twice. If you see the move; take the trade and set your hard stop. In 2 weeks or 2 months you'll know the reason why, and in the mean time, you'll be putting coin in your pocket.
When the CME / CBOE actually had humans in the trading pits of Chicago, those traders predominately came not from Harvard Business School, but from the streets in and around Chicago. Guys with a High School degree or less. Trading was their ticket out of tough factory work. They went into battle each day knowing how their commodity behaved. They traded on price action on the tape. They didnt have a computer model predicting that it would rain next week on the corn fields of Iowa. Anybody that hesitated to "ask why" was run over by a freight train. In short, very few of these guys were book smart. I think that was a real advantage. What they were good at is reading the message of the tape.
Watch the movie Floored: Into the Pit on YouTube and see for yourself
"Reminiscences of a Stock Operator" by Edwin Lefevre recounts the fabled trading life of Jesse Livermore who is widely regarded as belonging to the pantheon of great Wall Street traders. The book has had and continues to have a profound impact on my trading.
In this series, I will go through the book, page by page, and unpack the lessons Livermore offers. Where applicable, I will offer examples from my own trading experiences. I hope the effort reveals aspects of trading that help you move the ball in your own trading.
Let's start with this:
"The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the man of inferior emotional balance, nor for the get-rich-quick adventurer. They will die poor." Jesse Livermore. "How to Trade in Stocks" paragraph 1 page 1
Upon a first reading of the above, I would venture to say that 98% of all readers would say "That's not me". They'd say I'm not stupid nor am I lazy. I possess good emotional balance and I am not looking for a get rich quick scheme. In short, "I'm good to go". Onto the next paragraph.
Juxtapose those thoughts with the fact that 90% of would- be traders fail. People's image of themselves and actions they take are often very different from one another. I include myself in that population. When I began my trading journey I wanted to parlay my nest egg into a fortune and the faster the better. I found that I was book smart but market stupid. I also wrestled with emotional demons as trades played out both for and against my position. I never imagined trading would be as hard as it has turned out to be. I believe many of you have had similar experiences. Additionally, deep down we crave and often seek a short cut. My in-box is filled on a daily basis with promises of the secret sauce. I know those ideas sell very well. They offer we traders a short cut. How many times do you secretly wish for a short cut? Take a hard look at it.
The answers to the above couldn't be more important. As Livermore points out, misguided traders die poor. Statistics tell us that the pile of dead trader bodies is quite large. What makes you think you will be one of the 10% that make it out alive?
Till next time, Happy Hunting and Good Trading
We've all heard about or witnessed first hand the 30 year bull market in Bonds. It's actually been closer to a 35 year run but no need to quibble with CNBC. Shown below is a weekly look at the $USB / 30 year Bond prices from 1982 to date. You can see price has been in a well-defined up-channel since 1988. In Mid 2016, price tagged the outer limits of the up-channel and has pulled back sharply since then.
The chart gives a nice example of how negative divergence of both the RSI and Momentum ( MACD / PPO ) played out. Note how both the RSI and Momentum peaks were at lower levels even as priced moved significantly higher than the prior peak in 2015. It proved to be an early heads up that a pull back in price was a distinct possibility. Negative divergence is also often seen when price is forming a double top.
As you can see from the chart, 140 is the lower bound of the up channel that has been in place for 30 years. I expect $USB to re-test the lower channel bound near the 140 level which will be a major test. The multi decade bull move in bond prices cant be questioned until that lower trend line is violated to the downside. If / When $USB reaches 140, it would be a beautiful place to get long. If price falls out of the channel, the trade is wrong; close it. If indeed price falls out of the channel its time to fade bonds against 140. Because that up-channel has been in place for so long, dropping out of that channel could mark the beginning of a bear market in bonds; something that hasn't been seen since the 1970's.
I love trades where there is a clear line in the sand to shoot against. In this case, the lower channel line is a beautiful line of demarcation that has been in place for decades. How price behaves in and around 140 will be significant either way.