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.
The $USD has been consolidating for nearly 2 years after having had an epic run from June 2014 - March 2015. Since then it has been range bound between 100.50 and 92. The Dollar is now breaking out and has an open runway to move higher. Trader's can view 100.5 to 100.70 as a support zone. You can see this clearly on the weekly chart shown below. If any $USD weakness were to result in a pull back into this area, interested traders could use the opportunity to get long with a tight stop. Unless and until the $USD has a weekly close below 100.50 the bulls remain in control.
While this is not a prediction by any means, and may be viewed by some as an absurd notion, there is not a lot of technical resistance between the current position of the $USD and the 120 level where it topped in 2002. You can see this on the long term monthly chart shown below. Viewed in those terms, building a long position in the Dollar on dips would be a smart move. Again, with 100.5 as a stop, the minimal downside risk vs potential upside reward is substantial.
The rising bond yields, an impending FOMC rate hike priced in at nearly 100% and optimism regarding fiscal stimulus via an infrastructure package in early 2017 are supportive of dollar strength. The YEN and EURO remain tepid against the dollar. In just 3 weeks the $USD has appreciated 6% against the YEN and 4% against the EURO. As long as the FOMC talk remains hawkish and expectations for a stimulus package remain in place, pull backs in the Dollar should remain shallow and short lived.
The other day a trader reached out to me for a helping hand. He wanted to learn more about how to become a more confident trader. It’s a great question and one I have spent time thinking about and working on for my own trading. In my mind we are looking for the sweet spot (as defined by me) between lack of confidence and cockiness. Stereo-types however lead us to believe that the most successful traders are also the cocky ones. Confidence taken to the extreme. I don’t think it’s true. What is true IMO, is that cockiness can lead to eventual ruin because the trader can never envision true risk or imagine being wrong. For the purposes of this note, let’s define the sweet spot as “quiet confidence”.
Ideas on Building Self - Confidence
1. Transition from Seeking Shortcuts to putting in the Work
I think there is something deep within all of us that seek and relish a short-cut. Successful people push that urge down so that it really does not emerge into their actions or thought processes. Some of you may know that I enjoy cooking and seeing my family and others enjoying the fruits of my labor. The recipe is simple; Fresh ingredients and the willingness to put in the time. You’re not going to have great Mac n cheese out of a box. You need a solid process ( the recipe ) and be willing to put in the time.
Confidence in cooking or in trading stems from a willingness to put in the hard work. The hard work of sifting thru hundreds of charts, the hard work of creating, tweaking, polishing, and following a trading process. We’ve talked about owning ideas before; it’s critical to building confidence. There’s a bridge that must be crossed from idea origin to idea ownership. When I offer or you see a trade idea, take that idea and rip it apart. Dissect it and see if it makes sense for you. A blind follow is a trade gone wrong from the get go. Even if you make a lot of money from tagging along other folk's trades, no confidence will be built. I see a lot of people racing around frantically trying to find “good follows” on social media almost as if that is their edge… Finding the best traders to tail. Although I am not deep into it, it was a problem for me too. Less so now.
True success has no short cuts. Focus on your work. Put in the time. Good things will come your way. Your sense of accomplishment and confidence will grow.
2. Transition from Negative Self Talk to Positive Self Talk
When we focus on everything we could have done better and everything we did wrong, we create mini failure experiences for ourselves over time. Our self-talk reflects our relationship with ourselves. How can we feel confident in who we are and in what we do if we're constantly tearing ourselves down? When faced with a disappointing result from a trade, try to engage in positive self-talk and look for the many good aspects about the trade. Examples:
3. Identify, then play to, your strengths
Many traders attempt trading styles that don't match their personality and cognitive strengths. Over time that generates frustration and erodes confidence. Work hard at matching your skill set and personality to the trading style you employ. To a certain degree this is a trial and error process. For a while I tried to be a Swing Trader and be a Day Trader on the side. Didn’t work…….but I sure tried. In the end, the skill set and temperament for Day Trading does not suit me well. Swing Trading is in my wheelhouse. Trying to force Day Trading into my mix was a real confidence killer. My frustration at lack of success in Day Trading overwhelmed the good things that were happening on my Swing Trades. Document your feelings in your Trade Journal when you try different trading regimes or styles. I think you’ll soon know in your gut if something isn’t right.
4. Avoid and reject negative environments; Seek out and Embrace Positive Ones
Imagine if you were helicoptered deep into the Rocky Mountains and dropped into a commune of hardcore survivalists. Upon arrival, you’re handed a gun and a Manifesto explaining in deep detail how the Government is after you. Doomsday is near. At first you laugh at the comical notion, then 3 weeks later you’re practicing your marksmanship with a bazooka and organizing the ammo bunker.
We absorb the ideas and attitudes of the people that dominate our environment. Same is true for we traders. If we hang out with the “trader’s lonely losers club” would we be surprised to feel confidence being drained from our existence? Losing is a part of trading, but it doesn’t have to be a lifestyle. Find a diverse mix of positive people and traders to associate with. Get out of the chat rooms where the prevailing view is that Lloyd Blankfein is pulling on all the strings so it’s impossible to succeed. If you truly believe that, simply stop trading.
Hanging out in the wrong places can also affect your P&L along with your confidence. It happened to me in the Spring of 2016. I’d like to think I am a good market technician. I can certainly identify pattern changes, trends and breakouts etc. How then would it be possible for me to miss, ignore, or even shoot against a powerful rally? Because I was living in the Bear Base Camp. Daily readings of Bearish theses, homing in on all the bearish macro factors that are out there of which there are many, seeing earnings collapse etc. It was no different than living in the survivalist commune; boogeymen everywhere. I subjected myself to a harsh bearish environment that blinded me from bullish chart input. In trading what you call an advance really doesn’t mean anything. Bear market correction or Bull rally? Who cares! If price is going up, get long or step aside if you don’t trust it, but certainly don’t hold shorts or fire bazookas. Price = Truth. Opinions about the whys and what-for’s are pure speculation and wont contribute one iota to your P&L.
Prescriptions to re-boot your attitude and to begin building Self - Confidence
Think about this one. I challenge you to "Trade like a Monk" for 6 weeks . Imagine yourself as a monk in a cave on the far edge of civilization. All you have is your trading platform and your charting package. No phones, no chat rooms, no blogs, no TV to distort your market input. Can you imagine the clarity of your thinking going sky high? Can you imagine truly owning your trade ideas? Can you imagine the confidence you'd gain by seeing and trading pure market input?
These ideas are free and you can start tomorrow.
I challenge you to follow the above ideas for 6 weeks. It's a big ask. From experience, I know 95% of you either wont try it or will fall off the wagon within a week as you battle symptoms of withdrawal. The reward for challenging yourself however will be great. For the 5% of you that give it your best effort, you will emerge a different trader. You will emerge a more confident and disciplined trader. By eliminating all the noise, you will become very attuned to market input. You should experience a groundswell of self-confidence. A self-confident trader is a powerful trader. Beginning that journey is one of the most important things a trader can do.
If you decide that it's worth the effort and give it a try , keep me posted on your progress. Either post a comment here for others to see and learn from, or send me a private note. Reach me anytime at firstname.lastname@example.org
Happy Hunting and Good Trading
Back in 1989 I took my nest egg of about $100,000 and plunged into the tropical plant business. I found out very quickly that those monies did not go very far. But over time the business grew. I funded expansion through internal cash flow. I liked the idea of being debt free. Then in 1992 I had the opportunity to acquire a larger piece of property that was in foreclosure for $200,000. Having had the property on it's books for quite sometime, the bank seemed motivated to give me the loan with a nominal down payment.
A short 3 months later Hurricane Andrew rolled through Homestead, FL and upended my world. My inventory and nursery structures were gone. Cash was non-existent. I was wiped out. I calculated that I needed about $500,000 to rebuild the operation and get back on track. Back to the bank I went.
This time however the bank was much more skeptical of my ability to repay a loan of that amount. Bankers know 80% of small businesses fail. To make a long story short, they agreed to fund me with $200,000 but with lots of strings attached. Each quarter I was required to submit financials with cash flow statements and forward looking projections. They kept me on a short leash. Over time, I rebuilt the operation and held true to the covenants of the loan. About 5 years later I went back to the bank and requested another tranche to the loan. With a proven track record of prompt payment and with a growing business to support the debt load, it was easier to get funded.
Now About your Trading Ambitions
You've worked hard over a long period of time to build your nest egg. You have big dreams about parlaying that nest egg into a vast fortune through trading. That's fine. Most trader's are optimistic and probably think that way. But what if your own Hurricane Andrew hits your trading account? Remember 90% of would -be traders fail. What if you're not as good as you think you are? Are you really willing to put your entire nest egg at risk out of the gate without a demonstrated track record of success? Once your trading capital is gone, its gone.....you are out. It's a risky proposition. It's also true that your family has a stake in those monies as well. Would it be responsible to head off to Las Vegas with your entire net worth in hundred dollar bills in a briefcase? Think about it.
Hire a Banker
When I got my operating loan from the bank, I absolutely hated all those hoops the bank forced me to go through not only to get the loan but to remain in compliance with the covenants. But you know what? It enforced a discipline both on myself and the business. It protected the capital that was at risk. There was another set of eyes watching me. It instilled fiscal discipline. It forced me to perform. I think that same forced discipline would be helpful to traders.
Designate someone in your life to be your banker. Could be your spouse, could be your parents, could be someone else you trust implicitly. Put them in charge of your trading capital. Let's say you are starting with $50,000 for trading. Fund your account with $10,000. Set up a quarterly reporting scheme whereby you visit with your "banker" to review your progress. Establish the covenants of your trading account. If after 3 months your trading account is down 50% ( which is very easy to accomplish ) do you think your banker will be inclined to offer additional funding toward your trading efforts? If however after 6 months or a year you're up 50% and have demonstrated continual improvement in your trading, your banker may see fit to extend you additional trading funds. It's a forced discipline and a check on you the trader. It makes you accountable to another human being for your performance. Will it be a pain in the butt? Yes. Will it save you from yourself? Probably. Hiring a banker will put a fine point on what you need to do to perform and make progress. I recommend you giving this idea strong consideration.
Happy Hunting and Good Trading!
( An imagined recollection )
I seem to be the talk of the town now, but it wasn't always that way. Let me take you back to the beginning.
When I was a kid, I dreamed of being a big -league ball player. I did not have the best set of physical skills, but what I lacked in that department I tried to make up in sheer grit and determination. After high school I was bitterly disappointed not to be drafted by any team. After several months, I was lucky to be signed as a free agent by the California Angels. Here I am as a rookie.....full of dreams and big plans.
Over the next 3 years, those dreams and big plans slowly dissolved. I did not get to play in very many games and those I did play in were uninspiring. In 3 years of single A ball, I batted barely over .250 as a role player. As my dreams of being a big league player evaporated, I re-aligned my sights toward being a Manager. I approached the organization and expressed my ambition. They gave me a chance to manage their rookie and Class A teams. Over the next 6 years as a manager I learned a lot but never once posted a winning record. Again, not very inspiring. Inexplicably, the organization did not fire me but re-assigned me to "roving scout" and roving "hitting instructor". Imagine that. A career .250 minor league hitter as a roving hitting instructor. My boss at the time impressed upon me that my role was that of a teacher and to maximize each prospect's potential. My lack of hitting prowess shouldn't hinder me from helping others get better. I think I was good at that.
Life as a minor league anything is not a bed of roses. If you don't know anything about the economics of baseball, it works like this. All the money is at the top. Compensation drops off fast as you work your way down the food chain. By the time you get to the minor leagues and "roving instructors" there isn't much money left. Money was always tight for me. I wasn't able to give my wife and 2 small kids the life I thought they should have. The financial strain and transient lifestyle as a roving coach took a toll on my young family and my marriage fell apart. That was a huge sacrifice to give to the game. Still, I kept putting one foot in front of the other.
Over time I made my way up the ladder to become a bench coach on the Angels. All told, I gave 31 years to the Angel's organization before being named Manager of the Tampa Bay Rays. That's a long time to wander in the wilderness. Most folks conveniently forget about the sacrifices that I made and the years of self-doubt that I had as I pursued my dream.
As Manager of the Tampa Bay Rays for 9 years, I had my share of success and began to emerge from the shadows into the limelight. Now as Manager of the World Series Champion Chicago Cubs, I qualify as the quintessential "Overnight Success". It's only been 40 years in the making. It's been an amazing journey. My name is Joe Maddon.