Sunday, November 27, 2016

Personal Notes Series 011 : The Dissonance of A High Risk Trader




This word was something that hit me a few years ago when I was starting to rake in those profits from the market.

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I have always made it clear to everyone that I am a firm believer in Technicals and Technicals only. Not to speculation, brokers or Insiders. And most specially not to Fundamentals. I have embraced this truth and will most likely die with it.

I am not saying that believing in Fundamentals or market insiders is wrong and that there is no money in it, because there is. What I am saying is that out of the 3 Truths I experienced, [Fundamentals, Technicals and Funnymentals] only Technicals has proven to be consistent in making me money in EVERY season - be it a bull, sideways, or a dreaded bear market.

(Exhibit A)




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"Cognitive Dissonance"



This might be confusing for those who are new to it. So to further expound on this lovely term, I'd like to introduce Bob. (He's a bit shy)




Bob has been studying and trading the markets for a few years now. He believes that stocks with good fundamentals, when timed with technicals, will yield him a fortune in a relatively short amount of time vs if he only believed in one truth.

"Why not get the best out of both worlds, ya know what I'm sayin?"

So in August of 2015, Bob bought TEL on the grounds that it was fundamentally sound and that techincally, it was at good levels and holding supports.


On the next month however, TEL broke down from it's supports and hit Bob's technical cut points at -5% to -8%. He was faced with a dilemma. It's a good stock and it pays good dividends. In a fundamental perspective if the price goes any lower, Bob will greatly benefit from it because he would be able to buy more shares and that would translate to more dividends. But on the technical side of things, he had to sell because TEL was already showing signs of a downtrend. 

There was dissonance. A chaos and disharmony boiled within Bob. Does he hold or does he cut?

So he starts thinking about the time he spent researching about the company. He computes the tax and the paper losses he'll incur if he sells. And after eating his favorite happy meal, he came to a decision.

"I'll hold and average down. Someday, this will go back up. It is after all, a fundamentally good stock. Ya know what I'm sayin?"




In order for Bob to alleviate his anxiety and find peace within himself, he had to choose to firmly believe in one truth and in this case, it was Fundamentals. A year passed by and he found himself with deeper losses. But that doesn't affect him anymore.

You just cannot serve two contradicting truths. 

If you're still new in the markets, there will come a point in your trades where you will have to decide just like Bob.

"Will I choose Fundamentals? Or will I choose Technicals?"





Remember, there is no middle ground. And now that I think about it, this truth reflects a lot about life and the decisions we make.

"Am I still serving God or am I serving my own interests?"




Wednesday, October 26, 2016

The Trend Following Astronaut




Of all the technical systems I've encountered, Trend Following [TF] has been the easiest to learn and master. Why? Because unlike other trading setups that require multiple indicators or tools, TF only require that you follow the lines. In the ZFT system we follow only 3 lines : The 20, 50, and 100 Moving Averages.

I'm not claiming that other combinations of moving averages are inferior to ours, but most variations we've tried are just too fast or too slow in reaction time when used in different time frames here in the PH market. The 20-50-100 combination has been our most balanced one. 

Not many understand the simplicity yet effectiveness of this tool. And I guess it's human nature - To have that unnecessary feeling of putting tremendous effort to something in order to make the victory sweeter.

Because why stick to one if you can have many right?



You Infidel.

But to those who have the right mindset, this tool can do wonders. So what are the essentials of Trend Following? 

Let's start!

Having a Trend Following Template

Not many trend followers have trading templates. And by this, I mean different ways to trade stocks under the TF category - because not all TF stocks are equal.

The primary element in trend following are the key positions of the Moving Averages [MAs]. One must first ask, "Which lines are showing bullishness? And are there any that are bullshitting me?" All other factors for your upcoming trade should revolve here. Should you buy on the ZS and sell on the iZS? How about buying on an established AOTS formation? Would it be wise to set your stop on the 20ma or the 50ma?

For example, if two stocks were in AOTS and assuming that both can handle my intended maximum trade volume, I'd put more volume on the one which has broken a higher level of resistance since that would suggest a stronger trend. ATH over 52-week highs, 52-week highs over 6-month breakouts, so on and so forth.

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Anticipating vs. Reacting

Many traders just love to anticipate movements before they happen. To buy before the breakout and to sell before the breakdown. When a trader works to show off that he bought at the lows and sold at the highs rather than show that he followed his trading plan and system, that's his pride and ego talking. Because who can consistently get it right every single time? 

No one.

And what's the point if all you do is anticipate stock breakouts with your holy grail screeners but don't trade them?



But plainly reacting on movements can be equally deadly. Imagine if you buy every breakout without planning ahead, who knows what could happen if the tide suddenly turned against you? Trust me when I say that you wouldn't want to be over committed on a trade, experience a bull trap and have no cut loss strategy.

And how about not selling at the top?

Below is a snapshot of having all my shares intact at it's peak price.


I sold all of my PRMX at an average of 3.52
Do I feel any regret of having lost those potential profits?

None.

So what if you didn't sell at the highs? Don't punish yourself for not being able to control the uncontrollable. Instead, reward yourself for following your trading plan.

Always remember that there should always be balance in anticipation and reaction.

Anticipation is being prepared of what's about to come, but it is the reaction that makes your dreams come to reality.

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Variable Change

When following trends and you bought a stock at a relatively low price, don't be complacent about your trailing stops. How many times have you had a good position mature into wonderful paper profits only to get eaten a few days later just because you failed to adjust your stops? 

"Okay lang. Mababa naman kuha ko."

Many fall into this pit of carelessness just because they bought at the lows. I cannot stress this enough, always account for variable change.


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Post Selling Evaluation


Have I followed the system? Was my volume allocation correct?
How can I improve in following trends?


These are important questions every trader should ask after completing a [TF] trade. I personally take a one or two day trading-break after selling a big position to make sure no lingering emotions remain. One of the worst things that could happen to a trader is to give back to Ms Market all your hard earned profits because of the Superman Syndrome - thinking you're invincible after having experienced a winning streak or a big win.  

Post trade evaluation and analysis gives you a step back and have a good look at the big picture. It not only helps you see the flaws in your system and how you can improve on your next trade, but also gives you that needed "space" to think and digest what you've learned and become a better trader as far as mindset is concerned.




Tag mo yung BF/GF mo na naging astronaut. 



-FIN


PS. Let me know your thoughts on the comments below.