Words to Live By? (Part 7)

Today I will wrap up my analysis of some apparently sage advice recently offered by an option trader.

Continuing from part 6:

“On this trade, I think it’s important to really understand how [the market] works so you can see the graph and see how these candles affect the trade.”

How the market works?  A strong bullish (bearish) candle means positive (negative) PnL for a long (short) trade–is that what he means?  This tells me absolutely nothing new.  “Master of the obvious” comes to mind.

“You’ll see patterns among the stocks.”

Will those patterns be evident at the hard right edge of the chart where all live trading occurs or only in retrospect?  Patterns are always evident in retrospect but not a single person has ever taken a dollar from the markets by trading this way [backtesting].  Making this claim implies the patterns are available at the hard right edge but it would require an extensive research effort to validate that claim.  From what I have seen in the markets thus far, I wouldn’t believe it for a second.

In this blog series we studied a clip of stock market wisdom that sounded natural, good, and useful.  All it took was some old-fashioned thinking in order to realize what initially seemed bright and shiny was more akin to coal in a holiday stocking.

In the world of trading, there are a lot of teachers and business people willing to tell you how to make consistent profits.  Before you pay anything for such “sage advice,” though, I strongly encourage you to get a free sample and subject it to the rigors of critical thinking.  This can provide a sneak peek into whether any of it has any merit at all.

Words to Live By? (Part 6)

In this series, I am challenging some “sage advice” offered by an option trader. I left off with words about a nonexistent Holy Grail.

The trader continued:

“…because I know how the market is moving around when I’m getting my trades on and I know when to just… hold off… doing my adjustment for 5, 10, or 15 minutes to see—you know, typically it’ll reverse here so I’ll wait and see and maybe get a better price.”

This is similar to what he said about “decent entries.”  Getting a better price implies saving money on a buy or making more money on a sell.  If he can do that on most trades then he can make boatloads of money, which gives this innocent phrase heavy persuasive power.

This quote also implies profitable trading, which once again boosts persuasion in a backward, illogical manner.  If his trades fare poorly then he’s probably not going to think anything is a “better” or good price and he’s not going to think any of the entries are “decent.”  If his trades fare poorly then he would not encourage trading just one market regularly, either.  Yet, none of “getting a better or good price,” “decent entries,” or “trading one market regularly” in and of itself makes for a consistently profitable trading strategy.  Why include them as trading advice for those looking to succeed in this endeavor?

Put another way, is this guy trading successfully because of his “sage advice” or is his sage advice relevant only because he’s had a flurry of winning trades?  We can’t tell and surely nobody asks because on the surface, his advice sounds solid.

Words to Live By? (Part 5)

In this series, I am breaking down a snippet of supposed “trader wisdom.”

In picking up where I left off in part 4, the trader continues:

“I sit here in front of the screens all the time watching the 5-minute bars on all the futures…”

He’s got multiple screens going, 5-minute charts, futures… like WOW!  He certainly sounds to know what he’s talking about.  The newer I am to trading and/or the less experienced I am with taking losses, the more apt I will be to believe him.

Heck, he might even be this trading G-d who I randomly found via Google search:

There are his multiple screens to watch all those intraday futures charts so he must be making millions of dollars.

“…and I’ve gotten very comfortable now with my trades because I kinda know… I get decent entry points…”

The Holy Grail has a very slippery slope and can be described in many ways.  One piece of trader wisdom I do believe is that the Holy Grail does not exist.  Logic therefore dictates that anything describing the Holy Grail does not exist either.  Making millions of dollars easily and quickly through trading:  Holy Grail and nonexistent.  What about getting “decent entry points?”  If the entry point is decent because it is followed by a successful trade then yes, this could be the Holy Grail.  By claiming decent entry points the trader implies that on average his trades are profitable.  Consistent, positive returns are what any trader seeks in order to be successful, after all.

I will continue to scrutinize said “trader wisdom” in the next post.

Words to Live By? (Part 4)

Having lain the foundation for critical thinking, I will now begin to analyze the trader “wisdom” as presented in part 1.

The trader begins:

“I think one of the most important things X teaches is trading the same market over and over and over again.”

This suggests I should not trade multiple markets sporadically.  I find this interesting because I have often debated whether I should have a watch list approach to trading where I limit myself to a specific group of markets to be analyzed and traded all the time or whether I should use a scanning approach to trade any markets that meet a specified set of criteria.  People line both sides of the aisle on this issue.  There is no right answer.

“You get to the point where you don’t need any indicators. You really understand how the market breathes.”

That sounds encouraging!  This also sounds very meaningful and even, dare I say, intimate.  Good persuasive technique.

“You get really comfortable [and really start to think] ‘okay, I know what I’m doing today.’  It’s not that you can predict the future with it but you get comfortable with how [the market] reacts.”

The unspoken premise here is if I consistently make money trading it.  Surely if I am losing then I will not feel comfortable or very knowledgeable.  If my losses are great enough then I won’t think I know a damn thing and I might even decide to throw in the towel altogether!  In other words, by phrasing the advice in this way, he suggests you will make money consistently because that is the only way his statement will be true.  This is good persuasive technique as well.

Are you getting the gist of where I’m going with all this?  I will continue with my next post.

Words to Live By? (Part 3)

In my last post I began to lay some foundation for critical thinking. This is useful to evaluate others’ claims in the financial industry or otherwise.

Television has dramatized countless times over the decades how you often cannot believe what people say.  Summed together, CSI: Crime Scene Investigation, CSI: Miami, and CSI: New York have entertained audiences to over 740 television episodes and not a single episode has failed to feature a suspect who did not lie.  The same may be said for patients of Gregory House in 177 episodes of House, M.D.  Pretty Little Liars features continuous deceit as does [probably] any and every soap opera ever to appear on TV.  If people in general can’t be trusted then claims about success (read:  marketing) certainly cannot be accepted without intense scrutiny.

This is valid reason why you probably should not heed others’ advice in financial matters.  “Others’ advice” may include premium investment advisories, investment/trading education packages or “mentorships,” and for-profit trading rooms (if you are paying then they are profiting).  The ultimate arbiter is the PnL and regardless of how well they organize a presentation, you can never verify its true authenticity.  Visiting face-to-face with the person and holding in your hand monthly brokerage statements with account numbers displayed tempts true belief but in the financial industry this never, ever happens.  More often, you talk to people over the phone, e-mail via the Internet, and see or hear alleged performance numbers.  Never do you personally witness a signed tax return complete with SSN.

This simple observation about human nature gives me tremendous latitude to say things that sound very logical on the surface.  If I present these words with confidence and appear to have a following of others then I may even have great persuasive power.  An apparent following may include positive reviews on Amazon.com, virtual participants appearing to be attending my webinars, students I claim to be enrolled in my education program, or my face frequenting financial media such as theStreet.com articles or CNBC segments.  When you believe me then you will pay me because you hope I can make you rich.

In too many cases, all you will end up doing is allowing me to live criminally.

Words to Live By? (Part 2)

A few days ago, I heard a trader addressing a group.  By the tone of his voice and the superficial meaning of his words, this was certainly sage advice.  Today I will begin to lay the framework of critical thinking that should always be employed to evaluate what people say in financial circles [or anywhere else, perhaps].

The ultimate arbiter on all things right or wrong about financial markets is the profit/loss (PnL).  I can say whatever I want about this stock or that market, this pattern or that valuation, this metric or that performance statistic.  If I make money for myself or for others then I will stay in the game.  If I lose money then I will eventually go bust and you will hear me no more.

Unfortunately for those listening, you can never know what my true PnL is.  I can tell you that I’ve made hundreds of millions of dollars in stocks.  Will you believe me?  In an industry sometimes suspected of snake oil, chicanery, and egregious fraud driven by human greed, should you believe me?

If there’s any possible way that I might profit now or later from your belief then you probably should not believe me.

Mull that over for a couple days and I will continue to develop this thesis in my next post.

Words to Live By? (Part 1)

The last couple of posts elucidated my general belief that the financial industry is a comprehensive scam.  I mentioned chipping away at a foundation suggesting that once the evidence accumulates, the totality of deception will be overwhelming beyond any reasonable doubt.

Today I heard something that had the veneer of trading wisdom.  You know, the old adages that seemingly light the way to the Holy Grail… common mistakes that I am always guilty of making when I lose significant money…

Here is what I heard:

“I think one of the most important things X teaches is trading the same market over and over and over again.  You get to the point where you don’t need any indicators. You really understand how the market breathes.   You get really comfortable [and really start to think] ‘okay, I know what I’m doing today.’  It’s not that you can predict the future with it but you get comfortable with how [the market] reacts.  I sit here in front of the screens all the time watching the 5-minute bars on all the futures and I’ve gotten very comfortable with my trades because I kinda know… I get decent entry points because I know how the market is moving around when I’m getting my trades on and I know when to just… hold off… doing my adjustment for 5, 10, or 15 minutes to see—you know, typically it’ll reverse here so I’ll wait and see and maybe get a better price.  On this trade, I think it’s important to really understand how [the market] works so you can see the graph and see how these candles affect the trade.  You’ll see patterns among the stocks.”

Does that sound like good, reasonable advice coming from a professional trader?  Words to live by?

I’ll begin my analysis in the next post.