The Traders Journal

How A Fellow Investor Critiqued This Trader

My motives in writing these weekly blogs and in teaching investment classes are in part selfish ones.  I write and teach to become a better trader myself.  By weaving together the key attributes that I deem most useful in trading the stock market and sharing them with other investors, I find that I’ve woven them together more effectively into the fabric of my own trading.

Two eyes are better than one, and I often benefit when students hold up a mirror and reflect their experiences back to me through their own investment lenses.  A fine example of this occurred last year.  The trading course I teach – Real Time Hands On Trading – has a strong group of 100 investors and includes a good number of full-time traders.  After last fall’s semester ended, I received a detailed email from a student named Kelly H. who proceeded to list his key takeaways from the course.  Coming from a full-time trader with more than 15 years of experience, Kelly’s comments were those of a colleague who had just spent seven weeks participating in my class.  His comments were insightful and reinforcing, offering me a unique perspective as to what other investors felt were the most useful skills gleaned from the class.  I was grateful to Kelly for the email, and I’d like to paraphrase his input.  I hope I manage to capture his true intentions as I summarize the points he made.

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Your Investing Pipeline to Profits

It might be human nature, but it’s not a good thing.  In my Tensile Trading seminars, investors study six essential stages of stock market mastery before they ever arrive at Stage #7 – Buying.  This foundation building is imperative if investors expect to achieve consistent profitability, but it takes some convincing.  

Human nature makes investors want to take action by buying stocks prematurely.  When investors in my class finally reach Stage 7, they’re invariably relieved to be at the point where they can finally buy something.  Being able to say “objective achieved”, they all too often want to rush off and look for more equities to buy.  That is human nature, and therein lies the downfall of many a great trade.

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The Secrets I Learned from Jesse Livermore

When seasoned traders get together, we have a sort of “secret handshake” that the uninitiated may not notice.  We ask each other if they’ve read Reminiscences of a Stock Operator.  The insiders reply by telling you the number of times they’ve read the book.  Novices ask for the author’s name.

Recently, I’ve been rereading Jon Markman’s wonderful annotated version of this Jesse Livermore classic. This special edition even has a forward written by Paul Tudor Jones.  As I revisited Mr. Livermore’s wisdom, I realized that so much of the trading baton that I’ve endeavored to pass on to my readers is directly or indirectly the result of the special batons he passed on to me.  In considering this, I feel it’s only appropriate to salute the man.  Afterall, I have patterned myself after him and my favorite quotes come from this truly extraordinary trader.  As Dr. George Lane, the creator of the stochastic oscillator, once told me over dinner, “Gatis, you can never get enough of that good stuff.” 

My trading approach is organized into 10 stages that I call Tensile Trading.  For this week’s blog, I’ve chosen a few of my favorite Jesse Livermore quotes for each of these 10 stages.

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Ben Bernanke Speaks, This Trader Listens

A good friend of mine who is a professional money manager recently invited my family to hear former Federal Reserve Chairman Ben Bernanke speak at a forum here in Seattle.  As you might expect, much of his talk centered on the 2007-2008 financial meltdown.  As Bernanke described these events in detail, I had this vision of a large stock price chart above his head playing out in real-time.  I envisioned this chart keeping up with his verbal descriptions of the events that occurred behind closed doors while simultaneously reflecting price action in the public markets.

Two observations struck me.  First, it is only now, seven years later, that Bernanke has written a book (The Courage to Act) explaining many of the fundamental and economic reasons for the 2008 market collapse.  It’s interesting to have his perspective, but after all the intervening years, it’s merely academic.    The second observation is how amazingly accurate the markets were in reflecting the financial deterioration that was being dealt with out of public view.  The charts revealed the deterioration long before the average investor understood what was happening. 

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ChartPack Quarterly Update 50 New Enhancements Version 7.50

I would like to acknowledge that this update has significant enhancements to many chartlists, as well as all 40 of the usual Fidelity Select Sector Funds due to a new collaboration.  Grayson Roze is now working at StockCharts full-time since graduating from Swarthmore College in June.  He has brought many new and useful ideas to the table that we’ve now built into ChartPack Version 7.5.  As always, we welcome your feedback.  Here are brief descriptions of some of these enhancements.

S& P Earnings:  It is a fact that earnings drive the market.  Therefore, we have added S&P Earnings to ChartList #10.4 – Permission to Sell Dashboard.  From the chart, it’s evident that earnings reinforce and confirm an uptrend in the S&P price chart.  On the reverse side, the chart shows that declining earnings historically decrease the likelihood of developing a sustainable uptrend in the S&P price chart.

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Asset Allocation: Why Strategic Versus Tactical Choices Matter

How can I be energized after teaching a six-hour workshop?  When investors appreciate the message, their enthusiasm is like jet fuel.  Partly, I assume that contagious enthusiasm is what I love about the stock market in general.  In any event, Chip Anderson, Grayson Roze and I presented our Asset Allocation seminar this past Saturday to a roomful of investors, some of who had travelled thousands of miles to be there.  According to the feedback, we did not disappoint.  The DVD should be available early next year.

I thought I’d carry this inspiring energy over to my blog this week. We presented nearly 200 slides throughout the day, so please understand that I am picking only three out of the haystack to share with you.  A number of attendees recalled previous blogs where I insisted that novice investors must make the effort to understand the language of the market.  In other words, you best learn the difference between a market order versus a limit order or the stock market will take you to school and charge you tuition.  Similarly, in books, articles and discussions about asset allocation, a number of key terms are bandied about.  It’s important that you understand what they mean.  Here are three examples.

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Selling Methodology: 1 + 1 = 3

I’ve been teaching investors about Stage 9 – The Selling Stage – of the Tensile Trading methodology for over 15 years.  My observation is that novice investors need a simple selling routine as a fist step.  Once they are able to embrace the necessity and validity of deploying a selling strategy, they are better able to move forward and empower their own actual exit strategy.  Before the empowerment comes the embrace.

In this case, the embrace is the straightforward three descending peaks selling routine I’ve written about before here. This week’s blog will move forward to step 2 – the empowerment phase where we add an indicator (On Balance Volume) to the basic three descending peaks selling routine and show how this increases the probability and accuracy of our sell signal.

As all investors trade in different timeframes, don’t flood me with comments about the specific descending peaks I’ve highlighted.  Instead, focus on the primary principle I’m trying to share with you and then apply it yourself to whatever timeframe you trade.

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This is How to Maximize Your Investor Benefits

After writing this column for over three years, I was recently asked by a reader what he should expect to get out of my weekly blog.  In other words, he asked me for a users manual to The Traders Journal.  No kidding – I looked on Amazon and found manuals for such topics as Spiritual Warfare, Creating Atheists, Manhood, Monsters and even Improvisation.  This one is far more profitable.

My new BMW comes with four manuals.  Inside the car, I’ve got a printed version in the glove box and an electronic version on the car’s hard drive that I access on the navigation screen.  At home, I can go online for the car’s web-based video manual or I can make an appointment at the dealership to meet one-on-one with a guru whose job title is “BMW Genius”.

Clearly, there’s a growing need and demand for manuals in this complex world.  I’m not interested in contributing to that mosaic.  The weekly Traders Journal blog is meant to simplify and de-mystify investing for you.  Please take a few minutes to read this and you’ll be better prepared to understand how and where to slot each week’s topic.  You’ll simply get much more value and useable benefits that you can apply immediately as an investor.

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Unique Insights From Dinner With An $8 Billion Investor

I had the pleasure of having dinner with a mutual fund portfolio manager who manages over $8 Billion and who has the impressive record of outperforming the S&P 500 over the past 10 years.  In other words, a Wall Street insider and real pro.  My apologies upfront for not revealing his name and giving you specifics about him.  But frankly, I’m better able to offer my readers more candid insights by allowing him to remain anonymous.

I found some of his pithy comments especially interesting.  He said that “in this business, we tend to overcomplicate things.”  As I think back over the years, that is certainly the tendency of my students, just as it was of myself as a novice investor.  He went on to explain that despite what academics want you to believe, the market is simply not efficient.  An equity does have fundamental intrinsic value, but the market is consistently overestimating or underestimating what that true value is.  This is precisely why he has been able to outperform the market. 

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Why Stress is Like Kryptonite for Investors

Years ago when I was a novice investor, I’d exhaust myself trying to figure out why things were happening in the markets.  I would struggle to comprehend it all, and when there were market forces I couldn’t understand or explain, it would simply eat away at me.  I was burning emotional energy and feeling frustrated at every turn.  How could I trade equities when I did not fully grasp all the reasons for my stocks’ rallies and reactions? 

Eventually, I came to realize that I needed to stop marinating in stress by trying to achieve perfect knowledge.  The “eureka” moment came to me when I finally recognized that I didn’t need to fix my analysis – I just needed to fix myself.  And herein lies the misconception most investors hold about stock market knowledge.  

As an investor, my objective is not the pursuit of intellectual wealth –my objective is that of financial wealth.  Get that straight!  Over time, it gradually dawned on me that none of the talking heads or big-name money managers could claim with absolute certainty that they actually know what makes a stock turn bullish or bearish.  Their knowledge may seem impressive, but they certainly don’t have crystal balls to predict future price actions.

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Why the NFL, MLB and NHL Should Hire Me (Or Another CMT - Technical Analyst)

I liken old school General Managers of professional sports teams to fundamental investors.  The GMs that have not yet embraced the trend of data mining and statistical analysis – under the umbrella that’s now being labeled as “Sports Analytics” – are being left behind, sliding down the leader board or being fired outright.  

This is not unlike old school fundamental investors who try to hang on to old ways in this internet age of visual analysis.  To these investors, I extend a warm invitation to join our inner circle of Technical Analysis.  

But back to the pro sports managers.  I find it mildly amusing that this trend towards intensive number crunching and the dissecting of pro sports games in new ways is finally catching the attention of the major sports leagues.  Even MIT is endorsing this new discipline by sponsoring events such as the MIT Sloan Sports Analytics Conference.  We visual investors (technical analysts, chartists or whatever label you care to give us) have been doing this with reams of stock market data for 80 years or more.  I humbly submit to you that the Pittsburg Penguins of the NHL might be better served hiring not just a statistical PhD but a seasoned Chartered Market Technician (CMT) who would be better able to present mountains of statistics in useable, enlightening, visually-friendly charts from which conclusions can flow more easily.  

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