PMKing Trading LLC - Trading Weblog June 2006

Paul King, June 30th 2006

Laying Plans continued...

All warfare is based on deception

There are many ways you can be deceived when trading. Market action can give you an impression of strength where none exists, or price and volume patterns can signal the opposite of what is really happening. If you trade only in liquid markets, however, manipulation and deception are significantly reduced and the price is the only thing which you can take as the absolute truth: it is the sum total of all available information at that particular time and represents the equilibrium point between the bulls and bears.

In order to maximize your chances of success you should always keep as much information to yourself as possible. Putting stops in the market which are either held on the exchange, or at your broker, is the equivalent of showing your cards after you fold your hand in poker. It is information that you could keep secretly – on your own computers, rather than publicly so it cannot be used against you. If you do want to practice deception as far as stops go, you could consider putting you worst-case stop loss in the market, but leaving it there even when you have moved it up (on your computer) to protect a profitable position. If the price trades though your computer-based stop you can then exit your position and cancel the ‘dummy’ stop in the market. In this way your real intentions are always kept private.

When he concentrates, prepare against him; where he is strong avoid him.

Successfully trading any market requires a depth of knowledge and experience specific to the way that particular market works. No one can be expert in all instruments traded on all exchanges so it is much better specialize and only trade where your knowledge is likely to be at least equal to the person on the other side of the trade. Don’t try to be a generalist simply for the sake of diversification. Tackle each Market or instrument type one at a time, and become expert in each before moving on to another.

Anger his general and confuse him

During trading hours it is very important that you learn to stay calm. Angry or confused traders lose money. If you have a trading plan that is complete (i.e. rules for every eventuality during market hours) then there is nothing that can make you confused or angry; you already know what you should and will do in any event, and whatever happens you will stick to your plan because you know it is the key to long-term survival and ultimate victory.

More coming soon.

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Shorting Can be Good for Your Trading

Paul King, June 22nd 2006

Going short (in equities) is often associated with high risk trading and everyone says it should be left to the experts. Although there are a few factors to consider that make shorting equities different from going long, a long/short system can usually give you a smoother equity curve than a long-only one simply because it can operate in more types of markets (up and down trend) and generate more trades on a more consistent basis.

Some of the main factors which make shorting different to going long include:

Limited upside but (theoretically) infinite risk

This is a bit of a red herring since I've never seen any financial instrument go to infinity within the timeframe of my trades - as long as you use stops and keep your trade durations less than an infinite amount of time, this factor should not have any practical effect on your trading.

Back-testing is not necessarily representative

Since all equities are not automatically shortable (either due to being on a restricted list, or temporarily unavailable to borrow from your chosen broker) one cannot historically test which short trades that your system signals were actually possible to implement. Also, forced liquidation of an open short position is also possible and (again) not historically testable. Both these factors can severely affect actual results compared to historical testing.

Extra slippage

Due to the 'uptick rule' for US equities, short positions are often subject to more slippage than a corresponding long entry. If the market is dropping when you enter you order it may move a long way before an uptick occurs and you are able to have your short order executed.

More complicated margin rules

Since all short trades involve margin rules it is more difficult to calculate your actual minimum amount of capital required to trade your system (especially if it takes multiple long and short position simultaneously - which is desirable for hedging overall market exposure).

In summary, going short in equities cannot simply be considered equal and opposite to going long (especially during historical system testing), but in my view the advantages of adding a short component to any trading system usually outweigh any disadvantages.

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Product Review: Secrets of Short-Term Trading from InvestorFLIX

Paul King, June 16th 2006

This DVD presented by Larry Williams, would more correctly be called 'A Collection of S&P entry Techniques' although the information in the first half of the presentation is interesting and useful.

Larry talks about the following three important concepts:

1. The cyclical nature of ranges
2. The close in relation to 'large' range days
3. The close in relation to the daily range

In the first section the concept that the daily range for the S&P fluctuates between small ranges and large ranges is covered, with the practical upshot being that if you enter a trade after a number of relatively large-range days, then you will get 'stuck in the mud' with the following short-range days.

In the second section Larry covers how it is typical for the closing price to be nearer the high on large-range up days. This can be useful in designing systems that are good at taking small losses when the daily range is small, and then hoping to capture a significant profit when a large-range day comes along.

The last section talks about the close in relation to the daily range and how it can be a predictor of the overall trend of the market and where in the market cycle we currently are. A sentiment indicator that tells us whether we are at the start or end of a trend is also discussed.

The rest of the presentation is about other typical entry signals Larry uses (including his famous OOPS Entry), and it is obvious that he does not want to divulge anything about his exit strategies, or position-sizing techniques (since they are obviously the important parts of his trading methods that actually make the money). At one point he even says 'Exit techniques are proprietary.' as an answer to a direct question'.

To me this all goes to show that assuming a trading system = an entry signal is a common mistake, and that you should be spending most of your time investigating and developing exit strategies, and position-sizing models rather than concentrating on entries.

Visit InvestorFLIX

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Product Review: TradingMind from Subconscious Training Corporation

Paul King June 13th 2006

TradingMind is a software application that is focused on improving trading discipline by simple repetition of targeted self-hypnosis and relaxation techniques.

The software is easy-to-run since it is written in MacroMedia Flash and requires no installation - it operates directly from the CD ROM. After a brief introduction the main application consists of a menu with 10 lessons that cover the following topics:

Trading to Win
Taking Losses
Trading Discipline
Fears and Emotions
Focus
Success
Losing
Bad Habits
Over-confidence
Success Zone

Each lesson is presented as an audio soundtrack in a pleasant female voice and starts with different variations on basic relaxation techniques including posture and breathing that is designed to get you ready to gain the most benefit from the session.

Once you are totally relaxed the session consists of key concepts presented in the first person so that the ideas are most readily received by your conscious (and subconscious) mind. Nothing in the sessions is "mind blowing" or unique, but straightforward and simple beliefs that are useful to your trading, but often difficult to adhere to under pressure.

"I always adhere to my stops to avoid large losers" is a typical example of the kind of beliefs that are being "embedded" during the session. Each session lasts only a few minutes and is designed to be repeated a few times per week (daily would be ideal).

One key caveat is that this software will not and cannot make up for a negative expectancy system - no matter how disciplined you are. In fact, using the software to aid in the accurate implementation of a losing system would actually be detrimental to your trading. Have a complete, tested, and positive expectancy trading plan is a pre-requisite to using this software.

In summary, if you do have a good trading system but are losing money due to psychological implementation errors, stress, or other human mistakes, then this software could definitely help you reduce your stress level, increase discipline and accuracy, and therefore reduce trading errors. At $129 the relaxation techniques on their own could make enough difference to pay for the software in saved errors many times over.

Visit Subconscious Training Corporation.

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How Not to Buy A House (Or Anything Else Really)

Paul King June 8th 2006

Here is a little scenario that usually plays out when anyone buys a house and a realtor and bank are involved. Let's see if you can spot the problem.

So you want to buy a house and you go and see a realtor.

Question: What's the first question they ask you?

Answer: "What's your price range?"

What they really mean is "What's the maximum amount you can afford to pay?" They need to know this so they can work out how big their commission will be on the sale. So you say you're not sure - you need to go and talk to the bank about financing. So you go to the bank.

Question: What's the first question they ask you?

Answer: "What's your income?"

They need to know this so that they can determine the maximum loan amount you should be able to afford whilst maintaining a reasonable level of default risk (for the bank). They then determine your maximum house purchase price by making the loan about 80% so they should still get their money back if you default. If the loan is more than 80% they cover their risk by making you purchase an insurance policy that pays them if you default on your mortgage payments (called Private Mortgage Insurance). If you do default, you may owe the outstanding mortgage amount to the insurance company instead, but the bank will be paid off!

So, armed with this information you head back to the realtor and they find you a house that matches as many of your criteria as possible (number of bedrooms, size, geographic location etc.) close to the maximum purchase price determined by the bank, from the current inventory of houses on the market.

In summary, you just bought a house where all the parameters were optimized for:

a) The highest amount of interest to the bank, and

b) The highest amount of commission for the realtor.

Does this seem like a good idea to you?

Buy the FinanceSpotlight Article 'How to Buy a House' for advice about how to do it right.

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Van Tharp Institute Peak 101 Workshop

Paul King June 6th 2006

I had the good fortune to attend Van's Peak Performance 101 Workshop recently and would highly recommend it for anyone who wants to improve their trading, themselves, or their life (OK so that just about means everyone).

The interactive course is split over 3 action-packed days (with 'homework') so you definitely get value for money in terms of the time you spend there. The main split in the course is between working on all the psychological aspects that can mess up your trading, and actually playing a trading game in groups that is a very accurate proxy for the real-life issues that come up with real trading without risking your trading account.

A small selection of the topics covered in the course included:

Parts negotiations (to eliminate conflicts in your trading)
Feelings release (to manage negative emotions)
Self-sabotage and how to prevent it
Common trading mistakes and how to avoid them

The trading simulation game that was played was an excellent way to see which of one's psychological 'buttons' trading is most likely to press and gave everyone a direct and complete overview of the psychological areas we need to work on the most. This allowed everyone to use the practical techniques we learned throughout the rest of the course in the most effective way.

Key learning in the game (since every team received the same trades) was that position-sizing is the component of your trading system that is responsible for meeting your objectives. Also, trading without a plan that includes written objectives and complete trading method shows up very quickly when the markets put you under pressure.

In summary, if you bring away one technique that can help improve your trading for the rest of you life, the cost of the course will repay itself many times over (and you could also end up making relationships that can truly help you succeed in whatever you are trying to do).

Click here to see the list of Van Tharp products we recommend.

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