PMKing Trading LLC - Trading Weblog April 2006

The Art of Trading #5

Paul King April 27th 2006

The Seven Elements

Sun Tzu uses the seven elements to asses the situation and predict the victor before a war is even commenced. These will now be discussed.

i Which rulers possess moral influence?

Which traders have trading systems that are most suited to their personality?

ii Which commander is more able?

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Do you Think Like a Trader?

Paul King, April 19th 2006

Take 1 – The Idiot

A penniless bum walks in to a bar and sees a sign on the wall and jumps for joy. Before the bartender can ask him what he wants he says ‘I’ll see you tomorrow’ and leaves.

Take 2 – The Norm

A man walks in to a bar and sees a sign on the wall and smiles. The bartender asks him what he wants. The man says ‘A pint of beer please’. The bartender gives him his beer, the man drinks it, pays, and leaves.

Take 3 – The Trader

A trader walks into the same bar, sees the sign, and gets a sly grin on his face. The bartender asks him what he wants. He says ’How much is beer?’ The bartender says $5 a pint.

The trader says ‘No, not how much I have to pay, how much do you pay for beer?’

‘Why should I tell you that?’ says the bartender.

‘I’ll make it worth your while’ says the trader.

‘OK’ says the bartender ‘I pay $2.50 a pint, now what do you want?’

‘I want to sell you some beer at $2 a pint’ says the trader.

‘How much beer?’ the bartender asks.

‘As much as you can take’ says the trader.

‘Where is it?’ says the bartender.

‘Oh, I don’t actually have any beer, I just want to agree to sell you some’.

‘You’re drunk or insane’ says the bartender ‘Get out of my bar’.

The trader leaves in disgust muttering something about the misleading sign.

Question: What did the sign say?

Contact Us if you can’t work out the answer.

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R.N. Elliott's Masterworks edited by Robert R. Prechter Jr.

Paul King, April 17th 2006

If you can get past the truly horrible jacket design for this book which is bright yellow and looks like it took about 10 minutes to put together, you will find a very informative insight into the life of R.N. Elliott and the genesis and evolution of his Wave Principle.

The books starts with a brief but worthwhile biography of Elliott which covers his business career as a consultant (who mainly charged out of additional profits generated - how's that for confidence!) and describes exactly how his Wave Principle came about. Although this section does not really tell you anything useful (or new) about the usage and application of the Wave Principle per se, it does give additional supporting 'evidence' for the meticulous and analytical nature of Elliott himself that builds confidence that his methods are at least worthy of investigation.

The middle section of the book is Elliott's Wave Principle as first outlined by the man himself with useful comments and (rare) corrections (where necessary) by Prechter. Even though Elliott's main work has been later extended and refined by others, it is still informative to see the 'definitive' version direct from the source along with practical application.

The remainder of the book presents articles and essays written by Elliott and gives some background about the underlying fundamental laws of nature and the universe that support the Wave Principle. This section includes many useful perspectives and ideas and is good fuel for further study. I think Elliott himself would have been pleased with the completeness and thoroughness of this book with the only main caveat being the amateurish jacket design.

Buy R.N. Elliott's Masterworks at Elliott Wave International.

Take a look at our new Market Perspective feature (based on Elliott Wave) here.

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InvestorFLIX Product Review: New Samurai Secrets for Trading presented by Richard McCall

Paul King, April 12th 2006

In this 2 hour audio CD McCall gives a very detailed and informative overview of the application of Martial Arts training and methods to the trading arena (although all of it is applicable to life in general). Even though this could be construed as a plug for his book 'Way of the Warrior Trader' it contains a much better insight into the material than a simple 'brochure' would provide.

There analogy for trading is that traders face financial risk in the same way a Samurai faced death in the normal course of their 'being who they are'. Managing stress is a large part of excellent performance and Martial Art is spit into 3 main parts based on mental discipline:

Psychology of Existence
Psychology of Action
Psychology of Recovery

The way you view your existence is a key concept in becoming a good trader, and performance of a Samurai was linked intimately to their desire to win, their system of fighting, the flawless execution of their techniques, and treating their actions as a pure (unencumbered) work of art. When you can do this a transformation occurs and you end up on the 'Winning Way' or true path.

The main barriers to achieving a seamless blend of 'correct' action are the 3 negative emotions:

Stress
Anger
Fear

These are generated because our natural 'fight or flight' instincts are not geared to inaction even when inaction is the best course. This causes stress and effects morale. Self-directed anger is very destructive and fear is a big handicap. The way the Samurai dealt with these emotions is through 4 motivational pillars:

Mortality Awareness - Accept the risk of what you are doing
Life Purpose - Do what you know you are supposed to be doing
Soul Passion - Use your passion to generate inner energy
Higher Goals - Have something to aim for that is beyond you

Self-perception is very important and also the understanding that you are made of 3 interconnected parts: Mind, Body, and Soul. Rather than delegate independent responsibility for each of these parts to independent institutions (Academia, Healthcare Industry, Organised Religion) a Samurai understands that they are responsible for these areas as a complete whole.

The rest of this review can be read here on our InvestorFLIX product review page.

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Book Review: Prechter's Perspective by Robert Prechter edited by Peter Kendall

Paul King, April 7th 2006

In this interview-style book published in 2004, Bob presents his own perspectives on subjects as far-ranging as Elliot Wave Principle (obviously) to the way he believes that the 'normal' cause and effect relationships people take for granted in a market environment (and the world in general) are actually inverted.

As well as a detailed and personal discussion of the application of Elliott Wave in the context of the practical uses in actual trading, Bob gives some simple but excellent rules for trading in general. These include:

Having a method
Having discipline
Gaining experience
Accepting responsibility for your actions
Accommodating losses
Accepting huge gains

Although an interview format book is sometimes difficult for some people to extract the true ‘value’ from, it is well worth the effort of studying this book since it can give you some useful insights into things that you may currently take for granted as ‘truths’ that are actually detrimental to your trading performance.

The main novel theme in this book is about Bob’s concept of ‘Socionomics’, where social mood and psychology are the result of movements in the markets not the other way round. Believing that the market goes down because people are depressed, for example is a complete reversal of the ‘conventional wisdom’ and thinking about it deeply can lead to some interesting conclusions and beliefs that have a significant practical impact on how one approaches trading.

Discussing specific approaches to trading, and how Bob thinks about them is a useful and informative look into the trading methods of an obviously accomplished and passionate market participant and also gives a context for the application of Elliott Wave Principle. All-in-all it should be considered a very worthwhile read.

Read out reviews of other Elliott Wave International books here.

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The Art of Trading #4

Paul King, April 5th 2006

The Five Factors continued

v By doctrine I mean organization, control, assignment of appropriate ranks to officers, regulation of supply routes, and the provision of principal items used by the army.

To be a successful trade you must be organized, and treat trading as a business. This means you must manage the cash flow of the business to allow for business expenses, and the capital required to trade your systems. If your business and personal expenses are not covered by other forms of income or cash reserves that are separate from your trading account, it will be very difficult to consistently apply your trading system through the inevitable losing periods. Your trading will not go well if your systems are competing for capital with other commitments like mortgage payments, grocery bills, and car payments. If you are in a situation where you must make money trading within a certain time period (e.g. monthly), then you will have much more stress on your trading than is desirable since the markets or trading system do not generate cash ‘on demand’

Most trading systems exhibit medium or long periods of losing money followed by short periods of making a lot. You need the resources to allow your trading systems to realize their potential in their own time, not when you need the money. For this reason it is important that you plan for alternative, more predictable, income streams to pay business and personal expenses.

If this is not possible, then do not commence trading full-time; keep your steady income stream in your regular profession, and build your trading business in the background when you can. This will mean that it will take far longer to make your trading business work, but you will have a much higher chance of success.

Every general has heard of these five matters. Those who master them win; those who do not are defeated. Therefore in laying plans compare the following seven elements appraising them with utmost care.

Successful trading is a matter of good preparation, knowing your trading system is effective, trading it when conditions are favorable, and having courage, confidence, and discipline to stick to your plans accurately

Next come the Seven Elements to consider when assessing your situation…

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