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Using Trading Metrics to Get to the Next Level of Performance


Using Trading Metrics to Get to the Next Level of Performance

The hallmark of performance improvement is keeping score with relevant metrics.  If a baseball pitcher is working on performance, the metrics might be hits and runs allowed; number of walks given up; percentages of balls and strikes thrown; success at getting outs with right vs. left-handed hitters; etc.  Then the metrics can get more detailed.  How does performance vary with men on base vs. no men on base?  How does performance vary during early vs. middle vs. late innings?  How does performance vary when throwing breaking balls vs. fast balls?

By slicing and dicing performance data, we can gain a valuable window on strengths and weaknesses and areas to target for improvement.  Of course, the data must be collected over a sufficient time that we see meaningful trends and differences, not just random changes.  During any week, a pitcher may do better or worse in a category simply because of normal variation in performance.  It is over time that we see important distinctions emerge.

It is common for performers to have blind spots in their self assessments.  A simple example would be driving skill.  The great majority of drivers rate themselves as better than average when we know that, statistically, that can’t be the case.  If we had on-board computers calculating things like speed, braking time, closeness to other vehicles, etc., we could more accurately detect who was driving well and who wasn’t.  Indeed, the metrics would detect areas to focus upon to improve driving that the driver might not be aware of at all.

So it is with trading.  We write in journals and we assess our performance, but rarely do we take a hard look at actual performance data.  Very often, if we don’t measure it, we can’t manage–and improve–it.  Here are a few examples of traders I’ve recently worked with who have used metrics to get to the next level of performance:

*  A diligent trader measured confidence level in each trade taken based upon the evidence in favor of that trade idea.  The trader then tracked the hit rate on high confidence trades versus others.  When he saw that the high confidence trades actually had a greater likelihood of being profitable, he began sizing those larger and making more money;

*  A wise portfolio manager went back to previous trades and calculated the P/L on those trades if the entries had been made at the end of the trading day rather than when they had actually been made, during the day.  The profitability of the trades improved markedly simply by entering on an end of day basis.  When entering during the day, the trader tended to buy strength and sell weakness out of a fear of missing the move, creating poor trade location and diminished reward-to-risk.

*  A motivated trader working on becoming better at generating ideas kept track of the correlation of his P/L with his hedge fund overall, with the markets he was trading, and with hedge fund industry statistics.  Over time, he saw a reduced correlation as he traded some unique strategies and expressed views in more unique ways.

*  A concerned trader working on discipline and taking better trades calculated her hit rate on trades (percentage of winning vs. losing trades), and also compared the average size of winning vs. losing trades.  We additionally calculated forward P/L after runs of recent winning and losing trades.  All of these helped to measure whether she was becoming more selective in her trading, whether she was engaging in sound risk management, and whether she was avoiding overconfidence and underconfidence after winning and losing periods.

Almost any trading goal that we can set can be measured with the right metrics.  We may feel we’re getting nowhere or we may delude ourselves that we’re making progress, but over time the numbers will tell us where we truly stand.  Focusing on improving our metrics is a great way of improving our trading processes and not becoming overly focused on short-term P/L.

What are you working on right now and how are you measuring and recording it?

Further Reading:  Using Metrics to Discover Your Trading Psychology

Published at Fri, 03 Mar 2017 10:32:00 +0000

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The bump isn’t just Trump: What’s driving the stock rally

Photo: Richard Drew /Associated Press

The bump isn’t just Trump: What’s driving the stock rally


NEW YORK — The stock market is hitting new heights, and yes, excitement about President Donald Trump’s policies is part of the reason for it. But it’s not the only one, analysts say.

Even if Trump had lost the election, many professional investors and analysts say they still would have expected stocks to rise, just perhaps not to the same degree. The Standard & Poor’s index has leapt 11.6 percent since Election Day, packing more gains into four months than it’s had in five of the last six full years. It dipped a bit Thursday, but it’s still close to its record set a day earlier.

Here’s a look at some of the factors behind the strong run for stocks:

Trump bump: The first reaction for markets to Trump’s win of the White House was confusion. Many investors had been expecting a victory for Hillary Clinton, and markets around the world tumbled on election night as the result became apparent. But they reversed course within hours. The reason: Investors are expecting the Trump White House to push through tax cuts for businesses and to loosen regulations on them.

Lower tax bills for companies should lead to an immediate rise in earnings, and stock prices tend to track profits over the long term. Easier regulations should also help businesses, the thinking goes, particularly big banks and other financials that have been under restrictions imposed following the financial crisis.

Financial stocks have been the best-performing sector by far of the 11 that make up the S&P 500 since the election. Besides the hope for looser regulations, analysts are also excited about the prospect for bigger profits given recent gains in interest rates, which will make lending money more profitable.

Improving economy: Growth has been frustratingly slow since the end of the Great Recession, but the job market is picking up steam. The unemployment rate in January was 4.8 percent, and economists see the economy as close to full employment. A report on Thursday showed that the fewest number of workers applied for unemployment benefits last week since Richard Nixon was in the White House.

Improvement was underway before Trump entered the White House, but his election has spurred things along. Optimism among small businesses, for example, spiked higher after the election and is now at its highest level since 2004, according to surveys from the National Federation of Independent Business.

Confidence also jumped for regular households following the election, and consumer confidence is at its highest level since the summer of 2001. If that translates into more purchases at stores and elsewhere, it should drive even more economic growth.

Other economies around the world are also improving, raising expectations for profits of big U.S. companies, which do a lot of their business overseas.

Investor confidence: Confidence has spread even to regular investors.

After years of hiding out in bonds and other safer investments, retail investors began creeping back into stock mutual funds and exchange-traded funds following the election. Investors plugged $20.7 billion into U.S. stock funds in November, the biggest month in nearly two years. They’ve followed that up with more purchases. That buying has helped to bid up stocks even more.

Corporate profits: Big businesses are finally earning bigger profits again.

Earnings per share for companies in the S&P 500 were nearly 6 percent higher last quarter than a year earlier, with nearly all of the companies reporting, according to S&P Global Market Intelligence. It’s a sharp turnaround from a year ago, when low oil prices and other factors were pulling down profits for S&P 500 companies. Profit growth was particularly strong for technology and financial companies. Microsoft’s earnings rose on stronger sales of business software, for example, and investment banks reported a strong quarter for their trading operations.

But just as each of these pillars has helped to lift stocks in recent months, a weakening of any one of them could remove some support. If tax cuts come later than expected, or if they end up being only minor ones, it could mean a drop for stocks.

Critics also worry that that stock prices have run up at a time when they were already looking overpriced relative to their earnings. One popular way to measure whether the stock market is expensive or not is to compare the S&P 500’s level against its earnings over the prior 10 years, adjusted for inflation. By that measure, which was popularized by Nobel-winning economist Robert Shiller, the S&P 500 is close to its most expensive level since the dot-com bubble was deflating in 2002.

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History In The Making


History In The Making

Ludwig van Beethoven’s Symphony No. 7 in A major, consists of four incredible movements and was composed between the years 1811 and 1812, at which time the poor man had already turned almost completely deaf. I must admit that listening to this symphony in particular often brings tears to my eyes. First as a visceral response to its unparalleled beauty and technical perfection, but even more so knowing that Beethoven never had been able to actually listen to his own creation.

The story almost seems like a cruel punishment of the Gods portrayed in ancient Greek or Roman mythology. To be handed such a divine talent or gift, but at the same time losing your own ability to enjoy it the more you actually use it. I can only imagine the mental anguish and emotional torment Beethoven was forced to endure over the course of about 20 years up until his death. He died pretty poor as most of his income was dependent on live performances (Spotify wasn’t available until about 180 years later), which obviously turns into a tough act to pull off if you’re as deaf as rock wrapped into a blanket.

I sometimes wonder if the knowledge of his future fame would have offered him much solace. Knowing the mentality of the Germans quite well as I sprung from that same gene pool I can assure you that we are quite a narcissistic bunch underneath the cold exterior. So my hunch would be that it would probably offered him at least some comfort. What impresses me the most however is that his torment did not detract him from his mission to do what he was born to do and he continued writing two more symphonies of which the 9th is the one he most definitely never heard a single tone.

Now think about that next time when you’re having a tough day or when you find yourself blaming others or your circumstances for not being able to pursue your dreams. Beethoven was a giant and unfortunately they don’t make them like this anymore.


Now what inspired this intro was the concept of perfection, to which LVB’s 7th symphony is without doubt a timeless example. When it comes to trading of course we sometimes refer to charts or campaigns in an emotional fashion, but rarely do they entail the concept of perfection and beauty. But if I look at our entry three weeks ago and consider the ensuing rally then I cannot help but feel awe and joy. For one we were able to jump on board and that’s on us, we should be proud. But this rally stands on its own in that it is almost historical in its relentless propagation.

If someone would ask me to point toward one of the best campaigns in my life then this one would probably be among the top three. I remember riding gold and crude a year or two ago but although those rallies were impressive I believe they are thwarted by this one. Could we be looking at perfection here? A rally that future traders will point toward and say – “heck grandpa/grandma, I wish I had been around to jump on that one.” And you’ll say “well, as a matter of fact…”

Anyway, this campaign is now bordering the ridiculous and I’m now advancing my stop to below the 2380 mark. There’s really nothing left to be said here – technically we are in uncharted territory and it’ll end when it will end. We don’t ask questions and ride it until that moment arrives.


Silver hasn’t gone anywhere and my trailing stop remains where it is. Could we be painting a little pennant here? If so then we’re in good shape but we could fall prey to a fake out spike lower. I’m comfortable trailing where I’m at however.


Gold has lost much of its luster in the past few days but I think we’ve got a possible long candidate here again once the short term panel paints something resembling a spike low preferably followed by a retest. I very much like the context on the daily panel. Although gold has been pounded lately I think this may be the big shake out before a jump higher. We’ve accumulated a ton of support context here just a few handles away and the potential for a continuation of the current daily trend is pretty good.


Yellen is scheduled to deliver a speech tomorrow and perhaps that’s why equities are in a rush to paint a bit more green before she says something stupid. I for one won’t add any more exposure until then. Ms. Market has been good to me/us and there’s no reason to test my luck.
Published at Thu, 02 Mar 2017 14:26:07 +0000

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Yelp Inc. Buys Nowait in $40 Million Deal


Yelp Inc. Buys Nowait in $40 Million Deal

By Tim Brugger | March 2, 2017 — 1:42 PM EST

Offering what it bills as “the industry’s leading waitlist system and seating tool,” Pittsburgh-based Nowait is now fully owned by its one-time partner and investor, Yelp (NYSE: YELP). Yelp’s connection with Nowait began in August 2016 with an $8 million investment. By October, Yelp had integrated Nowait into its industry-leading app, where it quickly became “a valuable addition to our overall restaurant offerings.”

Yelp added that the $40 million all-cash deal for the remaining stake in privately held Nowait closed on Feb. 28. At the end of last quarter Yelp had approximately $480 million in cash, equivalents, and short-term securities on its balance sheet.

Nowait began in Pittsburgh, a city notorious for restaurants that don’t take reservations, and was an instant hit locally. Today, it has arrangements with an estimated 4,000 casual dining restaurants in the U.S. and Canada. Participating restaurants are able to share seating availability with mobile users in real time. Prospective customers can then “get in line” for a table remotely via the app.

Yelp co-founder and CEO Jeremy Stoppelman said of the deal, “With this acquisition, we’ll make even bigger strides in the restaurant industry by allowing Yelp users to more quickly move from search and discovery to transacting at a local business.”

Nowait’s focus on consumers in search of casual dining is due to the segment’s popularity. According to Statista, 54% of U.S. diners eat in a casual establishment at least once monthly, three times more than patronize fine-dining restaurants.

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Tim Brugger has no position in any stocks mentioned

Published at Thu, 02 Mar 2017 18:42:02 +0000

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This Indicator Points to a Top-Heavy Stock Market


This Indicator Points to a Top-Heavy Stock Market

The S&P 500 index reached new highs following President Trump’s speech to Congress that promised increased infrastructure spending, lower corporate taxes, and less red tape for the financial industry. At the same time, billionaire investor Warren Buffett suggested that stocks are comparatively cheap based on where interest rates are in an interview with CNBC, and FactSet’s Earnings Insights showed two-thirds of S&P 500 companies beating Q4’16 estimates.

Despite these positive developments, the CME Group’s FedWatch points to a 68.6% chance of a March interest rate hike and FactSet’s data shows that two-thirds of companies issued negative earnings guidance for Q1’17. The combination of rising interest rates and slower earnings growth could force valuations to move lower, especially with the index’s price-earnings ratio standing at 26.9x – significantly higher than its 14.65x mean.

Technical indicators seem to confirm that equity valuations have become frothy and a downturn could be a possibility over the coming weeks. In particular, more than 400 S&P 500 components are trading above their 200-day moving average, which is the highest level in at least a year. The last time these levels were reached in early-2015 and late-2015, equities moved significantly lower to more rational price points from a technical perspective.

The S&P 500 index’s relative strength index (RSI) of 81.86 is a further sign of an overextended market with 70.0 being the upper bound for the indicator. However, the moving average convergence-divergence (MACD) remains in a bullish uptrend dating back to early-February. The key levels to watch at this point are R1 resistance at 2,399.57 and R2 resistance at 2,435.50, which could prove to be near-term resistance to the rally.

Traders and investors may want to take a conservative approach to the market after the recent rally given both fundamental and technical factors pointing to overbought conditions.
Published at Wed, 01 Mar 2017 20:11:00 +0000

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Finding Star Trades When the Market Seems Dark


Finding Star Trades When the Market Seems Dark

Thanks to Bella at SMB for the posts on key takeaways and inspirations from my recent seminar at Traders Expo.  I think Bella has gotten it right:  those are key points worth taking away.  I strongly recommend reviewing his posts.

I’d like to underscore the point about first understanding the regime we’re trading in and only then figuring out which setups are associated with positive expected returns.  Here is a recent post on the topic.  

If the regime has not changed, the patterns that have shown up recently should replay themselves in the immediate future.  The recent regime has told us loudly and clearly to buy dips.  That regime will eventually change, but it is not helpful to try to front run that change when there is no current evidence that the regime has shifted.

The astronomer does not fret that the sky is dark.  That permits a gaze at the stars.

This has been a totally neglected topic within technical analysis and trading psychology.



Published at Wed, 01 Mar 2017 10:41:00 +0000

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Domino’s Streak of Strong Sales Growth Continues

by Riedelmeier from Pixabay

Domino’s Streak of Strong Sales Growth Continues

By Daniel B. Kline | February 28, 2017 — 12:01 PM EST

Clearly, the Noid has been defeated.

Domino’s (NYSE: DPZ) continues to deliver results that defy the market conditions dragging down sales in much of the restaurant industry. The company posted comparable-store sales gains in both the United States and globally in the fourth quarter, its 23rd straight quarter of domestic same-store growth and its 92nd quarter in a row growing internationally.

And it’s not just that the company managed to add to its same-store sales totals: The numbers have been impressive. Domestic same-store sales climbed 12.2% year over year in Q4, and they jumped 10.5% for the full year. The chain’s international locations had 4.3% growth in Q4 and a 6.3% gain for the year.

“I’m extremely proud of our franchisees and operators worldwide, including those who contributed toward back-to-back years of double digit sales growth in the U.S.,” said CEO J. Patrick Doyle in the Q4 earnings release. “While these unprecedented results speak for themselves, I am most pleased with the passion and energy we demonstrated throughout 2016 in meeting the challenge of sustained success. The momentum and alignment within our system has never been stronger.”

A look at Domino’s numbers

In addition to growing same-store sales, Domino’s also improved its earnings per share. The company delivered Q4 EPS of $1.48, up 25.4% over the prior-year quarter. Full-year EPS came in at $4.30, up 23.9% over 2015. Revenue also climbed 10.6% year-over-year, despite the previous year’s quarter being a week longer.

Domino’s also provided indications that its expansion across the world is unlikely to slow down anytime soon. The company reported “record global net store growth of 1,281 stores in 2016, comprised of 171 net new domestic stores and 1,110 net new stores internationally.”

What’s next?

This is a clear case of “if it’s not broke, don’t fix it.” Going forward, however, Domino’s will tweak its formula. The company will continue to modernize the look of some of its stores, and it has been a steady innovator when it comes to ordering technology.

There’s nothing that suggest that an end is coming to either of Domino’s same-store sales streaks in the current quarter. Customers globally seem to have an ever-increasing desire for really convenient, mediocre pizza that this chain has been stunningly good at filling.

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*Stock Advisor returns as of February 6, 2017

Daniel Kline has no position in any stocks mentioned.
Published at Tue, 28 Feb 2017 17:01:02 +0000

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A New Low Volatility ETF Soars

{pixabay|100|campaign}A New Low Volatility ETF Soars

A New Low Volatility ETF Soars

By Todd Shriber | February 28, 2017 — 12:12 PM EST

Low volatility exchange traded funds (ETFs) were the talk of the ETF universe for a significant portion of 2016, but judging by recent outflows from some of these funds, investors currently are not overly enthusiastic on the low volatility factor.

Enthusiasm or not, some low volatility ETFs continue delivering solid returns and that includes some of the newer members of the group, such as the Fidelity Low Volatility Factor ETF (FDLO). FDLO debuted in September as part of a broader group of smart beta offerings from Fidelity, so the ETF is not old, but it was one of about 120 to ascend to record highs on Monday.

FDLO tracks the Fidelity U.S. Low Volatility Factor Index, “which is designed to reflect the performance of stocks of large and mid-capitalization U.S. companies with lower volatility than the broader market,” according to Fidelity.

A deeper look at FDLO reveals this is not what many are used to when it comes to low volatility ETFs, but that is not a bad thing. For example, FDLO’s largest sector weight is an almost 21.4% allocation to the technology sector, making FDLO the only U.S.-focused ETF dedicated to the low volatility factor that features technology as its largest sector weight.

Said another way, investors are unlikely to find rival low volatility ETFs that feature Microsoft Corp. (MSFT) and Alphabet Inc. (GOOGL) as the top two holdings, as is the case with FDLO.

Standard operating procedure for many low volatility ETFs is to feature overweight exposure to the utilities and consumer staples sectors, and maybe healthcare, too. FDLO’s 13.2% healthcare weight is nearly inline with the S&P 500, but the ETF’s 3.1% utilities weight is low compared to competing volatility-fighting equity funds.

While FDLO has its perks, including the availability of trading the ETF without a commission charge on the Fidelity platform, this is still a low volatility fund. What that means is that investors should be prepared for some lagging when the broad market is sailing higher. For example, FDLO is up 8.4% since inception, a performance that lags the S&P 500 by about 200 basis points.

FDLO charges 0.29% per year, which is inexpensive relative to other smart beta strategies, but nearly double the 0.15% annual fee on the rival iShares Edge MSCI Min Vol USA ETF (USMV).
Published at Tue, 28 Feb 2017 17:12:00 +0000

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Silver – Pausing Before Another Leg Higher

by tookapic from Pixabay

Silver – Pausing Before Another Leg Higher

By: MIG Bank | Tue, Feb 28, 2017

Silver has finally exited an area where bearish pressures seem important. The precious metal is way into a bullish momentum. Hourly support can be located at 17.75 (14/02/2017 low) then 16.63 (27/01/2017 low). Expected to reach 19.00 in the medium-term.

In the long-term, the death cross indicates that further downsides are very likely. Resistance is located at 25.11 (28/08/2013 high). Strong support can be found at 11.75 (20/04/2009).

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Published at Tue, 28 Feb 2017 06:43:42 +0000

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A Powerful Technique for Changing Your Trading Psychology


A Powerful Technique for Changing Your Trading Psychology

In the last post, we took a look at four patterns that commonly show up when traders experience emotional challenges to their trading.  The underlying drivers of these patterns are frustration (over losses or missed trades), distorted thinking (overly optimistic/pessimistic following wins/losses), and anxiety (over possibilities of losing money or failing to make money).  Once those triggers are activated and we become frustrated, overconfident, negative, or fearful, it’s easy for those states to color our views of markets and our next decisions and actions.

So how can we prevent cognitive and emotional triggers from sabotaging our trading?

My favorite approach addresses prevention rather than care:  not allowing state shifts to shift our trading processes.

The approach begins with acceptance.  We are not going to eliminate frustration, uncertainty, or mood swings.  Trading operates in an environment of uncertainty and risk.  That will elicit unwanted thoughts and emotions at times.  It’s OK to be human and to have human feelings.  It’s going to happen.

Once we accept that these patterns will crop up, we can then actively anticipate them.  Instead of putting them out of our minds, we want to make them our focus.

Once we’re in that state of acceptance, we want to make use of a straightforward, but powerful stress management routine.  We listen to peaceful, relaxing music; close our eyes; slow and deepen our breathing; and sit very still while slowing down and focusing on the music.  We use the breathing to bring our body’s level of arousal down, and we use the close listening to the music to intensify our cognitive focus.  Through this routine, we keep ourselves out of the “flight or fight” mode of stress and into a mode of peaceful alertness.

The stress management routine requires some practice, so we want to repeat the exercise a few times a day for several days to become good at reaching that peaceful alert state.  With practice, we can focus ourselves and get ourselves out of fight or flight mode on demand.

Then, once we’ve become good at the stress management, we do the exercise with the music and deep breathing, but now we add imagery.  We imagine the challenging market situations that normally trigger our frustration, distorted thinking, anxiety, etc.  In other words, while we’re playing the music and breathing slowly, we’re vividly walking ourselves through situations where we miss a trade, lose money, go into drawdown, trade poorly, etc.  While you’re imagining those situations, you want to actually imagine and *feel* those emotional responses that have sabotaged your trading in the past:  you want to feel the fear or greed or frustration.

But you’re now experiencing those emotions while you are in control, focused and relaxed.  You keep focusing on those situations and emotions until you can stay in your calm, focused zone.  

This is an exercise you’ll want to do every day before the start of trading and perhaps also during midday breaks.  The repetition allows you to actively face emotional challenges while staying in control.  Through repeated experience, we reprogram our negative patterns of thought and emotion.  We experience them, but they no longer define or control us. 

Once we’ve achieved a level of acceptance and self-control, we then add a final component to our imagery work:  we vividly imagine the problem scenarios and our negative emotional and cognitive reactions to those, but now we also vividly walk ourselves through how we would like to deal with those reactions.  So, for example, we might imagine missing a trade and feeling frustration and thinking how stupid we are and then visualize ourselves stepping back from the screen temporarily, doing some deep breathing, and coaching ourselves in a more constructive mode, telling ourselves that it’s OK to miss something, that opportunities will continue to arise, that the important thing is to stay focused for future opportunity, etc.

All of this mental rehearsal is also done while we’re breathing deeply and slowly and listening to the relaxing music while seated in a still position.  So through repeated mental rehearsal, we’re imagining situations that upset us–and we’re practicing ways of thinking and behaving to handle those situations constructively.

The repeated mental rehearsal builds new habit patterns for us.  As we build those new habits, we can then experience frustrating and discouraging situations in our trading, take a few deep breaths, and engage in the constructive self-talk and actions that we’ve been rehearsing.  The visualization exercises act as practice, so that we are more prepared to sustain control during actual trading.

Over time, this accomplishes prevention.  We still experience losses, we still have frustrating experiences, we still feel giddy at times, but now we have a set of tools for staying calm, staying focused, and staying in control by responding to these challenges in the ways we’ve practiced.  Once we accept that emotional and cognitive overreactions will occur, it becomes easier to anticipate them and deal with them effectively.

Further Reading:  Performance Anxiety in Trading as a Cause of Discipline Lapse

For those looking to go into greater depth into related topics, The Daily Trading Coach book contains a cookbook of psychological techniques for traders.  The Trading Psychology 2.0 book contains strategies for enhancing positive emotional experiences as a way to buffer trading stresses.

Published at Tue, 28 Feb 2017 12:08:00 +0000

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Fidelity slashes fees on stock and ETF trades to $4.95

A sign marks a Fidelity Investments office in Boston, Massachusetts, U.S. September 21, 2016. REUTERS/Brian Snyder/File Photo

Fidelity slashes fees on stock and ETF trades to $4.95

Fidelity Investments said on Tuesday it cut the price on trades for stocks and exchange-traded funds by 38 percent for retail brokerage clients.

Boston-based Fidelity’s price reduction to $4.95 from the previous commission of $7.95 a trade, will likely put pressure on the rest of the U.S. brokerage industry. Fidelity’s price offers a discount of more than 50 percent when compared with some rivals.

“It puts the flag up that Fidelity is the value player in investing,” said Ram Subramaniam, president of Fidelity’s retail brokerage business.

Discount brokers TD Ameritrade Holding Corp and E*Trade Financial Corp each charge $9.99 per trade and Charles Schwab Corp charges $6.95.

Fidelity said it also reduced option pricing to $0.65 per contract, down from $0.75. Fidelity’s online brokerage business has 17.9 million accounts and $1.7 trillion in total client assets.

(Reporting By Tim McLaughlin; Editing by Andrew Hay)

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A Cognitive View of Trading Psychology

A Cognitive View of Trading Psychology

A common view, held among traders and coaches of traders, is that emotional factors account for the difference between trading success and trading failure.  Some hold that emotions should be controlled, held in check, and made secondary to the discipline of rules.  Others hold that emotions should be accepted and experienced in a mindful way and, when possible, used as information.  In either case, the goal is to ensure that decision making is achieved through a proper trading process and not driven by the emotional experiences and impulses of the moment.

I believe this emotive view of trading performance is incorrect and, in fact, is not plausibly asserted in any other performance domain.  No one, for example, would contend that the path to reaching grandmaster status in chess is a function of successfully dealing with one’s feelings.  Emotional self-control, while necessary for exemplary performance, is hardly sufficient.  Very often, emotional loss of control is the result of poor performance and not its primary cause.

Consider an algorithmic trading system that has been overfit, using many predictors over a lookback period to anticipate future price behavior.  Such an overfit system has negative expected returns, but hardly because emotional factors have interfered with its performance.  Rather, it is generalizing from improperly derived rules, assuming that the future will rigidly replicate the past.

My years of working with traders as a performance psychologist have led me to the view that success in financial markets is more a function of cognitive strengths than emotional/personality ones.  Moreover, my experience has suggested that these cognitive strengths are domain specific, rather than domain general.  That is, the skilled trader develops ways of thinking about markets that are unique and distinctive to financial markets and doesn’t simply develop general reasoning skills that would lead to success across fields of performance.

An analogy would be the performance of a physician.  The skilled physician picks up on symptoms, takes a good history and physical, decides upon tests to conduct, assembles the findings into one or more plausible diagnoses, conducts more tests to differentiate among the diagnostic possibilities if necessary, and eventually finds treatment options based upon the preferred diagnosis.  All during this time, the skilled physician is maintaining a good rapport with the patient and engaging the patient in a supportive way, encouraging the patient to be as forthcoming with information as possible.

Should the physician get the diagnosis and treatment wrong, we would not immediately assume that emotional factors got in the way of a successful outcome.  Rather, we would look for breakdowns in the physician’s reasoning and decision-making process.  This process is domain specific in that it is not used by professionals in other performance-related fields.  The reasoning process of the chess grandmaster does not resemble that of the physician and neither resembles the reasoning of a successful daytrader.

(Notice in the case of the physician that more than one reasoning skill may be at work simultaneously.  The judgments involved in sensitively engaging the patient and maintaining rapport are different from those used to navigate a decision tree for diagnosis.  For a successful trader, the reasoning used to identify a worthy investment could be quite different from the reasoning used to determine when to make that investment.  The skill needed to accurately diagnose a tumor is different from the surgical skill needed to remove it.)

When trading firms *have* shown interest in cognitive factors when recruiting traders, they often have looked for general competencies rather than ones specific to the trading domain.  Thus, for example, they might have candidates perform a general reasoning test or they might look for good grades on a college transcript.  When I was teaching full-time at the medical school in Syracuse, I was surprised by the fact that grades in college *did* predict medical school grades–but only in the first two years of classroom-based medical education.  College grades and even grades in basic science courses in the initial years of medical school were not meaningful predictors of clinical performance with patients.  Knowing how to study for tests did not correlate highly with knowing how to engage patients, navigate decision trees of diagnosis and treatment, and implement actual procedures.

The domain specificity of the cognitive processes that contribute to successful trading performance helps to explain one observation that has always struck me.  Traders trained in classroom-like settings (or left to their own devices to learn trading through reading books and watching screens) rarely achieve success.  I consistently observe the highest hit rate on trader development in situations where the new trader directly observes the experienced trader and models the behavior of that more senior professional.  In other words, trading is not learned through general learning mechanisms (classrooms, study), but through very specific observation and modeling.

It is not coincidence that medical education starts in the classroom to gain basic knowledge of physiology, biochemistry, and pathology but then quickly moves to the clinics and hospital floors to allow for shadowing and direct observation of practicing physicians.  You learn to treat a patient by watching competent physicians treat patients and by modeling their decision-making processes and domain specific skills.  No amount of reading or self-study could help a student become a successful psychiatrist or gynecological surgeon.

The domain specificity of trading skill also helps explain why very intelligent people often don’t make for very successful traders.  Other traders I’ve known who are quite successful in markets are notably weak in their performance in other areas of life (as parents and spouses, for example, or in the conduct of their own personal finances).  Several trading firms have been known to look for potential trading stars by recruiting successful poker and video game players.  They are hypothesizing that the skills specific to those performance domains are generalizable to trading.  That focus on domain specificity is one of the rare pieces of recognition that it takes more than emotional discipline and awareness to succeed in trading.

All of us have two eyes, but many of us have different views.  It’s what happens cognitively–in our information processing–that determines how perceptions become expressed as views.  Traders truly interested in developing themselves as professionals need to do what aspiring chess masters and physicians do:  learn from the masters.

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Schedule for Week of Feb 26, 2017

Schedule for Week of Feb 26, 2017

by Bill McBride on 2/25/2017 09:31:00 AM

The key economic report this week is the second estimate of Q4 GDP.

Other key indicators include the February ISM manufacturing and non-manufacturing indexes, February auto sales, and the Case-Shiller house price index.

—– Monday, Feb 27th —–

8:30 AM: Durable Goods Orders for January from the Census Bureau. The consensus is for a 1.8% increase in durable goods orders.

10:00 AM: Pending Home Sales Index for January. The consensus is for a 1.1% increase in the index.

10:30 AM: Dallas Fed Survey of Manufacturing Activity for February.

—– Tuesday, Feb 28th—–

8:30 AM: Gross Domestic Product, 4th quarter 2016 (second estimate). The consensus is that real GDP increased 2.1% annualized in Q4, up from advance estimate of 1.9%..

Case-Shiller House Prices Indices

9:00 AM ET: S&P/Case-Shiller House Price Index for December. Although this is the December report, it is really a 3 month average of October, November and December prices.

This graph shows the nominal seasonally adjusted National Index, Composite 10 and Composite 20 indexes through the November 2016 report (the Composite 20 was started in January 2000).

The consensus is for a 5.4% year-over-year increase in the Comp 20 index for December.

9:45 AM: Chicago Purchasing Managers Index for February. The consensus is for a reading of 52.9, up from 54.6 in December.

—– Wednesday, Mar 1st —–

7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.


Vehicle Sales

All day: Light vehicle sales for February. The consensus is for light vehicle sales to decrease to 17.7 million SAAR in January, from 18.4 million in  December (Seasonally Adjusted Annual Rate).

This graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is the January sales rate.

8:30 AM: Personal Income and Outlays for January. The consensus is for a 0.3% increase in personal income, and for a 0.3% increase in personal spending. And for the Core PCE price index to increase 0.2%.


10:00 AM: ISM Manufacturing Index for February. The consensus is for the ISM to be at 56.1, up from 54.7 in December.

Here is a long term graph of the ISM manufacturing index.

The ISM manufacturing index indicated expansion at 56.0% in January. The employment index was at 56.1%, and the new orders index was at 60.4%.

10:00 AM: Construction Spending for January. The consensus is for a 0.2% increase in construction spending.

2:00 PM: the Federal Reserve Beige Book, an informal review by the Federal Reserve Banks of current economic conditions in their Districts.

—– Thursday, Mar 2nd —–

8:30 AM ET: The initial weekly unemployment claims report will be released.  The consensus is for 240 thousand initial claims, up from 239 thousand the previous week.

—– Friday, Mar 3rd —–

10:00 AM: the ISM non-Manufacturing Index for February. The consensus is for index to increase to 57.2 from 57.1 in December.

2:00 PM: Speech by Fed Chair Janet Yellen, Economic Outlook, At the Executives Club of Chicago, Chicago, Ill.


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Finding Opportunity in Difficult Market Conditions

Finding Opportunity in Difficult Market Conditions

In my recent Forbes article, I reflect upon traders that I see making money in these low volatility market conditions and identify four strategies that they are employing.  In each case, they look at markets in a different way to detect meaningful movement in seemingly choppy, difficult market conditions.

What the article doesn’t highlight is that the great majority of those traders had to go through challenging P/L periods to get to the point of embracing the strategies that have proven helpful.  They stayed on the dance floor long enough to find opportunity.  Many times, inspiration came from seeing what other traders were doing that was making money.  That inspiration led them to try new things in small ways, build familiarity with a new way of viewing and trading markets, and then build out those strategies.

In my most recent trading, I have been focusing on identifying stable market regimes–periods in which who is in the market and what they are doing has been relatively constant–and then identifying winning trading patterns specific to those regimes.  When I detect the current day’s trading to fit within that regime, I wait for those winning patterns to emerge.  Those define opportunity for that particular market.  Another market may yield a very different pattern of opportunity and still others may yield none at all.

Note how different this is compared to expecting one particular “setup” to work across all market conditions.  It opens the door to opportunity in a new way.

If markets are always changing, traders must always innovate.

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Buffett expected to tout passive investing in Berkshire annual letter

File Photo: Berkshire Hathaway CEO Warren Buffett plays bridge during the Berkshire annual meeting weekend in Omaha, Nebraska May 3, 2015. REUTERS/Rick Wilking/File Photo

Buffett expected to tout passive investing in Berkshire annual letter

By Jonathan Stempel| NEW YORK

Warren Buffett, widely considered one of the world’s best investors, is likely to tout the merits of passive investing this weekend to readers of his annual letter to Berkshire Hathaway Inc (BRKa.N) shareholders.

The letter, slated for release around 8 a.m. EST on Saturday, will probably focus on familiar themes for the 86-year-old Buffett, with many single-spaced pages reviewing Berkshire’s businesses and managers, Wall Street, the economy and perhaps even politics.

“The letters are written as much for sophisticated financial people as for people in high school,” said Andy Kilpatrick, author of “Of Permanent Value: The Story of Warren Buffett.” “It’s a fun read, and when you get through it, you think, ‘Wow, I could be doing better with my life and my investing.'”

Buffett believes most stock investors are better off with low-cost index funds than paying higher fees to managers who often underperform. He told Fortune magazine he expects to write “a lot” about passive investing. (here)

Berkshire itself might seem anomalous, with shares of the Omaha, Nebraska-based conglomerate having generated a roughly 2 million percent gain in Buffett’s nearly 52 years at the helm.

In 2016, Berkshire’s stock price rose about 23.4 percent, easily outpacing the market, though most investors who bought its stock in recent years have achieved closer to market-average returns.

Kilpatrick expects Buffett to discuss Precision Castparts, an aircraft parts maker that Berkshire bought last January for $32.1 billion, its biggest acquisition.

Buffett is likely to discuss other Berkshire businesses, such as insurance and the BNSF railroad, and shower praise on Berkshire managers, perhaps including investing deputies Todd Combs and Ted Weschler.

Combs alerted Buffett to Precision Castparts, and Buffett may discuss what drove Berkshire’s unexpected, multi-billion-dollar investments in Apple Inc (AAPL.O) and the four biggest U.S. airlines.

Buffett may also focus on his desire to spend Berkshire’s huge cash pile after Kraft Heinz Co (KHC.O), which Berkshire partly owns, on Sunday scrapped a bid to buy food rival Unilever Plc (ULVR.L) that Berkshire might have helped finance.

U.S. President Donald Trump may also be a focus for Buffett, who was a vocal supporter of Hillary Clinton.

Buffett alluded elliptically to Trump in last year’s letter, bemoaning the “negative drumbeat” from presidential candidates talking down U.S. economic prospects.

Berkshire is also expected to report fourth-quarter results. Analysts expect operating profit of around $4.5 billion, or $2,717 per Class A share, down from $4.67 billion last year, Thomson Reuters I/B/E/S said.


(Reporting by Jonathan Stempel in New York; Editing by Jennifer Ablan and Dan Grebler)

Published at Thu, 23 Feb 2017 21:03:24 +0000

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Group Coaching: A Powerful Trading Resource


Group Coaching: A Powerful Trading Resource

One of the things I’m most looking forward to in this coming Sunday’s four-hour seminar at the New York Trader’s Expo is the opportunity to conduct true group coaching with attendees.  It’s surprising how little coaching of traders occurs in group mode, especially given the common overlap of concerns among traders.  I’m looking forward to the experience because of several powerful advantages of working in groups:

1)  In groups, there are opportunities to gain insights from other members as well as from the group organizer.  Take AA as an example:  much of the impact derives from the interactions of members to support, challenge, and enlighten one another.

2)  Groups, run properly, can be fun.  They lend themselves to interactive exercises and lively dialogue.  We tend to be most focused on what is most engaging.  Groups can actively engage us.

3)  The loyalty built within groups brings the best out in people.  I saw this when I ran group therapy sessions on the inpatient psychiatry unit of a hospital.  Members reached out in ways for others that they couldn’t always do for themselves.

Perhaps best of all, groups can become phenomenal creativity resources.  Imagine a group of dedicated traders, each bringing their best trade of the week–and their best psychological practice–to the group meetings.  Everyone can play off everyone else, modifying the ideas, applying them to their own situations, and generating new best practices for the entire group.  When group members are passionate about what they do, that passion becomes self sustaining, fueling the development of new ideas and methods.  It’s an important reason some traders choose to join trading firms rather than trade on their own.  It’s an important reason solo traders maintain active networks with like-minded peers.

Think of basketball and football teams.  Think of AA.  Think of Special Forces units.  So often, groups push us in ways that we would never push ourselves.  Groups support us in ways we cannot support ourselves.  Groups give us feedback we’d never think of on our own.

(While writing this, I’m listening/watching MMJ doing their early Conan session.  From 2:45 on in the video, you can see how groups, passionate about what they do, make beautiful music.)

Look forward to some great music making this weekend!

Further Reading:  Joining a Hedge Fund or Prop Trading Group

Published at Mon, 20 Feb 2017 11:44:00 +0000

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Buy These Uptrending Stocks on the Pullback (LRCX)


Buy These Uptrending Stocks on the Pullback (LRCX)

By Cory Mitchell | Updated February 20, 2017 — 10:08 AM EST

Some traders like to buy a stock as it makes a new high, while others prefer to buy on a pullback. Stock prices are always moving up and down, so buying on a pullback presents an opportunity to get in at a better price than the recent highs the price has fallen from. These stocks have been trending higher for the last year and are currently pulling back. If the uptrend continues, these pullbacks could provide a good opportunity to take advantage of the next swing to the upside.

Lam Research Corp. (LRCX) started rallying in February of 2016, and in July broke out of a year-long range. The price has continued to rally strongly in 2017, reaching a high of $119.14. The price has started to pullback off that high, closing at $114.90 on Feb. 17. The trendline extending back to early 2016 indicates a potential buying region near $110 to $109. That entry area aligns with minor resistance from November and December, which could now act support. A number of other pullbacks during this rally have been about $9 to $10. If that holds true on this pullback, then the price would be expected to drop into that $110 region before rallying again. Ideally, wait for the price to stall out in the $110 region and then start bouncing again—showing that the price is still respecting that area—before buying. That way a stop loss can be placed below the recent swing low. A more conservative upside target is $121, while a more aggressive target is $125 for this short-term trade.

waiting for buying opportunity on LRCX

Copart, Inc. (CPRT) rallied strongly in 2016, also breaking out of a long-term range. In 2017 the price hit a high of $59.86 on Feb. 16. The price has barely started to pull back, but when it does, the first potential buying region is near $56. That’s where a trendline extending back to June intersects. Wait for the price to pause and rally off the $56 area before buying. This way a stop loss can be placed just below the recent swing low. June, September, and November are all examples where the price paused near support and then rallied. The price target on this short-term trade is $60.75. Note that Copart has earnings on Feb. 21.

waiting for pullback in CPRT

Genesee & Wyoming Inc. (GWR) bottomed at $41.56 in 2016 and has been moving steadily higher since. The rally since the start of 2016 has shown some tendencies which can aid in picking an entry area. Mainly, the price tends to rally and then move sideways within a range. In November the price rallied to a 2016 high of $80.73. It then experienced a sharp pullback, but then paused and rallied off the $69 region. Based on the tendency to range, and $69 being the closest support area within the uptrend, $69 to $68 is the potential buying zone. The stock has also shown a tendency to have a false break through the bottom of range before moving higher. Therefore, traders may need to give this trade a large stop loss (below $65 for example), or alternatively look for an entry near $67 or $66 if the price pulls back that far. This provides for a lower-risk trade as the entry point is closer to the stop loss level. The price target on this trade is $83.

Waiting for buying opportunity on pullback in GWR

The Bottom Line

Depending on the exact entry and stop loss levels, these trades have the potential for providing excellent risk/reward ratios. The trades are based on the assumption that the current uptrend will continue. The risk is that it won’t. This is why stop loss orders are used to limit the risk in case the price drops more than expected. These trade ideas are short-term in nature, designed to capture only a short-term rise in the stock price. Traders should do their own analysis and make sure all trades they take align with their own trading objectives.

Disclosure: The author doesn’t have positions in any of the stocks mentioned
Published at Mon, 20 Feb 2017 15:08:00 +0000

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SoftBank shares up; sources say company willing to cede control of Sprint

File Photo: SoftBank Group Corp Chairman and CEO Masayoshi Son attends a news conference in Tokyo, Japan, February 8, 2017. REUTERS/Toru Hanai

SoftBank shares up; sources say company willing to cede control of Sprint

Shares in SoftBank Group Corp (9984.T) rose nearly 3 percent in morning trade on Monday after a Reuters report that the Japanese company is prepared to cede control of Sprint Corp (S.N) to T-Mobile US Inc (TMUS.O) to clinch a merger of the two U.S. wireless carriers.

SoftBank is expected to approach T-Mobile parent Deutsche Telekom AG (DTEGn.DE) for negotiations when an ongoing auction of airwaves ends in April and a ban on talks between rivals is lifted, people familiar with the matter told Reuters.

A potential deal could bolster SoftBank’s shift towards what billionaire founder Masayoshi Son calls the “Berkshire Hathaway of the tech industry,” or a company with cutting-edge tech investments as the telecoms services markets mature.

The proceeds of the possible sale of all or a portion of its Sprint stake to a third party could improve SoftBank’s credit rating and “allow it to dedicate more of its managerial and financial resources to growth businesses,” analysts at SMBC Nikko Securities said in a research note.

While SoftBank’s domestic mobile business remains a cashcow necessary to fund investments, analysts have said it may be hard for Sprint to grow on its own as it lacks the scale to challenge larger rivals.

Son told reporters earlier this month that he was focused exclusively on an acquisition of T-mobile three years ago, but that Sprint’s return to profits has opened various new possibilities for SoftBank in an upcoming industry realignment.

Son’s previous attempt to merge T-Mobile and Sprint, ranked third and fourth respectively, fell through amid opposition from U.S. antitrust regulators.


(Reporting by Makiko Yamazaki; Editing by Chang-Ran Kim and Stephen Coates)
Published at Mon, 20 Feb 2017 00:56:59 +0000

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BlackRock’s largest mutual fund sours on Google


 BlackRock’s largest mutual fund sours on Google

By Trevor Hunnicutt| NEW YORK

Managers of BlackRock Inc’s (BLK.N) largest mutual fund, fearing Trump administration policies could hurt technology companies with hefty foreign revenue streams, have reshuffled their top holdings, and it appears one of the first casualties is Google.

Alphabet Inc (GOOG.O) has dropped out of the fund’s top-10 holdings list after the $41 billion BlackRock Global Allocation Fund (MALOX.O) (MCLOX.O) pared back its near-half-billion-dollar stake in the parent of the leading search engine in January.

Last year, Alphabet C-class shares worth about 1 percent of the fund’s total assets were on its top-10 list. The Global Allocation Fund holds hundreds of stocks and also invests in bonds.

The C-class shares have no voting rights. Alphabet’s A-class shares (GOOGL.O) were not a top-10 holding of the fund.

As of Jan. 31, the list still included other tech innovators, such as Apple Inc (AAPL.O), Inc (AMZN.O), Uber Technologies Inc [UBER.UL] and Facebook Inc (FB.O), according to BlackRock’s website.

Global Allocation held about $443 million in Alphabet C-class shares, as of Oct. 31, down from $550 million the prior quarter, according to regulatory filings. The fund has held the stock since October 2015, according to Morningstar Inc.

The latest disclosures do not make clear how much of the Alphabet stake has been sold. The 10th-largest Global Allocation holding, Pfizer Inc (PFE.N), accounted for about 0.58 percent of the fund, which would work out to $237 million, suggesting the Google stake had fallen at least to that level.

Alphabet did not respond to requests for comment. BlackRock, the world’s largest asset manager, declined to comment.

“Our enthusiasm for U.S. stocks is tempered by elevated valuations, a lack of fiscal policy specifics, and uncertainty regarding future U.S. trade policy,” the fund’s managers wrote in a summary covering their January trades.

“We reduced the fund’s exposure to select technology stocks, including U.S.-based companies that generate a significant portion of revenues from non-U.S. dollar sources.”

Alphabet earned 53 percent of its revenue outside of the United States last year, according to its earnings statements. The value was reduced by the U.S. dollar’s strength against the British pound, euro and other currencies.

U.S. President Donald Trump has touted a series of trade and tax reforms to boost domestic growth, some of which could also push up the U.S. dollar.

A Republican proposal to reform taxes that would levy a 20 percent tax on imports and exclude export revenue from taxable income has been circulating. Trump has said he would announce his own tax plan in coming weeks.


(Reporting by Trevor Hunnicutt; Editing by Richard Chang)
Published at Fri, 17 Feb 2017 22:55:09 +0000

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Fake and Real Education in Trading


Fake and Real Education in Trading

We’ve heard a lot lately about fake news, both from the political right and left.  The truth is that it’s difficult to report truth, objectively.  Too often agendas slant what we present, turning what should be enlightenment into persuasion or, at worst, propaganda.  A credible academic journal presents studies supporting and not supporting various ideas, allowing the data to speak for themselves as much as possible.  No one would read an academic journal that only published information supporting specific views, suppressing contrary evidence.

In trading, we see a great deal of web content, seminars, webinars, and books offered as “education”.  Too often, this is fake education, in that it promotes a particular agenda that is marketed by the writer.  How often have we seen something offered as education that starts with a tease and ends with a sales pitch to get interested students to purchase a service or product?  That’s an infomercial, not information.  It’s not education; it’s advertising.

So what is *real* trading education?

*  Real education educates.  You come away with specific information and/or skills that you didn’t previously possess.

*  Real education is on the cutting edge.  It provides new information and new skills.  It does not merely repeat what has been written many times previously.  If what you encounter in a book or webinar could have been encountered three years ago, thirteen years ago, or thirty years ago, it’s rehashing, not educating.

*  Real education is grounded.  It draws upon actual research and actual practice.  It is not mere opinion or preference.

*  Real education stands on its own.  It is not a throwaway lead-in for commercial products or services.

As many of you know, I teach in a medical school.  I value the education and training of medical students and residents, and I especially respect the continuing education of practicing physicians.  Without continuing education, a physician is locked in old information and old practices and become stale.  Patients suffer.  Without quality continuing education, traders–and their capital–suffer the same fate.  Education is far too important to be left to fakery.

True continuing education for experienced traders is the next great frontier in trader development.  Not rehashings of worn out technical trading patterns, bromides about discipline, or trading tales from old timers.  Real, actionable education based on real research and real practice.  It’s an important part of what distinguishes a profession from a hobby.

Further Reading:  Toward a Curriculum for Traders

Published at Sat, 18 Feb 2017 12:48:00 +0000

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