Good Traders Don’t Gamble


Recently a fellow trader (thank you Alex) emailed me of the parallels of trading and gambling at a casino.  I have taken the liberty to paraphrase as well as add my own input into today’s blog post:

There is an extremely long thread on a LinkedIn forum debating the difference between gambling and trading.  It is a fascinating subject of which most people have a strong opinion on.

For me, the difference between trading and gambling is the same as the difference between being the house and being the guy in the chair at the blackjack table.  Casinos win at their games of chance by having a slight edge and sticking to the rules of play.  Gamblers lose, not only because the odds are against them, but because they are inconsistent in the application of their bets –the average bettor loses more than what the odds against him dictate he/she should lose. Gamblers go by “feel” or emotion, a state of mind encouraged by casinos with their festive atmosphere, loud noises, pretty staff, free drinks, etc.

The house controls the size of the bets they take (money management), they know the probability of making money (their system), they can’t control the cards any more than we can control what a stock/ETF/Mutual Fund et al is going to do, but they know that their system will make them money over time.

In trading, the newsletters, brokers, twitter feeds, TV shows, and so on are like the distractions in a casino. Contrary to their customers, Casinos earn incredible profits using math and strict discipline. Most casinos can predict their revenue within a few dollars based on the number of people that walk through their doors. Yet despite all their technological firepower, they can’t predict which specific patron (trade) will win and which will lose — but they don’t care, because in the end, their edge shines through and they make a ton of money.

Of course you could argue that people who visit a casino, expect to lose, it’s purely for entertainment value, but traders expect to win, it’s not very entertaining to lose money in the market, completely different mentality and approach, but with the same outcome if you don’t act like the house.

Bottom line for successful traders: Be the casino, not the patron.  Have a system, know how well the system has performed in the past.  Like the Casino, know your stats:  Percentage of time it was right v wrong, average size of winning trade v losing trade and max drawdown over time.  Without knowing the stats it will be difficult to endure when things don’t go as well as you hoped.  Then follow with strict discipline, cutting your losses short and letting your winners run, as the odds are in your favour over time.

Greek Tragedy

Greek Tragedy

I’m not usually pessimistic, but I think we are going to see a Greek train wreck before the month is out and a significant sell off in the market.  No one can be sure, but this latest bounce is likely to fail…again.  
It is all about the European Finance ministers meeting tomorrow.  We shall see what they have to say about any possible deal, but it is looking increasingly unlikely.
In this environment all I can do is protect my capital by making sure my stop losses are in place and never moving them.  It can be very frustrating seeing the market continually come back after a stop out, but the alternative is worse.  This is a long term game, and those that use stops will win in the long term, them that don’t will be forced to stop playing the game.
Market News:
U.S. stocks closed modestly higher on Wednesday as investors digested the Federal Reserve statement and Fed Chair Yellen’s press conference.The Federal Reserve held interest rates at zero and provided only faint clues about when the first hike in nine years might occur. The central bank downgraded the GDP forecast for the year to 1.8-2 percent while raising longer-term growth expectations.

Stocks extended early gains as Yellen said markets should focus on the pace of rate increase rather than the timing of the initial hike.
Stocks traded lower ahead of the release, giving back opening gains.With consensus for a rate hike in September at the earliest, most investors did not expect major policy changes from the central bank’s announcement.

Traders also kept an eye on the Greece debt negotiations ahead of the euro group meeting of regional finance ministers on Thursday.Greek negotiator Euclid Tsakalotos said in a Reuters report Wednesday that the country is willing to make concessions but pension cuts cannot be on the agenda. He confirmed that Athens does not have enough funds to make the debt repayment to the International Monetary Fund due on June 30.

Read MoreWhy should we care about Greece?

The European Central Bank raised the Emergency Liquidity Assistance for Greece to 84.1 euros from 83.0 euros. Greek banks are reliant on this funding and analysts warn that if the central bank curbs this liquidity, Greece may have no option but to impose capital controls.

European stocks closed lower as caution ahead of the Fed and ECB meetings weighed, while Chinese stocks closed higher. Japan’s blue-chip Nikkei 225 stock index ended a touch lower.

Earnings: Kroger, Rite Aid, Red Hat, Finisar, Smith & Wesson8:30 a.m.: Initial claims

8:30 a.m.: CPI

8:30 a.m.: Current account Q110 a.m.: Philadelphia Fed survey

The Bears have Kidnapped the Bulls

Bull and Bear

It seems that it is now improbable that we will see a new all time high in the coming weeks.  I think we may be heading back below 2060 into oversold territory.  I really thought that the market would have one more go above 2130, but alas, the downward action is pointing towards a correction.

A correction is overdue and quite frankly required.  The slow chop upwards over the last couple of months has reduced the volume in the market as fear built around the highs.  As I have mentioned before, less volume means more manipulation by the algos searching for stop losses, both in the shorts and the longs.  In my opinion this is why we have seen large volatile swings in the market on a daily basis recently.

This kind of market chop without significant rally’s or sell off’s is near an end.  The market can only do one of three things, go up, go down or go sideways. and it never does one phase for very long before switching to another type of market action.  So despite the possibility of a dead cat bounce in the next couple of days, I expect more selling this week.

Market News:

U.S. stocks traded mostly lower on Monday as investors eyed a calmer bond market and weighed greater expectations of tightening following Friday’s strong jobs report.

On Friday, nonfarm payrolls for May beat expectations with the addition of 280,000 jobs. Analysts also cheered a greater-than-forecast 8 cent increase in hourly wages and a 5.5 percent unemployment rate. Signs of continued strength in the labor market strengthened the case for the Federal Reserve to begin raising short-term interest rates in September.

Germany’s DAX entered correction territory as European stocks declined on continuation of Greek debt negotiations. Last week, Athens postponed a payment deadline to the IMF.

On Monday, European Central Bank governing council member Christian Noyer said if Greece had to leave the euro zone, it would not cause a problem for the currency bloc but rather for Greece itself.

The G-7 leaders also wrap up a two-day summit in Bavaria, Germany.


Earnings: HD Supply Holdings, Lululemon Athletica, Burlington Stores, Hovnanian, Quiksilver, Greif, Oxford Industries

7:30 a.m.: NFIB survey

10 a.m.: Wholesale trade, JOLTs

1 p.m.: $24 billion 3-year note auction

Groundhog Day


Good grief, it’s groundhog day in the S&P 500.  Once again, it threatened to actually go somewhere only to fail once more.
I have to say I am getting a little concerned about the inability to move higher.  We seem to be churning back and forth to the same prices over and over.
​Technically the charts look like they have bottomed with a distinct possibility of a more permanent move higher in the next 2 days.  But it will be news dependent via the Greece saga and the monthly jobs report on Friday.
Today’s wild swings shows just how trend-less the market has been.  It is going to blast off in one direction, as it’s coiling like a spring, and my belief is that the direction will be up.
Market News:
U.S. stocks closed higher on Wednesday despite a sharp rally in bond yields as investors found encouragement in signs of economic growth and coming resolution in the Greece debt talks.
The Federal Reserve’s Beige Book said economic activity expanded at a modest to moderate pace, a view affirmed by the morning’s data reports on private payrolls, the service sector and trade.
The Dow Jones industrial average closed off its highs, up about 60 points. The Dow transports continued to recover, closing up 1.2 percent.
Greek Prime Minister Alexis Tsipras agreed in a telephone conversation with German Chancellor Angela Merkel and French President Francois Hollande on the need for an immediate solution involving a lower primary budget surplus target for Greece, a Greek official said in a Reuters report.Athens warned it could miss a 300 million euro payment due to the International Monetary Fund this Friday.
European stocks closed mostly higher as investors eyed Greece negotiations and unchanged central bank policy.
At a press conference Wednesday European Central Bank Mario Draghi reaffirmed the continuation of ECB’s asset purchase program and said the central bank wants Greece to stay in the euro zone. He would not comment on the Greece debt talks. Earlier in the day, the ECB left the benchmark interest rate unchanged at 0.05 percent, as expected.
Ahead of the highly-anticipated nonfarm payrolls report due Friday, U.S. data continued to show moderate growth in the second quarter.The ISM non-manufacturing index for May came in at 55.7, nearly a year low. Analysts expected the figure to slip to 57 in May from 57.8 in April. The U.S. Markit PMI Services read for May showed a slight decline from April and came in below expectations at 56.2.
ADP private sector payrolls increased 201,000 in May, with the service sector boosting the figure to above the expected 200,000.The U.S. trade deficit narrowed in April as exports of services hit a record high and imports fell. The U.S. Commerce Department on Wednesday said that the U.S. trade gap shrunk to $40.9 billion in April, the largest decrease since early 2009 and down from March’s revised deficit of $50.6 billion.
The Atlanta Federal Reserve’s GDP Model showed the U.S. economy is on track to grow 1.1 percent, up from a 0.8 percent growth projection on Monday.Chicago Fed President Charles Evans said the fact that Federal Reserve policymakers are talking about possibly raising U.S. interest rates this year signals the progress that has been been made on the economic front, Reuters reported.
Thursday:8:30 am: Initial claims8:30 am: Productivity

12:00 pm: Fed Gov. Daniel Tarullo on economy

Earnings: JM Smuckers, Lands End, Joy Global, Ciena, Diamond Foods,Cooper Cos, Verifone

Toughest Market Since 2011

bull v bear

I haven’t seen this type of choppy trading since the last quarter of 2011.  We are stuck in a range between 2060 and 2130 for the last 2 months.  It seems that everyday we are re-testing the highs and lows of the previous days range.  This type of market is a swing/position traders biggest challenge.  In fact it can be argued that even the day traders must be having a difficult time given how broken the patterns are intraday.

However, I still believe that the bulls are in charge short term.  Therefore, soon we will see a new all-time high, as all selling has been light and is quickly re-bought at the same levels.  Perhaps tomorrow we will see a 20 point rally on the S&P 500. It is overdue in my eyes.  This range must be broken sooner rather than later and the path of least resistance is higher.

With that being said, I felt that today at the open, it was prudent to reduce my positions just in-case I am wrong.  No system can survive without great risk management, and in this market I am just trying to stay above water till a trend shows up.

According to the traders almanac, the first trading day of June has been positive 20 out of the last 27 years, and today was no exception.  Considering how hard the DAX went down on Friday, I expected a stronger recovery over in Europe.  However, all the strength came in the Chinese market.  The Shaghai market closed up a whopping 4.72%.  That is crazy volatility.  I am glad that I trade the US markets, I don’t have the stomach for those wild rides up and down…but then I don’t really have the stomach for the market in the US right now either.  I suppose I just have to grin and bear it for a short while longer.

Market News:

U.S. stocks closed slightly higher on Monday, the first day of trade for June, as investors found some encouragement from mixed second-quarter economic reports.

The major indices pared gains to trade mildly higher after earlier fluctuating around the flatline. The Dow Jones industrial average traded about 30 points higher, after briefly topping a gain of 92 points in the open.

Morning data showed consumer spending was flat month-over-month, while construction spending hit a nearly 6-1/2-year high.

Utilities and industrials were among the leading sectors in the S&P 500. The Russell 2000, often considered a proxy on the domestic market, traded 0.3 percent higher as the dollar gained.

The Dow transports traded more than 1 percent higher, with airlines helping the index reverse a recent decline. The index is down about 8 percent for the year.

The Atlanta Fed’s GDP Now forecast remained unchanged from May 26 at 0.8 percent after the morning’s data. The forecast for real consumption growth fell to 2.1 percent from 2.6 percent.

Peter Cardillo, chief market economist at Rockwell Global Capital, highlighted improvements in housing and manufacturing data.

“Two important sectors of the economy continue to shine,” he said. “The economy seems to be headed for recovery in his quarter—modest growth.”

However, stocks held to a trading range. “We have a lot of data giving somewhat conflicting stories,” said Ben Garber, capital markets economist at Moody’s Analytics. He noted the counter effect of continued weakness in consumer spending.

There are “concerns that the economy is not bouncing back as much in the second quarter as people expected,” he said.

The Institute for Supply Management (ISM) said its index of national factory activity was 52.8 in May, up from April’s reading of 51.5, which had tied with March’s reading as the lowest since May 2013. The reading topped expectations of 52.0, according to a Reuters poll of economists.
Construction spending for April increased 2.2 percent, the highest level in nearly six-and-a-half years.

The May manufacturing PMI index came in at 54.0, slightly above the initial read of 53.8 and little changed from April’s 54.1 report.

Futures held gains after personal income increased 0.4 percent in April. Consumer spending was unchanged from the prior month.

Boston Fed President Eric Rosengren said Monday that he would like to begin raising rates as soon as possible, but risks from the slowdown in China and Europe in particular loom large even as growth at home is still not strong enough.

European stocks closed mixed on weaker-than-expected factory growth amid strength in health care stocks. The Shanghai Composite surged following a slight improvement in China’s PMI reports.

Investors continue to eye Greece, which faces a June 5 deadline for a payment to the International Monetary Fund.

European Central Bank President Mario Draghi and IMF chief Christine Lagarde will join the leaders of Germany, France, and the European Commission for talks on Monday evening in Berlin on Greece, European Union officials said.


Monthly vehicle sales

10:00 am: Factory orders

Earnings: Medtronic, Dollar General, Cracker Barrel