Bruce Lee and The Art of Trading

Passing by a Jeet Kune Do training center in Hong Kong earlier today got me thinking of Bruce Lee, his life, his martial arts and movie careers, and most importantly, his philosophy.
In one of my favorite books about Bruce Lee, Dynamic Becoming, author James Bishop covers Bruce Lee’s life and martial arts philosophy, some of it, could have easily come out of a trading book, without a doubt, Bruce lee could have been a great speculator.
The following are two sample quotes from the book, both relate to martial arts, life and trading.
“The great mistake is to anticipate the outcome of the engagement; you ought not to be thinking of whether it ends in victory or in defeat. let nature take its course, and your tools will strike at the right moment.”
Too many speculators, traders and investors are emotionally over invested in their ideas. In their mind their research is solid, their charts pointing higher and positive outcome is anticipated.
In fighting as in trading, anticipating particular outcome can lead one to get caught off guard at the most dangerous moment, when your opponent (the market) does something highly unpredictable, the ability to act in these moments requires ones to instantly apply the right tools, such as execute a stop loss on surprise negative news event, a tough psychological task when one is over anticipating a particular outcome.

“We must first understand ourselves in order to know anything and to understand and solve problems.”

As in the martial arts, trading starts with a battle with ourselves first and our opponent second. We must beat our fears, our insecurities and our emotional weaknesses, a speculator that does not understand himself is likely to have tough time applying the right tools of the craft.

Is Facebook Out of the Woods or Out In the Woods?

Facebook downtrend line since the “IPO disaster day” is finally broken on heavy volume, is Facebook out of the woods ? Is the stock about to start the uptrend widely anticipated pre-IPO ? Obviously no one knows, but what we do know, is that current price action could represent a possible change in trend from negative to positive, especially, with current negative sentiment backdrop.

Is The Market Really Going Up?

With the SP500 at new highs, the answer to the question “Is the market really going up?” is somewhat obvious, but is it really?

Could it be that the market is not going up, but simply repricing itself for devalued currency?  (Thanks Ben!)

What if we price the SP500 in gold terms, would the market still show strength then? The answer is in the chart above, representing long SP500 position against gold, NOT USD.

Obviously this chart is NOT at new highs, nor does it show major upward momentum.

Now does that mean that the market will not go higher ? No, not by a long shot, but it does mean that if you have no edge picking those equities that can really outperform the market, in general, you might be better off riding the Gold / Silver commodity train, opposed to the equity train.

Where There Is Smoke There Is A Foreshadowing

Israeli Shekel

“Tracking is identifying an animal by the footprints the animal left on the ground, by it’s scat, and by the environment surrounding those footprints. By identifying the animal in question, a person can know whether to pursue the animal or evade it. ” – Native American Indian

Needless to say tracking is essentially what we do as traders, attempting to identify the footprints of various participants, analyze them, and decide whether to pursue or evade a particular security. Sometimes however, footprints are hard to detect, for example a 10 million dollar purchase in the T-bond market by an extremely knowledgable participant will likely go unnoticed as the T bond market is simply too deep.

But what if this same knowledgable participant would also trade a smaller, less liquid related markets?

This brings us to the Israel / Iran constant war rumor fest.

If we assume that such potential conflict will not be pre-announced as the U.S. Iraq war was for example, (it is simply not Israel “style,” ) and if we assume that such conflict will have an immediate impact on crude and equity markets, we as traders should be on a mission to look out for footprints.

But since crude and equities markets are extremely deep, looking at a smaller related market might provide an early mover advantage.

One such market is potentially the Israeli Shekel (ILS) which curiously enough is at a technical inflection point, following a decent decline (inverse chart) versus the USD, a breakout of the pennant formation below might provide a decent trading opportunity regardless of the reasons (the currency could be weak for unrelated economic reasons for all I know…)

Acceleration in the decline or in the currency’s volatility, might provide a great indication that “something” is going on, enough to get our antennas up, potentially tighten our stops in crude and other related markets, buy volatility etc…

Blame Game

Time magazine is doing its blame-game pandering part by listing mug shots of the 25 People to Blame for the financial crisis. Many of these folks did make bad decisions and some broke the law, but investors who did not have a risk management or sell discipline in place to mitigate the risk in their portfolios have to take the blame for losing a lot of their own money. “Buy and Hold” is not “Buy and Forget.”

Blaming others feels good though. It puts the “fault” on someone else. But that, to me, is giving your power away. Taking responsibility is a better approach to taking control of your finances. It would be better to be out of Citi at $40 per share and be in cash, than to be long Citi at $1 and write scathing blog entries about Angelo Mozilo.