Trends Persist

Trends Persist, Regardless of What You Think You Know

Media reports on the health of the markets. Earning reports from firms around the world. Central banks and their policies. Influential analysts upgrading and downgrading stocks. The quarterly number. The Whisper number. The aftermarket activity. Fast Money. Mad Money. Madmen. How do you filter all these electrons to make sense out of them?

There are too many of these valuable electrons being flung around the world each day. White noise and statistical noise. Those are trends unto themselves. Nothing wrong with it. Just know it for what it is. I talked about Ritual versus Process in one of my blog posts. Know what makes you money and what feels good. Sometimes they are not related.

But you can’t trade on most of this knowledge, especially about the economy or the market health. That information you can use to formulate a macro call as a discretionary trader. Another difficulty is that you might be right on your ideology, but horrible with your timing and thus lose money. Traders, especially new students of the markets, need to have a definable and measurable action plan each day.

Television, Twitter, Facebook fan pages, and RSS feeds & emails from leading blogs provide us with great entertainment. Some, and I mean very few, actually teach us something. And as a teacher, I believe in knowledge for the sake of knowledge. But the best teachers are not always easy to find.

But listen closer and you’ll get learned wisdom from Larry Hite, a guy I first read about in Market Wizards. He founded a firm called Mint Management which he had had as 50/50 partners with what was then called E. D. & F. Man, now MF Global. (There is a physical cash market commodity trading firm that spun off when Man Financial IPO’d and separated the brokerage from the physical commodity business). Mint is still around, albeit with yet another name. Mint was the first CTA to have over $1 billion in AUM.

Very refreshing to listen to Salem and Larry compared what’s on TV. I tend to enjoy their electrons much more that what had come off my HDTV before I turned off my cable. Watching their interviews reminded me of my interview with Bill Dunn of Dunn Capital Management and the Reason Foundation. I think what makes them so refreshing and informative is that we’re not bombarded with their electrons every day in one form or another.

At the end of the day, there’s not much to say about any trading vehicle. It’s either up, down, or flat. And you’ll never know which of the fundamentals is at work. You might be smart, you might be lucky, you might be both. You still need to have a plan. Position sizing and Risk Management are what save lives.

In order to capitalize on your luck and smarts, and to develop a career as a trader, you need to be able to systematize your thoughts. Once you do that, you can test your ideas and see how they would have done over time. Think that’s a waste of time? Tell that to Bill Dunn who revealed in my interview with him that he’s not taken a single discretionary trade in his WMA, which has a track record going back to 1984. Are you smarter than Bill Dunn? Maybe you are, but it’s going to take a few decades to convince others. And, you’re competing against his system that has performed well consistently.

“But MM, trading system software is so expensive…”

Yes, probably true. You get what you pay for usually. If you want a cheap way to test an idea on the S&P for example, go to Yahoo! finance and download the free data there and upload it to a Google Docs spreadsheet. You can calculate the moving averages and “the highest high of the past 20 days” etc. by hand. Have fun!

“But MM, hypothetical results are not predictive – so why bother?”

You don’t need predictions. And you don’t need the Platinum league education that you have either. You need to learn to trust that birds fly south for the winter on some level. Trends persist. I won’t bet you the actual day that they leave, but I’ll bet you they leave. See the difference? One is a day trader, the other is a trend follower. Rather corny, yes, but it makes the point and as a teacher that’s all that matters to me. Oh, one more thing: don’t go get an MBA. Save your money. Learn to trade and you’ll have all the liberty and independence you’ll ever want.

“MM, Trading is legalized gambling.”

Please click the X in the corner of the screen and go back to focusing on obtaining tenure or getting paid for 8 hours of work while only putting in 5 hour of quality work. Please be serious. There are similar tools that traders and professional gamblers can use, such as Mathematical Expectation or Bayes Theorem. Anything else is your imagination.

Earnings Drive Stocks. What Drives Commodity Markets?

Unlike stocks, commodities are cyclical in nature. (Stocks are secular). Cycles repeat themselves too. Each year decades and decades of economic power descends upon the grains, metals, softs, and credit market futures to name a few. Human behavior is measured in the supply and demand numbers for each commodity. And those forces cause prices to rise or fall.

There are old crops and new crops, there are seasonal tendencies, there are investors, and there are hedgers. Each party comes to the market and they are happy to meet one another. They look at the price as the single most important piece of information you can input into your decision making process.

What do you look at to make your trading decisions? Do you make a watch list from Fast Money? Or do you buy what Dennis Gartman says to buy? Or Jim Rogers and Victor Sperandeo? No one is going to care about your money more than you. You are responsible for it’s growth and decay. Not Obama. Not your failed bank. Not your broker or RIA. And certainly not the jackass who gave you the last tip on investing. You are responsible for your own plan.