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Persistence and Practice in Trading

August 18, 2014

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I grew up in a small town and went to a small public school.  Our school year was on a traditional schedule so the month of August was always back to school time for me.  Two of my three kids are now in school so back to school preparation is very important in our house.  We don’t do anything atypical of what most families have to do to prepare to send their kids back their school.  We school shop for some new clothes  hopefully that fit a little too big right now so my growing children can wear them all year).  We buy supplies, meet their teachers, plan our vacations and family plans around the school schedule released and generally start to get excited about the entire process.  One thing I’ve been doing with my 5-year-old who is starting kindergarten is riding our bike together to her school just to teach her the route (she’s in a new building this year) and to make sure she’s being safe while crossing the street and watching out for traffic.

 

School preparation is important.  But to be able to learn, grow and develop a student has to actually show up and participate in school.  I know I’ll make sure my daughters will do this because that’s my job as their dad is to hold them accountable, put them in a position to succeed and make sure they are learning.

 

As a mentor myself who teaches new traders how to build a trading business and trade options, stocks, forex and futures I’ve frequently seen this same process play out.  New traders have lots of energy when they start.  You see beginners watching videos, reading books, taking every class they can and trying to learn as much as they can right from the jump.  Some taper off, others keep it consistent.  But one of the keys to translating the excitement and energy of starting a new journey into actual success is to show up.  Showing up is 90% of the battle.

 

In trading, showing up means that you have to trade.  You can’t wait until you learn everything about the markets before you start trading.  Part of your development will occur because you are practicing and applying what you are learning.  Just like a new student going into 1st grade, 12th grade, starting a new continuing education course on poetry or taking a self-help class it is very important that you show up each day and participate in the course.  In the stock market – the ‘course’ is the market itself.  Do yourself a favor and make a trade each day.  Should you risk live money while you’re new and learning?  Probably not – I’d advise a beginner to paper trade until they can build a track record of success and develop their money management rules.  But should you wait to start practicing until  you feel comfortable with what you’re doing?  Absolutely not.  Embrace the discomfort – you’ll learn from it.

 

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Stock prices were up for most of the week as economic data was uneventful, didn’t have much of an impact and traders focused on the technical charts to take their cues.  The market is in limbo right now as it’s experienced some volatility in the last month as prices fell due to geo-political concerns in Iraq, Ukraine, Syria, Israel and elsewhere.  Most people would like to see some stability on these fronts, traders included, but while conflict and tensions march on stock market participants are left wondering when the next shoe will drop.  Conflict doesn’t always make stock prices fall – to the contrary actually – but the unknown does make implied volatility rise and fear creeps back into the collective trading consciousness.  Most traders I talk to are still focused on short-term signals and not trying to solve the long-term problems that the world faces – including an inflated stock market that by any measure is over-valued relative to historical standards.  You don’t have to be a bean counter to recognize that the stock market could use a breather and if it did sell-off sometime this fall it wouldn’t be unexpected.

 

SPX monthly

SPX Weekly

SPX Daily

 

The monthly, weekly and daily charts are shown above for the S&P 500 Index ($SPX).  The monthly chart is particularly interesting as it shows the context of how far the market has really risen since the economy and market crashed in 2007, 2008 and early 2009.  When priced bottomed out in March of 2009 I don’t think any trader or economist would have predicted the enormous rally in stock prices over the last 5.5 years.  Historically stock prices tend to stall out after a bull market of this length.  Data from the National Bureau of Economic Research will show that the average expansion in the economy doesn’t last for much longer than what we’re seeing right now.  Simply put, markets are stretched.  But does that mean they’re going to drop right away?  No it does not.

 

Looking at the weekly and daily charts we can see much more detail in the pattern, candlesticks and momentum of the trends.  Stock prices sold sharply, then started to slowly battle back upwards.  This has been the case over the last few years that profit taking on the broad market tends to last for about a month before it starts to battle back up.  The daily charts show that when markets do sell-off they do so with more speed and volatility.  This is traditional in stock market behavior.  Bears sell stocks faster than bulls buy them.  So where are we moving from here?  The most likely scenario is that the market will see volatility over the next 6 to 8 weeks that will create a consolidation in the pattern and then the earnings season for the 3rd quarter will drive the overall trend one way or the other.  If someone told me they were trading bullish now – I wouldn’t argue their position.  The long-term trends are bullish and there are good stocks out there.  If someone were bearish – I wouldn’t argue their position either because valuation doesn’t dictate the current price of this market.  So the position I would take would be balanced and neutral with equal opportunity for both sides of the market.  One great thing about using all of the strategies available to us as traders is that we can buy, sell, play a consolidation or volatility.  There are lots of strategies that we can use.

 

Currencies

 

The currency market has basically been reduced to most currencies downtrending while the US Dollar has rallied.  Dollar strength is based on the belief that the Federal Reserve will back away from their money creation and inflation driving policies and the dollar will be allowed to be used without as much manipulation.  I don’t believe it, and I’m going to wait until I see it from the Fed.  They have a drug addiction called the fix-its.  Every time something bad happens in terms of economic data the Fed promises that they have an answer to the problem and are willing to act.  The dollar has much more long-term risk in my perspective because of the global trends from countries to embrace policies and international trade agreements that would move the dollar out and bring in other fiat currencies or payment solutions that wouldn’t involve dollars.  The long-term view that the dollar will see weakness and or volatility hasn’t changed.

 

Metals

Crude Oil

 

Metals and Crude oil have seen weakness in the face of the strength from the US Dollar.  When the dollar rises, underlying commodities tend to drop.  The charts are in downtrends and bearish.  Gold and Silver are interesting areas to watch for long-term investors as they do offer some value here.  The short-term charts don’t show any entry point to speak of though, so be patient when developing a trading plan in those areas.

 

Next week

 

The economic calendar for the week highlights CPI numbers on Tuesday, the FOMC meeting Minutes on Wednesday, the Philly Fed Manufacturing Index on Thursday and a testimony from Fed Chair Yellen on Friday.  I will be watching all of the data, but I’m most interested in the testimony from Chair Yellen as it may offer some new insight into the mindset that body has right now.  The Federal Reserve, their tapering program and eventual interest rate adjustments will drive this market over the next 6 months.  So much of the current price of the Market and stocks in general is based on Fed manipulation that its impossible to watch everything they do and more importantly the reaction from investors in terms of stock prices.  Keep an eye out this week on those events tied to the Fed.

 

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Market conditions don’t always scream to buy or sell.  Sometimes you have to balance your account, try new techniques, learn a new strategy or play the volatility.  If you don’t know how to do that yet, remember that we’re always students in the trading game and a new school year is about to start.  Jump in there and participate and show up.  You’ll learn faster, absorb more and reach your goals quicker if you do.

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