Bottom fishing

I never try to buy a bottom or sell a top. Even if you manage to pick the bottom, the market can end up sitting there for years and tying up your capital. You don’t want to have a position before a move has started.”

Randy McKay


Dr. Steenbarger on 5 Trading behaviors for making money in the current environment

1) PatienceThe ones who are afraid of missing moves, who chase moves as a result, are getting hurt. The ones who wait for clear signals and good reward-to-risk opportunities can take advantage of the volatility. The successful traders aren’t afraid of missing a move; they know, in this volatile environment, other opportunities will arise.

2) Position Sizing – Trading smaller when markets are moving more means that one or two losing trades won’t knock you out for the day or the week. The successful traders tell me they’re making plenty of money with smaller size simply because we’re moving triple digits in the Dow just about every day.

3) Resilience – When you’re wrong in these markets, you can really be wrong. My first trade yesterday lost over 20 S&P points; I wound up the day solidly in the green. By managing risk, you also manage emotions and can stay in the game. The successful traders are in there, making trades. They get off the canvas when they’re wrong and they play defense, even as they look for opportunity.

4) Minimizing Distractions – One thing I noticed is that the successful traders in this environment have taken active measures to protect their personal finances. The less successful ones have been distracted by losses they’re incurring outside of trading. It is difficult to focus on trading if you’re worried about unemployment or loss of savings; addressing personal security helps maximize focus during trading.

5) Self-Maintenance – It’s easy to get run down following markets through the day, every day, and then tracking them overnight and overseas. One troubled trader told me he was living, eating, and breathing trading. That is a risk factor for burnout, lessened concentration, and bad decision making. The successful traders aren’t afraid to step away from the screens; once again, they know opportunity is not going to go away.

I’m finding that execution is the better part of success in these times. If you have a good idea, but the timing of your entry is wrong or your position is too large, you’re likely to get stopped out at the worst conceivable time. By waiting for markets to put in a seeming high or low, waiting for a bounce or pullback that can’t make a new price extreme, and *then* getting into a position, you can minimize the heat you take on trades. That, I’m finding, is half the battle.

Hedge Fund Manager says Goodbye!

Andrew Lahde, manager of a small California hedge fund, Lahde Capital, burst into the spotlight last year after his one-year-old fund returned 866 percent betting against the subprime collapse.

Last month, he did the unthinkable — he shut things down, claiming dealing with his bank counterparties had become too risky. Today, Lahde passed along his “goodbye” letter, a rollicking missive on everything from greed to economic philosophy.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life — where I had to compete for spaces in universities and graduate schools, jobs and assets under management — with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

Dr. Brett Steenbarger on market bottom

Bottoms are made when selling becomes exhausted and long-term participants perceive value and lift stocks sharply off their lows. That exhaustion can occur over a period of months, as fewer stocks and sectors make new lows over time and individual stocks and sectors find fresh buying interest. Thus far, we’re not seeing such selling exhaustion; weakness has, so far, begotten further weakness. While it is tempting to call market bottoms and pick up bargains, all we can say Wednesday is that a historically weak market just got weaker.”

The "secret" ingredients

To be successful in the markets you need to know:

– what to buy (equity selection);

– When to buy it and when to pass on it (risk management);

– When to exit (time management).

The most essential part of equity selection is finding/creating a trading system with positive expectancy. Look for the catalyst/catalysts than has/have the potential to start a big move in the desired direction. There are two catalysts I focus on – earnings related and sector related. I pay attention to price, because it measures the only factor than really moves markets – confidence. It always says more than any other source of information. Reaction to news is more important to news itself.

Risk management has two basic elements: defining risk/reward ratio for every position I consider to get involved in and position sizing (how much to buy, what % of capital to put on risk).

Time management involves taking into account the opportunity cost. How long to stay in a position?