Seven P’s From a Day of Education

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  • on April 2nd, 2011

Wow, February and March got away from me…two months later and I’m finally writing a summary from the awesome day of education hosted by the Market Technicians Association here in Charlotte.  There’s no way this can substitute for the concepts explained, or friendships built, but a summary of my takeaways and some videos to share still makes sense.

I won’t summarize each speaker’s presentation…I did that here if you’d like some background.  What I find useful are not simply the favored techniques of each presenter, but the traits common to each.  Not a “super-indicator”, but a way we can all improve our own approach.  Following are some commonalities I saw:

1) Process- from beginning to end, it was clear these pros aren’t “winging it”.  They don’t swing from one technique to another in hopes of finding the holy grail.  Through backtesting or living the ups and downs of trading, they’ve refined their work to the point of machinery.  Ralph Acampora shared an exercise he does once a year where he charts each Dow Jones stock assuming major or minor declines or advances.  This gives him 4 potential targets for each major stock, which he can then add up to set realistic possibilities for the trading range of the most watched index.  A simple but useful routine he’s done for 30+ years that gives him some perspective on potential market risk and reward.  Cody Tafel discussed not only his outlook but the steps he takes each day in assessing the status of each global asset class; it is the consistency of routine that allows us to take note of changes in the markets we track.

2) Passion- it takes a rabid belief in one’s potential to become an expert in any field, and trading is no exception.  To a man, it was clear that these folks thoroughly enjoy the thousands of hours put into developing their skill set; time that could easily have been wasted watching television or engaging in a hobby that wasn’t as appealing to them as market speculation.  Corey Rosenbloom lives and breathes market structure and divergence analysis, and it shows in the depth of his discussions.  Craig Johnson spends 100 hours each quarter putting together a book with hundreds of pages of technical and fundamental data for major stocks, and how that data compares to others in each group.  Tom Dorsey put so much effort into relative strength analysis that he is now among the foremost crusaders in bringing the concept to the masses.

3) Patience- when presented with inferior odds, the best speculators decide not to play.  I’ve met no one who crunches the market’s data lab better than Wayne Whaley.  Using his engineering background, he’s become a premier source for discerning patterns that have repeated throughout market history.  Instead of just focusing on short-term extremes and the “need” for them to correct, he places great weight on the lasting impact of breadth thrusts.  Essential for sustaining any long rally, he is able to see through shorter-term extremes in sticking with the prevailing trend.  For Richard Hastings, it’s about digging deep into international trade data, identifying major sources of currency exchanges, and waiting for those floods of money to begin trickling into the dynamics of a retail business down the street.  In both cases, focusing on the tidal flow rather than getting caught up in ripples.

4) Prudence- in holding long-term portfolios, an investor is faced with danger at the hands of both deflation(loss of capital) and inflation(loss of purchasing power).  To combat these dual threats, Meb Faber has studied markets going back over a century to find the circumstances most likely to devastate portfolios.  Adding a price-based filter to a broad universe of asset classes allows for a belt and suspenders approach to portfolio construction.  Once we have a model to use, additional protection can be added by testing the models further to see when it makes sense to play larger or smaller, as detailed by Stanley Dash.

5) Psychology- behind the math and charts are actual people buying and selling.  Joseph Mertes used his discussion of auction market theory to help express the human actions that cause prices to move from one price level to another.  This facilitation of trade to meet the needs of both long and short term participants is no different than what goes on in setting prices in a retail business, yet we often forget the simple dynamics behind the movement.  Chuck Dukas described how simple it can be if we just get out of the way and let the action speak for itself.  To help us overcome ourselves, the use of basic algorithms can help us consistently do the right thing without falling victim to common hurdles like loss aversion and anchoring bias.

6) Price- at the end of the day, the piece of information that delivers our outcome is price.  Regardless of the indicator, without eventual approval from other players, we cannot exit our position at a profit unless others follow through by moving price in our favor.  As Brian Shannon is fond of saying, despite all the work we do “only price pays”.  The more complex we get, the further we get from what we actually seek…a clue as to where price is most likely to head next.

Having given a list of 6 winning traits starting with P, it’s hard to imagine I saved the most important for last…Personal.  No matter the record of any of these methods, in the hands of the wrong trader they are useless.  There is a certain something required to consistently execute a market edge, and that something is very unique to each individual…an “eat right for your type” kind of approach.  Yes, include snippets of what others do, but most importantly carve out a strategy based not on overcoming our weaknesses but on harnessing our strengths.  I hope you’ll take advantage of these resources to see if an “A-ha” moment lurks inside one of the discussions.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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