Mental Noise and The Importance of Exercise and Fresh Air

Saturday, February 27th, 2010

Trading can be an all encompassing endeavor that is hard to shut off. Your mind just keeps going on and on and on. The mental noise can often be a distraction and extremely detrimental to your trading.

If you are a discretionary trader the mental noise tends to sound like this, I could have done better, I could have made more money, my stop was in the wrong place, or It should have had a tighter stop, my position size was too small, no it was too big, I left a lot on the table, I can’t get a winner if my life depended on it.

If you are a systematic trader its more like how long am I going to have to sit through this drawdown, the market looks like its going to go against my positions for a few more days should reduce my size, I have a ton of profits that I don’t want to give back should I get out, all these other system traders are making money and I’m not.

If you are trading for clients its more like how much more money am I going to lose, my clients are gonna freak out, what do I tell them, its coming up on the end of the month and its time to report my results and this is my third losing month in a row, how do I raise more money, how can I improve my system, my system isn’t working, do I need to make changes, the market environment is changing and that may be bad for the system I am trading.

The cycle goes on and on and the best way to make it end is to take a break and get some exercise and some fresh air. No matter what is going on with your trading, getting out of your office or your house and letting it all go is food for the soul and your psyche. It is amazing what just a 5-10 walk can do on a daily basis to clear your head and give you a new perspective.

Exercise tends to be extremely beneficial because of movement of air through your body and the raising of your endorphins. Exercise literally changes the physiological state of your body thus forcing a mental change that is extremely freeing and refreshing. The more stressed out you are the more exercise you need no matter how tired you are. You will feel much better and have a lot more energy when you are done.

For me, I tend to really enjoy getting out in nature and noticing all that is going on around me. It helps me realize that the world is much bigger than my little bubble and that life goes on no matter what is happening in my life, good or bad. I love to notice and hear the birds chirping and see the chipmunks chasing each other. It brings me back to the purity of life and energizes and cleanses me in a way I can’t get indoors. Skiing in the winter and hiking and mountain biking in the summer are my main outlets. If I do not have much time I simply take my dogs for a walk around the block.

Posted in Emotions, Trading | 3 Comments »

Richard Dennis – the Story Someone Won’t Tell You and Doesn’t Want You to Know, The Real Story

Friday, February 26th, 2010

First, let me start by saying that I have a tremendous amount of respect for Richard Dennis and all of the turtles. One of them has been my roommate and a few others are acquaintances. They have been an enormous influence on my life and paved the way for many successful traders. I have respect for all traders and anyone that is willing to take and assume risk in any endeavor.

What I am addressing here is the real story of Richard Dennis. It seems that people have the misconception that his life has been all roses, it hasn’t. His life and career has taken many of the same twists and turns that we all experience in this journey called life. We must be careful whom we worship and put on a pedestal for we are all human.

Similar to many Market Wizards and great traders, Dennis has had his ups and downs and bumps in the road. For instance, in 1987 Richard Dennis stopped following his rules and encountered significant losses and was later sued. He made a comeback in 1990 which failed immediately. After a few more years he tried it again and failed again, and this is Market Wizard Rich Dennis we are talking about not some average trader.

Trading is a very difficult endeavor and even the best have bumps in the road. I know I have experienced them and it doesn’t make me, Rich Dennis, or anyone else for that matter any less of a human being.

The fact remains that trading is DIFFICULT! There are a few that claim its easy. My question to them is; if Richard Dennis couldn’t follow his own rules and even when he claims to have done so he was still forced to shut down, how is it easy? The record and reality reflects him closing his doors at least THREE TIMES publicly. Trading, and specifically Trend Following, isn’t easy as some claim, judge for yourself. I can’t make this stuff up! Some say its easy and others put their own money at risk and trade.

Here are a few articles about Dennis from the New York Times, Futures Magazine, and Business Week:

Judge Approves Dennis Pact

PUBLISHED: November 21, 1990

A Federal judge in Manhattan yesterday approved a multimillion-dollar settlement between a commodities trader, Richard Dennis, and a group of investors who said they had been misled by his company and lost half their outlay.

United States District Judge Milton Pollack agreed to a settlement in which nearly 6,000 investors will share $2.5 million almost immediately and get half of Dennis & Company’s trading profits in the next three years.

The initial cash payment will be delayed for 30 days while a Federal magistrate considers how legal fees and expenses should be met. Lawyers for the investors have asked for $750,000 and a quarter of Dennis & Company’s trading profits to cover their fees.

The investors contended they had been misled by the investment firm, causing them to lose more than 50 percent of the value of its Preferred Futures Fund, or about $51 million. The fund was liquidated in 1988 because of excessive losses.

Judge Pollack called the settlement “fair, reasonable and adequate.” He said there were no objections from any of those who brought the class-action suit. Under the settlement, Dennis & Company did not admit any wrongdoing.

Source: http://www.nytimes.com/1990/11/21/business/judge-approves-dennis-pact.html

RICH DENNIS: A GUNSLINGER NO MORE

The 1980s’ superstar commodities trader, is now doing what his computer tells him

June 15, 1997

For years, Richard J. Dennis lived by his wits in the commodity markets–and quite a living it was. His knack for the quick kill made him an estimated $200 million in the 1980s and brought him fame unmatched by any other futures trader. Then his instincts failed him. By the early 1990s, having lost tens of millions for his customers, he quit the business. Now, he’s trading again, with a difference.

Instead of acting directly on his thoughts, theories, and impulses, Dennis translates them into computer programs. When those bits and bytes align with market prices, the computer orders a trade. Under an agreement with a third-party broker who controls most of his customer funds, Dennis must follow the system. No matter what his gut tells him, discretion isn’t allowed. So far, the deal has paid off: With a 111% gain in 1996, Dennis once again ranked among the world’s top-performing commodity traders. ”The left side of my brain has put the right side out of business,” the soft-spoken 48-year-old explains.

HUGE LOSSES. Dennis’ transformation to robo-trader could prove significant. In derivatives markets, taming traders is the preeminent risk-management problem–just ask Barings PLC or Sumitomo Bank Ltd. A computer system that limits potential losses has great appeal. In Dennis’ case, his goal was to separate a brain loaded with money-making insights from the heart of a gunslinger. By the time he retired in 1988, he had shot himself in the foot by making unusually risky trades–purchasing huge quantities of options just before they expired and became worthless, for example. In one day, he lost $8 million in a soybean trade gone bad. Losses in his personal accounts paralleled those of his funds. Adding insult to injury, an early 1990s comeback attempt flamed out in months.

Now, the system curbs Dennis’ tendency to go off on fliers by imposing strict risk parameters. In programming the computer to evaluate price, volume, and other market data in search of profitable trades, Dennis says he employs only strategies that have survived rigorous testing and proved successful in the past. While many traders employ computer models, such rigid systems remain more the exception than the rule; most traders keep some discretion.

Despite his past big losses, customers have responded enthusiastically to Dennis’ new approach. So far, they’ve given his Dennis Trading Group Inc. $85 million to manage, up from $2 million at the beginning of 1996. ”What I see here is completely different from the way he was before,” says Bob Collins of Rosenthal Collins Group, an investor in the fund whose firm has cleared trades for Dennis since the 1970s. ”It’s very disciplined and regimented.”

If the past is any guide, Dennis is reaching the point where his computers will be truly tested. A review of his trading over the past decade shows that, like many traders, he has performed best when handling relatively small amounts of money. In 1987 and 1988, when he was trading as much as $159 million, his net loss after fees was $60 million. And in 1992, when his equity climbed as high as $86 million, he lost $48 million. So far, the fast growth of his stake hasn’t caused him to spin out of control, though it may have slowed him down. Through February, he was up 6% for the year, compared with nearly 10% a year earlier.

By thwarting the impulses that led to huge losses in the past, the computers have freed him to concentrate on the theorizing that was always his greatest love, Dennis says. His faith in his new system has led him to promote himself aggressively, even though he swore in the late 1980s that he’d never trade again, except as a pastime. He changed his mind, he says, because he wants to build a war chest to support a variety of philanthropic and political goals–among them, legalizing marijuana and aiding victims of domestic abuse. Money, he says, ”is the main ingredient if you want to influence things.”

Like many kids growing up in blue-collar Chicago, Dennis viewed the city’s futures exchanges as his best shot at riches. He became fascinated with trading even before he was old enough to enter the pits. While still a teenager, he persuaded his dad, a city engineer, to fill orders for him. Before long, the plump, bookish kid had lost half his father’s life savings and his younger brother’s pizza-delivery money, too. ”I made every mistake 10 times over before I was 21,” he says. Yet even as he learned through painful trial and error to anticipate price movements, he never lost the courage to bet the ranch. He made his first million by age 25, and his fortune soared over the next decade. Never married, he remains close to his brother, Tom, a veteran trader and his longtime partner. He guards his privacy carefully and declined to be photographed for this article.

By 1984, Dennis was one of the biggest single traders in the commodity markets, and mere rumors that he might be buying or selling would move prices. When he placed classified ads proclaiming ”trader wanted,” he got some 1,000 responses from people eager to learn his secrets. He settled on fewer than two dozen novices–among them two professional gamblers and a fantasy-game designer–and after a two-week training program, he gave them money to trade under his firm’s auspices. Several went on to become top commodity-fund managers, including Jerry Parker of Chesapeake Capital Corp., who now manages more than $1 billion. ”It was sink or swim. Sort of an experiment,” recalls Parker, a former accountant. Dennis ran the training, Parker says, ”because he wanted to have a certain chunk of money traded using systematic rules” while he went on and tried out new techniques.

As Dennis’ bank account grew, his interest in influencing public affairs grew along with it. Starting with a $1,000 donation to George McGovern in 1972, he has given $10 million to politicians, he reckons. An additional $20 million went to a think tank he founded in the early 1980s and closed in 1989, and still more went to a private foundation, he says. While some of the money paid for domestic-violence shelters, his chief cause is decriminalizing pot, which he calls good economic and social policy. ”A lot of people give money to the heart association,” he says dryly. ”I try to pick things that are as unpopular as possible.”

In addition to giving money, Dennis has participated in political debates and written op-ed pieces and magazine articles, including a 5,000-word article on the economics of legalizing drugs that ran in The Atlantic in 1990. When his public funds collapsed in the late 1980s, burned investors accused Dennis of being so distracted by politics that he failed to monitor trading–an accusation he disputes. In any case, Dennis says, all his political giving achieved little. ”I wasn’t looking for an ethanol subsidy. I was looking for specific policy outcomes,” he says. ”[The politicians] would say, ‘What’s the hidden agenda?”’ The lack of results helped transform him from liberal to libertarian. These days, he advocates less government at all levels: ”The rule of thumb in politics ought to be, when in doubt, don’t do it.”

BIG LOAN? Dennis is deeply bitter about a class action brought against him by investors after his big losses. In 1990, plaintiffs concluded that he was ”financially strapped” and ”debt-ridden,” and court records say he agreed to borrow $2.5 million from his brother for a settlement. Dennis says his net worth has been in the millions for more than 20 years and that he paid the settlement. But Philadelphia attorney Merrill G. Davidoff, who represented plaintiffs, insists: ”He had no money.”

That’s not an issue any longer. The question now is whether he can maintain his phenomenal rates of return. Will he substitute nerve endings for microchips if his results head down? Dennis says no. Yet his funds’ disclosure documents impose no legal obligation to obey the computer. The fine print must read that way, his partners say, so that Dennis can exit markets quickly in the event of war or financial meltdown. If he overruled the computer under less drastic circumstances, ”We would close our accounts,” says Esther Goodman of Kenmar Holdings Inc., the firm that reconciles Dennis’ computer signals with his trading blotter on behalf of customers. Still, for investors it’s a matter of trust that Dennis, once so quick to shoot from the hip, will keep his guns holstered in bad times as well as good.

By Greg Burns in Chicago

Source : http://www.businessweek.com/1997/14/b3521101.htm

Richard Dennis closes shop — again.

By Krueger, Diane

Publication: Futures

Date: Wednesday, November 1, 2000

After coming out of his first retirement to form Dennis Trading Group (DTG), Richard Dennis once again has decided to close shop, further evidence of the difficult times gripping the managed futures industry.

One Sept. 29, Dennis along with Kenmar Holdings, the firm that raised assetsfor DTG, decided it was in everyone’s best interest if DTG ceased trading and liquidated customer accounts at the end of October.

“DTG was 50% down in June but then made a slight recovery in July,” says Burt Hozloff, president of Select Advisors LLC, which handles client relations for DTG. “But we finally broke through the 50% mark to 52% You still can trade and try to recover when you’re down 50%, but you run the risk of falling to 60% or 70%, and there’s no turning back from there.”

DTG, which began trading in May 1994, had $79.5 million under management in early October, over $230 million less than the $310 million in had in August 1999. Despite a 27.8% return in January, DTG had only one other positive monthly return for 2000, an 89% return in July. DTG posted a -36.7% year-to-date return through Sept. 30, 2000, after a 10.6% loss for the month. The firm ended 1999 down 10.28%.

Dennis was to continue managing funds until the end of October. After that time, remaining assets were to be transferred to Beacon Management Corp.’s Meka program. The Meka program uses a technical intermediate- to long-term trend-following approach. The program was down 0.40% in September and has a 12.27% year-to-date return. It closed down 28.18% in 1999.

The trading approach of DTG differed from the methodology Dennis employed in his earlier trading in that it was a purely systematic approach; no discretion was used. Dennis, a well-known and respected futures trader, retired the first time from trading in 1988. That venture, Dennis & Co., used a combination of systematic and discretionary trading and also had a string of considerable profits before experiencing large losses. He than started DTG in 1994 using the systematic methodology.

While Dennis hasn’t made any decision if this will be his last foray into managed futures, he is the latest big name to exit the managed funds business.

“It’s been a tough year because of the lack of trends,” Kozloff says. “Some might disagree and say look at oil, but that isn’t a trend. They are rapid price spikes, not trends, and these rapid price spikes hurt everyone who follows trends.”

Source: http://www.allbusiness.com/specialty-businesses/671779-1.html

Posted in Educational, Trading, Trend Following | 2 Comments »

Is There Only One Trading or Investing Strategy That Works?

Friday, February 26th, 2010

The overwhelming answer is NO! There are many ways to make money in the markets. My own experience and reality proves that this is the case. When you look across the investment landscape you see successful buy and holders like Warren Buffet, day traders and short term traders like Steven Schonfeld, day trading statistical arbitrageurs like Jim Simons, Long Term Trend Followers like John Henry, multi-strategy managers like Steven Cohen, Bruce Kovner, and Louis Bacon, and everything else in between. The key is to find a strategy that fits your personality.

For some that means systematic trading, for others that means discretionary trading, or maybe a combination of both. To be a successful trader or investor it comes down to two things, having a strategy and money management. Without either one of those key elements you are dead in the water.

What I like to tell people is that there are a hundred ways to make money in the markets and a million ways to lose money in the markets. My point is that it is much easier to lose money than it is to make money trading and investing. Anyone that says trading is simple and easy, has never traded, is a liar, and a snake oil salesman trying to sell you something you don’t want. If it was so easy they would post their real track record, like my real track record, to prove how easy it is. On top of that, everyone would do it and we’d all be multimillionaires many times over.

Don’t fret, it is possible to make money in the markets but only with hard work, a valid strategy, and prudent money management. If you want learn more, check out my products page.

Posted in Educational, Research, Trading | No Comments »

Precter on Deflation and a Market Crash, Plus A Rebuttal

Thursday, February 25th, 2010

Bear Market Armageddon: Why Prechter Might Be Right This Time

Bullish a Year Ago, Robert Prechter Now Sees “the Biggest Bubble in History”

Why Bob Prechter Is Wrong on Deflation: Ben Bernanke “Wants Inflation”

Posted in Economics | No Comments »

Have We Reached the Tipping Point?

Wednesday, February 24th, 2010

While the equity markets and many commodity markets have had a “V” shaped recovery the economy has not. The problem is the two eventually come into parity and the economy is turning back down and I expect the market to follow. The weight of the negative news is stacking up more and more everyday. And, although the market loves to climb a wall of worry this wall could collapse at any time. Here are just a few headlines hitting the tape from the past two days:

Lending Falls at Epic Pace

New Home Sales Hit Record Low in January

Fed’s Next Move to Hit Housing, Mortgage Rates

The Death of American Capitalism

If these headlines were appearing after a severe market decline I may be looking to be buyer, but we are up 50-100% across the various markets in the past 12 months. Warren Buffet’s partner Charlie Munger, who is arguably the real mastermind of Berkshire Hathaway, is warning that America is on a ‘Road to Financial Ruin.’ I agree 100% and think this is the tipping point where the markets fall back into line with the economy which is on life support at best.

Posted in Economics, Risk Management | No Comments »

Market Leaders Breaking Down

Tuesday, February 23rd, 2010

The charts of market leaders Google and Apple seem to be breaking down. I find that these two stocks tend to lead the market and I do not like what I see. While it is entirely possible that we are stuck in a sideways trading range, any breach of the trading range to the downside should usher in strong selling pressure. I would keep on an eye on Google $525 and Apple $188. If we get closes below one or both of those numbers I would anticipate a fairly large market correction of at least 5-10% for the broad indices. Here are the charts of these two market leaders:

GOOGLE:

AAPLE:

Posted in Trading | No Comments »

Losing is a Necessary Part of Successful Trading

Monday, February 22nd, 2010

Everyone seems to have this infatuation with always winning and never losing. The problem is in trading there is no such thing as a no lose system or methodology. In fact, losing is a very necessary part of good trading. Successful trading is a game of probabilities and statistics. Understanding the simple math behind it is a necessity.

Many extremely profitable trading systems have a higher percentage of losing trades than winning trades. Now you may be asking yourself, how is that possible? It is possible because the average winning trade is 3-4 times the size of the average losing trade. The key is to think in statistical terms and probabilities and understand how that math bears out. Once that sinks in you have a chance, until then your ego is going to fight you every step of the way.

This concept is alone, losing more often, makes it very difficult for many people to succeed at trading. Their ego just cannot handle it. In trading, it is often the case of being right more often than you are wrong and losing money or being wrong more than you are right and making money. Yeah, yeah, I know its not an easy concept to grasp, but its the truth.

Posted in Educational, Trend Following | No Comments »

The Importance of a Trading Plan

Sunday, February 21st, 2010

In order to succeed in trading you need a trading plan, in other words you need a business plan. Here are the necessary elements of a good trading plan:

1. Mission statement and objective – What is your purpose, what are you trying to achieve, and why is that important?
2. Strategy Description – Describe your trading strategy and process.
3. Strategic Market Analysis – Portfolio Selection, what markets are going to trade and why?
4. Competitive and Feasability Assessment – Who are you competing against? Do you have an edge and what is it?
5. Psychological Analysis and Emotional Plan – Can you psychologically handle the volatility and uncertainty inherent in your strategy. Are you aware of the psychological implications of implementing your strategy? Do you have a plan to deal with your emotions?
6. Operating Plan – What do you need to implement your strategy and how do you intend to carry out your plan?
7. Financial Plan – How much money do you need to trade? Is it money you can afford to risk? What is your worst case scenario? Do you have a stopping point?

If you put in the time, energy, and effort to answer all of these questions to formulate a trading plan your chances of success increase dramatically.

Posted in Educational | No Comments »

Biotech

Saturday, February 20th, 2010

Right now I think biotech may be the best place to invest. The BBH, biotech holders trust, has been basing for the past 7 months with a reverse head and shoulders pattern. The pattern suggest a minimum of a 10% move higher if the pattern plays out. Besides the favorable technicals, the reason I really like the biotech sector is because it is not necessarily dependent on the economy. I would look to buy the BBH at 104 with a stop at 98.40. I would look for 110-115 as a minimum upside target. Here is the chart:

Posted in Trading | No Comments »

Tiger Woods and Trading

Friday, February 19th, 2010

Today, Tiger Woods apologized to the world for being unfaithful to his wife and for letting his ego get the best of him. For a guy that seemed infallible, the world now realizes that he is human too. Everyone, including the best in the world, go through set backs and bumps in the road in this journey called life. I know that I have experienced them and I am sure you have as well.

These moments tend to be very polarizing and awakening. The key is to use these events to grow and become more conscious. In trading, events like this happen all the time. Traders have a strategy and their ego gets the best of them and they deviate, or cheat on their system or strategy so to speak. When this happens it inevitably leads to losses and sometimes failure.

I have lived these experiences in the markets and in life, and I can tell you firsthand that they are very humbling. Trading in my ways is a metaphor for life. It requires commitment, continual growth, humility, and most of all consciousness. Consciousness can be extremely brutal on the psyche. It can easily bring you to your knees and it will if you are not willing to learn from the events of your life. One of my favorite spiritual teachers, Caroline Myss, says consciousness can only be learned through wisdom or woe. Unfortunately, woe is the typical path for 95% us.

For this reason, I have spent a lot of time studying eastern spirituality. Eastern spirituality is deeply rooted in consciousness and freedom from egoic thinking and behavior. I tend to find implementing these concepts in my life makes me a much better trader and more importantly a much better person. Take the time to improve your life and your trading by learning from others experiences.

Posted in Educational, Emotions, Trading | No Comments »