Trading markets

[Doug Coulter]

[Note, I'm in the process of editing this, using the board as backup, I'll remove this line when I'm done with the post, which right now isn't quite the overview I want, Help, Curtis! Ah, Curtis tells me he's busy writing another book himself right now, but he'll be here -- good thing, he writes better than I. Hope he sends me a copy, but if not, I'll buy one, his stuff is good.]

It appears I'm writing a book here, which wasn't my plan but...why not? If it helps anyone, well, that's what I'm all about. What goes around comes around, and the golden rule IS a description of how the universe works -- how it happens seems like magic sometimes, but hey, it works. Do good, and you'll be rewarded, though as often as not from some unexpected direction.

Second big note -- my lawyer would have kittens if I didn't say something like "don't take my advice, I'm wild-crazy-nuts, and this is educational and entertainment only, don't try this at home, and a bunch of "don't sue me if it doesn't work, and especially if it doesn't work because you didn't do it right and then whine about it, because then he'll not be your pal". Or words to that effect. And more words like "past performance doesn't guarantee future results" and stuff like that. Get it?

This could be utterly off topic on this board, but...maybe not. I'll go by responses, and am posting this here in water cooler because if no one cares, it will simply disappear, and I'll shut up about it all.

Trading is what I do for a living these days, and I seem to be pretty good at it, but....not perfect (don't think anyone is). For example, yesterday (10/19/10), I took a pretty decent hit when China did some surprise things that I couldn't do anything about until our markets opened, and by then it was too late; no, even I am not anal enough to stay up all night and trade overseas markets. That's for heavily leveraged and probably coked-up Forex types one step out of bankruptcy. (try google if any terminology goes past you here, for now)

So, I'm a fallible human -- no surprise there! The thing is, with the right plan(s) you can make money and "beat the markets" despite not having a perfect crystal ball -- and if anyone wants to know how, it turns out we have a couple of people here who can teach - myself and Curtis Faith come to mind. Though I took a big hit for me, a couple percent loss on the amount I was "in", it really wasn't bad compared to what probably happened to most people who aren't "on it", which is one key. Like any other game, you get out of it what you put in, and paying attention is a crazy-big part of that. You will almost always do better than something automated, or "your broker who wants commissions on your business" almost certainly.

As luck (or would that be skill, or maybe laziness?) had it, I had put trailing stops under a lot of the more in-the-money issues I was holding large amounts of, so while the account did lose over the peak of the day before, I automatically sold quite a lot of stocks still "in the green" for well more than I'd paid, just not perfect. Though I lost a little unrealized profit, that was all it was -- still way up on the year and next year's budget is looking good. Risk management is the key, and there are a few approaches to that that work, and at least for me, trailing stops are one of the techniques, but in the presence of flash crashes, not the best one -- think reserve parachute on that, it's a last resort that doesn't always work as you'd hope. Or worse yet, a pilot chute that if loosely deployed, might yank you out the door of a perfectly good airplane.

I am a behaviorist in this game, to me it's all about human emotion, even when there are computers trading too (remember who programs them!), and that theory seems to pan out fairly well when tested daily and minute by minute over the past few years. The truth of the matter boils down to this -- stocks have NO intrinsic value, period. They are worth what someone else will buy them from you for at the time you want to sell, end of story. Some purists will point out that some stocks sometimes pay dividends (at the whim of the company), but that doesn't qualify them for intrinsic value in my eyes. In general, they're worth the bits they are printed on (not even paper any more unless you pay extra for actual certificates, which very few do). So yes, it can be pretty scary to shift large amounts of bucks in and out of something essentially valueless at the philosophic base. On the other hand, it can also be pretty darn exciting to make serious money doing it, and there is that practical aspect -- for the last 5 years or so it's been my only income, and I'm growing principal while taking some out to live on and do physics. Neither my science work or this board would exist without it.

This game is a good one for engineers who have spent a lot of time with scope traces and charts and trade-offs, it's the same "stuff" you need to be good at it. It also often requires control over your own emotions so you can clearly see those of the other players. This is more like poker than roulette -- a good player can win over poor ones even if the dealer is cheating a little, and some of the techniques are pretty similar. You're always looking for the "tells" of the other players, and the more you know about them, the better you do. Technical analysis is a not magic trick and stocks must follow its predictions -- it's that a lot of people think it works, and it is self-fulfilling to a very large degree -- it's a tell on the other players, as are other things you ignore at your peril. Stocks rarely touch what investors call fundamentals, but sometimes revert to them, every so often (usually at crisis points, every few years). So I think most of the various kinds of analysis is junk and bunk, but that doesn't matter if everyone else believes in it and lets it drive their actions. If analysis makes someone think a stock is going up, they buy, and guess what -- supply and demand make it go up! And the vice is versa. That said, I prefer to trade good solid companies and I prefer going long to short. If I get stuck in a good company, I have a better chance of it going up if I just wait, after all. Although I suppose a perfect trader would dump such a trade right off, I'm never trading even close to my cash limits, so I can afford to let things ride sometimes, rather than having to concentrate too much on putting it all on the things going up the quickest right now. Good to mostly be there, of course.

Any engineer looking at these charts will immediately see some patterns. You could almost use a Fourier transform as a predictor, and I'd bet some do. One thing I'd point out that most of the pros don't mention (whether they agree or not, I don't know) is that the basic frequency (not to mention amplitude) of the various swings is highly dependent on the "mood" of the market -- excited or fearful people move quicker, and the cycles shorten, where in calm times you might have long boring stretches of a mostly unidirectional trend with only small variations from a straight line.

Many trading systems only work in certain types of markets, which are normally a trending thing, but not necessarily right now, and recognizing what type of market behavior dominates at any one time is key, in my view. Right now (and for the last good while) it seems people are panicking, and the cycles are shortened over the norm. The time to flip from joy to despair back to joy is pretty short these days, and it helps a lot to be aware of that and adjust your own style accordingly. A lot of people would say, hey, we're in an uptrending market, and with slight pullbacks, have been since about March 9 of last year. But price the markets in gold, or even euros, and you see quite a different picture due to the dollar's spectacular drop (you know, what we accuse the Chinese of doing...).

I'll stop for a second and give Curtis a plug. He's written a few books on trading style that are super good for trending type markets, and they are all worth reading if you are going to venture into any of this, even though he's not specific about some things -- he gives a very good view about how to approach it, instead, which is really what most people need -- how to think versus what to think, which is dated the instant it's written -- his take has more lasting value than that. Once you have that, filling in the details is not so hard at all. I would simply say that in the main, we're more in a trading range market with the odd panic in either direction, which requires different techniques for best success than a trending one does. Further, due to certain interventions by governments, the rules are a bit twisted right now.

The four most dangerous words are "it's different this time" as has been proven quite a few times, but it really is different this time. At no time in history has there been so much government intervention, by so many governments, with so much coordination between them. This is not necessarily a bad thing for a trader, however one feels about it politically. Best to leave the emotion to the guy on the other side of the trade where it clouds his judgment, but not yours. Further, there is this new phenomenon of sovereign wealth funds which may not have the same sort of greed motive as the normal players. (note to self, there are good examples of this I can show)

For a short sample of Curtis' work, check this out:

originalturtlerules.pdf

Curtis reveals the Turtle rules & "secrets".

(270.62 KiB) Downloaded 1026 times

I found this online someplace, so I hope he won't mind me putting it here too (Curtis, you there?). While some of the rules mainly apply to trending markets, the super excellent risk management rules here always apply, or so it seems to me. I don't always follow them (to my peril) but they work when I do. As he says, publishing the "secrets" is safe, because most humans can't or won't stick to the rules, and this is not a case where you can choose one from this, one from that, in general and do well. Along with another one by William O'Neill, which basically goes like this -- cut your losses brutally, but let profits run. For example, if you limit your losses on a trade to at most X percent, and take money off the table at 2.5 to 3x that percent, even a person who only calls 50% of their trades right makes good money -- work it out. And with a little experience, many get to the high 80% range of calling them right. I'm in the 70's myself after a little practice. In a more normal uptrending market, you'd always cut losses to 8% max, and take the money and run at about triple that gain. We are not in a normal market right now though, and I am using tighter numbers at the moment. In no case should you ever violate that -- no trade should ever lose more than 8%, and these days, I cut that closer to 4%.

Everyone is free to develop their own style at this, and I can of course only describe mine, so here goes.

1. I do my homework, which is most of the work. Most of that is updating my watch lists, analysis, and updating the list of things I will trade in.
2. I don't do leverage, options, or anything real tweaky or dangerous. Bulls do well, bears do well, pigs get slaughtered.
3. I use risk management.
4. I trade high beta stocks, that have a lot of motion -- the trick there is just being on the right side of any big move either way. Motion is money, so I crave motion.
5. I trade only a few stocks, ones I've been able to get familiar with the behavior that the other players at the table exhibit.
6. I watch more stocks than I trade, as there are ripple effects, and most stocks have some correlation with the market as a whole. So even though I don't trade tech much (for a few reasons I'll mention later or in response to questions) I do watch it.
7. I make plan A, plan B and so on, and am ready to make plan C and execute it on a moments notice, because whatever I think, the ticker is the truth, and it doesn't respond to what I think will happen one bit, doesn't care about my emotions, and so on. Many people over-think things. Heck, with not much analysis, we can all see where things are going long term, and there's a lot of agreement among the pros on that, but as someone said, the markets can stay irrational longer than you can stay solvent if you depend on them being rational, efficient, free, or any other religious term.
   
   So you might take some obvious bad signs long term with a grain of salt (but it's good to track them), and simply make hay while the sun shines, which is my approach. By the time the long term hammer drops, I'll have been in and out of trades hundreds of times anyway, and have been adjusting my style as the market changes.
8. I cut my losses ruthlessly, and let my gains run. There are a few ways to get this cat skinned, which I can elaborate on further.

Stocks (and the companies that issue them) have no loyalty to you, and the reverse should be true! Once a stock is sold by a company, they are out of it -- they got their money, and in general the price of the stock later doesn't affect them all that much (unless they own and trade their own stock, or have the usual ego issues at the top). Many traditionalists think going short is bad morally. Hooey. Even if all the retail traders did it, it wouldn't affect the price of an equity all that much, we are small part of the game -- most trading is institutions, mutual funds, hedge funds, and 70% or so of the volume in the market is their computers. During the previous crash, I sold about a million bucks worth of stock, all at once, and yes by golly you could see the very tiny blip on google finance that created, which "healed" in about 20 seconds. So any idea that what you as a little guy does is either good or bad for the markets or the companies is purely thinking you're a lot more important than you really are.

Now, there are about three kinds of styles as defined by time-in-trade.

1. Buy and hold - long pushed as the best way (especially by people who sell things they don't want you to get out of, because you might get wise and not get back in with them) but actually dead for the last decade at least. How was it not smart to sell when things started tanking in the last crash, and then buy back in much cheaper later? Puleese.
2. Swing trading -- positions from days to months, which is what I mainly do. Also what most big boys do, and sometimes called active trading.
3. Day trading -- in and out sometimes in minutes. Good for ADD types I suppose. Lots of little gains unless you use dangerous amounts of leverage. Sometimes a last resort. Even a swing trader might enter a position to find out almost right off he called it dead wrong. Might be wise to admit the mistake and get right back out at that point. Or you called it so right you made "too good to be true" gains -- and if they are that good, why not get out and put the money back in the mattress? You'll probably get a pullback to buy in again after a little mean reversion if it really was too good to be true, if that's what you want to do at that point. But no one ever got broke banking their profits.

Markets trend most of the time, or at least there's a trend underlying the shorter swings. Some would say that despite yesterday, the USA market is in an uptrend. It is, when priced in dollars. But it's very illuminating to look at it priced in say, gold, or even euros. We're treading water and even trending the other way by those valuation measures, something that people seeming to make a little money would like to ignore -- and hope you will ignore if they're making money as your broker. What's the point of making 5% in a market priced in dollars that go down 10% in the same interval? Better than a CD or the mattress, but still a losing game, so you have to set your sights higher. This means you might want to have some stuff that's not dollar denominated at its base, where you at least have a chance of actual gain! While of course, watching the currency wars try and race everyones fiat money to the bottom. The US is mostly winning that one at present but as always, there are mini swings within the larger trend, and every now and then, a wild card.

This is more often than not a "hurry up and wait" kind of game, where you watch a lot, but don't do that much. If something major happens, you might do well to make a quick move to take advantage of it, but usually you just pay attention and wait. Kind of like being deployed in harm's way, it's mostly boring....with intervals of extreme excitement in there.
Doing the right thing at the right time is key, duh, in many fields, and very much so in this one. He who is lost, hesitates.

Imagine a stock that doubles over say, two years, as some did before the latest crash (POT for example). Well, in that case you'd have done pretty well with "buy and hold" if you'd been paying attention during a few key days at the start of the crash and sold before all your gains evaporated. But during that doubling, those stocks had periods of very fast gains, interspersed with pullbacks and flat spots. Had you bought the dips, and sold the peaks, you'd have quadrupled your money at the very least, and that only calling the moves with fair accuracy, simply sitting out when you weren't seeing what you wanted to see, or putting the money elsewhere where the timing was right for that. This is what I do, and to me, it matters very little what the underlying trend actually is.

Curtis uses a different plan, which works for him and his temperament. That's one of the things that make this cool, actually. There's more than one way that works, or as perl programmers say, TMTOWTDI. As I think he'd say, if we all did this the same, there'd be no successful trades for anybody. There is always a buyer for every seller, or the other way 'round, which means by definition you're not on the same plan.

One of the ploys that's working well just now for me is mean reversion. The idea is that some issues jump up, or get hammered unfairly, then revert to the underlying trend. If you take time to get real familiar with a few, and watch for spoilers (like news events that may have more lasting effects) you can make a lot of hay on that one. In fact, I did today, on some that got clobbered for no good reason in that huge drop mentioned above. When the emotional types came to their senses, they bought back in, right after me, and drove the prices back up again.
This works especially well in the current conditions, where emotional traders over react and then recant. Think frightened 7th graders and you'd be pretty close to the other guys at the table right now.

Yes, the dealer cheats, the markets are now and have been manipulated. So? Poker is gambling to be sure, but do you really think that in that imaginary world (The Gambler series) that Kenny Rogers was actually gambling when he sat down at a table with the rubes? He didn't have to cheat to win, either -- he just knew how to play better than they, and how to tell when they thought they had a good or bad hand.

In fact, one ace trick is to know how to recognize the cheating and manipulations (worth a post or few) and ride along. We little guys have a huge advantage over the big boys in that, as we can toss it all into something and not move the price diddly -- we can be fast. Try that with billions -- you can't do it -- you drive up the price of the thing you're trying to "buy low". But you can watch them try, and get a free ride.

Note that you cannot do most of what I'll describe through a human broker or wire house unless you want to spend all day on the phone. You'd have to have a computer trading account that lets you pull the trigger quick when the aim is just so. You don't have to be there every second, or be superman-fast, just not wait half hours between deciding and action.

Most of the stocks I play with move on the order of a couple to a few percent per day, and most often do that in either the first few or last few minutes of the trading day (not always but often). That means if you call a good percentage of trades right, you can make a few percent on every trade, every couple days. That adds up nicely over a year of trading...
I rarely get a "day trade" flag, and then only if I make a bad call, and it's pretty obvious right off or ten minutes later, and the wisest thing to do is admit I blew it and get back out, take my whippin' (about 20 bucks worth of commission plus what I lost calling it wrong, maybe a percent or at most two). Understand, if you are there and paying attention, it's never smart to wait and see -- if it's going wrong badly, get the heck out -- you can get back in soon enough, because you're paying attention and won't miss the next turn. Fund managers that say you'll never get back in right are just telling a self serving outright lie, in most cases (some people have emotions such that once burned, they can't make themselves stay in the game, for them its not a lie, but they shouldn't be doing this if that's the case). The only advantage they really have these days is it's not their money, so they can watch big red numbers build up and not care. With only a little discipline, so can you, and no one cares about your hard earned bucks more, so why not do it yourself and get it right?

[Doug Coulter]

Here's how to recognize and understand the most basic and oldest form of market manipulation and go along for the ride. While not stated as such, this is responsible for a lot of the "patterns" mentioned by William O'Neill and his famous cups, handles, and other stuff.

Put yourself in the place of a major mutual fund manager for a moment. You have billions (many) to work with, and generally hold about 100 positions, usually more or less evenly divided in bucks, though due to some things going up, some going down, and various biases, it may be twice of half that before you re-balance. Some funds concentrate more than others do, of course, but I'm talking mainstream ones, the kind most people's retirement funds are in.

You decide you want into something else, and you've got the money. Well, you want to buy low, right? So the first thing to do is temporarily scare off the other people who are in it. One easy way to do that is sell a bunch of it, and trip off everyone's manual or automatic stop losses, creating more selling, and driving down the price. How can you sell what you wanted to buy? Well, of course you go short, or if you can't, you have gotten a little (from your perspective) to slam-sell. Normally a large fund will not do anything quick for reasons that will soon be obvious, but for maximum effect, this time you do. You put in one or a few very large short-sell orders, more than the current demand will easily satisfy. Boom, these hit the market and the equity, stock, whatever, tanks as a result of all that selling -- all you needed to do was catalyze it, and let other's fear do the rest.

Now, as soon as that happens, you put in a bunch of small buy orders, with limit prices, and generally do it through several different houses, so it's not obvious what is going on, because once people figure it out, the game is up. You buy slowly, because a big fast bunch of buying (remember you're working with real big money) will cause people to notice and buy too, driving the price up before you get yours. So you take it slow, and stay under the radar as well as you can. Nowadays with flash crashes and mini flash crashes, maybe a few of those limit orders have real low limits (but not stupid-low, those tend to get canceled and noticed) and you get some of your position really cheap -- I've done this and got 5% instant profits myself.

Ok, now you've got your position. If it does well, maybe you just hold and do nothing for awhile, but after awhile you want out for whatever reason -- you probably have some knowledge that isn't on the news, borderline illegal insider kinds of things maybe, dunno. But at some point, you want out so you have dough to do something else for example. It's time to run that price up!
So, just like when you got in, you place some real big buy orders, maybe with high bid prices (remember these are big compared to us little guys, for you they are a small percent of your billion per position). Wham, these hit, the stock zooms. That's about when it hits the news and the analysts notice this thing is "goin for the moon, Gladys". Fine, now it's news for all the hungry little retail investor/traders, and the other vultures out there. They see this zooming, and have to get in, which of course, drives up the price further.

You are selling this whole time -- you did know you can have both kinds of orders out at the same time, right? Just as Joe Sucker and his neigbors are buying this amazing phenomenon, you're the one selling it to them. Keep going until you're where you want to be -- sometimes you can do this twice if there's just a small pullback.

At some point, you're out, the other smart money has figured this out too, they are out, and only the enthusiastic optimistic little guys are in, and by golly, with that crazy runup they're all in.
Hah. Now someone a little smart decides to put that money back in the mattress, because it's not a stupid move to sell on the way up -- and easier to catch, too. Bam, since everyone who wants to be is "all in" where's the buyer when you want to sell? So the price goes back down, and this trips up the trailing stops of some, or the fear reaction of others, and down we go till no one but the slugs are still there, and the price is at a bottom. Joe lost his dough....

While you buy back in, wash rinse repeat. Simple enough? As someone almost everyone (including me) hates once said, "quantity has a quality all its own".

This is where those cups with handles and all that other tech analysis junk comes from, this one basic trick is what has driven a lot of the market moves for decades now. It used to work very reliably for the guys in the big firms that had the guts to do it. Yes, it's legal. And tech analysis is boot camp. Don't believe in it past how it affects others, but...you have to see what they are seeing to know how they are going to handle what they see.

That is it worked real well for the big guys, until it became cheap for a lot of us to have real-time level II data, so we could see it going on. Now you can see those out of band actions, know what's going on, and catch the middle of a sure move, with very high edge, percentage, whatever-you-wanna-call-it. I get this data free as an Apex account(s) at TD Ameritrade, and I'm sure some of the other online brokers are the same. (I have several accounts by the way, and trade them with different styles as "diversification" and a learning exercise, which I'll have more to say about later).

So, learning just this one trick (you don't use it, understand, you just ride along), you'll make money if you do risk management well, and make a lot. Feel free to send me the tenth million you make from knowing it (just kidding).

This trick is used various ways with various things. Options are a cheaper way to move markets if you've got the stomach to sometimes lose 10 or 100x more than you bet, or margin if 2x is fine. Or you can emit analyst "ratings", most of which are purely bogus, but no one seems to ever catch on -- Goldman is famous there for saying one thing while actually doing the opposite -- watch guys like that (Soros) and learn how it is. But don't believe them. Those who know, don't talk, and all that. You only pay attention to the writers and the news to find out what others think and you need real discipline to not let it mess up your thinking and emotions, else it's best not to pay attention to all that and learn the ticker is the truth, period.

Note, Warren Buffet even does a little of this, but he's actually neither a trader or investor. At some point you get so big it's a different game entirely. What he does is buy enough of a company to get full control over it, then fixes it up -- he's a CEO of CEO's and darn good at straightening out companies that are off track. For him, it's not a bet, he gets to control the dice all the way. And of course when he does that, he's not secretive about it after he's made most of his move, and the follower effect just helps him more. Nice guy as these people go, actually. I've even seen cases where his strategy is to hold companies that are also customers of one another, getting all these nice synergy (and information bonus) effects without the M&A craziness that in general results in layoffs -- which no one gets as right as he does anyway, most companies lay off the wrong people, or a lot of them when they do that after a merger. Warren is better at this than most.
But remember, even he says things like "options are financial weapons of mass destruction" as he's selling (writing) vast amounts of them long term, only to be found out later on.

Is this immoral? I have a call on it that it's better to win than be a puppet of these guys, but I'd love to hear comments, because I feel more like Robin Hood than anything else, and these guys are bleeding you dry even if you're not in the market at all, via indirect effects and no so indirect effects of Wall street on Main street. Why not be a winner? Go ahead and pay some taxes to help support the less-astute among us so we all have a nice time. I could be wrong about this, I've thought about it a fair amount, and I like having good karma and all that -- so anyone who thinks this is something to "not be done", I'd like to hear why and what would be better to do instead. Until then, passing information and technique on how to succeed at whatever matters is what this board is all about.

And it turns out that engineers and techies kind of have a natural talent at this if they have one at that, so I'm hoping there's some slight relevance here. All you need is some knowledge of how it works, and how other people tend to act to make a good go of this. The rest you probably know already, as I didn't invite any known-losers here.

[Doug Coulter]

Ah, the old buy low, sell high thing again. But in shorting you sell high, then buy low (when things go your way). We little guys can't do naked shorting and that's just as well. We have to have a broker we can borrow shares from to sell, and at some point have to buy them back and return them. I'm not going to recommend that anyone short, except when you should, of course. It's harder to make money at, most times, because moves down tend to be swifter than grinds up, so the timing is a lot tougher to get right. The saying is stocks take the stairs up, but the elevator down (or jump out the window!). The behaviorist take on this is that fear is a stronger emotion than greed. It's more dangerous another way. When you borrow shares, the entity you borrowed from may demand them back at any time, and it it's your broker (as usual) it may come at a bad time for you to close the trade. Haven't had that one happen to me, but it's possible.

Why bother with any info on this, if you're mostly not going to do it? Because other people do it, and it affects markets, and gives some information you can use when going long!

For example, let's assumes a stock is getting hammered for whatever reason (and sometimes no apparent reason). A bunch of players will short the stock, hoping to cover later on, when it's gone down further. This extra selling is like most things, self fulfilling and it does drive prices down. Now for the reasons above, and others, shorters are among the more nervous of market participants, because a stock may also zoom right back up in many cases -- because it didn't go down for a good reason and people figure that out. So shorters have to be on a hair trigger to make money reliably, and will often cover at the slightest twitch. This drives the stock back up - buying pressure, and results in what's called a "short squeeze".

Note, when any stock makes a big move in either direction for no apparent reason, believe me, there's a reason, and you just don't know it, and probably won't till after the fact. Part of the discipline needed to do this is even if your're not trading that one, find out why, even if the news is days late (usually). This informs future decisions to trade in that one, and gives you a clue about the baloney in most of the financial news media, one myth of which is that they have timely news that is of value other than a peek into the mentality of the people playing this game.

Now, it's possible, though with some serious time lag, to find out how much "short interest" there is in a stock, as a ratio to the number of shares traded on the average day. A high short interest means a short squeeze is possible, and the stock will zoom from the slightest trigger. Doesn't that mean you might want to be long just then, not short? You bet it does. In fact, when stock violate the rule about going up slow, but down fast, more often than not, this is the reason. As always, motion is money and being on the right side of it is the name of this game.

If there is already a lot of short interest in a stock, maybe you shouldn't follow the herd, then. What is fun about this is it's possible that both sides make money. In a hypothetical situation, lets say a bunch of traders short a stock. It goes down a good bit, so if they cover they make money. What will usually cause them to cover is that it starts going back up, so their green numbers get smaller. That's when you go long. Now the stock goes back up a little, they cover, driving it up further -- then you get out too. You both made money!

Now, sometimes the only reason for a move is pure sentiment and emotion. Those are usually the ones you want, because if there's a more fundamental reason the stock may start down and keep on going down -- good if you're short, bad if you're playing the other side, obviously. This is where doing one's homework is vital, because when a good stock of a well run company that is competitive in a good market for them goes down, it's going to go back up at some point. On the other hand, a company tanking for good reasons (GM comes to mind) goes down, the shorts may never have to cover or can cover at pennies on the dollar; GM again, and the car in my avatar was paid for by that one, by the way, thanks GM and Unions! Hard to believe anyone would loan me shares to short after they announced they were going bankrupt, but...it happened and now I have a neato hot rod I paid for in cash made on that one trade.

How much short interest is a sign you should either join the crowd, or take the other side? That's a pure judgment call in my opinion, and part of the homework I do is to check this on things on my "might trade this" list now and then to see what's happening, and maybe get a heads up, which is valuable if I already have a trade on that equity going on in either direction. For whatever reasons the amount of short interest that is a big deal in one stock makes almost no difference another, so you kind of have to get familiar with how each equity reacts to an amount of short interest.
Here's one place that has this sort of information free. And here's the wiki on this topic.

Now, though I only trade stocks (and funds, and etfs) myself, many people use much more leverage to do this, in the options game, which tends to give 100::1 leverage. That means the same amount of money has a lot more effect on things (and that things have a lot more effect on the option trader who stands to lose a lot more than he's got in the game). But the big guys use this to hedge their bets, and also use the power of options to more or less force stocks into a target range, because it takes less money to manipulate the markets that way (when it works, when if fails, the leverage is against the entity using it). So I also find this site handy when doing homework.

Though not specific to this topic, doing the homework, the due diligence, is one of the main "edges" you can get in this game, since few others do it. Knowledge is power, or in this case, money.

FWIW, I'm right now (10/21/10) short BAC and it's looking good. Might be to late now to climb aboard this one, but go look at the chart on google finance. For those not used to the site, I'm just giving the home, you'll have to type BAC into the quote edit box to get this plot.
This could either zoom back up if the government lets them whitewash mortgage-gate and keep "marking to fantasy" their bad loans, or it could be another GM -- or they could go way bad and get bailed out, again -- this is a cowboy trade, understand, and not the norm even for this cowboy. Forces outside the control or prediction ability of most will rule this one, and as always, the ticker is the truth, the rest is spin usually designed to part you from your money. And those who pay attention are the winners.

I use that site as one of my tools. When we get to tech analysis and chart reading we'll discuss why, but right now I can say that one huge reason is that they can give you good plots that are log, not linear, and log is what you want, the other is a joke and requires far more skill to read right. After all, if you put X bucks into something, you don't care about it going up a dollar a share, or 10 cents -- what matters is the percentage rise. In other words, you make the same money if a dollar stock goes up 10 cents as you do when a $100 dollar one goes up 10 bucks.
Those look VERY different on the normal linear plot, and tend to fool people badly who don't get that. Funny most of the retail trading software (at least the cheap stuff) doesn't have that feature, eh? And with the fancy autoscaling most of it has, you also lose the perspective, which is all important. But that is a topic for another post in this book I appear to be writing.

Classic short squeeze that then faied

Here's a classic short squeeze that happened yesterday, along with some of the indicator tools I'm using on this trade (many more are available, and as usual click the pic to get a bigger version). I'm still short from about the $13.20 level, and didn't get head-faked by it, as the news is truly bad for these guys, even though they kicked out "satan" as their CEO awhile back. I admit to a certain satisfaction taking money from people who steal and club baby seals for a living, and then using the money for something good, in this case, fusion research.

For starters, lets look at the indicators on the main chart, which are the ones I use most until that crucial moment of "pulling the trigger". I use volume vs normal as a confidence measure. All it means is that there are more or less people trading something at the moment, and the more trades, the more confidence you can have in all the other numbers. A moving average over volume (available on google) is good if you get the averaging time tweaked right. Below that is the classic MACD, which is kind of a momentum indicator, comparing two different moving averages and multiplying the difference by volume for the little bars there. If a stock is flat, while this is going up or down, it's a decent bet the stock will soon be going up or down to match, not a sure thing, but a decent bet. The bottom one is "on balance volume" which measures how many shares go at the "ask" vs "bid" prices nearest together at the time. One of my favorites, and again, if it's going down the stock is, or will be soon, and the the other way around. Notice what it did during the squeeze yesterday -- the panic of those covering their shorts meant they were buying at the ask price, rather than putting in a bid and waiting and hoping. This one can be tricky, depending on how your platform computes it. Most do it on the time scale of the candlestick bars, and the picture can be very different depending on the time scales you use (which is another topic, but it's important to gain perspective at several time scales).

On the left is a depth chart, showing what you'd pay or get depending on how many shares you want to move right now -- it's updating once a second. As you can see, the more shares you want to move, the more different from the current last sale price you'll get or pay, and changes in the shapes there tell you the mood right this minute. The other chart I flubbed, as it's just a line chart for the last few minutes. I normally have that one on the 10 min setting, on which you can see each and every trade going down, as well as the lowest ask close to the trade, and the highest bid close to the trade. In that mode, it's very useful for figuring out just the precise moment to pull the trigger on the trade. Other indicators are available, as in showing all the bids and asks (which can be overwhelming), and where they are coming from -- useful to detect manipulation in progress, and last sales -- what trades actually went down at what price, and who did both sides of each (there are a lot of trading exchanges). More on all that later...

I will note that had you been a day trader playing the other side of this trade yesterday, you could have bought at 11.22 in the morning right after open, then sold at 11.88 near the close and made 1188/1122=1.058823529 (5.8%) on the trade in one day. But it takes a perfect call on both sides to do that. Beats making a few percent a year, doesn't it? The reality is you win some and lose some, but good money management means you make money anyway, so no one (hardly ever) makes 5% a trading day every day. But it doesn't take many to add up nicely either. In this case that would have been $588 profit for "lending the market" $10,000 for a few hours. Subtract about $20 in commissions, and that's not a bad day's work. I'm working with more money than that, and usually have a few trades on at a time, and I use management similar to what Curtis describes while doing it. I will in general max out at about 10% of my account on any one trade, but I never start that high, but only add more in if it's going my way -- it's safer. I don't get as much, but there's nothing like the confirmation of a trade already going your way to make you willing to add in a little more.

Not to go too nuts with aphorisms, but here's a couple goodies -- it's better to have your eggs in a few carefully watched baskets than spread so far and wide you can't watch them all.
Diversification can be de-worse-ification. It's a hedge against ignorance, and the cure for that is knowledge, not a scattergun approach.

These days due to the rise of ETFs and indexing funds, diversification doesn't work as well as it used to anyway, which never was that great. Add nearly 24/7 global trading and a just plain interdependent world, more so than ever before, and it's even less effective than it was, despite what "they" say. See for yourself! Asia tanks, and down we go too, and so forth.

[Doug Coulter]

Quick, which stock(s) are being traded by fast computers in the picture?

Watch this!

Hint, it's a big bank with very many shares out there liquid. Note the entire spread is 1 cent. When you're trading huge numbers of shares, that can be money. Once in awhile a human injects a large trade to mess up the computers (or a programmer might be debugging), and the thing will actually move. In general when you see this, get out of stay out of that stock, it's being manipulated and they are probably going to do something strange and unpredictable. Here's another view, note how many shares are up for bid and ask spread of 1 cent at the top of the level II box - I've seen it as high as a couple million so that's big bucks, not us normal humans. Also note that some people have a way to trade at fractional pennies and are doing it. That can actually be human to human trades, reported after they are made, with no computer in the loop, market maker types. Or Goldman Sachs.

look at these single orders!

In general this is easy to spot. Yes, these trend too and are tradable, but when something is this heavily manipulated and hedged, unless you have some sort of (illegal) insider knowledge of what's really going on, stay out! Here be dragons.

Note most of the rest of the day-trader watchlist I use to get the zeitgiest of the market doesn't show this (that's not a list of the stocks I actually trade, though there is some overlap), they only do it on a few stocks, because their computers aren't that smart and can't handle their own side effects on less liquid issues.

I may link this from other sites I post on as a rebuttal to the crowd yammering that it's all rigged, you can't win (why are they bothering to post, then?) and so on. Yeah, some of it's rigged, and on those parts it's hard to win. Was it ever any much different? Now we have data access that used to cost many thousands a year to have, for free, and the playing field is if anything, leveling out. Let those guys go play in their corner, and you be smart and play against others. Look how easy this sort of thing is to detect!

Also note the "way off" bids and asks at the bottom of the level II chart. People are trying to benefit from any flash crash caused by a computer error. This, I approve of. Rather than be beat up by these guys, catch their errors for profit. When your trade goes off (beep!) wait a few seconds and sell it back to them...at a nifty profit in a couple minutes. You can't put in a bid too way off, as NSYE and others are now canceling those trades, in favor of the big boys generally. So yeah, parts of this game are rigged, and you play those parts at your own risk, more risk than usual. So, be smart and either don't play there, or only play with little money for the fun of it.

[Doug Coulter]

Here's another chapter (probably out of order) in this book I'm writing which may be of little interest here, but...

Paying attention is key, if not THE key to making money in markets that are semi-panicked and lacking direction, as now, if not always. If you know all the analysis stuff, broad trends and so forth, it's useless if not applied frequently -- things change and create swings that are playable (or ulcer inducing if you're not agile). Do NOT depend on the financial press for this, they have uses but they are not the ones they want you to think of. "Those who know, don't talk" for one thing, and those who talk more often than not have an agenda that doesn't include your best interests. No, I'm talking about tape-reading here, doing research on companies, paying attention to what other investors and indicators are saying, and mostly ignoring the "pros" who as often as not are telling you to buy something they want to sell, or the obverse.

For a fairly benign example of this press foolery, look at the craze in ETFs the press is promoting as a "simple" way to play whole sectors. Is that in your best interest? Probably not. For one thing they all have management fees that eat into any winnings, or increase your losses. Looked at logically, this means that the people who create and sell them believe it's better to get a fractional percent of your dough for managing an ETF, than it is for them to just trade their own money. Which means even they don't think they actually know how to trade! They want to put your money where their mouth is, in other words. There are exceptions where an ETF is a good deal -- for getting into some markets that are hard to get into as a small trader/investor, but those aren't the norm. Me, I'll trade anything, trying to be long if it's going up, and short if otherwise (or waiting for the right time to put on a trade going either way) but these in general don't qualify. On even a puny $10k investment, in a year you're probably going to give those guys $100 in fees/yr, risk free to them, but not you. Further in the name of diversification, they will tend to include other than the best of breed companies in a sector. For 100 bucks, I'll figure out who those are (takes only minutes) and just work with those, direct, fee free, and skip the relative slugs in an area. Doh! So much of this is so obvious if you follow the money -- they are making out on your back, but don't even believe in their own ability to trade, or they wouldn't bother with this, it's a version of "I can steal a penny from everyone, risk free, rather than have to learn how to really do this, and since it's a little from a lot of people, it will take time for them to figure out and get mad, if they ever do". That's just one example of things to avoid.

The news is more often than not well after the fact -- the tape makes a major move, then the news that caused it comes out, days later most often, if ever. The big players who move the market obviously aren't depending on the news (they'd rather create and front run it) obviously. Now, to cut the newsies a little slack, they are in a tough business. Content must be produced every day, and every market move has to have a cause in their eyes. So they pick the nearest thing and spin out on that, even if it's bogus, and due to the self-fulfillingness of things, well, sometimes they accidentally get it right -- after the fact. There is one use of these guys, and that's to get a feel for the panic level, the zeitgeist of things, some differing views, things like that -- at best. Sometimes they get long term things more or less right (which you can also do by flipping coins) but truthfully, that doesn't matter so much, we can all guess where a race to the bottom in currencies and super high debt levels are going to lead eventually -- but the important question isn't that -- it's when, and in what order, things will be affected by it, for which they have no crystal ball to use, or at least not one that works.

Paying attention is HARD. At least for me. It's what I spend most of my working hours doing, in some form or another, whether it's watching the market itself (crucial) or gathering data in my own ways -- talking to other business owners about things, looking for how many trucks are clogging the roads, and whether they are carrying loads or not, how full are parking lots in the malls compared to "normal" and other indicators where the books aren't cooked. These are often the best leading indicators, and the trick there is to figure out by how much they lead, but it beats looking in the rearview mirror while driving forward.

Earlier in my learning this game, I found I'd missed most of the good opportunities due to a lack of paying attention to what the markets were really doing, and for me there turned out to be a simple answer to that -- skin in the game. It doesn't have to be too much, just at all. In these days of trading via a computer at home, and low commission online brokers, it's not hard to have a few shares of all the things you trade -- the penalties for not trading in 100 share blocks are pretty much gone, so having just a few shares so they show up in your "holdings" and are easier to watch is really worthwhile. It won't amount to a ton of money, but it will serve to keep you focused.

In fact, as I'm writing this, I just flipped over to my trading platform (open in the same browser) and noticed a stock I'm holding making a near vertical dive in volume and a falling on balance volume, in an otherwise rising market. So I sold all but 10 shares of it, quick, to hang on to a little profit and avoid a big loss. The ten shares I kept keep it on my "watch this really close" list (in other words, it's my real money in the game list), and I'll be ready to jump back into it as soon as that reverses -- this particular one tends to make crazy swings all the time. I won't lose or gain much on 10 shares of course, but it will keep me focused on what that stock (or in other words, the crowd that trades that one, remember the poker analogy) is up to, so I'll catch the next swing going my way a lot quicker than if it was just buried in some big watch list.

No matter how smart you are, you really can't pay much attention to the details on 100+ stocks -- your eyes and mind glaze over. It's good to have some big lists as I've shown in some screen shots, but those few that are "in play" are the ones you really need to watch for the purposes of getting in or out now. The others you just scan to see if one of them deserves to be in the current "club" or not, and you'll miss some, but since you're not in them, you won't lose or gain money, you'll simply miss a a chance to make some now and again. No big deal.

There is some tension in these ideas. It's tempting to try to watch more things, so as to always or nearly always be ready to put on or take off a trade, else you spend a lot of time just waiting (which is still preferable to "doing something" out of boredom or feeling the need for some action and looking in the wrong places for it). We all know what happens for example when a government feels the need to "do something" and it's usually not good. It's no different in this game. Hard as it is to do, it's better to wait for the juicy trade to turn up, and do "nothing" the rest of the time but watch.

Although as a daily thing, stocks are this imaginary stand-in for sentiment, and the ticker is the truth (always!), it also pays to do due diligence and see how the company is run, how their financial look, is their CEO a good businessman and so forth. Even if the plan is to short term trade the stock, and to usually go long, it's a very good idea to be doing that with best-in-sector stocks that will in general trend up in the long term. While there is an old saw about never letting a trade turn into investment, and that's wise, it will sometimes happen, so why not trade in things that will tend to recover any short term losses if you just wait a little more. You should never wait too long -- because your money will always be better off in something going up NOW than that, but for my psyche at least, it's nice to know that I probably won't lose even if some of my numbers are temporarily slightly in the red. In no case will I let a large loss accumulate even if it hurts to lose a couple hundred on a trade -- because from experience, it hurts much more to lose thousands, and there's no magic that prevents that if you are hard headed and stubbornly hang on to something no one else wants much. Once burned, many won't buy back into a stock for a looonnnng time, and so you'd get stuck holding this dog long term....not good.

[Joe Jarski]

Doug,
Interesting write up on trading. I've always stayed out of trading because it looked liked a fixed game and those with the big bucks could make the stock prices do whatever they wanted. With the right approach and some research, though, it sounds like you've been able to do pretty well at it. I'll have to take some time and look at trading and the markets a little closer now.

[Doug Coulter]

Oh, the game is most surely rigged in various ways -- some of which are not so hard to figure out, but to make it "sanitized" so they all don't get the pitchfork and fire treatment, they have to make moves the rest of us can be advantaged by, at least for the present. Most of it is legal, sadly.

A lot of people aren't used to this information flood we can now have, unfiltered, and still do things they used to be able to get away with easily when there wasn't so much scrutiny. A really good example is SCO's lawsuit against the world discussed for the last 6-7 years on Groklaw, which would normally have happened out of the light. Now this sort of thing doesn't fly so well. SCO's line now is "we'd have gotten away with it if not for you pesky kids" shining a bright light on their shenanigans.

Sooner or later, the guys doing the equivalent on the markets will figure out we can see them behind the curtain, and the tricks will change. For now, we are in a sweet spot that way, they still think we can't figure it out. But right now, and I hate to say this in public "it's different this time" because for the first time in history, we have all the governments on earth in there manipulating markets too (and mostly cooperating with one another, very strange, but that kind of deal is like just before one of the big wars -- alliances, when the first guy ditches, it comes apart quick) -- and if you did boot camp learning how to outsmart Goldman or some big fund, then these guys are easy and not that hard to figure out -- thing is, because they don't understand, the governments aren't doing it in a way that is sustainable either, they forget (or never learned) that a successful disease doesn't kill the host too quick...

Sadly, I believe with some others, that this is merely the eye of the financial storm, and the other storm wall is going to be a lot worse than the first. So be careful out there!
I am merely making hay while the sun shines, here.

I'll be putting more up on this as it occurs, and when Curtis finishes his current book on the topic, I'm hoping he'll chime in some too -- he's one heck of a good trader himself.
Curtis comes from that world where you can't even do all you'd like because you move the markets doing it before your move is done with...so his insights are worthwhile too.

I will put up some links to the couple of people I actually listen or pay attention to soon. It's not many. Those who know, mostly don't talk, and those who talk, mostly don't know, or worse are pushing an agenda, which I plan to expose as part of this just in case your own BS detector hasn't already. Plenty of BS in this game. People who are really good and honest tend to get into something better, like what most of the rest of this board is about. Which kinda gives us types an advantage, when you think about it because those of use who DO THINGS and actually CREATE VALUE are a little smarter in some ways -- we have to be.

[chrismb]

I read this article in IEEE spectrum and thought you might like to see it:

http://spectrum.ieee.org/at-work/innova ... ocks-stink

[Doug Coulter]

Yes, it's tough making money in tech for more than one reason, especially if you're a techie -- which is why I don't usually play that sector at all. It is simply too easy to get caught up in an issue, get "married to it" and then not have the unemotional clarity to trade it right. Gawd, I'd love to get rich shorting Microsoft...we all know they aren't growing, and they put out junk, and I know that better than most having programmed for their stuff and had access to the innards The myth that no one sees windows source code is just that, a myth. But! In fact, I was pretty sure Apple was on the way down, as a chart of recent activity seemed to show up till the last couple of days. So I shorted them....bad idea as now we can see the right side of the chart and what actually happened.

Remembering that you can't see the right part of this chart back on about 10/20, the setup looks perfect, and it was looking good on some other levels. Stevie didn't have much new coming up, Android has passed them in new sales, only a few people have a clue what an iPad is good for (obviously not anyone creating content, just content renters are served by that), the new Mac looks kind of ho hum and is getting to be locked down -- lots of reasons for that top to have been a top. But! In the name of honesty, despite all that look what we see now. In a series of going short, partly covering, going shorter again, and finally covering in the last couple days, I lost money on this one -- a fair amount. Now there's something most writers on this topic never admit -- their bad calls But I'm an honest guy, and the point here is to teach how you can make (good) money despite calling one dead wrong now and then. And who knows, if I held the short longer, reality might have caught up with them and it would have been a winning trade. I judged the risk of that not happening too high, and took my whippin'. And today, when strangely after a very weird whipsaw yesterday when the Fed announced their actual QE2 plans, it seems to have taken till today for the effects to kick in and I'm up on other holdings so big time I'm going to cut this short for now and go do the "sell high dance" part of this game, most of my holdings are up a few percent this hour, kind of "too good to be true" and from experience, when you think that, you're usually right! I'm guessing there will be some sort of mean reversion or reversion to the trend in one or two "human greed-fear time constants", and then I will buy again, maybe.

Really, the point of the article Chris linked is that duh, random "investments" in any sector are a stupid idea.
Diversification inside a sector is at best "a hedge against ignorance" or "de-worse-ification". That's not how this is done by those who succeed at it. You only play best in class within the sectors you play (at least with other than toy money). Not that it's stupid to occasionally put a bet on that 100:1 horse, they do sometimes win -- but you use perhaps inverse money, eg 100th as much as a normal bet until your prescience is confirmed by the actual ticker.

I'll post some more on all this -- this is becoming the draft of a book I'll publish, you guys just get a preview and your comments are welcome indeed. If you think I'm missing something, pipe up and I'll get it in there -- with attribution if you like.

Since there seems to be some interest, I think I will start a parallel thread on what's going on now, and how I'm playing it. I want to keep this one "timeless" except for the odd example that illustrates some important principle.

[Doug Coulter]

To some I'm a cowboy, to some I'm too timid. I'm a cowboy because of the rate I trade, I think buy and hold is largely dead. To some I'm too timid. I don't use margin, I don't play options (but I do pay attention to them for reasons I'll get to) and so on. In fact, this year I've had at most about half my cash involved, and usually more like a quarter of that. There's been this feeling of deep unease and general malaise, as well as the knowledge that some large firms are cooking their books with government permission and it's really a lot worse out there than most know about. Most of the large financial institutions are actually still insolvent when you mark to reality, instead of fantasy. And that's the real reason for QE2, not the stated reason. The government isn't that stupid to think that buying our own debt is going to make the economy better on the ground -- there are far easier ways to do that, lets go build some roads etc for example. But they know some things that most don't know and are addressing them.

While the market only touches fundamentals once in awhile, usually only when forced to, that time could be coming up, just a question of when. Which is always the question, actually. It's trivial to predict that governments are going to inflate their way out of debt -- they have no choice, but just when that will push this and that up or down? No one really knows. And until it happens, being right too soon means you have your money at risk in something that might go against you while you wait, rather than in something going up NOW, and that's what matters.
If you're going to let money sit, there are few truly safe places to do that, but there are more and less dangerous places. You definitely lose in the bank at current ratios of inflation to interest, but the loss is limited, and sometimes that's not a bad risk/reward ratio. Remember, things completely unforeseen may happen between now and when the dollar (for us US guys, substitute your own money) becomes worth 1/2 or 1/10 of what it is now, which is where it's going. It's a handy way for any government to raise taxes on us all as well. Ours cooks those books too, so as not to have to give cost of living increases to entitlement collectors (social security etc), but that doesn't mean my grocery bill is going down. Right now, they are using the fact that housing prices are going down to cancel the fact that everything else is going up. If like me, you own your house, you don't care and the prospect of paying less in property tax is good. All I buy is food, fuel, and physics gear. Those first two are going up bigtime. For the latter, well, I have nearly everything I could dream of, can build what I don't have cheaply, and there's still ebay.

Stealth inflation allows the brokers of the world to play a fun game, and why shouldn't they? They can show you nice dollar gains, but you're still losing money in real value, it's easy to show some but not enough profit to even stay truly even. If we price the US market in gold, or even euros, the last upswing from September is actually not enough to stay even! This is a game that forces you to keep your eyes on the ball if you're going to actually win it. Gold is favored by many, and for some good reasons (and some very stupid ones). Sometimes it goes up faster than the dollar goes down -- there's been a good run recently there, and that's when to be in it. When it's just obverse tracking the dollar, the usual case, not so much so, better than losing in the bank, but only a little bit. The key with that one is to be in when (irrational) sentiment makes it zoom, and get out when it goes over a top -- you can always buy back in after it dips and turns back up, and you make a lot more real profit that way.

Very much key to this game is the hurry up and wait part. If you trade just to be doing something, to feel like you're not wasting time, you don't do nearly as well as if you wait for the juicy setups and get those right, and in fact, trading at random is a great way to donate money to the other players. If you find you can't help it, get a secondary account, put play money in it (not very much) and use it to learn how true this is. I do and it's very educational -- and if something is working out well in my "toy" account, I go and do it in the "real" one bigger. Some will say you can learn by paper trading, in other words, without real money. I find otherwise, though for a real beginner it's better than nothing. I do far better with some skin in the game, it makes me handle the emotional stuff in a more real manner, and I pay a lot better attention because by golly, it's real money I had to earn. I'm in pretty good control of my emotions mostly, but...somehow it just works better when it's real.

////

One of my basic tenets is to be mostly in whatever is going up quickest right now, and that it's better to have your eggs in a few carefully watched baskets, rather than spreading them all over (can't be expert in how too many things are trading at a time) or all in one. Pick a sector or couple, trade the best in breed in those, watch for what I call "sector rotation or slosh" and balance accordingly. Again, we are playing poker here and looking for the "tells" of the other players, a meme I've been injecting into the stock trading forums (more on those later) and it's getting picked up nicely out there.

I cannot for the life of me understand why I should be holding through corrections or dips if they are of any size. How is it not better to sell at the top and buy back in after the dip is done?
The answer is, it isn't, but doing it my way does require a lot of attention to moment by moment motions in this twitchy environment. During the previous boom, for example, POT doubled, and did really well. You'd have done well just buying that and holding it a couple years. But I did far better playing the swings than that. While it doubled, I did 4x.

This is one of the "big lies" the financial community pushes on us, and there is a reason they do, and why it's not always exactly a lie. They don't want you to ever get out -- they after all, are playing a zero risk game themselves -- they get management fees and commissions whether you make money or not! But only if they have your money. And the psychology of most is once burned, twice shy, and they are sort of telling the truth that once you get burned bad enough to get out, it's hard for most to get back up on the horse when the time is right again -- and during the wait, they can't collect their little tax for (not) paying close attention to your best interests. In other words, they feel correctly that once they lose you, they probably aren't going to get you back, so....always look at why people say what they do, what's in it for them to be saying that, it will help you a lot. It may not even be malicious on their part, but it's just hard for humans to completely neglect their own best interest -- we are rationalizing animals not rational ones, in the main. The key to success here is being fully rational while others aren't!

I can tell I'll be back editing this one, or adding to it, or having more than one philosophy chapter....but I have other things to move on to while I'm thinking about them, and I can re-organize this later.