Rambling recap.

Wow.  Time flies.  It has been five years since my last post.

Much has happened during that period; I watched a friend destroy himself, his family and business due to drug use, I formed a company to operate a fleet of trucks, became an agent for the company the trucks were leased to, hired and fired employees and contractors, made mistakes such as trying to grow too fast, and "inorganically," leveraged with debt only to watch things go horribly wrong.  Relationships soured, business failed, bankruptcy ensued.

2014 was a transitional year.  Back to being a contractor, a lease operator, learning to manage stress and rebuild my life.  July 2014, I entered into a relationship with a company that I admired, and was rewarded with the best employment situation I've ever experienced.

Early 2015, realizing that I'd turn 50 in another year, I decided I should, -no, I must pursue happiness and good health, and I returned to a life long passion, cycling.  Trucking is sedentary, and weight gain and atrophied muscles are common.  My "innie" belly button had become a self embarrassing deeper innie.  So I found a good deal on a older titanium framed road bike and decided to fulfill another dream from my youth, licensed bicycle racing.

While in the Marine Corps in the early '90's, I had raced in Bowie MD and Montgomery County, and had placed well, 1st through 10th.  But never licensed, or maybe one day licenses, I don't recall.  Anyway, I thought I'd have no problems getting back into it.  I couldn't have been more mistaken.  My first race I was dropped from the main group, eventually lapped twice, and finished 58th or so, out of 60 something racers.  Eyes opened!

This led to the realization that, unlike my twenties, I'd need to actually train, not just ride around for fun!  Well eventually, this desire to train, to get fit, created conflict and stress with my bills paying occupation.  I acted on a bad decision which led to the cancellation of my contract, losing the best job I ever had.  But this is a story for another time.

Charm City Circulator Free? Impossible!

Yesterday morning, listening to the radio on my way to Chambersburg, I was disturbed by what amounted to an 'infomercial' for the Charm City Circulator.  One of the hosts actually said "if it's free, then it's for me!"  I couldn't believe it.  These guys have discussed the Federal and State budget deficits in the recent past, if not that same day, yet made the CCC sound like some miracle of modern convenience.

Anyone with a mind for critical analysis must understand that this service cannot be free.  The riders may not be obligated to pay for the service, but there are costs associated with its operation all the same.  How can there not be?

Were the buses donated to the city?  Are the bus drivers, mechanics, administrative staff, and other 'volunteers' donating their time?  Are the insurance companies donating their coverage?  Are the fuel companies donating fuel?  How about the wear and tear on city streets, are the repairs and materials donated to the city?  Short answer, no.  The Baltimore City Department of Transportation pays Veolia Transportation to operate the buses, and the resident tax payers of Baltimore City fund the Department of Transportation's annual budget.

Folks, it is this mentality which has contributed to the situation where we find ourselves now.  Local, State, and Federal spending outpacing receipts.  Businesses, families and individuals moving to juristictions where tax burdens and opportunities are balanced to best suit their needs and interests.  The longterm trend is that this is not in Baltimore City.  A Google search yields the following:

Faced with a combination of City, State, and Federal taxes and regulation, people and businesses are leaving Baltimore City for more promising locales.  Increasing the burden on resident taxpayers is not the solution to reversing this trend.  And extrapolating to the National perspective, when one listens to another complaining about 'off-shoring' or manufacturing moving out of the country, a contributing factor to this is programs, taxes and regulation like this, that impose a burden on those not receiving benefit.

Pick and choose.

Part of my philosophy of trading is that if I feel unsure or lack confidence of my 'reading' of the market's direction, then it is better to sit out.  Lately, (since early mid-December) I've been focused on my primary occupation.  A couple of mechanical issues and purchase of additional equipment has kept me from the research and analysis required to form a rational macro economic premise on which to base a trading hypothesis.  So when I'm able to commit some time to trading, I'll post more regarding it.

Some Thoughts on Position Sizing

Just a quick word about position sizing as a tool to manage risk. The first thing I have to determine before entering a trade is just how much I'm willing to lose on that trade. Since I cannot control price action or direction, when I enter the trade, I must assume that there is a probability of loss that I must accept. So for longevity's sake, it is prudent to limit my losses and let my profits run as much as possible.

Some traders use a fixed quantity of pips as their stoploss. Others, identify price levels which have the potential to provide support or resistance, and use a breach of these levels as their stoploss. Either way, there is a quantifiable number of pips one can determine to set a stop order to limit the amount of loss from one's entry point.

The next step would be to determine the amount of monetary loss one is comfortable losing on the proposed trade. I plan to discuss the philosophy of losses in a later post, but for now, lets just assume that a loss, or a string of losses is inevitable. Consider the following:

• Risking 5% on a trade (given a theoretical $100 account) allows for a string of 180 losing trades before zero, assuming no friction for commissions or fees.
• Risking 1% on a trade (given the same theoretical $100 account) allows for a string of 917 losing trades before zero, assuming no friction for commissions or fees.

The assumption that the probability of losing 917 times in a row is far smaller than losing 180 times in a row is justifiable, if not quantifiable. So, what it really comes down to is, how much of a loss does the least amount of damage to the trader's confidence. For the purposes of this post, let's just use 1% of a $1000.00 account, or $10.00.

The chart above illustrates what I would consider a long entry setup for AUDUSD. Macroeconomic factors favor the Aussie, there are some tails (or pin bars, hammers, whatever you prefer) on the most recent closed bars indicating that support is holding. It is a bit troubling that the last series of highs was not higher than the previous, so this trade is not a slam dunk, there is some risk. For me, a break of 0.91 would indicate a setup failure. I've got about 50 pips to play with, so let's determine the lot size to use for this trade, to limit my loss to $10.00. It is rather simple, 10 divided by 50 equals 0.2, which I will use as my lot size, a $2000.00 short Dollar, long Aussie position. If I get 0.9144 as my entry price, I set 0.9094 as my stoploss, 0.9319 appears to be the area of last resistance, it has potential to be resistance again, this will be my target profit. This gives me a 3.5:1 risk/reward ratio.

The formula for position sizing can be summarized as:

Dollar amount to lose divided by pips to setup failure equals lot size.

Knowing this in advance will eliminate any indecision when the time comes to exit a losing trade.

The importance of a written trading plan.

Treating trading as a business should include having a written trading plan. There are several reasons why this exercise is necessary for long term success. Primary among these is that a written plan helps one focus on the action needed for the fulfillment of one's stated goals. But just what is a trading plan, what are its components, and why are they needed or helpful? With the help of Van Tharp's book Super Trader, I'll summarize the components and their purpose.

A business plan attempts to address issues that affect the daily and future direction of the business. A trading plan should do the same. So to begin, one needs to define why they are interested in trading, a mission statement, to define the real motivation behind their trading. For example, my mission statement states:

“I believe that the income from successful trading is scalable. Using leverage, I can increase my income without increasing the “hours worked.” Given this, I intend to replace my current occupation with trading so that I may free up time to spend with my family, while increasing our standard of living and quality of life.”

To achieve this mission, I need to state my interim goals and objectives. Or how I intend to get from point A to point B. Within this segment, I address my periodic goals, in terms of monetary gain, as well as if my trading focuses on taking positions based on fundamental analysis, or trades entered on analysis of price action, or a combination of both.

The next segment of the trading plan addresses trading and market beliefs. Tharp has asserted, in his several books, that traders trade their beliefs concerning markets rather than anything else. In this segment, one should address their beliefs concerning their trading strategy, their beliefs concerning the market traded, and how these beliefs impose limits, how they are helpful, and if not, if and how can these beliefs be changed.

 

Next, a statement of one's beliefs concerning the big picture, the macroeconomic situation, legislation which might affect the market, and other general considerations. This is kind of an big picture overview which guides the development of the big picture strategy. It is from this that the next section, the tactical trading strategy takes shape.

The tactical trading strategy should answer how it fits in the big picture, how it addresses quiet and volatile bear, sideways and bull markets, entry set ups, entry timing, worst case acceptable loss per trade (and how it is determined,) how profits are taken or what the exit set up and timing is. If your trading system is mechanical, a backtest should be able to statistically determine what the expectancy of the system is, and should be stated. If the trading system is discretionary, use a spreadsheet to determine the real expectancy of the system, and state it in the plan. The tactical trading strategy section should also address how your objectives will be met through position sizing.

A treatment of psychological challenges and problems should be addressed in the next section. Address how losing streaks are to be dealt with, how corrective action is to be developed and implemented, how discipline is to be reinforced and maintained, how emotional issues are to be dealt with, how self sabotage is to be identified and avoided, how trading efficiency is to be increased, and how developing problems are to be recognized and dealt with before they become self sabotaging.

Daily procedures follow in the next section. If you don't have a regularly schedule time to trade, you should probably make one. This is one way to start enforcing trading discipline. I use a time schedule to outline my daily trading procedures, as I constantly monitor the 24 hr market of forex. Some procedures would include a review of schedule data releases, time to complete a self assessment, establishment and up keep of trading result statistics, trade journal entries, review and modification of the trading plan, continuing trading education, etc.

Continuing trading education is so important that Tharp gives it its own section in his model trading plan, following the daily procedure section. This section could address what and how one intends to become a more efficient trader.

A business plan would not be complete without a disaster plan, and neither is a trading plan. How will you deal with a loss of internet access? What if Congress imposes a new tax on your trading vehicle? What if your broker goes bankrupt? Attempt to address any disaster now, so you can deal with it when and if it occurs.

Next is a budgetary plan, how are you going to fund your trading capital, where will you move your profits, and tax planning.

Then address general business system issues such as record keeping, dealing with broker and/or client issues, paying estimated taxes, etc.

Finally, the trading plan should explain how mistake avoidance is to be implemented. Trading mistakes have a big impact on overall performance, so it is important that a system is developed and put into action to quickly recognize mistakes and that corrective action is taken. Including this in your plan is a must.

To summarize, a trading plan can be outlined as follows

1. Mission Statement
2. Goals & Objectives
3. Trading & Market Beliefs
4. Macro Assessment
5. Tactical Trading Strategy
6. Position Sizing
7. Challenges & Problem Resolution
8. Daily Procedures
9. Continuing Education Plan
10. Budgetary Plan
11. General Business System Plan
12. Mistake Avoidance

Review your plan daily, and make updates as needed.

Some Reflections on Nonfarm Payrolls Report

It is my belief that NFP day is the most difficult data release to trade, because the report is intricate and difficult to analyze quickly, as opposed to a rate announcement which is either up, down, or unchanged. 12/4's NFP release startled dollar bears with the "headline" number of -11,000, this following ADP's number of -169,000 on Wednesday. Gold dropped over $48 yesterday, just over 4%, just to underline the significance of the surprise.

Market commentary services pointed to reexamination of rate expectations as a result of the "improvement" in the employment situation. But a closer look at the report, in my opinion, casts doubt on this.

First, the long term unemployed has increased.

“Among the unemployed, the number of job losers and persons who completed temporary jobs fell by 463,000 in November. The number of long-term unemployed (those jobless for 27 weeks and over) rose by 293,000 to 5.9 million. The percentage of unemployed persons jobless for 27 weeks or more increased by 2.7 percentage points to 38.3 percent.

About 2.3 million persons were marginally attached to the labor force in November, an increase of 376,000 from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Among the marginally attached, there were 861,000 discouraged workers in November, up from 608,000 a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.5 million persons marginally attached to the labor force had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.”

Long term unemployment does not lead to price inflation, which does not support expectations of a near term rate increase. How can it, when these unfortunate people have limited incomes on which to support themselves?

Secondly, the nature of employment gains has temporarily, if not fundamentally, changed.

“Employment in professional and business services rose by 86,000 in November. Temporary help services accounted for the majority of the increase, adding 52,000 jobs. Since July, temporary help services employment has risen by 117,000.

Health care employment continued to rise in November (21,000), with notable gains in home health care services (7,000) and hospitals (7,000). The health care industry has added 613,000 jobs since the recession began in December 2007.”

Employment gains in the health care industry has been growing consistently, as one would expect, as the “boomer” generation enters its twilight years.

But more significant are the gains in the “Temp” services industry. A career as a “temp” is far from stable, as current employment is subject to change at the client's whim. And if anyone really believes that the path to economic growth is through a transition to an economy consisting of temporary employment may be in for some disappointing results. My first question, acknowledging the importance of rate expectations in determining long-term trading direction, is whether one could reasonably expect the Fed to change its rate opinion based on positive changes to the employment situation coming primarily from improvements in the temporary employment industry. I think not, given the nature of temp employment. How does one make long term plans based on inconsistent income earned from this occupation? What inflationary price pressures arise from the masses of temp employees?

As traders, a large part of our job is managing risk, protecting our trading capital. We cannot influence the market movements, we can only control our entries and exits. Increased volatility, large movements in price on NFP days at first glance engender dreams of large gains, when one's first thought should focus on limiting loss. And regardless of what our individual interpretations of the data may be, we must trade the reality of the market action, attempting to remain near the front of the herd.

Confidence, Credit, Spending & Saving

A reasonable person must be confident of their economic future when considering spending or borrowing money for a purchase or business expansion. Some commentators have opined that banks need to start lending, others have complained about "predatory lending," and others have stated that consumers are now saving too much.

I cannot think of any situation where an investor would undertake a situation that is almost certain to result in failure and loss of capital. This is where the phrase "predatory lending" leads me. Certainly, there may have been loan/mortgage brokers whose financial interests may not have been linked to the ability to repay of the borrower. But a broker would face increasing resistance of loan application acceptance by underwriters if a continuing pattern of malfeasance was evident. A reasonable lender would not make a loan if there was little hope of being repaid. And if the lender's intent was to resell the loan to "holding" institutions, the value of the transaction would be negatively impacted if there was little hope of being repaid. Think about it, would you buy a General Motors bond at the market open this Monday, March 9th, 2009? Blaming the current national economic situation on "predatory lending" is fallacious.

Saving too much. At the height of the boom, economic commentators commented that consumers were spending too much and saving too little. Now, in a period of economic recession, the problem is that consumers are saving too much. There has been little material change in consumer credit levels, so the data does not support that a majority of people are paying off accumulated debt instead of making new purchases. There has been a slight increase in tracked deposits, but I would not conclude that they are great enough to hold responsible for the recession.

As for banks not lending, at most, only anecdotal evidence of this is available. The consumer credit levels reported by the Federal Reserve (linked above) are not plummeting. This would lead me to believe that some people are paying off loans, and others are taking out new loans. Banks cannot survive for long on transaction fees and interest payments on existing loans. They must make new loans to replace those being paid down, or paid off, in order to maintain revenue streams to meet day to day expenses and acquire a reasonable profit.

In my opinion, it is confidence that is to blame for the state of the economy. With an ever increasing level of governmental meddling in the economy, i.e., trying to avoid recessions, the government has, despite its best intentions, made the recession worse than it would be if the government did nothing at all. The business cycle cannot be denied. There are periods of expansion and contraction as excesses are corrected naturally by the market, just as ordinary as the seasonal changes in the weather. The market is comprised of 303 million Americans each making economic decisions which best suit their individual situations. The best thing government can do is try to restore the confidence of the 303 million market participants, not try to manage their decisions for them. Consider the essay "I, Pencil."

Like it or not, taxing the rich does not boost overall confidence. The US has the 2nd highest corporate tax rate in the world according to The Tax Foundation and the National Center for Policy Analysis. Just this statistic alone is a barrier to entry for potential start up businesses. Businesses employ people, who spend money and stimulate the economy. Attacking business, and "the rich" does not instill confidence.

Letting the "Bush Tax cuts" expire will increase taxes on businesses and individuals. Net effect, confidence sapper.

Green house gas regulation/taxation, environmental controls/regulation, Climate change regulation all increase uncertainty, and reduce economic activity. I am involved in an industry which releases carbon into the atmosphere. My concerns regarding the probability of punitive taxation and regulation has increased my uncertainty regarding my industry, and has stalled plans for expansion and hiring. My situation is anecdotal, however I do not believe that I am the only individual in the nation with these concerns.

Well, I'm ranting now. So thanks for reading, more later.