Windows of Opportunity: The Real Holy Grail?

[Billy]

We received great news today from our friends (and EV website members) Gil Morales and Chris Kacher (a.k.a. Dr.K). As of month-end, April 2011, their MoKa Market Direction Fund is up 49.57% year-to-date before management and performance fees, and 41.87% net of fees, vs.
S&P 500: 2.96%
Dow Jones Industrial: 4.13%
NASDAQ Composite: 3.37%
Russell 2000: 2.64%
Gil commented: “What Dr. K and I find is that we are very compatible running a fund together, and instead of running separate halves of the fund as we tried to do with Oceane I we are running it jointly with great effect. Also, having a consistent "ethos" or philosophy towards the market as former O'Neil managers without others in the mix causing distractions is a critical factor with respect to maintaining a strong and even psychology, the most important aspect of managing money in my view. Given the risk controls we are using I believe there is zero chance of any significant drawdowns outside of what is normal for the model.”
I found it was a striking similarity with Pascal and I running jointly our methodologies to build the robots. But even more striking is the similarity of our conclusions: in order to do well in this market, one must absolutely wait for the optimal window of opportunity to act. Gil and Dr.K saw that window in AGQ when silver cleared the $31.50 high and they went in big at that point. They exited on a sell signal almost at the top around SLV =$50. Since then, they remain almost all in cash with a small position (10%) in DGP, waiting for the next window to develop. They have noticed that their fund does very well when it operates in this manner. The test fund was up over 55% being invested less than half the time, so this is a key factor in their success: Patience, followed by decisive, though less frequent, action.
Isn’t it exactly the same message from the conclusions of our own GDX robot report?
In the past 44 months, the GDX Robot found 42 strong buy/short signals, with an average return of about 6% per trade that on average lasted 9 trading days.
That is an uncompounded low-drawdown return of 72% per year, also being invested less than half the time!
Patience, followed by decisive, though less frequent, action on optimal windows of opportunity should become the norm for all traders in this group. Maybe the legendary Trading Holy Grail is hidden behind this simple discipline!
Billy
PS Gil Morales will be on Fox Business News discussing today's market action and some individual stocks with Liz Claman at 1:40 p.m. Pacific time, 4:40 p.m. Eastern, and 9:40 p.m. London time.

[ericoleman]

Thank you Billy for these sage comments.

[Ken]

Patience, followed by decisive, though less frequent, action on optimal windows of opportunity should become the norm for all traders in this group. Maybe the legendary Trading Holy Grail is hidden behind this simple discipline!


Thank you Billy. This is indeed a common discipline that I've observed among successful traders. In my experience, it becomes difficult to keep up with the ebbs and flow of the market when I'm completely in cash as psychologically & emotionally I've disengaged. I found it easier to be patience and at the same time keep myself in sync with market actions by maintaining a very small position in play.

What do you find to be effective ways to maintain just cash position yet at the same time maintain that "edge" where you are still immersed in the market actions ?

-Ken

[Rembert]

Very true. I might also add that buy signals from Pascals 20DMF also offer great 'windows of opportunity' to get into discretionary stock positions. They don't occur often, I think 3 to 4 times a year, but they are well worth waiting for.

[Billy]

Thank you Billy. This is indeed a common discipline that I've observed among successful traders. In my experience, it becomes difficult to keep up with the ebbs and flow of the market when I'm completely in cash as psychologically & emotionally I've disengaged. I found it easier to be patience and at the same time keep myself in sync with market actions by maintaining a very small position in play.

What do you find to be effective ways to maintain just cash position yet at the same time maintain that "edge" where you are still immersed in the market actions ?

-Ken

Ken, my daily six-hours routine and 7 hours RT market monitoring are enough to keep me immersed in the market actions whether in cash or not! When in cash, I simply try to see if the next high probability window of opportunity is approaching fast or not and I am focusing on the planning of my next trade if it is near instead of worrying about an existing position. For most people, staying invested 10% of a normal position size or trading some small options positions should probably be effective ways to stay connected with market reality.

[Billy]

Gil's appearance on Fox Business News today can be viewed at:

http://video.foxbusiness.com/#/v/956432819001/stocks-to-boost-your-portfolios-growth/?playlist_id=87185

[Andrei]

Billy,

Can you please expand a bit more on options, and why you find this suitable for you investing style (in some cases)?

Thanks a lot.

[Charl]

Thank you Billy. This is indeed a common discipline that I've observed among successful traders. In my experience, it becomes difficult to keep up with the ebbs and flow of the market when I'm completely in cash as psychologically & emotionally I've disengaged. I found it easier to be patience and at the same time keep myself in sync with market actions by maintaining a very small position in play.

What do you find to be effective ways to maintain just cash position yet at the same time maintain that "edge" where you are still immersed in the market actions ?

-Ken

Trading is an odd occupation. No other job that I can think of can prepare you for what it takes to become a successful in trading. What other profession can teach you (give you experience) to be successful and maintain an edge by remaining patient at doing nothing - taking no action most of the time but be ready at any time?

for me to relate - think about the game of soccer, a 90 min game (i think) on average each player touches the ball about 5min to 10 min during the course of the game. Those few minutes are critical to the overall success of the game, and each player needs to be ready at any time to receive the ball an be on his A game - So for me, the principal that can be applied to trading is what do I do when I don't have the ball/ or trade on ? what am I thinking of during that time, am I doing stuff that makes me feel (emotionally) I'm working hard (like in other jobs) yet I'm pissing away money? Of course the last thing you need to do is do something to lose your mental edge or be come inpatient and then get whipsawed when I do decide to enter a trade.

Billy, as far as I can tell from following your post over the past 15 months - you are born to think and act like a trader, you do it without even thinking about it! I'm learning from you and relating your comments/princials to stuff I can understand and apply to my personality. Hope my soccer analogy can help some-one else whith similar questions.

thanks, cheers
Charl

[Billy]

Billy,

Can you please expand a bit more on options, and why you find this suitable for you investing style (in some cases)?

Thanks a lot.
Andrei, I just mentioned options here as an alternative suggestion to cash for staying "psychologically" involved in the market action with very little capital at risk.
As for my investing style, I like options for CANSLIM-type trades on individual stocks where I can fix in advance my maximal potential loss on any trade to the premium paid. This practice allows me to stay totally focused on my leveraged ETF trades, since any damage control distraction on stocks ( such as after a big gap down) never bothers me.
Now with the GDX robot and in the absence of liquid related leveraged ETFs, I plan to leverage my positions with options too, limiting premiums paid to the percentage away from the trailing stop loss.
Maybe once or twice a year I see clearly some huge window of opportunity in something and I trade options to increase my leverage well above the usual three-times leveraged level.
I am not an options expert at all and sophisticated options strategies are not my cup of tea. I like to keep it most simple, buying puts or calls at the money with more than one month to expiration.
Thanassis, our technical wizzard administrator, is a real expert in sophisticated options trading and I hope he will soon be able to post about it once he has finished with the fine-tuning of the new website and the real-time 20 DMF tool.
Billy

[nickola.pazderic]

Hi--

I stumbled into this group via a High Growth Stock Investor webinar by Mr. Duncan. I'm also a subscriber to Morales and Kacher. I've been in trading only since last summer. I have sorted through a lot of promotion, hype, thievery... to arrive here with you all. I'm very happy about this and am excited to see how this program evolves.

If I can be of any help, please let me know.

Nickola Pazderic, Ph.D.

[Billy]

Hi--

I stumbled into this group via a High Growth Stock Investor webinar by Mr. Duncan. I'm also a subscriber to Morales and Kacher. I've been in trading only since last summer. I have sorted through a lot of promotion, hype, thievery... to arrive here with you all. I'm very happy about this and am excited to see how this program evolves.

If I can be of any help, please let me know.

Nickola Pazderic, Ph.D.

Welcome on board, Nickola!
A quick Google search reveals that you are a respected cultural anthropologist and University Professor specializing in qualitative research. You also immersed yourself for 20 years in Taiwanese society for an anthropological study of their culture.
Perhaps you can help with qualitative resarch ideas and concepts about the markets, counterbalancing the dominant quantitative approaches.
And immersing yourself for as long as you wish in our EV family, you are welcome to ask the right questions stemming from your experience.
Also, you may from time to time give some feedback on Taiwanese financial culture.
Feel free to be the only judge of your posts.
Cheers,

Billy

[nickola.pazderic]

I appreciate very much the warm welcome.

I've done many things in life and have the scars to prove it!

I'd like to think that if I can do anything well it is to spot quality in people and their pursuits-- thus, my optimism about what I find here.

On investing, in a previous (my first) post I noted my game with the SPY and my investment in TZA. I agree with the Robot, Pascal, Dr. Kacher, and others. This makes buying puts on rallies and the following volatility easier to do and to stomach.

I have some good friends in Taiwan who speculate-- all very successfully; and they've taught me a lot, especially that I must always respect the charts. I'm sorry, however, that I can't comment on any specific Taiwanese companies at this point. I will inquire and pass along what I may learn.

Since I am not an engineer, computer programmer or mathematician, I rely on others, such as the Robot, to help me with brute calculations and precision. An an anthropologist I've written on neoliberalism and its effects on tertiary education in Taiwan. It has been and remains a difficult process for me to transform my thinking from critic to investor. Nonetheless, I think my long term strength as an investor will be in analysis of macro-economic trends.

Again thank you for the kind words and welcome.

Back to work I go...

Nickola

[adam ali]

http://www.ritholtz.com/blog/2011/05/many-hats-great-investors/

[nickola.pazderic]

As a contemporary cultural anthropologist, I can say it has been difficult to adjust myself to the absolute practicality of investors. In teaching, there remains the element of missionary or monastic life. Professors are paid poorly in the USA and elsewhere, but they justify their sorry state on the grounds of the greatness of their callings/research and on importance of the transfer of knowledge through (and from the point of view today) archaic means of transmission (classes, tutorials, etc.). Traders also live a life of the mind. The greatness of their achievements are measured by capital, expanding social networks, and notoriety. In many ways, the most successful university teachers have adopted these measures, as well. The difference of course is money. It is clear to me that no professor in the USA can compete with a successful investor in the game of capital accumulation. And since the world is capitalist, the bounty of the world will be steered their way, too.

From the stand point of the practicing academic, this seems artificial, anemic, heartless, and artless. Traders seem to ignore the reality of capital itself as they play their games of liquidity. Meanwhile, anthropologists and others are perplexed by questions such as: what precisely is value? How is it measured, accrued, transferred, and politicized? These questions are no doubt germane to trading but perhaps not to traders. Of course, value can change in a heartbeat. Every trader knows this and has experienced it. Every trader implicitly acts as though there is no absolute store of value-- even though they may claim that it is gold, or real-estate, or even the common stock of Dow Chemical. There are some "gold bugs" who see intrinsic value in objects and perhaps rightly so. But the fact remains that most, if not all traders, would exchange their gold or other store of value for something that could guarantee them more of what they desire. Anthropologists would look at traders and their fixation on liquidity and wonder how can the acts of so many be rendered liquid during a sale (as Marx noted in his study of commodity fetishism)? Traders, however, will consider liquidity as a dynamic store of value itself. Both are operating in the realm of the mind. The difference again: the academic will speak of the abstract in terms of social justice, the good or beauty while the trader intends to realize new surroundings and opportunities via the machinations of his or her intellect, ambition, and skill.

It is saddening to me to note that most traders, if they attend to academic thought at all, consider only the work of economists. But academics are impoverished too by their lack of knowledge about the sophisticated working of traders. In particular, the antennae of quant-oriented traders are very fine. They pick up money flows, statistical values, the slightest changes in seasons, multiple and simultaneous auctions, and many other elements of quantitative analysis. Indeed, it has occurred to me since the first day I began to use ThinkorSwim that the complexity and artfulness of the trading platform is one of the magnificent accomplishments of this epoch. Outside of business school, who knows anything about ToS or Tradestation? Both sides suffer from their ignorance.

I’m also struck by how much traders depend on unwritten rules of decorum in the same way academics do. I am struck every day by how well certain pivot and resistance points are respected by traders. Only when a market is flying away like a beautiful balloon or selling off like-- what else?-- suicidal traders during the Great Crash of ’29 are boundaries not honored it seems to me. Of course, prices are manipulated and weak hands shaken out. But this nastiness is understood by experienced hands. In academics, social codes prevail in writing as well as conversation and debate. Boundaries are well understood, and those who violate them pay the price of ostracism and derision (or, we might say following Pierre Bourdeiu, with the loss of their cultural capital).

Ok. This is enough for me tonight. I wonder if there is any interest in such reflections? And surely, I would accept comments; for this is really my first attempt to write anything of this sort on this topic. I wonder now how I got started on this topic. ...

[ericoleman]

Thank you Nickola. I greatly enjoyed reading your observations and reflections. The anthropology department was my favorite on campus some years ago, and I have fond memories of my "Money and Power" course and instructor.

Best,

Eric

[grems8544]

Quite and enjoyable read, and yes, keep the flow of ideas coming.

Regards,

Pgd