Trading 101 -Psychology
Know thy Self
Today, I am going to add a little different element to Magnelibra’s usual market technical and fundamental outlooks. Years ago I wrote a trading manifesto, it was about 50 pages of mentality, structure and lessons, a culmination of what I learned up until that point. I have spent 2 decades trading futures, cash and options. Even to this day I arbitrage U.S. Securities vs futures and options and I continue to learn not only about the general chaos of markets, but rather and more importantly, learn about myself as I grow. There in lies the first basic understanding when it comes to most things in life, that adaptation is the key to survival. In order to adapt you need to know your internal limits, strengths and weaknesses.
There are no shortages of hard lessons, unfortunately the greater the risk, the higher the reward, there isn’t really any way of getting around that. However what one can do is consistently reevaluate what it is they are doing, how they are doing it and truly make the necessary adjustments to enhance ones outcome.
The one mantra that stands out in my overall thesis is that markets are always underestimated as to their propensity for chaos, for their inefficiencies, inadequacies in addressing true or real inherent risk.
Most investors fall prey to their emotions, and they lose sight of the fact that markets can stay irrational far longer than one can stay solvent. Even the most brightest minds fall victim of this, LTCM in 1998 is always a constant reminder for me. LTCM was chalk full of intellectual and mathematical brain power, yet they fell victim to arrogance and of course, this ushered in the era of “Too Big Too Fail.”
I was too young of a trader at the time to recognize the reality of what this all meant. All I know is I was barely a year into trading US Treasuries, a role which was a dual one, where I clerked for cash traders during the day and my firm allowed me to trade overnights as long as it didn’t affect my day time role. This was the old trading floor days where I would Arbitrage via hand signals into the US bond futures trading pits orders conveyed to me over a phone by my cash trading bosses. I loved the role, I loved the power of the markets, the sound of everyone yelling and to me there was always this inherent order out of all the chaos. Needless to say, I picked up the arbitrage game very quickly as it all just clicked to me the objective, the risk, the reward, the ability to make decisions on the fly whereby each situation was generally the same, yet the markets were always ever changing.
Anyway, back to LTCM, it was a major lesson for me, because unfortunately it cost me a decent amount of capital being short US 10YR Basis. Being short the basis as an arbitrageur meant you were short the actual OTR or on the run vs a modified duration hedge of futures, this was “the basis."
I generally kept it less fully delta hedged because creating too equal of a duration didn’t allow for the same alpha generation, but it came with higher risk and this time I was on the wrong side. My short cash position was walloped given the flight to quality the market exhibited once it knew LTCM would get blown out of their positions and when major risk finds its way into the general market place, at least back then, it was the US Govt 10Y cash that was the golden goose, the “must have” liquidity and collateral, the market whereby all risk was hedged and duration sought. Well I was short and I took the loss. So irrationality and unexpected unknown, unknowns has been branded into my psyche for a very long time.
To all those aspiring traders, know this, that you must learn to consistently find a new love and respect for the markets that you trade. That the learning curve is steep and ever present and its truly inherent to you as an individual as to how you deal with your own emotions. I can tell you hundreds of stories of times where I had to pull my chin up, suck it up and take the loss, losses are ok, they provide us with a multitude of learning lessons. They provide the deep reflection necessary to not only improve on our systems, but to improve our own internal processes and how we handle various situations. Always remember there are plenty of roads that lead to the same goal, how you get there is most likely dependent on your demeanor as a trader, do not try to fit into a mold, there isn’t one! There are basic principles, sure, but we are all very different when it comes to tendencies, background, education, motivations, age, a plethora of factors that determine who we are and how we operate.
So back to the sub title of this note, “KNOW THY SELF.”
It is really one of the most significant understandings for success, not just in trading but in all of life. You have to know who you are, because if you do not, the trading world will make you realize it and it won’t be a favorable outcome.
I plan on making this a weekly part of our offering and I believe this is where we have the most experience, the most to offer our readers. Yes we provide a lot of data in a structured way that we believe is best suited for how we view markets, yet in reality, our goal is always to improve your endeavors, not just in trading but as we stated, in all facets of life. I believe we all have something to offer one another, that we are put here to coexist and to manifest our destiny and it is our goal to achieve those outcomes.
Let’s take a look at psychology in a real time example. I will display a chart and I will shrink the timeframe on it and show you that taking a limited view of something can skew your vision. Here is a picture of the Nasdaq futures markets over the last 2 and a half months:
The Bullish trader will say we have built a very nice consolidated base after breaking out above 14869. Equity players and for very good reason are always “long” its inherent to the system right, consistent monthly 401k deposits, consistent monetary growth from the central banks, I get it. However this bullish outlook doesn’t look so bullish if we span out a bit at the start of the year we were nearly 5000 points lower:
The Bearish trader is looking at this, always fighting that long only bullish overall sentiment and saying mean reversion. Yet who is right? Can both players be right? Yes they certainly can because both players can play the game very differently and that is why we stress to you that one mold does not fit each individual the same. Understanding time frames is key to perspective, but also understanding your own perspective and aligning it with your objectives is also very important.
We all must be cognizant of where it is we are in order to truly understand where it is we are going!
For me, our long time readers know where I stand, this is a longer term top akin to 2000 and 2008 and our readers know the rationale behind our thesis. We warned yesterday of Nvidia FOMO meeting sellers at the 15450/15550 area and that these sellers would most likely lay into the euphoria and they most certainly have. As of this chart the market is nearly 460 points off the high, the days not done but technically this is major damage to the bulls today if we close sub 15000. There is a lot of time ahead but one thing is clear, those are real sellers up there and maybe they see the same thing we do in that latter chart.
Magnelibra has stated very openly our pillars to a longer term top and we have 2 outcomes left:
FRB announcement of a change in sentiment due to incoming data, i.e. we are indeed pausing and not skipping
Negative non farm payroll print
We know #2 is close by and in all honesty we suspect the US Bond market will be up 5 handles should that day come. Ok till next time! We leave you with a quick look at risk markets, a sea of red once again:
Many traders subscribe to guru’s, coaches, etc. and if it works for you, then great, that is a positive outcome, our approach is a bit different, our real life experience is being conveyed not tailored to a particular individual, but rather just our lessons that we learned and it is up to you to convey them in your own life. In life there are no short cuts, the most precious and valuable things generally come with a very high price and we hope that what we have to offer sheds some light on how you can avoid or curtail some of those hard high priced lessons!
DISCLAIMER: For educational purposes only. This is not a solicitation to buy or sell commodity futures or options. The risk of trading securities, futures and options can be substantial and is not for everyone. Such investments may not be appropriate for the recipient. The valuation of futures and options may fluctuate, and, as a result, clients may lose more than their original investment. Nothing contained in this message may be construed as an express or an implied promise, guarantee or implication by, of, or from the author Michael Agne owner of Magnelibra Capital Advisors. Magnelibra the CTA and its Global Futures Benchmark Program may hold long and or short positions in the various futures and markets that Magnelibra covers. We will never claim that you will profit or that losses can or will be limited in any manner whatsoever. Past performance is not necessarily indicative of future results. Although care has been taken to assure the accuracy, completeness and reliability of the information contained herein, we make no warranty, express or implied, or assume any legal liability or responsibility for the accuracy, completeness, reliability or usefulness of any information, product, service or process disclosed.