Trader’s Narrative

A few weeks ago I did an interview with Scott Beck of the Trader’s Business Plan website. We also did a giveaway of epic proportions:

• a free trading psychological profile
• a one-year subscription to the site
• trading plan development program

After a random draw, we have our winner! I’ve contacted the lucky person and soon they will be enjoying their prize package. But that’s not all, I’ve got great news not just for the winner, but also for everyone else.

The Trader’s Business Plan has decided to offer their subscription services for FREE. That’s right, the site is now open for use by everyone. Take advantage of this to register an account and start using their templates and guidance to write your trading plan and get started on the right foot.

Scott is also doing FREE one hour trading plan development webinars. The next one is for Tomorrow 9pm. And then on June 10th and June 17th. They are also completely FREE but you have to register ahead of time. Go to his site to learn more about them and how to sign up. Honestly, if you’re starting out, or even just new to trading and want to reboot properly, take this amazing opportunity. Failing to plan is planning to fail.

You can also get extra help by doing a psychology profile test to discover more about yourself. As well as the Trading Plan Development Program which includes online videos and manuals which you can revisit again and again. Scott is also available for one-on-one mentoring over a 12 week program.

If you missed the interview, check out How to Write a Trading Business Plan. There’s a lot of great information there for people starting out.

Well, is it?

That’s what a lot of people are wondering (which has the built in assumption that this is a bear market rally and not the real thing). To get some perspective on this, I decided to look at a long term view of the Nasdaq Composite Bullish Percent Index.

If you’re unfamiliar with this type of index, it is created by looking at what percentage of the components of an index (in this case the Nasdaq Composite) are exhibiting a certain bullish pattern according to point and figure charting. To see how I use this as an indicator, check out: How to Time the Market with Bullish Percent Charts.

Here’s the long term chart of the Nasdaq Composite compared to its Bullish Percent Index:

By the way, I used the Nasdaq Composite because it is very broad with about 3000 components and it excludes a lot of the junk found in the NYSE (CEFs, convertible debentures, ETFs, preferred stocks, rights, warrants, etc.) which can skew the index, especially because of their sensitivity to interest rates.

The chart shows the tech bear market and the latest one which started in late 2007. Almost every single bear market rally top was flagged by the Bullish Percent Index (BPI) - indicated by the red down arrows. It also did a good job of finding exhaustion points during the good times - with one important exception.

The red box shows the span of time that the BPI went above 60% and stayed there. During this time, the normal relationship we otherwise see between the two charts broke down. The only argument I could think of to explain this, is that this time period was the start of a new (albeit short lived) bull market. All kinds of indicators, breadth readings and overbought metrics went into the red zone and stayed there as the stock market powered ahead - seemingly oblivious to them.

The other difference between this most recent bear market and the last is that the counter rallies we’ve seen this time around have been much less powerful than before. As you can see marked by the orange down arrows, they don’t even reach 50% BPI.

The latest BPI reached slightly higher than 62% - that the highest since early 2007 and before than, early 2004. Obviously, this latest run up is different from the previous ones. Going back to 1996 (not shown on the chart) it was rare for the Nasdaq Composite Bullish Percent Index to reach or exceed 50%. So this level is clearly significant.

So what we have to consider is, if this is just a run of the mill bear market rally, then it is over. But if it the real thing, similar to what we saw in 2003 (the red box) then the market will confound everyone and keep going higher.

According to the long term market direction guide known as the Coppock Curve, the Nasdaq is already on a buy signal (from last month). But since it tends to whipsaw much more than the Standard & Poor’s 500 Index (SPX), I’m waiting until it gives a signal. There are only 8 more trading days left in the month and if the S&P 500 can stay above 874 (3.74% lower from Tuesday’s close) then the Coppock Curve curls up.

Freebies & Giveaways
All the SkyGrid invitations are now gone! I warned you they would go fast. If you happened to miss the train, try your luck at the latest giveaway worth more than a $1000 US (courtesy of the Trader’s Business Plan). Best of all, even if you don’t win the grand prize, you don’t walk away empty handed!

Readers contact me with a lot of questions and although I try my best, I can’t answer all of them. But some questions get asked over and over again. One of these is how do I get started in trading? or for some with a little bit more familiarity with the topic, how should I start a trading business plan?

Since this is an pivotal question for many of you, rather than try to give an email reply which wouldn’t do the topic justice, I recently sat down with Scott Beck of the Trader’s Business Plan to discuss the how and why of writing a business plan for trading.

Stick around because at the end of the interview we’re doing an unbelievable giveaway worth $1097 to a lucky reader.

I’ve done many giveaways on Trader’s Narrative, from trading books to membership at resource sites that I recommend.

But this is the largest prize I’ve given away yet. So if you want to start on the right foot and even if you’ve already started trading without a plan, this is the opportunity to get a $1097 package for free. Make sure you read how to enter the draw at the bottom of the interview.

Here’s the interview with Scott Beck of theTradingBusinessPlan.com:

Hi Scott, please introduce yourself by giving us a little information on your background.
My background in trading began in the year 2000 when I joined Fidelity Investments working in their trading department. I spent a year and a half there, and then a year with Wells Fargo in their discount brokerage unit before being recruited by Investools to work as a trading “coach” in the summer of 2003. I had been trading my own account up until that point, but with somewhat mixed results. It was during my time at Investools that I was really able to define my trading philosophy and develop my strategies and trading plan. Starting in the fall of 2004 until I left the company in August of 2008 my role in the company was to instruct 3- and 4-day “boot camp” style trading classes. Each week I would teach 20 - 25 new students one of three classes: Basic trading strategies, Advanced Technical Analysis, and Advanced Options strategies.

One of my responsibilities was to develop most of the trading psychology and risk management content for these classes, as well as for most of the company’s online curriculum. All told over the period of four years I would estimate that I taught close to 4,000 aspiring traders.

What is your personal take on the market? how do you approach trading?
I consider myself a market technician, and rely mainly on price action and volume to make trading decisions. I mainly trade options in my personal account. Long calls and puts for short-term moves when the implied volatility is low, spread trades for most everything else.

Why do you think is the key to success in trading?
I believe the secret to trading has nothing to do with signals or entry points or exit points, and everything to do with managing risk, completely understanding your trading strategies and philosophy, and being as organized and prepared as possible. I have seen people spend up to $40,000 for a trading education, and still walk away without a sense of who they are as a trader, what their trading style is, or how to effectively and consistently execute the strategies they have been taught. I believe that trading should be perceived as a business. That is the entire analogy of my website. If you start a business, you should have a business plan in place. If you are a trader, even a beginning trader, you should have a trading business plan in place. With a trading business plan, you can improve every aspect of your trading. Without one, you are a hobby trader and should expect to lose money. To me, it’s just that simple.

You mentioned you’ve taught close to 4000 students. That’s a lot of students! What insights did you learn from interacting with so many aspiring traders? Was there a key characteristic that they shared? what differentiated the successful ones from the others?
I am very lucky for the opportunity I had to teach those students in the format that I did. The company I worked for has since switched to a primarily one-to-many delivery format using webinars, which has significantly lessened the amount of personal, one-on-one interaction. It was a “perfect storm” so to speak, for someone to have the opportunity to analyze the trading education process in that environment the way I did. What I learned was that your professional background or education level had much less to do with your probability of success than your mindset.

Hence my focus on trading psychology and trying to understand the various biases and different perspectives that traders have regarding the market, and realizing what impact they can have on trading. If you have an open mind, are willing to work hard and educate yourself with the right trading principles, and you can develop and execute your trading plan with discipline and consistency, you have what it takes to be a profitable trader. I also saw a very strong correlation between organization and success.

Those traders who took good notes and kept good trading logs, were able to see and understand their trading with much more clarity than those who didn’t. As you can probably tell, most of the things that I realized help make traders successful, I have tried to incorporate into my website.

Of course, a trading plan and a trading business plan are two different things. The first tells you what you will trade and when. The latter is about how you will execute the trading plan as a business. I just want us to remind everyone that there are no short cuts. As I wrote in the Definitive Guide to Trading Mastery, you need to put in the hours. But a trading business plan can steepen the learning curve by providing you with the adequate framework. It can also protect you by mitigating the risk of blowing up your account.
I like your comment about the difference between a trading plan (entries, exits, etc.) and a trading business plan. The nice thing about my site is it allows you to define both. Users can enter all of their trading rules according to the different ’systems’ they trade, and can then go back and individually analyze each system to see how well it is performing and identify how it can be improved. The other point I try to emphasize is that all traders need a business plan whether they are actually structured as a business or not. My belief is that if you trade at all, you need to treat it like it’s your business or else it is your hobby, and hobby traders lose money. I think one of the biggest reason most retail traders lose money trading is they don’t approach trading with the right mindset. You were spot on with your comment from your Definitive Guide to Trading Mastery about needing to put the hours in, and developing a strong trading business plan is no exception.

Yes, that’s the thing that strikes me the most, if someone wants to start any sort of business, even a franchise, they would sit down and draw up a business plan. But when it comes to trading, very few people do that. Where do you suggest new traders start in thinking about developing their business plan?
As for trading as a business, I think the best place to start developing your “trading business plan” is to address your motivations. That is the starting point on the trading plan template that is in place on the website. Before you really begin trading I think it is very important to answer the question “Why?”. Why are you trading? The obvious answer that most people give is “To make money.” I’m a big believer in keeping things simple, but never over simplifying. That answer to me is a case of over simplifying. It as an example of weak motivation, and here’s why: If your motivation in trading is simply to “make money”, then what happens when you hit a rough patch for a month or two or even longer and you aren’t making any? If your motivation is making money, and you aren’t making any, then apparently you have just lost your motivation. You and I both know that those rough patches will always be a part of trading, so we need to account for them by developing a stronger answer for the question “Why?”.

The people I used to teach paid anywhere from $25,000 to $40,000 for their trading educations. When I would ask why they were willing to pay so much, the response would be usually be something along the lines of ‘Because I believed trading could change my life.‘ But when I asked why they were trading, they still said ‘To make money.‘ My job as I saw at the time was to steer them back to their original motivation for enrolling in the first place: Because if they are successful at trading, it can change their lives. Now that is a powerful motivation. How it could change their lives depended on the person. Maybe they could retire earlier, or travel more, or pay for kids or grandkids education, or do more charitable work.

Those types of motivations are strong enough that when trading gets hard and you start to think to yourself “Why am I doing this?”, you are able to provide an answer that makes sense and helps you keep trading until you are able to get your results back on track. If your motivation is to make money, then the second you start losing it you are likely to quit. So I think the best place to start with your trading business, is to determine why you are starting it in the first place.

One of the ways you help people is through a series of questions that creates a psychological profile. Could you explain a little about how you devised this test, what it measures and how the results can help a trader?
I originally recognized the importance of trading psychology about five years ago when I first started working in the trading education industry. And I mostly realized its importance based on the effect my psychology was having on my personal trading. So at that time I began studying anything and everything I could get my hands on regarding the subject (which wasn’t much at the time - but the information seems to be much more readily available now). I did a lot of research on behavioral finance (which really is the root of all trading psychology) and some of its derivatives like prospect theory and disposition effect. Once I had the opportunity to start teaching weekly classes with new traders each week, I was able to see the impact of different perceptions, biases, and emotions could have on traders, and what mistakes they often lead too. I was able to recognize specific patterns and thought processes that correlated with successful and not-so-successful behaviors.

After I resigned as a trading instructor, I organized and developed these observations and thoughts and developed them into the trading psychology test and profile. As for how it will help traders, the first thing it will do is open their eyes to lot of trading psychology concepts that they probably didn’t even realize exist. It will increase their awareness of what some common psychological factors are, how they can impact their trading, and how they can be improved. It will also provide an objective, in-depth look regarding how likely each of the factors tested for may impact their individual trading. And probably most importantly, it will help move the concept of trading psychology to the forefront of their trading thought process, rather than an after-thought as is too often the case.

Thanks for your time Scott.
Thank you.

Here’s information on the $1097 raffle from the Trader’s Business Plan and how to win it:

• a free trading psychological profile
• a one-year subscription to the site
• trading plan development program

How to Enter the Trading Business Plan Giveaway (worth $1097)

I’ve structured the giveaway so that even if you don’t win the grandprize, you still don’t walk away empty handed - instead you’ll get to watch 4 free videos from INO tv:

So for the lucky reader that wins the raffle, they get a package worth more than a $1000 US to develop a trading business plan. And even if you don’t, you still win by learning something new from INO TV. Here are the steps to enter:

1. Please enter the draw if this is something you are interested in and will benefit from. Feel free to pass it on and tell your trading friends about it if it isn’t exactly your cup of tea.
2. Sign up for INO’s FREE four trading videos (triple check to make sure the email you use to sign up is correct)
3. Come back here and drop a comment below letting me know you’ve done the above and entered the draw (double check the email you use).

It’s that simple. At the end of the month we’ll draw a random name from those that have followed the above steps and contact him/her to award them their prize!

New to INO TV?
The list of INO’s featured experts reads like a who’s who: Linda Raschke, Tom DeMark, Larry Williams, Mark Cook, Gerald Appel and many others. These are categorized in different sections like Beginners, Forex, Futures, Day Trading, etc. The site also has many video tutorials covering different topics like how to set up your money management rules, your daily routine, trading rules and goals, etc.

Watching INO TV is like attending trading seminars, just without all the expenses and stale coffee. A full one year unlimited access is $99.95 which comes to $0.25 a day. When you think about how much people usually spend on these materials, books and seminars you realize what an amazing deal that is.

Book Giveaway
If you haven’t already, throw your name into the hat for a giveaway of:
Hedge Fund Operational Due Diligence (follow link and submit comment)

Jeremy Grantham, Chairman of Grantham Mayo Van Otterloo, is one of the few that saw the financial crisis coming. In 2007 he wrote, warning that we were caught in “The First Truly Global Bubble“. There was only one asset class that liked back then, and even that didn’t fully escape unscathed.

But Grantham isn’t a perma-bear. Since the brutal bear market, his views have changed completely. Here’s a preview of his newest letter to GMO clients:

In his letter, written before last week’s gains, he says that the market is fully valued at appx. the 900 level:

For the record, we now believe the S&P is worth 900 at fair value or 30% above today’s price. Global equities are even cheaper. (Our estimates of current value are based on the assumption of normal P/Es being applied to normal profit margins.) Our 7-year estimated returns for the various equity categories are in the +10 to +13% range after inflation based on an assumption of a 7-year move from today’s environment back to normal conditions. This compares to a year ago when they were all negative!

Then he discusses briefly how GMO is handling the dilemma of either moving too early, and having to endure further losses, or moving too late and giving up gains as the market moves up:

… you absolutely must have a battle plan for reinvestment and stick to it. Since every action must overcome paralysis, what I recommend is a few large steps, not many small ones. A single giant step at the low would be nice, but without holding a signed contract with the devil, several big moves would be safer.This is what we have been doing at GMO. We made one very large reinvestment move in October, taking us to about half way between neutral and minimum equities, and we have a schedule for further moves contingent on future market declines.

Of course, he is an institutional investor, having to position billions of assets. But the lesson is the same no matter the size of your account. You must have a battle plan laid out before hand so that when the market reveals itself, you know exactly what to do and aren’t caught off guard.

You can read the whole March 2009 letter from GMO in the Free Trading Resource section - in the Reports & Articles folder, where you’ll also find other interesting reports, articles and even complete trading books.