Nothing beats original investigation.

“Ninety-nine percent of the people in the business are followers. They’re not creative and they’re not willing to rely upon themselves to make decisions, so they rely upon other people.”

–Tom Demark

The Study

Covered approximately 6000 years of raw price data from the Philippine stock market

• 600 stock charts
• Approximately 240 listed companies
• 10 years of monthly price data
• 10 years of weekly price data
• 10 years of daily price data

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The Objective:

I sought the answer to 1 question:  What common denominators are to be found in market conditions prior to, or at the inception of, long-term trends in price? (We assumed a long-term trend to be a sustained price increase lasting at least 12 months)

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“Certain price patterns are non-random.”

–James Simons, Renaissance Technologies Corporation

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Ultimately what we found was a distinct recurring price movement preceding all long-term trends in the study. Since nearly 70% of the ensuing trends ranged from 18 months to 5 years, we came to think of this as a high probability indication of a long-term trend. These findings are encapsulated in what we now call the Big Wave Indicator.

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See

Riding Giants at Very Low Risk, Chapter 1:  Big Wave Coming

When Failure Is Not an Option:  The Stewardship of Your Financial Future

E. M. Murray. Customized Portfolios. Professional Management. Fixed Downside Risk.

Can the skills of a successful trader be reduced to a set of rules?

“We are going to grow traders just like they grow turtles in Singapore.”

–Richard Dennis in Market Wizards

The Turtle Experiment

The story, which first appears in Jack Schwager’s Market Wizards, by now has attained almost legendary status.  The year was 1984 and Richard Dennis, a hugely successful commodities trader, was in a long-running philosophical argument with his partner William Eckhardt.  The debate?  Could the skills of a successful trader be reduced to a set of rules–Dennis’s view–or was trading skill an unlearnable intuitive gift?

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“Let’s hire and train some people and see what happens.”

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After running an ad in a Chicago newspaper they screened 1000+ applicants, interviewed 40 and hired 10.   After only 2 weeks of training, the new-hires were turned loose with $100,000.00 each.

In 1985  Dennis repeated the process but reduced training to only 1 week.

Out of 23 trainees, 3 washed out.  The other 20 went on to average 100% per year.

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If you’re interested in how a trading system similar to the Turtle Rules performs when turned loose on the Philippine Stock Market, see Riding Giants at Very Low Risk.

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E. M. Murray. Managed Equities. Fixed Downside Risk.

Do you, your broker or your investment manager have a pre-flight checklist?

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“After 20 years of trading, I find it almost impossible to trade without a plan that does not have fixed rules.”

–Robert Krauscz, New Market Wizard

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Can you imagine the pilot of a jumbo jet climbing into the cockpit, firing up the engines, and hurtling down the runway into the sky without a second thought?  I mean, no checklist, no clearance from the tower, no nothin’?

"Tower, I've cleared myself for take-off..."

I can’t either.  Yet it never ceases to amaze me how many traders–individual and professional–put on trades in more or less the same way.  No checklist, no clearance from the tower, no nothin’.

Even more amazing is if you were to attempt to pin down the precise reasons a trader clears himself for take-off, some traders give 10 different reasons for the last 10 trades.  At times positions are taken on little more than a hunch or an emotional impulse.  Or a broker or analyst recommendation  (See Be Careful Who You Listen To).  Is it any wonder why the typical experience with your average broker leaves your account in wreckage at the end of the runway?

Gimme a break.  If your broker or investment manager can’t articulate in detail what criteria compels them to “kick the tires and light the fires”, why in the world would you entrust your hard-earned money to them?  Why catapult your financial future into the sky with someone who can’t even reasonably explain why he or she takes off?

#1 Killer of Traders

After over 1000 hours of research, if you were to ask me what I think is the number one killer of retail and professional traders, this is it: 

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When your average broker is piloting your account...

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There’s no delicate way to put this:  If you can’t articulate your trading plan, you’ve got no trading plan.  And if you’ve got no trading plan, from a purely statistical standpoint your exposure to Risk of Ruin is so high you’ve got no business piloting your own investments, much less anyone else’s.

The good news is that although lack of a trading plan is a common affliction, this can be remedied. And for the sake of your financial future, it must be remedied.  And quick.  You have one of two options.  Either:

1. You develop a viable trading plan if you are managing your own investments.
2. Find a professional who is utilizing a viable trading plan.

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Components of a Complete Trading System

The first thing you should do when meeting a prospective investment manager (or when looking in the mirror if you are your investment manager) is ask him or her to explain their approach to investing.  Although the terminology may vary, they must be able to explain each of the following core concepts:

Your broker or investment manager should be able to explain each of these components of his or her methodology.

If they have no response for each and every one of these components, don’ walk out.  Run.  I hate to say it, but they don’t know what they’re doing.

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See

On Mechanical Trading Systems

Your Average Broker Couldn’t Be a Trader in a Million Years

E. M. Murray. Personalized Stock Portfolios. Professional Management. Fixed Downside Risk.