Tuesday, July 31, 2007

Keeping Posted at Month's End

* Emotions Are Universal - This is an excellent article about the fear that has gripped the credit markets, particularly in the debt instruments of the investment banks. What is important to note, however, is that the small, retail trader is not trading these instruments! It's the investment banks themselves that make markets in the derivatives that are being shunned. Professional traders have access to greater information flows and financial resources than the average trader, but they seem no less affected by fear and greed. It seems almost quaint that, just a year or two ago, I was hired by two investment banks to help their traders. The problem? The firms wanted them to "take more risk". Like I said: fear and greed.

* Tightening Emerging Markets - First China, now it's India raising the reserve limits of banks in an effort to curb inflation. With India, unlike China, there's also a rising currency to contend with, which will cut into export earnings. (Although traders are also betting on an more expensive Yuan). Can these economies achieve soft landings? The history of runaway markets such as China's doesn't leave much room for optimism. While we've seen risk aversion in the credit arena, that hasn't been the case in emerging market equities: Shanghai's "A" index is at an all-time high and India's Sensex 30 is not far off its peak. At some point, tightening monetary authorities and exuberant stock markets are going to butt heads. Not yet.

* Connect the Dots - Let's see: Russia is making unprecedented arms sales to Iran. The U.S. is raising its military aid to Israel by 25% and pursuing billions of dollars in arms sales to Saudi Arabia and the Gulf States. The U.S. is pursuing a missile defense system at Russia's doorstep and Russia is abandoning treaties to develop new missile systems on its own. Methinks these things are not unrelated.

* The Primed Mind - This excellent NY Times article outlines research on how our brains respond to subtle stimuli, all beneath the level of our consciousness. How many impulsive trading decisions are made simply because we are primed to act by events that have little to do with markets or trading edges? One advantage to having clear trading plans and rules is that they provide a focus for action apart from extraneous priming.
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1 comment:

bzbtrader said...

Dr. Brett:
Regarding the different mental sets of pros versus retail traders (or those trading their own account)... I have a friend who is director of managed futures for a medium size firm. He oversees about 80 CTA's and reports that when many CTAs start to show superior performance they often choose to leave the firm and trade their own money. He further reports than in over 50% of those cases over the next year the CTAs have substandard performance or worse....... much worse. Managing other people's money involves a whole lot less risk than managing your own and although the stated trading plan may be the same, the frame of mind from within which it is executed can be dramatically different......along with the results.